10-Q 1 f53317e10vq.htm FORM 10-Q e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware   No. 41-0449260
(State of incorporation)   (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
    October 30, 2009
Common stock, $1-2/3 par value
    4,685,063,588  


 

FORM 10-Q
CROSS-REFERENCE INDEX
             
   
PART I          
Item 1.  
Financial Statements
  Page  
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Item 2.          
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        25  
        29  
        32  
        54  
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Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
    48  
   
 
       
Item 4.       61  
   
 
       
PART II          
   
 
       
Item 1.       148  
   
 
       
Item 1A.       148  
   
 
       
Item 2.       148  
   
 
       
Item 6.       148  
   
 
       
Signature     148  
   
 
       
Exhibit Index     149  
   
 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     Nine months ended  
    Sept. 30 ,   June 30 ,   Sept. 30 ,   Sept. 30 ,   Sept. 30 ,
($ in millions, except per share amounts)   2009     2009     2008     2009     2008  
   
 
                                       
For the Period
                                       
Wells Fargo net income
  $ 3,235       3,172       1,637       9,452       5,389  
Wells Fargo net income applicable to common stock
    2,637       2,575       1,637       7,596       5,389  
Diluted earnings per common share
    0.56       0.57       0.49       1.69       1.62  
 
Profitability ratios (annualized):
                                       
Wells Fargo net income to average assets (ROA)
    1.03 %     1.00       1.06       1.00       1.21  
Net income to average assets
    1.06       1.02       1.07       1.02       1.22  
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
    12.04       13.70       13.63       13.29       15.02  
Net income to average total equity
    10.57       11.56       13.66       11.32       15.06  
 
Efficiency ratio (3)
    52.0       56.4       53.0       54.9       51.8  
 
Total revenue
  $ 22,466       22,507       10,377       65,990       32,400  
Pre-tax pre-provision profit (PTPP) (4)
    10,782       9,810       4,876       29,791       15,612  
 
Dividends declared per common share
    0.05       0.05       0.34       0.44       0.96  
 
Average common shares outstanding
    4,678.3       4,483.1       3,316.4       4,471.2       3,309.6  
Diluted average common shares outstanding
    4,706.4       4,501.6       3,331.0       4,485.3       3,323.4  
 
Average loans
  $ 810,191       833,945       404,203       833,076       393,262  
Average assets
    1,246,051       1,274,926       614,194       1,270,071       594,717  
Average core deposits (5)
    759,319       765,697       320,074       759,668       318,582  
Average retail core deposits (6)
    584,414       596,648       234,140       590,499       230,935  
 
Net interest margin
    4.36 %     4.30       4.79       4.27       4.80  
 
At Period End
                                       
Securities available for sale
  $ 183,814       206,795       86,882       183,814       86,882  
Loans
    799,952       821,614       411,049       799,952       411,049  
Allowance for loan losses
    24,028       23,035       7,865       24,028       7,865  
Goodwill
    24,052       24,619       13,520       24,052       13,520  
Assets
    1,228,625       1,284,176       622,361       1,228,625       622,361  
Core deposits (5)
    747,913       761,122       334,076       747,913       334,076  
Wells Fargo stockholders’ equity
    122,150       114,623       46,957       122,150       46,957  
Total equity
    128,924       121,382       47,259       128,924       47,259  
Tier 1 capital (7)
    108,785       102,721       45,182       108,785       45,182  
Total capital (7)
    150,079       144,984       60,525       150,079       60,525  
 
Capital ratios:
                                       
Wells Fargo common stockholders’ equity to assets
    7.41 %     6.51       7.54       7.41       7.54  
Total equity to assets
    10.49       9.45       7.59       10.49       7.59  
Average Wells Fargo common stockholders’ equity to average assets
    6.98       5.92       7.78       6.02       8.06  
Average total equity to average assets
    9.99       8.85       7.83       8.98       8.11  
Risk-based capital (7)
                                       
Tier 1 capital
    10.63       9.80       8.59       10.63       8.59  
Total capital
    14.66       13.84       11.51       14.66       11.51  
Tier 1 leverage (7)
    9.03       8.32       7.54       9.03       7.54  
 
Book value per common share
  $ 19.46       17.91       14.14       19.46       14.14  
 
Team members (active, full-time equivalent)
    265,100       269,900       159,000       265,100       159,000  
 
Common stock price:
                                       
High
  $ 29.56       28.45       44.68       30.47       44.68  
Low
    22.08       13.65       20.46       7.80       20.46  
Period end
    28.18       24.26       37.53       28.18       37.53  
   
(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 new accounting guidance on noncontrolling interests on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. The guidance 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.
 
(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 18 (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 September 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, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (First Quarter 2009 Form 10-Q), our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Second 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. See page 145-146 for the Glossary of Acronyms for terms used throughout the Financial Review section of this Form 10-Q and page 147 for the Codification Cross Reference for cross references from accounting standards under the recently adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification) to pre-Codification accounting standards.
OVERVIEW
Wells Fargo & Company is a $1.2 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 third in the market value of our common stock among our peers at September 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 help 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.
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 new FASB guidance on noncontrolling interests on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. The guidance requires that noncontrolling interests be reported as a component of total equity. In addition, our consolidated income statement must disclose amounts attributable to both Wells Fargo interests and the noncontrolling interests.

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Wells Fargo net income was a record $3.2 billion in third quarter 2009, with net income applicable to common stock of $2.6 billion. Diluted earnings per common share were $0.56, after a $1.0 billion build of the allowance for credit losses ($0.13 per common share) and merger-related and restructuring expenses of $249 million ($0.03 per common share).
We generated record earnings and built capital at a record rate in third quarter 2009 despite cyclically elevated credit costs. Our fundamental diversified business model continued to generate strong revenue in the current environment. Our cross-sell at legacy Wells Fargo set records for the 10th consecutive year — an average of 5.90 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 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. Business banking household cross-sell offers another potential opportunity for growth, with a cross-sell of 3.72 products at legacy Wells Fargo. Our goal is eight products per customer, which is approximately half of our estimate of potential demand.
Wells Fargo remains one of the largest providers of credit to the U.S. economy. We have extended more than $547 billion of new credit to creditworthy customers through third quarter 2009, including $169 billion in new loan commitments and originations this quarter. Average checking and savings deposits grew 11% (annualized) to $629.6 billion in third quarter 2009 from $613.3 billion in second quarter 2009 as we continued to gain new customers and deepen our relationships with existing customers.
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 third quarter 2009, we opened 15 retail banking stores throughout the combined company for a retail network total of 6,653 stores. The first state community bank conversion (Colorado) of Wachovia stores to the Wells Fargo platform is scheduled for November, with the conversion of our remaining overlapping markets scheduled to occur in 2010.
The Wachovia integration remains on track and on schedule, with business and revenue synergies exceeding our expectations. Cross-sell revenues are already being realized. We are on track to realize annual run-rate savings of $5 billion upon completion of the Wachovia integration expected in 2011. We currently expect cumulative merger integration costs of approximately $5.5 billion, down from our previous $7.9 billion estimate. The revised estimate reflects lower owned real estate write-downs and lower employee-related expenses than anticipated at the time of the merger.
We continued taking actions during the quarter to further strengthen our balance sheet, including building the allowance for credit losses to $24.5 billion, reducing previously identified non-strategic and liquidating loan portfolios to $152.7 billion, and reducing the value of our debt and equity investment portfolios through $396 million of other-than-temporary impairment (OTTI) write-downs. Also, the value of our mortgage servicing rights (MSRs) as a percentage of loans serviced for others dropped to 83 basis points, in line with lower mortgage rates and the influence of new Federal mortgage modification programs on servicing costs and expected consumer refinancings. We significantly built capital in third quarter 2009, primarily driven by record retained earnings and other sources of internal capital generation. Tier 1 common equity increased to $53 billion, 5.18% of risk-weighted assets. Tier 1 leverage and Tier 1 capital ratios increased to 9.03% and 10.63%, respectively. While the Supervisory Capital Assessment Program (SCAP) will not be completed until after the end of the third quarter, we have already generated $20 billion from market and internal sources toward the $13.7 billion capital buffer required by the Federal Reserve, exceeding the requirement by $6 billion. See the “Capital Management” section in this Report for more information.

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We have seen signs of stability in our credit portfolio, as growth in credit losses slowed during third quarter 2009. We expect credit losses to remain elevated in the near term, but, assuming no further economic deterioration, current projections show credit losses peaking in the first half of 2010 in our consumer portfolios and later in 2010 in our commercial and commercial real estate portfolios. Our credit reserves as of September 30, 2009, reflected an improvement in consumer loss emergence, with all of the third quarter 2009 reserve build covering either higher commercial loss emergence or consumer troubled debt restructurings (TDRs).
We believe it is important to maintain a well controlled operating 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.
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 nine months of 2009. Based on the purchase price of $23.1 billion and the $12.9 billion fair value of net assets acquired, inclusive of refinements identified during the first nine months of 2009, the transaction resulted in goodwill of $10.2 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 were accounted for using the measurement provisions for purchased credit-impaired (PCI) loans, which are contained in the Receivables topic (FASB ASC 310) of the Codification. PCI loans were recorded at fair value at the date of acquisition, and any related allowance for loan losses cannot be carried over.
PCI loans 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). PCI loans are also not included in the disclosure of loans 90 days or more past due and still accruing interest even though a portion of them are 90 days or more contractually past due.
Certain credit-related ratios of the Company, including the growth rate in nonperforming assets since December 31, 2008, may not be directly comparable with periods prior to the merger or with credit-related ratios of other financial institutions. As noted above, PCI loans were reclassified from nonaccrual

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loans to accrual status. In addition, we believe our purchase accounting has resulted in some anomalies in our nonaccrual loan growth rate. For example, the percentage increase in nonaccrual loans may be higher than historical trends due in part to the minimal amount of nonaccrual loans from Wachovia at the beginning of 2009. For further detail on the merger see the “Loan Portfolio” section and Note 2 (Business Combinations) to Financial Statements in this Report.
Summary Results
Wells Fargo net income in third quarter 2009 was $3.2 billion ($0.56 per share), compared with $1.6 billion ($0.49 per share) in third quarter 2008. Net income for the first nine months of 2009 was $9.5 billion ($1.69 per share), compared with $5.4 billion ($1.62 per share) for the first nine months of 2008. Wells Fargo return on average total assets (ROA) was 1.03% and return on average common Wells Fargo stockholders’ equity (ROE) was 12.04% in third quarter 2009, compared with 1.06% and 13.63%, respectively, in third quarter 2008. ROA was 1.00% and ROE was 13.29% for the first nine months of 2009, and 1.21% and 15.02%, respectively, for the first nine months of 2008.
Revenue, the sum of net interest income and noninterest income, of $22.5 billion in third quarter 2009 was flat compared with second quarter 2009. Year-to-date revenue was $66.0 billion, more than double legacy Wells Fargo’s revenue for the comparable period last year. The breadth and depth of our business model resulted in strong and balanced growth from a year ago in loans, deposits and fee-based products. While mortgage origination and hedging results contributed to our performance, collectively all of our other businesses have also grown pre-tax pre-provision profit (PTPP) each quarter this year reflecting the breadth of our diversified business model, record levels of sales and cross-sell, the realization of revenue synergies from the combination with Wachovia, and further improvements in our net interest margin to 4.36% and efficiency ratio to 52.0%.
We continued to maintain a strong balance sheet. Our allowance for credit losses was $24.5 billion at September 30, 2009, compared with $21.7 billion at December 31, 2008, and we believe was adequate for losses inherent in the loan portfolio at September 30, 2009, including both performing and nonperforming loans. We continued to reduce the higher risk assets on our balance sheet, with non-strategic and liquidating loan portfolios (home equity loans originated through third party channels and indirect auto at legacy Wells Fargo, Pick-a-Pay at Wachovia) down by $14.2 billion from December 31, 2008. We recorded $1.4 billion of OTTI write-downs on debt and equity securities available for sale in the first nine months of 2009.
Our financial results included the following:
Net interest income on a taxable-equivalent basis was $11.9 billion in third quarter 2009, up from $6.4 billion in third quarter 2008. While the net margin improved to 4.36%, average earning assets were down $23.7 billion from second quarter 2009, reflecting soft loan demand and reductions in non-strategic and liquidating assets. While average securities available for sale were up $7.3 billion, this largely reflected the averaging effect in the quarter of mortgage-backed securities (MBS) purchased late in the second quarter at yields more than 1% above the current market. During third quarter 2009, $23 billion of our lowest-yielding MBS were sold to reduce exposure to higher long-term interest rates. The net interest margin reflected the benefit of continued growth in checking and savings deposits, which represented about 83% of our core deposits in third quarter 2009.
Noninterest income reached $10.8 billion in third quarter 2009, up from $4.0 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 $3.1 billion in third quarter 2009;

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    $1.1 billion in revenue from mortgage loan originations/sales activities on $96 billion of new originations;
 
    Mortgage applications of $123 billion, with an unclosed application pipeline of $62 billion at quarter end; and
 
    $1.5 billion combined market-related valuation changes to MSRs and economic hedges (consisting of a $2.1 billion decrease in the fair value of the MSRs more than offset by a $3.6 billion economic hedge gain in the quarter), largely due to hedge-carry income reflecting the current low short-term interest rate environment (the low short-term interest rate environment is expected to continue into fourth quarter 2009); MSRs as a percentage of loans serviced for others reduced to 0.83%; average servicing portfolio note rate was only 5.72%.
  Trust and investment fees of $2.5 billion primarily reflecting an increase in client assets, bond origination fees, and higher brokerage revenue as we continued to build our retail securities brokerage business; client assets in Wealth, Brokerage and Retirement were up 8% from second quarter 2009 driven largely by the strong equity market recovery;
 
  Card fees of $946 million reflecting seasonally higher purchase volumes and higher customer penetration rates;
 
  Service charges on deposit accounts of $1.5 billion driven by continued strong checking account growth; and
 
  Net losses on debt and equity securities totaling $11 million, including $396 million of OTTI write-downs and $120 million of realized gains on the sale of MBS in the third quarter. After having purchased over $34 billion of agency MBS in the second quarter of 2009 at yields more than 1% above the current market, we sold $23 billion of our lowest-yielding MBS after long-term interest rates declined in the third quarter.
Due to the general decline in long-term yields and narrowing of credit spreads in third quarter 2009, net unrealized gains on securities available for sale increased to $6.6 billion at September 30, 2009, from net unrealized losses of $400 million at June 30, 2009.
Noninterest expense was $11.7 billion in third quarter 2009, up from $5.5 billion in third quarter 2008, predominantly attributable to the Wachovia acquisition. Noninterest expense in third quarter 2009 reflected $200 million of Wachovia merger-related costs and $49 million of non-Wachovia-related integration costs. Noninterest expense also included $100 million of additional insurance reserve at our captive mortgage reinsurance operation. Noninterest expense in third quarter 2009 declined from $12.7 billion in second quarter 2009, which included $565 million of Federal Deposit Insurance Corporation (FDIC) deposit insurance assessments. The balance of the decline from second quarter 2009 was due to merger consolidation savings and ongoing expense management initiatives. As we reduce expenses through consolidation and other expense initiatives, we continue to reinvest in our businesses for long-term revenue growth. During 2009, we opened 41 retail banking stores, including 15 in the third quarter, and converted 1,274 ATMs to Envelope-FreeSM webATM machines. We have also continued to increase the level and productivity of our sales force in community banking, commercial banking and wealth management. We continued to manage to a variable expense base in the mortgage company. Part-time staff was reduced in third quarter as application volume declined, and increased again in September and early in the fourth quarter as the volume of applications increased. Our efficiency ratio improved to 52.0% in third quarter 2009 from 56.4% in second quarter 2009.
Net charge-offs in third quarter 2009 were $5.1 billion (2.50% of average total loans outstanding, annualized), compared with $4.4 billion (2.11%) in second quarter 2009 and $2.0 billion (1.96%) in third quarter 2008. While losses were up in the quarter, the increase in terms of both dollars and percentages moderated from prior quarter growth. Net charge-offs of $5.1 billion in third quarter 2009 included $1.5 billion of commercial and commercial real estate loans (1.78%) and $3.6 billion in consumer loans (3.13%). Legacy Wells Fargo net charge-offs were $3.4 billion in third quarter 2009, flat compared with

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second quarter 2009, and Wachovia net charge-offs totaled $1.7 billion (including $225 million related to PCI loans), compared with $984 million in second quarter 2009. Wachovia’s PCI loans were written down to fair value at December 31, 2008, and, accordingly, charge-offs on that portfolio only occur if the portfolio deteriorates more than was expected at the date of acquisition.
Commercial and commercial real estate charge-offs were up 28% in third quarter 2009 from second quarter 2009. The increase in commercial and commercial real estate losses in third quarter 2009 was entirely in the Wachovia portfolio, in part reflecting the fact that charge-offs are just now coming through Wachovia’s portfolio after having eliminated nonaccruals through purchase accounting at the end of 2008. The overall loss rate in third quarter 2009 for Wachovia’s commercial and commercial real estate portfolio was roughly comparable to Wells Fargo’s commercial portfolio, which we believe was underwritten to conservative credit standards. In fact, legacy Wells Fargo’s commercial and commercial real estate losses declined $35 million, or 4%, from second quarter 2009.
Consumer losses were up 12% in third quarter 2009, with virtually all of the increase in Wachovia’s consumer portfolios. Over 40% of the increase in Wachovia consumer loan losses came from the non-impaired Pick-a-Pay portfolio, in large part reflecting the lagging effect of purchase accounting.
The provision for credit losses was $6.1 billion and $15.8 billion in the third quarter and first nine months of 2009, respectively, compared with $2.5 billion and $7.5 billion, respectively, in the same periods a year ago. The provision in the third quarter and first nine months of 2009 included $1.0 billion and $3.0 billion, respectively, of net build to the allowance for credit losses 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 $24.5 billion (3.07% of total loans) at September 30, 2009, compared with $21.7 billion (2.51%) at December 31, 2008.
Total nonaccrual loans were $20.9 billion (2.61% of total loans) at September 30, 2009, compared with $15.8 billion (1.92%) at June 30, 2009. Nonaccrual loans exclude PCI loans acquired from Wachovia 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 $3.7 billion related to Wachovia in third quarter 2009. The increase in nonaccrual loans was concentrated in portfolios secured by real estate or with borrowers dependent on the housing industry. Total nonperforming assets (NPAs) were $23.5 billion (2.93% of total loans) at September 30, 2009, compared with $18.3 billion (2.23%) at June 30, 2009.
While commercial and commercial real estate nonaccrual loans were up in third quarter 2009, the dollar amount of the increase declined in third quarter 2009 and the rate of growth slowed considerably. Legacy Wells Fargo’s commercial and commercial real estate nonaccrual loans increased $777 million. Wachovia’s commercial and commercial real estate nonaccrual loans increased $1.9 billion. The growth rate in consumer nonaccrual loans slowed in third quarter 2009. Legacy Wells Fargo’s consumer nonaccrual loans increased $606 million, reflecting the more moderate deterioration we have experienced in consumer loans. Wachovia’s Pick-a-Pay portfolio represented the largest portion of consumer nonaccrual loans. While up $1.2 billion in third quarter 2009 from second quarter 2009, the increase in nonaccrual loans in the non-impaired Pick-a-Pay portfolio reflected the inflows to nonaccruals expected in the first few quarters after purchase accounting write-downs. Due to our active loss mitigation efforts on Pick-a-Pay loans, some of our modifications on the non-PCI portfolio are classified as TDRs causing our NPA levels to remain elevated until the loans can demonstrate performance. To the extent these nonperforming loans return to accrual status, NPA growth may moderate.

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We continued to build capital in third quarter 2009 and the Company and each of its subsidiary banks continued to remain well-capitalized. Our total risk-based capital (RBC) ratio at September 30, 2009, was 14.66% and our Tier 1 RBC ratio was 10.63%, 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. Tier 1 RBC and Tier 1 common equity ratios increased to 10.63% and 5.18%, respectively, at September 30, 2009, up from 9.80% and 4.49%, respectively, at June 30, 2009. Our Tier 1 leverage ratio was 9.03% at September 30, 2009, and 14.52% at December 31, 2008, exceeding the minimum regulatory guideline of 3% for bank holding companies.
As previously disclosed, 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 economic scenario. Through September 30, 2009, we generated $20 billion toward the $13.7 billion regulatory capital buffer under SCAP, exceeding the requirement by $6 billion. We accomplished this through an $8.6 billion equity raise in second quarter 2009 and by internally generated capital, which has been tracking above the Company’s internal SCAP estimates and 35% above the supervisory adverse economic scenario estimate. See the “Capital Management” section in this Report for more information.

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Current Accounting Developments
Effective July 1, 2009, the FASB established the Codification as the source of authoritative generally accepted accounting principles (GAAP) for companies to use in the preparation of financial statements. SEC rules and interpretive releases are also authoritative GAAP for SEC registrants. The guidance contained in the Codification supersedes all existing non-SEC accounting and reporting standards. We adopted the Codification, as required, in third quarter 2009. As a result, references to accounting literature contained in our financial statement disclosures have been updated to reflect the new Accounting Standards Codification (ASC) structure. References to superseded authoritative literature are shown parenthetically below, and cross-references to pre-Codification accounting standards are included on page 147.
In first quarter 2009, we adopted new guidance related to the following Codification topics:
  FASB ASC 815-10, Derivatives and Hedging (FAS 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133);
 
  FASB ASC 810-10, Consolidation (FAS 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51);
 
  FASB ASC 805-10, Business Combinations (FAS 141R (revised 2007), Business Combinations);
 
  FASB ASC 820-10, Fair Value Measurements and Disclosures (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);
 
  FASB ASC 320-10, Investments — Debt and Equity Securities (FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments); and
 
  FASB ASC 260-10, Earnings Per Share (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 new guidance related to the following Codification topics:
  FASB ASC 825-10, Financial Instruments (FSP FAS 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments); and
 
  FASB ASC 855-10, Subsequent Events (FAS 165, Subsequent Events).
In third quarter 2009, we adopted new guidance related to the following Codification topic:
  FASB ASC 105-10, Generally Accepted Accounting Principles (FAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162).
In addition, the following accounting pronouncements were issued by the FASB, but are not yet effective:
  FAS 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140;
 
  FAS 167, Amendments to FASB Interpretation No. 46(R);
 
  FASB ASC 715-20, Compensation — Retirement Benefits (FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets);
 
  Accounting Standards Update (ASU or Update) 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent); and
 
  ASU 2009-5, Measuring Liabilities at Fair Value.

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Information about these pronouncements is described in more detail below.
FASB ASC 815-10 (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 this pronouncement for first quarter 2009 reporting. See Note 11 (Derivatives) to Financial Statements in this Report for complete disclosures on derivatives and hedging activities. This standard does not affect our consolidated financial results since it amends only the disclosure requirements for derivative instruments and hedged items.
FASB ASC 810-10 (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 our adoption of this standard, noncontrolling interests were classified outside of equity. This new guidance 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. When a subsidiary is deconsolidated, a parent is required to recognize a gain or loss with any remaining interest 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. This new guidance was effective on January 1, 2009, with prospective application to all noncontrolling interests including those that arose prior to adoption. Retrospective adoption was 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 on the Prudential joint venture, see the “Capital Management” section in this Report. 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 issuance of new accounting requirements for noncontrolling interests, related interpretive guidance, and Prudential’s 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.
FASB ASC 805-10 (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. This standard was applicable prospectively to business combinations completed on or after January 1, 2009.
FASB ASC 820-10 (FSP FAS 157-4) addresses measuring fair value in situations where markets are inactive and transactions are not orderly. The guidance acknowledges that in these circumstances quoted prices may not be determinative of fair value; however, 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 pronouncement, many companies, including Wells Fargo, interpreted accounting guidance on fair value measurements 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

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normal conditions and therefore could have increased frequency of transactions that are not orderly. Under the provisions of this standard, 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 Fair Value Measurements and Disclosures topic in the Codification 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 new measurement provisions of FASB ASC 820-10 were 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 (OCI), and trading assets of $18 million, which was reflected in earnings. See the “Critical Accounting Policies” section in this Report for more information.
FASB ASC 320-10 (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 OCI. The new accounting requirements for recording OTTI on debt securities were 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 OCI for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had this accounting guidance been effective for those periods.
FASB ASC 260-10 (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 the Earnings per Share topic in the Codification. This pronouncement was effective on January 1, 2009, with retrospective adoption required. The adoption of this standard did not have a material effect on our consolidated financial statements.
FASB ASC 825-10 (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. Entities must also disclose 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

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quarter 2009. See Note 12 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional information. Because the new provisions in FASB ASC 825-10 amend only the disclosure requirements related to the fair value of financial instruments, the adoption of this pronouncement does not affect our consolidated financial statements.
FASB ASC 855-10 (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. Companies are also required to disclose the date through which management has evaluated subsequent events, which for public entities is the date that financial statements are issued. The requirements for disclosing subsequent events were 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 166 modifies certain guidance contained in FASB ASC 860, Transfers and Servicing. This standard eliminates the concept of qualifying special purpose entities (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 consolidation provisions related to variable interest entities (VIEs), which are included in FASB ASC 810, Consolidation. First, the scope of FAS 167 includes entities that are currently designated as QSPEs. 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 existing rules, 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 current 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. Our preliminary estimate includes entities in which we have the power to direct significant activities through our servicing and advisory activities as well as variable interests that expose us to benefits or risks that could potentially be significant.

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ESTIMATED IMPACT OF APPLICATION OF FAS 166 AND FAS 167
                 
   
    Incremental     Incremental  
    GAAP     risk-weighted  
(in billions)   assets     assets  
   
Residential mortgage loans — nonconforming (1) (2)
  $ 28       18  
Other consumer loans
    6       3  
Commercial paper conduit
    6        
Investment funds
    8       4  
   
Total
  $ 48       25  
   
 
   
(1)   Represents certain of our residential mortgage loans that are not guaranteed by government-sponsored entities (“nonconforming”). With the concurrence of our independent auditors, we have concluded that 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 167. 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.
FAS 166 and FAS 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. In addition, we are evaluating the impact of potential fair value option elections. Accordingly, the amount of assets that actually become consolidated on our financial statements upon implementation of these standards on January 1, 2010, may differ from our preliminary analysis presented in the previous table. The cumulative effect of adopting these statements will be recorded as an adjustment to retained earnings at January 1, 2010.
FASB ASC 715-20 (FSP FAS 132 (R)-1) requires new disclosures 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 on postretirement benefits will be required prospectively for fiscal years ending after December 15, 2009.
ASU 2009-12 provides guidance for determining the fair value of certain alternative investments, which include hedge funds, private equity funds, and real estate funds. When alternative investments do not have readily determinable fair values, companies are permitted to use unadjusted net asset values or an equivalent measure to estimate fair value. This provision is only allowable for investments in entities that calculate net asset value (NAV) per share or its equivalent in accordance with Codification Topic 946, Financial Services — Investment Companies. The guidance also requires a company to consider its ability to redeem an investment at NAV when determining the appropriate classification of the related fair value measurement within the fair value hierarchy. ASU 2009-12 is effective for us in fourth quarter 2009 with prospective application. We are currently evaluating the impact ASU 2009-12 may have on our financial statements.

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ASU 2009-5 describes the valuation techniques companies should use to measure the fair value of liabilities for which there is limited observable market data. If a quoted price in an active market is not available for an identical liability, an entity should use one of the following approaches: (1) the quoted price of the identical liability when traded as an asset, (2) quoted prices for similar liabilities or similar liabilities when traded as an asset, or (3) another valuation technique that is consistent with the principles of FASB ASC 820, Fair Value Measurements and Disclosures. When measuring the fair value of liabilities, this Update reiterates that companies should apply valuation techniques that maximize the use of relevant observable inputs, which is consistent with existing accounting provisions for fair value measurement. In addition, this Update clarifies when an entity should adjust quoted prices of identical or similar assets that are used to estimate the fair value of liabilities. For example, an entity should not include separate adjustments for contractual restrictions that prevent the transfer of the liability because the restriction would be factored into other inputs used in the fair value measurement of the liability. However, separate adjustments are needed in situations where the unit of account for the asset is not the same as for the liability. This guidance is effective for us in fourth quarter 2009 with adoption applied prospectively. We are currently evaluating the impact ASU 2009-5 may have on our financial statements.
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;
 
  PCI loans;
 
  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 is expected to reduce pension cost 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 new accounting provisions contained in FASB ASC 820-10, 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 new fair value measurement guidance included in FASB ASC 820, Fair Value Measurements and Disclosures, 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 orderly markets are determined to be, the less weighting we assign to price quotes.
In the determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we use a predetermined percentage to evaluate the impact of fair value adjustments derived from weighting both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.
Approximately 23% of total assets ($285.6 billion) at September 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 19% of these financial instruments (4% of total assets) at September 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 ($23.5 billion) at September 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 $7.9 billion at September 30, 2009, and $9.3 billion at December 31, 2008.

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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 on a taxable-equivalent basis was $11.9 billion in third quarter 2009 and $6.4 billion in third quarter 2008. While the net margin improved to 4.36%, average earning assets were down $23.7 billion from second quarter 2009, reflecting soft loan demand and reductions in non-strategic and liquidating assets. While average securities available for sale were up $7.3 billion, this largely reflected the averaging effect in the quarter of MBS purchased late in the second quarter at yields more than 1% above the current market. During third quarter 2009, $23 billion of our lowest-yielding MBS were sold to reduce exposure to higher long-term interest rates. Net interest income also reflected the benefit of growth in checking and savings deposits.
Average earning assets increased to $1.1 trillion in third quarter 2009 from $533.2 billion in third quarter 2008. Average loans increased to $810.2 billion in third quarter 2009 from $404.2 billion a year ago. Average mortgages held for sale (MHFS) increased to $40.6 billion in third quarter 2009 from $25.0 billion a year ago. Average debt securities available for sale increased to $186.3 billion in third quarter 2009 from $92.9 billion a year ago.
Core deposits are a low-cost source of funding and thus an important contributor to 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 $759.3 billion in third quarter 2009 from $320.1 billion in third quarter 2008, with over half of the increase from Wachovia, and funded 94% and 79% of average loans in third quarter 2009 and 2008, respectively. Checking and savings deposits, typically the lowest cost deposits, now represent about 83% of our core 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 $584.4 billion for third quarter 2009 from $234.1 billion a year ago. Average mortgage escrow deposits were $28.7 billion in third quarter 2009, compared with $21.2 billion a year ago. Average certificates of deposits increased to $129.7 billion in third quarter 2009 from $37.2 billion a year ago and average checking and savings deposits increased to $629.6 billion from $282.9 billion a year ago. Total average interest-bearing deposits increased to $633.4 billion in third quarter 2009 from $266.4 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 September 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
  $ 16,356       0.66 %   $ 27       3,463       2.09 %   $ 18  
Trading assets
    20,518       4.29       221       4,838       3.72       46  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    2,545       3.79       24       1,141       3.99       11  
Securities of U.S. states and political subdivisions
    12,818       6.28       204       7,211       6.65       124  
Mortgage-backed securities:
                                               
Federal agencies
    94,457       5.34       1,221       50,528       5.83       731  
Residential and commercial
    43,214       9.56       1,089       21,358       5.82       346  
                                     
Total mortgage-backed securities
    137,671       6.75       2,310       71,886       5.83       1,077  
Other debt securities (4)
    33,294       7.00       568       12,622       7.17       248  
                                     
Total debt securities available for sale (4)
    186,328       6.72       3,106       92,860       6.06       1,460  
Mortgages held for sale (5)
    40,604       5.16       524       24,990       6.31       394  
Loans held for sale (5)
    4,975       2.67       34       677       6.95       12  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    175,642       4.34       1,919       100,688       5.92       1,496  
Real estate mortgage
    103,450       3.39       883       43,616       5.60       615  
Real estate construction
    32,649       3.02       249       19,715       4.82       238  
Lease financing
    14,360       9.14       328       7,250       5.48       100  
                                     
Total commercial and commercial real estate
    326,101       4.12       3,379       171,269       5.69       2,449  
                                     
Consumer:
                                               
Real estate 1-4 family first mortgage
    235,051       5.35       3,154       76,197       6.64       1,265  
Real estate 1-4 family junior lien mortgage
    105,779       4.62       1,229       75,379       6.36       1,206  
Credit card
    23,448       11.65       683       19,948       12.19       609  
Other revolving credit and installment
    90,199       6.48       1,473       54,104       8.64       1,175  
                                     
Total consumer
    454,477       5.73       6,539       225,628       7.52       4,255  
                                     
Foreign
    29,613       3.61       270       7,306       10.28       188  
                                     
Total loans (5)
    810,191       5.00       10,188       404,203       6.79       6,892  
Other
    6,088       3.29       49       2,126       4.64       24  
                                     
Total earning assets
  $ 1,085,060       5.20 %   $ 14,149       533,157       6.57 %   $ 8,846  
                                     
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 59,467       0.15 %   $ 21       5,483       0.87 %   $ 12  
Market rate and other savings
    369,120       0.34       317       166,710       1.18       495  
Savings certificates
    129,698       1.35       442       37,192       2.57       240  
Other time deposits
    18,248       1.93       89       7,930       2.59       53  
Deposits in foreign offices
    56,820       0.25       36       49,054       1.78       219  
                                     
Total interest-bearing deposits
    633,353       0.57       905       266,369       1.52       1,019  
Short-term borrowings
    39,828       0.35       36       83,458       2.35       492  
Long-term debt
    222,580       2.33       1,301       103,745       3.43       892  
Other liabilities
    5,620       3.30       46                    
                                     
Total interest-bearing liabilities
    901,381       1.01       2,288       453,572       2.11       2,403  
Portion of noninterest-bearing funding sources
    183,679                   79,585              
                                     
Total funding sources
  $ 1,085,060       0.84       2,288       533,157       1.78       2,403  
 
                                       
 
                                               
Net interest margin and net interest income on a taxable-equivalent basis (6)
            4.36 %   $ 11,861               4.79 %   $ 6,443  
 
                                       

Noninterest-earning assets
                                               
Cash and due from banks
  $ 18,084                       11,024                  
Goodwill
    24,435                       13,531                  
Other
    118,472                       56,482                  
                                       
Total noninterest-earning assets
  $ 160,991                       81,037                  
                                       
 
                                               
Noninterest-bearing funding sources
                                               
Deposits
  $ 172,588                       87,095                  
Other liabilities
    47,646                       25,452                  
Total equity
    124,436                       48,075                  
Noninterest-bearing funding sources used to fund earning assets
    (183,679 )                     (79,585                
                                       
Net noninterest-bearing funding sources
  $ 160,991                       81,037                  
                                       
Total assets
  $ 1,246,051                       614,194                  
                                       
   
(1)   Our average prime rate was 3.25% and 5.00% for the quarters ended September 30, 2009 and 2008, respectively, and 3.25% and 5.43% for the first nine months of 2009 and 2008, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.41% and 2.91% for the quarters ended September 30, 2009 and 2008, respectively, and 0.83% and 2.98% for the first nine months 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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    Nine months ended September 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
  $ 20,411       0.73 %   $ 111       3,734       2.59 %   $ 72  
Trading assets
    20,389       4.64       709       4,960       3.57       133  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    2,514       2.61       48       1,055       3.88       30  
Securities of U.S. states and political subdivisions
    12,409       6.39       623       6,848       6.88       362  
Mortgage-backed securities:
                                               
Federal agencies
    87,916       5.45       3,492       42,448       5.93       1,854  
Residential and commercial
    41,070       9.05       3,150       21,589       5.92       1,010  
 
                                       
Total mortgage-backed securities
    128,986       6.72       6,642       64,037       5.92       2,864  
Other debt securities (4)
    31,437       7.01       1,691       12,351       6.78       670  
 
                                       
Total debt securities available for sale (4)
    175,346       6.69       9,004       84,291       6.11       3,926  
Mortgages held for sale (5)
    38,315       5.16       1,484       26,417       6.11       1,211  
Loans held for sale (5)
    6,693       3.01       151       686       6.66       34  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    186,610       4.10       5,725       95,697       6.29       4,509  
Real estate mortgage
    104,003       3.44       2,677       40,351       5.91       1,788  
Real estate construction
    33,660       2.92       734       19,288       5.29       763  
Lease financing
    14,968       9.04       1,015       7,055       5.63       298  
 
                                       
Total commercial and commercial real estate
    339,241       4.00       10,151       162,391       6.05       7,358  
 
                                       
Consumer:
                                               
Real estate 1-4 family first mortgage
    240,409       5.51       9,926       74,064       6.77       3,761  
Real estate 1-4 family junior lien mortgage
    108,094       4.81       3,894       75,220       6.78       3,820  
Credit card
    23,236       12.16       2,118       19,256       12.11       1,749  
Other revolving credit and installment
    91,240       6.60       4,502       54,949       8.84       3,637  
 
                                       
Total consumer
    462,979       5.90       20,440       223,489       7.74       12,967  
 
                                       
Foreign
    30,856       4.02       929       7,382       10.72       592  
 
                                       
Total loans (5)
    833,076       5.05       31,520       393,262       7.10       20,917  
Other
    6,102       3.02       137       1,995       4.55       68  
 
                                       
Total earning assets
  $ 1,100,332       5.21 %   $ 43,116       515,345       6.81 %   $ 26,361  
 
                                       
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 73,195       0.14 %   $ 77       5,399       1.31 %   $ 53  
Market rate and other savings
    339,081       0.42       1,072       162,792       1.45       1,765  
Savings certificates
    150,607       1.14       1,280       38,907       3.23       940  
Other time deposits
    21,794       1.97       321       6,163       2.87       133  
Deposits in foreign offices
    50,907       0.29       111       49,192       2.13       785  
 
                                       
Total interest-bearing deposits
    635,584       0.60       2,861       262,453       1.87       3,676  
Short-term borrowings
    58,447       0.50       217       67,714       2.51       1,274  
Long-term debt
    238,909       2.55       4,568       101,668       3.71       2,825  
Other liabilities
    4,675       3.50       122                    
 
                                       
Total interest-bearing liabilities
    937,615       1.11       7,768       431,835       2.40       7,775  
Portion of noninterest-bearing funding sources
    162,717                   83,510              
 
                                       
Total funding sources
  $ 1,100,332       0.94       7,768       515,345       2.01       7,775  
 
                                       
 
Net interest margin and net interest income on a taxable-equivalent basis (6)
            4.27 %   $ 35,348               4.80 %   $ 18,586  
 
                                       
 
                                               
Noninterest-earning assets
                                               
Cash and due from banks
  $ 19,218                       11,182                  
Goodwill
    23,964                       13,289                  
Other
    126,557                       54,901                  
 
                                           
Total noninterest-earning assets
  $ 169,739                       79,372                  
 
                                           
 
                                               
Noninterest-bearing funding sources
                                               
Deposits
  $ 169,187                       86,676                  
Other liabilities
    49,249                       27,973                  
Total equity
    114,020                       48,233                  
Noninterest-bearing funding sources used to fund earning assets
    (162,717 )                     (83,510 )                
 
                                           
Net noninterest-bearing funding sources
  $ 169,739                       79,372                  
 
                                           
Total assets
  $ 1,270,071                       594,717                  
 
                                           
   

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NONINTEREST INCOME
                                 
   
    Quarter ended Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions)   2009     2008     2009     2008  
   
Service charges on deposit accounts
  $ 1,478       839       4,320       2,387  
 
Trust and investment fees:
                               
Trust, investment and IRA fees
    989       549       2,550       1,674  
Commissions and all other fees
    1,513       189       4,580       589  
   
Total trust and investment fees
    2,502       738       7,130       2,263  
   
 
                               
Card fees
    946       601       2,722       1,747  
Other fees:
                               
Cash network fees
    60       48       176       143  
Charges and fees on loans
    453       266       1,326       765  
All other fees
    437       238       1,312       654  
   
Total other fees
    950       552       2,814       1,562  
   
 
                               
Mortgage banking:
                               
Servicing income, net
    1,873       525       3,469       1,019  
Net gains on mortgage loan origination/sales activities
    1,125       276       4,910       1,419  
All other
    69       91       238       282  
   
Total mortgage banking
    3,067       892       8,617       2,720  
   
 
                               
Insurance
    468       439       1,644       1,493  
Net gains from trading activities
    622       65       2,158       684  
Net gains (losses) on debt securities available for sale
    (40 )     84       (237 )     316  
Net gains (losses) from equity investments
    29       (509 )     (88 )     (149 )
Operating leases
    224       102       522       365  
All other
    536       193       1,564       593  
   
 
                               
Total
  $ 10,782       3,996       31,166       13,981  
   
   
We recently announced policy changes that will help customers limit overdraft and returned item fees. We currently estimate that these changes will reduce our 2010 fee revenue by approximately $300 million (after tax), although the actual impact could vary due to a variety of factors including implementation timing and customer behavior in response to the policy changes.
We earn trust, investment and IRA (Individual Retirement Account) fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At September 30, 2009, these assets totaled $1.8 trillion, including $529 billion from Wachovia, up from $1.2 trillion at September 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 $989 million in third quarter 2009 from $549 million a year ago.
We receive commissions and other fees for providing services to full-service and discount brokerage customers. These fees increased to $1.5 billion in third quarter 2009 from $189 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 September 30, 2009, client assets totaled $1.1 trillion, including $951 billion from Wachovia, compared with $123 billion at September 30, 2008. Commissions and other fees also include fees from investment banking activities including equity and bond underwriting.
Card fees increased to $946 million in third quarter 2009 from $601 million a year ago, predominantly due to $315 million in card fees from the Wachovia portfolio.
Mortgage banking noninterest income was $3.1 billion in third quarter 2009, compared with $892 million a year ago. Net gains on mortgage loan origination/sales activities of $1.1 billion in third quarter 2009 were up from $276 million a year ago. Business performance remained strong in third quarter 2009,

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reflecting a higher level of refinance activity due to the low interest rate environment, with residential real estate originations of $96 billion in third quarter 2009 compared with $51 billion a year ago. The 1-4 family first mortgage unclosed pipeline was $62 billion at September 30, 2009, $71 billion at December 31, 2008, and $41 billion at September 30, 2008. For additional detail, see the “Asset/Liability and Market Risk Management — Mortgage 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 charges to increase the mortgage repurchase reserve. Mortgage loans are repurchased based on standard representations and warranties. A $146 million increase in the repurchase reserve was recorded in the third quarter 2009, due to higher defaults, anticipated higher repurchase demands and overall deterioration in the market. If the current difficult economic cycle worsens, the residential mortgage business could continue to have increased default rates and investor repurchase requests, lower repurchase request appeals success rates and higher 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 third quarter 2009 included a $1.5 billion combined market-related valuation gain on MSRs and economic hedges recorded in earnings (consisting of a $2.1 billion decrease in the fair value of the MSRs offset by $3.6 billion hedge gain) and in third quarter 2008 included a $75 million gain ($546 million decrease in the fair value of MSRs offset by $621 million hedge gain). The net gain in the current quarter was largely due to hedge-carry income, which reflected the current low short-term interest rate environment. The low short-term interest rate environment is expected to continue into fourth quarter 2009. Our portfolio of loans serviced for others was $1.88 trillion at September 30, 2009, and $1.86 trillion at December 31, 2008. At September 30, 2009, the ratio of MSRs to related loans serviced for others was 0.83%.
Income from trading activities was $622 million and $2.2 billion in the third quarter and first nine months of 2009, respectively, up from $65 million and $684 million, respectively, a year ago.
Net investment losses (debt and equity) totaled $11 million and $325 million in the third quarter and first nine months of 2009, respectively, and included OTTI write-downs of $396 million and $1.4 billion, respectively. Net investment losses of $425 million for third quarter 2008 and gains of $167 million for the first nine months of 2008 included OTTI write-downs of $893 million and $1.1 billion, respectively.
Net losses on debt securities available for sale were $40 million and $237 million in the third quarter and first nine months of 2009, compared with net gains of $84 million and $316 million, respectively, a year ago. Net gains from equity investments were $29 million in third quarter 2009, compared with losses of $509 million a year ago. Net losses from equity investments were $88 million in the first nine months of 2009 and $149 million in the first nine months of 2008, which included the $334 million gain from our ownership interest in Visa, which completed its initial public offering in March 2008.

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NONINTEREST EXPENSE
                                 
   
    Quarter ended Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions)   2009     2008     2009     2008  
 
Salaries
  $ 3,428       2,078       10,252       6,092  
Commission and incentive compensation
    2,051       555       5,935       2,005  
Employee benefits
    1,034       486       3,545       1,666  
Equipment
    563       302       1,825       955  
Net occupancy
    778       402       2,357       1,201  
Core deposit and other intangibles
    642       47       1,935       139  
FDIC and other deposit assessments
    228       37       1,547       63  
Outside professional services
    489       206       1,350       589  
Insurance
    208       144       734       511  
Postage, stationery and supplies
    211       136       701       415  
Outside data processing
    251       122       745       353  
Travel and entertainment
    151       113       387       330  
Foreclosed assets
    243       99       678       298  
Contract services
    254       88       726       300  
Operating leases
    52       90       183       308  
Advertising and promotion
    160       96       396       285  
Telecommunications
    142       78       464       238  
Operating losses
    117       63       448       46  
All other
    682       359       1,991       994  
   
Total
  $ 11,684       5,501       36,199       16,788  
   
   
The increase in noninterest expense to $11.7 billion in third quarter 2009 from a year ago was predominantly 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 $249 million and $699 million of merger-related costs for the third quarter and first nine months of 2009, respectively. FDIC and other deposit assessments, which include additional assessments related to the FDIC Transaction Account Guarantee Program in 2009, were $228 million in third quarter 2009 and $1.5 billion for the first nine months of 2009, including a second quarter 2009 FDIC special assessment of $565 million. See the “Liquidity and Funding” section in this Report for additional information. Pension cost in the third quarter and first nine months of 2009 reflected actions related to the freezing of the Wells Fargo and Wachovia pension plans that lowered pension cost by approximately $187 million for third quarter 2009, and $312 million for the first nine months of 2009. These actions are expected to reduce pension cost in fourth quarter 2009 by approximately $188 million. See Note 14 (Employee Benefits) to Financial Statements in this Report for additional information. Noninterest expense included $100 million and $306 million of additional insurance reserve at our captive mortgage reinsurance operation for the third quarter and first nine months of 2009, respectively.
INCOME TAX EXPENSE
Our effective income tax rate was 29.5% in third quarter 2009, down from 30.8% in third quarter 2008, and 31.7% for the first nine months of 2009, down from 32.9% for the first nine months of 2008. The decrease was primarily due to higher tax-exempt income, tax credits, tax settlements, and statute expirations 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 new accounting guidance that 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

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rate is calculated by dividing income tax expense by income before income tax expense less the net income from noncontrolling interests.
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 $2.7 billion in third quarter 2009 from $2.0 billion in second quarter 2009, and $1.5 billion a year ago. Net income increased to $6.5 billion for the first nine months of 2009, up from $4.2 billion a year ago. The year-over-year growth in net income for Community Banking was largely due to the addition of Wachovia businesses, as well as double-digit growth in legacy Wells Fargo, driven by strong balance sheet growth and mortgage banking income. Revenue increased to $15.1 billion in the current quarter from $14.8 billion in second quarter 2009 and $8.5 billion a year ago. Revenue was $43.9 billion in the first nine months of 2009, up from $25.6 billion a year ago. Net interest income was $8.7 billion in third quarter 2009, flat from second quarter 2009 and up from $5.3 billion a year ago. Average loans of $534.7 billion in third quarter 2009 were down slightly from $540.7 billion in second quarter 2009, and up from $287.1 billion a year ago. Average core deposits of $530.3 billion in third quarter 2009, were down slightly from $543.9 billion in second quarter 2009 and up from $252.8 billion a year ago. The year-over-year increase in core deposits was due to the Wachovia acquisition, as well as double-digit growth in legacy Wells Fargo. Noninterest income increased to $6.4 billion in third quarter 2009 from $6.0 billion in second quarter 2009, driven by continued strength in mortgage banking and strong growth in deposit service charges and card fees, and from $3.2 billion a year ago. Noninterest expense of $6.8 billion in third quarter 2009, was down from $7.7 billion in second quarter 2009, driven by higher second quarter 2009 FDIC deposit insurance assessments as well as expense reductions due to Wachovia merger-related cost saves, and up from $4.0 billion a year ago. The provision for credit losses increased $308 million to $4.6 billion in third quarter 2009, including a $236 million credit reserve build, from $4.3 billion in second quarter 2009, which included a $479 million credit reserve build, and $2.2 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

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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 of $598 million in third quarter 2009 was down from $1.1 billion in second quarter 2009 and up from $103 million a year ago. Net income increased to $2.8 billion for the first nine months of 2009, up from $1.2 billion a year ago. The year-over-year growth in net income for Wholesale Banking was largely due to the addition of Wachovia businesses. Revenue increased to $4.9 billion and $15.1 billion in the third quarter and first nine months of 2009, respectively, from $1.7 billion and $6.3 billion for the same periods a year ago. Revenue decreased $322 million from $5.2 billion in second quarter 2009, primarily due to strength in investment banking and capital markets revenue in second quarter 2009, as well as insurance revenue seasonality. Net interest income was $2.5 billion in third quarter 2009, flat from second quarter 2009 and up from $1.1 billion a year ago. The year-over-year growth in average assets was largely due to the addition of the Wachovia businesses. Average loans were $247.0 billion in third quarter 2009, down from $263.5 billion in second quarter 2009, and up from $116.3 billion a year ago. Average core deposits increased to $146.9 billion in third quarter 2009 from $138.1 billion in second quarter 2009 and $64.4 billion a year ago. Noninterest income was $2.4 billion in third quarter 2009, down from $2.8 billion in second quarter 2009 and up from $631 million a year ago. Noninterest expense was $2.6 billion in third quarter 2009, down from $2.8 billion in second quarter 2009 and up from $1.3 billion a year ago. The provision for credit losses increased $623 million to $1.4 billion in third quarter 2009, including a $627 million build to reserves for the wholesale portfolio, up from $738 million in second quarter 2009, which included a $162 million credit reserve build, and $294 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 $244 million in third quarter 2009, down from $363 million in second quarter 2009, and up from $112 million a year ago. Net income increased to $866 million for the first nine months of 2009, up from $316 million a year ago. The year-over-year growth in net income and average assets for the segment was due to the addition of Wachovia businesses. Revenue of $3.0 billion was flat from second quarter 2009 as the strong equity market recovery led to increases in client assets across the brokerage, wealth and retirement businesses, driving solid revenue growth, partially offset by lower realized gains on sales of securities available for sale in the brokerage business. Revenue increased to $3.0 billion and $8.6 billion in the third quarter and first nine months of 2009, respectively, from $681 million and $2.0 billion for the same periods a year ago. Net interest income was $743 million in third quarter 2009 and $764 million in second quarter 2009, up from $223 million a year ago. Average loans were $45.4 billion in third quarter 2009, flat from second quarter 2009 and up from $15.9 billion a year ago. The year-over-year growth in average loans was largely due to the addition of the Wachovia businesses. Noninterest income of $2.2 billion in third quarter 2009 was

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flat from second quarter 2009 and up from $458 million a year ago. Noninterest expense of $2.3 billion in third quarter 2009 was flat from second quarter 2009 and up from $498 million a year ago. The provision for credit losses was $234 million in third quarter 2009, up from $115 million from second quarter 2009, largely reflecting a credit reserve build of $137 million due to higher loss rates, and up from $3 million a year ago.
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 September 30, 2009, we held $177.9 billion of debt securities available for sale, with net unrealized gains of $5.8 billion, 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 September 30, 2009, with net unrealized gains of $806 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 OCI, a component of common equity, at December 31, 2008, related entirely to the legacy Wells Fargo portfolio.
At September 30, 2009, the net unrealized gains on securities available for sale were $6.6 billion, up from net unrealized losses of $9.9 billion at December 31, 2008, due to general decline in long-term yields and narrowing of credit spreads.
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, we recognize OTTI in accordance with new provisions in FASB ASC 320, Investments — Debt and Equity Securities. We early adopted this new accounting guidance for recognizing OTTI on debt securities on January 1, 2009. Under this guidance, 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 OCI.

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Of the third quarter 2009 OTTI write-downs of $396 million, $273 million related to debt securities and $123 million to equity securities. Of the OTTI write-downs of $1,375 million in the first nine months of 2009, $850 million related to debt securities and $525 million related to equity securities.
At September 30, 2009, we had approximately $7 billion of securities, primarily municipal bonds that are guaranteed against loss by bond insurers. These securities are primarily 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 4.9 years at September 30, 2009. Since 75% 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 September 30, 2009
  $ 132.9       3.6       3.7  
 
                       
At September 30, 2009, assuming a 200 basis point:
                       
Increase in interest rates
    123.4       (5.9 )     5.2  
Decrease in interest rates
    139.0       9.7       2.7  
   
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
                                                 
   
    September 30, 2009     December 31, 2008  
            All                     All        
    PCI     other             PCI     other        
(in millions)   loans     loans     Total     loans     loans     Total  
   
 
                                               
Commercial and commercial real estate:
                                               
Commercial
  $ 2,407       167,203       169,610       4,580       197,889       202,469  
Real estate mortgage
    5,950       97,492       103,442       7,762       95,346       103,108  
Real estate construction
    4,250       27,469       31,719       4,503       30,173       34,676  
Lease financing
          14,115       14,115             15,829       15,829  
   
Total commercial and commercial real estate
    12,607       306,279       318,886       16,845       339,237       356,082  
   
Consumer:
                                               
Real estate 1-4 family first mortgage
    39,538       193,084       232,622       39,214       208,680       247,894  
Real estate 1-4 family junior lien mortgage
    425       104,113       104,538       728       109,436       110,164  
Credit card
          23,597       23,597             23,555       23,555  
Other revolving credit and installment
          90,027       90,027       151       93,102       93,253  
   
Total consumer
    39,963       410,821       450,784       40,093       434,773       474,866  
   
Foreign
    1,768       28,514       30,282       1,859       32,023       33,882  
   
Total loans
  $ 54,338       745,614       799,952       58,797       806,033       864,830  
   
   
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 pages 18 and 19.
In the first nine months 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 purchased credit-impaired (PCI) loans of $2.5 billion, consisting of a $1.7 billion decrease in commercial and commercial real estate loans and a $4.2 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, due to the addition of more loans as discussed above and refinement of the nonaccretable estimates, 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).

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The nonaccretable difference was established in purchase accounting for PCI loans to absorb losses. The nonaccretable difference can change when it is no longer needed to absorb future expected losses, or when losses that otherwise would be recorded as charge-offs are absorbed. Amounts absorbed by the nonaccretable difference do not affect the income statement or the allowance for credit losses.
CHANGES IN NONACCRETABLE DIFFERENCE FOR PCI LOANS
The following table shows the changes in the nonaccretable difference related to principal cash flows.
                                 
   
                    Commercial,        
            Other     CRE and        
(in millions)   Pick-a-Pay     consumer     foreign     Total  
 
Balance at December 31, 2008, with refinements
  $ (26,485 )     (4,082 )     (10,378 )     (40,945 )
Release of nonaccretable difference due to:
                               
Loans resolved by payment in full
                194       194  
Loans resolved by sales to third parties
          85       28       113  
Loans with improving cash flows reclassified to accretable yield
                21       21  
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (1)
    8,320       1,796       3,552       13,668  
   
Balance at September 30, 2009
  $ (18,165 )     (2,201 )     (6,583 )     (26,949 )
   
   
 
(1)   Use of nonaccretable difference through June 30, 2009, was $8.5 billion (including $5.1 billion for Pick-a-Pay loans); revised from second quarter to include all losses due to resolution of loans and write-downs.
For further detail on PCI 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
                 
   
    Sept. 30 ,   Dec. 31 ,
(in millions)   2009     2008  
 
Noninterest-bearing
  $ 165,260       150,837  
Interest-bearing checking
    60,214       72,828  
Market rate and other savings
    371,298       306,255  
Savings certificates
    119,012       182,043  
Foreign deposits (1)
    32,129       33,469  
   
Core deposits
    747,913       745,432  
Other time deposits
    16,691       28,498  
Other foreign deposits
    32,144       7,472  
   
Total deposits
  $ 796,748       781,402  
   
   
(1)   Reflects Eurodollar sweep balances included in core deposits.
Deposits at September 30, 2009, totaled $796.7 billion, up from $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 $747.9 billion at September 30, 2009, up $2.5 billion from December 31, 2008. High-rate certificates of deposit (CDs) of $38 billion at Wachovia matured in third quarter 2009 and were replaced by $22 billion in checking, savings or lower-cost CDs. We continued to gain new deposit customers and deepen our relationship 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 QSPEs, which are not consolidated if the criteria described below are met, or 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
                                                 
   
    September 30, 2009     December 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 (1):
                                               
Conforming (2) and GNMA
  $ 1,116,937       21,245       23,494       1,008,824       21,496       22,569  
Other/nonconforming
    280,304       9,291       9,593       313,447       9,483       9,909  
Commercial mortgage securitizations
    384,716       2,835       6,341       355,267       3,060       6,376  
Student loan securitizations
    2,675       167       167       2,765       133       133  
Auto loan securitizations
    2,723       157       157       4,133       115       115  
Other
    8,854       8       44       11,877       71       1,576  
   
Total QSPEs
  $ 1,796,209       33,703       39,796       1,696,313       34,358       40,678  
   

Unconsolidated VIEs
                                               
Collateralized debt obligations (1)
  $ 58,280       14,200       17,543       54,294       15,133       20,443  
Wachovia administered ABCP (3) conduit
    6,536             6,667       10,767             15,824  
Asset-based finance structures
    18,366       10,444       11,026       11,614       9,096       9,482  
Tax credit structures
    27,636       3,837       4,506       22,882       3,850       4,926  
Collateralized loan obligations
    22,531       3,668       4,154       23,339       3,326       3,881  
Investment funds
    87,132       2,089       2,697       105,808       3,543       3,690  
Credit-linked note structures
    1,846       1,116       1,884       12,993       1,522       2,303  
Money market funds (4)
    7,469       (9 )     41       31,843       60       101  
Other
    8,056       3,564       3,821       1,832       3,806       4,699  
   
Total unconsolidated VIEs
  $ 237,852       38,909       52,339       275,372       40,336       65,349  
   
   
 
(1)   For December 31, 2008, certain balances related to QSPEs involving residential mortgage loan securitizations and VIEs involving collateralized debt obligations have been revised to reflect current information.
(2)   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.
(3)   Asset-backed commercial paper.
(4)   At September 30, 2009, 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 American Institute of Certified Public Accountants (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, which is a required disclosure under GAAP, is determined as the carrying value of our involvement with off-balance sheet (unconsolidated) VIEs plus the remaining undrawn liquidity and lending commitments, the notional amount of net written derivative contracts, and the notional amount of other commitments and guarantees. It 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
All financial institutions must manage and control a variety of risks that can significantly affect financial performance. Key among them are credit, asset/liability and market risk.
CREDIT RISK MANAGEMENT PROCESS
Our credit risk management process is governed centrally, but 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. Accordingly, from time to time, we designate certain portfolios and loan products as non-strategic or high risk to limit or cease their continued origination and to specially monitor their loss potential. As an example, during the current weak economic cycle we have significantly tightened bank-selected reduced documentation requirements as a precautionary measure and to substantially reduce third party originations due to the negative loss trends experienced in these channels.
A key to our credit risk management is utilizing a well controlled underwriting process, which we believe is 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. Our underwriting of loans collateralized by residential real property utilizes appraisals or automated valuation models (AVMs) 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 in underwriting to support property values on loan originations where the loan amount is under $250,000. For underwriting residential property loans of $250,000 or more we require property visitation appraisals by qualified independent appraisers.
Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of risk to loss. Our credit risk monitoring process is designed to enable early identification of developing risk to loss and to support our determination of an adequate allowance for loan losses. During the current economic cycle our monitoring and resolution efforts have focused on loan portfolios exhibiting the highest levels of risk including mortgage loans supported by real estate (both consumer and commercial), junior lien, commercial, credit card and subprime portfolios. The following analysis reviews each of these loan portfolios and their relevant concentrations and credit quality performance metrics in greater detail.

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Commercial Real Estate
The commercial real estate (CRE) portfolio consists of both permanent commercial mortgage loans and construction loans. These CRE loans totaled $135.2 billion at September 30, 2009, which represented 17% of total loans. Construction loans totaled $31.7 billion at September 30, 2009, or 4% of total loans, and had an annualized quarterly loss rate of 3.01%. Permanent commercial real estate loans totaled $103.4 billion at September 30, 2009, or 13% of total loans, and had an annualized quarterly loss rate of 0.80%. 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, at September 30, 2009. By property type, the largest concentrations are owner-occupied and office buildings, which represented 32% and 22% of the population, respectively, at September 30, 2009.
At legacy Wells Fargo our underwriting of CRE loans has been focused primarily on cash flows and creditworthiness, not solely collateral valuations. Our legacy Wells Fargo management team is overseeing and managing the CRE loans acquired from Wachovia, which have effectively doubled the size of this portfolio. At merger closing, we determined that $19.3 billion of Wachovia CRE loans needed to be accounted for as PCI loans and we recorded an impairment write-down of $7.0 billion in our purchase accounting, which represented a 37% write-down of the PCI loans included in the CRE loan portfolio. To identify and manage newly emerging problem CRE loans we employ 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.
The following table summarizes CRE loans by state and product type with the related nonaccrual totals. At September 30, 2009, the highest concentration of non-PCI CRE loans by state is $27.0 billion in California, about double the next largest state concentration, and the related nonaccrual loans totaled about $1.7 billion, or 6.2%. Office buildings at $28.2 billion of non-PCI loans are the largest property type concentration, nearly double the next largest, and the related nonaccrual loans totaled $0.7 billion, or 2.6%. Of commercial real estate mortgage loans (excluding construction loans), 42% related to owner-occupied properties at September 30, 2009. In aggregate, nonaccrual loans totaled 4.5% of the non-PCI outstanding balance at September 30, 2009, which is up from 3.6% at June 30, 2009.

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COMMERCIAL REAL ESTATE LOANS BY STATE AND PROPERTY TYPE
                                                 
   
    September 30, 2009  
    Real estate mortgage     Real estate construction     Total  
    Oustanding     Nonaccrual     Oustanding     Nonaccrual     Oustanding     Nonaccrual  
(in millions)   balance  (1)   loans     balance  (1)   loans     balance  (1)   loans  
   

By state:
                                               
PCI loans:
                                               
Florida
  $ 1,090             954             2,044        
California
    1,195             172             1,367        
North Carolina
    345             549             894        
Georgia
    413             450             863        
Virginia
    442             310             752        
Other
    2,465             1,815             4,280 (2)      
   
Total PCI loans
  $ 5,950             4,250             10,200        
   

All other loans:
                                               
California
  $ 22,115       875       4,886       805       27,001       1,680  
Florida
    10,954       425       2,297       264       13,251       689  
Texas
    6,837       121       2,818       232       9,655       353  
North Carolina
    5,636       122       1,554       154       7,190       276  
Georgia
    4,449       137       951       105       5,400       242  
Virginia
    3,633       47       1,606       102       5,239       149  
New York
    3,720       50       1,181       17       4,901       67  
Arizona
    3,445       142       1,176       190       4,621       332  
New Jersey
    3,060       89       644       16       3,704       105  
Colorado
    2,104       58       951       88       3,055       146  
Other
    31,539       790       9,405       738       40,944 (3)     1,528  
   
Total all other loans
  $ 97,492       2,856       27,469       2,711       124,961       5,567  
   
Total
  $ 103,442       2,856       31,719       2,711       135,161       5,567  
   

By property:
                                               
PCI loans:
                                               
Apartments
  $ 1,275             984             2,259        
Office buildings
    1,756             222             1,978        
1-4 family land
    648             1,014             1,662        
1-4 family structure
    150             740             890        
Retail (excluding shopping center)
    510             365             875        
Other
    1,611             925             2,536        
   
Total PCI loans
  $ 5,950             4,250             10,200        
   

All other loans:
                                               
Office buildings
  $ 25,026       606       3,205       139       28,231       745  
Industrial/warehouse
    13,913       354       1,105       11       15,018       365  
Real estate — other
    13,289       468       996       73       14,285       541  
Retail (excluding shopping center)
    11,035       544       1,309       106       12,344       650  
Apartments
    7,615       213       4,492       216       12,107       429  
Land (excluding 1-4 family)
    3,252       123       6,431       456       9,683       579  
Shopping center
    5,982       78       2,514       151       8,496       229  
Hotel/motel
    5,091       67       1,165       93       6,256       160  
1-4 family structure
    1,273       68       2,558       669       3,831       737  
1-4 family land
    813       130       2,926       744       3,739       874  
Other
    10,203       205       768       53       10,971       258  
   
Total all other loans
  $ 97,492       2,856       27,469       2,711       124,961       5,567  
   
Total
  $ 103,442 (4)     2,856       31,719       2,711       135,161       5,567  
   
   
 
(1)   For PCI loans amounts represent carrying value.
(2)   Includes 42 states; no state had loans in excess of $675 million and $609 million at September 30 and June 30, 2009, respectively.
(3)   Includes 40 states; no state had loans in excess of $3,047 million and $3,116 million at September 30 and June 30, 2009, respectively.
(4)   Includes owner-occupied real estate loans of $43.6 billion and $44.6 billion at September 30 and June 30, 2009, respectively.

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    June 30, 2009  
    Real estate mortgage     Real estate construction     Total  
    Oustanding     Nonaccrual     Oustanding     Nonaccrual     Oustanding     Nonaccrual  
(in millions)   balance  (1)   loans     balance  (1)   loans     balance  (1)   loans  
   

By state:
                                               
PCI loans:
                                               
Florida
  $ 1,169             1,047             2,216        
California
    1,269             164             1,433        
North Carolina
    369             558             927        
Georgia
    410             473             883        
Virginia
    450             357             807        
Other
    2,159             1,696             3,855 (2)      
   
Total PCI loans
  $ 5,826             4,295             10,121        
   

All other loans:
                                               
California
  $ 21,809       601       5,215       802       27,024       1,403  
Florida
    11,113       278       2,465       207       13,578       485  
Texas
    6,738       71       2,917       214       9,655       285  
North Carolina
    5,797       83       1,605       47       7,402       130  
Georgia
    4,595       57       980       42       5,575       99  
Virginia
    3,520       55       1,613       82       5,133       137  
New York
    3,675       46       1,135             4,810       46  
Arizona
    3,309       121       1,335       132       4,644       253  
New Jersey
    3,168       70       676             3,844       70  
Colorado
    2,163       30       1,050       39       3,213       69  
Other
    31,941       931       9,952       645       41,893 (3)     1,576  
   
Total all other loans
  $ 97,828       2,343       28,943       2,210       126,771       4,553  
   
Total
  $ 103,654       2,343       33,238       2,210       136,892       4,553  
   

By property:
                                               
PCI loans:
                                               
Apartments
  $ 1,596             207             1,803        
Office buildings
    1,227             1,112             2,339        
1-4 family land
    675             1,080             1,755        
1-4 family structure
    155             868             1,023        
Land (excluding 1-4 family)
    639             276             915        
Other
    1,534             752             2,286        
   
Total PCI loans
  $ 5,826             4,295             10,121        
   

All other loans:
                                               
Office buildings
  $ 25,094       382       3,299       87       28,393       469  
Industrial/warehouse
    14,069       205       1,163       6       15,232       211  
Real estate — other
    12,848       352       1,089       84       13,937       436  
Retail (excluding shopping center)
    11,203       428       1,286       22       12,489       450  
Apartments
    7,473       181       4,490       105       11,963       286  
Land (excluding 1-4 family)
    3,474       65       6,562       359       10,036       424  
Shopping center
    5,888       296       2,604       150       8,492       446  
Hotel/motel
    4,911       43       1,308       59       6,219       102  
1-4 family structure
    1,299       23       2,989       599       4,288       622  
1-4 family land
    828       86       3,207       734       4,035       820  
Other
    10,741       282       946       5       11,687       287  
   
Total all other loans
  $ 97,828       2,343       28,943       2,210       126,771       4,553  
   
Total
  $ 103,654 (4)     2,343       33,238       2,210       136,892       4,553  
   
   

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Commercial Loans and Lease Financing
The following table summarizes commercial loans and lease financing by industry with the related nonaccrual totals. This portfolio has experienced less credit deterioration than our CRE portfolio as evidenced by its lower nonaccrual rate of 2.6% compared with 4.5% for the CRE portfolios. We believe this portfolio is well underwritten and is diverse in its risk with relatively even concentrations across several industries.
COMMERCIAL LOANS AND LEASE FINANCING BY INDUSTRY
                                 
   
    September 30, 2009     June 30, 2009  
    Outstanding     Nonaccrual     Outstanding     Nonaccrual  
(in millions)   balance  (1)   loans     balance  (1)   loans  
   

PCI loans:
                               
Real estate investment trust
  $ 418             523        
Media
    376             378        
Leisure
    211             112        
Residential construction
    152             106        
Insurance
    132             141        
Investment funds & trust
    125             348        
Other
    993 (2)           1,059 (2)      
   
Total PCI loans
  $ 2,407             2,667        
   

All other loans:
                               
Financial institutions
  $ 11,468       469       11,506       169  
Oil and gas
    9,389       229       10,091       188  
Healthcare
    9,144       106       9,767       79  
Cyclical retailers
    8,458       93       9,393       82  
Industrial equipment
    8,409       136       9,148       131  
Food and beverage
    8,351       85       8,578       47  
Real estate — other
    6,974       137       7,366       78  
Business services
    6,960       189       7,548       124  
Transportation
    6,505       42       6,406       24  
Public administration
    5,869       19       6,160       22  
Technology
    5,826       100       6,065       25  
Utilities
    5,799       15       6,683        
Other
    88,166 (3)     3,077       95,214 (3)     2,071  
   
Total all other loans
  $ 181,318       4,697       193,925       3,040  
   
Total
  $ 183,725       4,697       196,592       3,040  
   
   
 
(1)   For PCI loans amounts represent carrying value.
(2)   No other single category had loans in excess of $94 million and $100 million at September 30 and June 30, 2009, respectively.
(3)   No other single category had loans in excess of $5,380 million and $5,747 million at September 30 and June 30, 2009, respectively.
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 portfolio, which is composed primarily of option payment adjustable-rate mortgage and fixed-rate mortgage product. The option payment product making up 74% of this portfolio does contain the potential for negative amortization. Under purchase accounting for the Wachovia acquisition, the Pick-a-Pay loans with the highest probability of default were marked down in accordance with accounting guidance for PCI loans. 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. The liquidating portion of the Home Equity

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portfolio was $8.9 billion at September 30, 2009, down from $9.3 billion at June 30, 2009. The loans in this liquidating portfolio represent about 1% of total loans outstanding at September 30, 2009, and contain some of the highest risk in our $124.2 billion Home Equity portfolio, with a loss rate of 12.17% compared with 3.69% 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 $115.3 billion at September 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. California loans represent the largest state concentration in each of these portfolios and have experienced among the highest early-term delinquency and loss rates.
HOME EQUITY PORTFOLIO (1)
                                                 
   
                    % of loans        
                    two payments     Annualized loss rate  
    Outstanding balances     or more past due     for quarter ended  
    Sept. 30 ,   Dec. 31 ,   Sept. 30 ,   Dec. 31 ,   Sept. 30 ,   Dec. 31 ,
(in millions)   2009     2008     2009     2008     2009     2008  (2)
 

Core portfolio (3)
                                               
California
  $ 30,841       31,544       3.97 %     2.95       6.52       3.94  
Florida
    11,496       11,781       5.08       3.36       4.82       4.39  
New Jersey
    8,119       7,888       2.22       1.41       1.41       0.78  
Virginia
    5,736       5,688       1.60       1.50       1.22       1.56  
Pennsylvania
    4,971       5,043       1.95       1.10       1.51       0.52  
Other
    54,152       56,415       2.64       1.97       2.65       1.59  
   
Total
    115,315       118,359       3.13       2.27       3.69       2.39  
   

Liquidating portfolio
                                               
California
    3,406       4,008       8.75       6.69       18.22       12.32  
Florida
    435       513       9.83       8.41       16.97       13.60  
Arizona
    206       244       8.25       7.40       22.33       13.19  
Texas
    161       191       1.68       1.27       2.15       1.67  
Minnesota
    112       127       3.39       3.79       8.52       5.25  
Other
    4,546       5,226       4.68       3.28       7.14       4.73  
   
Total
    8,866       10,309       6.51       4.93       12.17       8.27  
   
Total core and liquidating portfolios
  $ 124,181       128,668       3.37       2.48       4.31       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 PCI 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 $1.9 billion at September 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 $107.3 billion and a carrying value of $87.8 billion at September 30, 2009. This portfolio includes loans that offer payment options (Pick-a-Pay option payment loans), loans that were originated without the option payment feature and loans that no longer offer the option feature as a result of our modification efforts since the acquisition. At September 30, 2009 the Pick-a-Pay option payment loans totaled $79.2 billion or 74% of the total portfolio, which is down from $101.3 billion or 86% at December 31, 2008. PCI loans in the Pick-a-Pay portfolio had an unpaid principal balance of $57.3 billion and a carrying value of $38.0 billion at September 30, 2009. A significant portion of the Pick-a-Pay PCI loans are option payment loans. The carrying value of the PCI loans is net of purchase accounting net write-downs to reflect their fair value at acquisition. 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. This portfolio declined $2.6 billion from June 30, 2009. We recorded a $22.4 billion write-down in purchase accounting on Pick-a-Pay loans that were impaired using the accounting guidance for PCI loans. Losses to date on this portfolio are reasonably in line with management’s original expectations and our most recent life-of-loan loss projections show an improvement driven in part by extensive and currently successful modification efforts.
Pick-a-Pay option payment loans may be adjustable or fixed rate. They 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.
The minimum monthly payment for substantially all of our Pick-a-Pay option payment 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 $3.9 billion at September 30, 2009, was down from $4.2 billion at June 30, 2009, due to loan modification efforts as well as falling interest rates resulting in the minimum payment option covering the interest and some principal on many loans.
Deferral of interest on a Pick-a-Pay option payment 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 option payment loans, we believe 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: $1 million in the remaining quarter of 2009, $3 million in 2010, $1 million in 2011 and $6 million in 2012. In third quarter 2009, the amount of

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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: $2 million in the remaining quarter of 2009, $39 million in 2010, $44 million in 2011 and $72 million in 2012. In third quarter 2009, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $9 million.
The table below reflects the geographic distribution of the Pick-a-Pay portfolio broken out between PCI loans and all other loans. In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is one important metric in predicting future loan performance, including potential charge-offs. Because PCI loans are carried at fair value, the ratio of the carrying value to the current collateral value for acquired loans with credit impairment 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
                                                         
   
    September 30, 2009  
    PCI 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
  $ 39,034       150 %   $ 25,492       98 %   $ 24,447       95 %   $ 24,395  
Florida
    5,929       144       3,532       85       5,166       108       5,117  
New Jersey
    1,676       101       1,309       78       3,017       82       3,021  
Texas
    452       81       395       71       2,031       66       2,039  
Arizona
    1,481       155       742       78       1,160       105       1,152  
Other states
    8,738       110       6,520       82       14,128       85       14,120  
 
                                               
Total Pick-a-Pay loans
  $ 57,310             $ 37,990             $ 49,949             $ 49,844  
 
                                               
   
 
(1)   The current LTV ratio is calculated as the unpaid principal balance plus the unpaid principal balance of any equity lines of credit that share common collateral divided by the collateral value. Collateral values are generally 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 PCI loans are the nonaccretable difference and the accretable yield, 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 are actively modifying the Pick-a-Pay portfolio. Because of the write-down of the PCI group of loans in purchase accounting, our post merger modifications to PCI Pick-a-Pay loans have not resulted in any modification-related provision for credit losses.
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 (from 30 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 third quarter 2009, we completed 19,148 full-term loan modifications, up from 18,465 in second quarter 2009. The majority of the loan modifications are concentrated in our impaired loan portfolio. As part of the modification process, the loans are re-underwritten, income is documented and the negative amortization feature is eliminated. Most of the modifications result in material payment reduction to the customer. We continually reassess our loss mitigation strategies and may adopt

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additional or different strategies in the future. We believe a key factor to successful loss mitigation is tailoring the revised loan payment to the customer’s sustainable income.
Credit Cards
Our credit card portfolio, a portion of which is included in the Wells Fargo Financial discussion below, totaled $23.6 billion at September 30, 2009, which is less than 3% of our total outstanding loans and is smaller than that of many of our large peer banks. Delinquencies at September 30, 2009, of 30 days or more were 6.22% of credit card outstandings, up slightly from 6.02% for the prior quarter. Net charge-offs were 10.97% (annualized) for third quarter 2009, down from 11.52% (annualized) in second quarter 2009, reflecting high bankruptcy filings and the current economic environment. We have tightened underwriting criteria and imposed credit line management changes to minimize balance transfers and line increases.
Wells Fargo Financial
Wells Fargo Financial originates real estate loans, substantially all of which are secured debt consolidation loans, and both prime and non-prime auto secured loans, unsecured loans and credit cards.
Wells Fargo Financial had total real estate secured loans of $27.0 billion at September 30, 2009, and $29.1 billion at December 31, 2008. 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 remained below industry averages for non-prime mortgage portfolios, with overall loss rates in the first nine months of 2009 of 2.94% on the entire portfolio. Of the portfolio, $8.8 billion at September 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 auto secured loans and leases of $18.1 billion at September 30, 2009, and $23.6 billion at December 31, 2008, of which $4.9 billion and $6.3 billion, respectively, was originated with customer FICO scores below 620. Loss rates in this portfolio in the third quarter and first nine months of 2009 were 5.19% and 5.04%, respectively, for FICO scores of 620 and above, and 7.07% and 6.79%, respectively, for FICO scores below 620. These loans were priced based on relative risk. Of this portfolio, $12.9 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 unsecured loans and credit card receivables of $8.0 billion at September 30, 2009, and $8.4 billion at December 31, 2008, 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 third quarter and first nine months of 2009 were 13.01% and 13.50%, respectively, for FICO scores of 620 and above, and 17.49% and 19.59%, 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 and no restructuring has occurred.
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)
Total nonperforming assets were $23.5 billion (2.93% of total loans) at September 30, 2009, and included $20.9 billion of nonaccrual loans and $2.6 billion of foreclosed assets, real estate and other nonaccrual investments.
                         
   
    Sept. 30 ,   June 30 ,   Dec. 31 ,
(in millions)   2009     2009     2008  
   
Nonaccrual loans:
                       
Commercial and commercial real estate:
                       
Commercial
  $ 4,540       2,910       1,253  
Real estate mortgage
    2,856       2,343       594  
Real estate construction
    2,711       2,210       989  
Lease financing
    157       130       92  
   
Total commercial and commercial real estate
    10,264       7,593       2,928  
   
Consumer:
                       
Real estate 1-4 family first mortgage
    8,132       6,000       2,648  
Real estate 1-4 family junior lien mortgage
    1,985       1,652       894  
Other revolving credit and installment
    344       327       273  
   
Total consumer
    10,461       7,979       3,815  
   
Foreign
    144       226       57  
   
Total nonaccrual loans (1) (2) (3)
    20,869       15,798       6,800  
   
As a percentage of total loans
    2.61 %     1.92       0.79  

Foreclosed assets:
                       
GNMA loans (4)
    840       932       667  
Other
    1,687       1,592       1,526  
Real estate and other nonaccrual investments (5)
    55       20       16  
   
Total nonaccrual loans and other nonperforming assets
  $ 23,451       18,342       9,009  
   
As a percentage of total loans
    2.93 %     2.23       1.04  
   
 
(1)   Includes nonaccrual mortgages held for sale and loans held for sale in their respective loan categories.
(2)   Excludes loans acquired from Wachovia that are accounted for as PCI loans.
(3)   Includes $9.0 billion and $3.6 billion at September 30, 2009, and December 31, 2008, respectively, of loans classified as impaired under FASB ASC 310 (FAS 114, Accounting by Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15 ) where the scope of this pronouncement 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, and nonaccrual debt securities.

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Nonaccrual loans increased $5.1 billion from June 30, 2009. The increase in nonaccrual loans was primarily attributable to deterioration in certain portfolios, particularly commercial loans and consumer real estate. Also, the rate of nonaccrual growth has been somewhat increased by the effect of accounting for substantially all of Wachovia’s nonaccrual loans as PCI loans at year-end 2008. This purchase accounting resulted in reclassifying all but $97 million of Wachovia nonaccruing loans to accruing status, resulting in a reduced level of nonaccrual loans as of our merger date, and limiting comparability of this metric and related credit ratios with our peers. Typically, changes to nonaccrual loans period-over-period represent inflows for loans that reach a specified past due status, 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. The impact of purchase accounting on our credit data should diminish over time. In addition, we have also increased loan modifications and restructurings to assist homeowners and other borrowers in the current difficult economic cycle. This increase is expected to result in elevated nonaccrual loan levels for longer periods because consumer nonaccrual loans that have been modified remain in nonaccrual status until a borrower has made six consecutive contractual payments, inclusive of consecutive payments made prior to the modification. For a consumer accruing loan that has been modified, if the borrower has demonstrated performance under the previous terms and shows the capacity to continue to perform under the restructured terms, the loan will remain in accruing status. Otherwise, the loan will be placed in a nonaccrual status until the borrower has made six consecutive contractual payments.
As explained in more detail below, we believe the loss exposure expected in our nonperforming assets is mitigated by three factors. First, 96% of our nonaccrual loans are secured. Second, losses have already been recognized on 37% of total nonaccrual loans. Third, there is a segment of nonaccrual loans for which there are specific reserves in the allowance, while others are covered by general reserves. We are seeing signs of stability in our credit portfolio, as growth in credit losses slowed during third quarter 2009. We expect credit losses to remain elevated in the near term, but, assuming no further economic deterioration; we expect credit losses to peak in the first half of 2010 in our consumer portfolios and later in 2010 in our commercial and commercial real estate portfolios.
Commercial and commercial real estate nonaccrual loans amounted to $10.3 billion at September 30, 2009, compared with $7.6 billion at June 30, 2009, $4.5 billion at March 31, 2009, and $2.9 billion at December 31, 2008. Of the approximately $10.3 billion total commercial and commercial real estate nonaccrual loans at September 30, 2009:
    $7.3 billion, have had $1.3 billion of loan impairments recorded for expected life-of-loan losses in accordance with impairment accounting standards;
    the remaining $3.0 billion have reserves as part of the allowance for loan losses;
    $9.5 billion (92%) are secured, of which $5.5 billion (53%) are secured by real estate, and the remainder secured by other assets such as receivables, inventory and equipment;
    over one-third of these nonaccrual loans are paying interest that is being applied to principal; and
    23% have been written down by approximately 40%.

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Consumer nonaccrual loans amounted to $10.5 billion at September 30, 2009, compared with $8.0 billion at June 30, 2009, $5.9 billion at March 31, 2009, and $3.8 billion at December 31, 2008. The $6.6 billion increase in nonaccrual consumer loans from December 31, 2008, represented an increase of $5.5 billion in 1-4 family first mortgage loans (including a $3.7 billion increase from Wachovia) and an increase of $1.1 billion in 1-4 family junior liens (including a $402 million increase from Wachovia). Of the $10.5 billion of consumer nonaccrual loans:
    $1.8 billion of TDRs have had $288 million in life-of-loan loss impairment reserves;
    the remaining $8.7 billion have reserves as part of the allowance for loan losses;
    $10.5 billion (99%) are secured, substantially all by real estate;
    24% have a combined loan to value of 80% or below; and
    $5.2 billion have had charge-offs totaling $1.5 billion; consumer loans secured by real estate are charged-off to the appraised value, less costs to sell, of the underlying collateral when these loans reach 180 days delinquent.
The following table summarizes nonperforming assets for the last three quarters for legacy Wells Fargo and Wachovia portfolios. As explained above, the third quarter 2009 growth in the Wachovia nonaccruals was influenced by the anomalies created in purchase accounting of reclassifying substantially all Wachovia nonaccrual loans to accruing status as of year-end 2008.

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NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS BY LEGACY WELLS FARGO AND WACHOVIA
                                                 
   
    Sept. 30, 2009     June 30, 2009     March 31, 2009  
            As a             As a             As a  
            % of             % of             % of  
            total             total             total  
(in millions)   Balances     loans     Balances     loans     Balances     loans  
   

Commercial and commercial real estate:
                                               
Legacy Wells Fargo
  $ 6,037       3.53 %   $ 5,260       3.02 %   $ 3,860       2.13 %
Wachovia
    4,227       2.86       2,333       1.46       645       0.39  
 
                                   
Total commercial and commercial real estate
    10,264       3.22       7,593       2.28       4,505       1.30  
 
                                   
Consumer:
                                               
Legacy Wells Fargo
    6,293       2.90       5,687       2.59       4,970       2.22  
Wachovia
    4,168       1.78       2,292       0.96       966       0.40  
 
                                   
Total consumer
    10,461       2.32       7,979       1.74       5,936       1.27  
 
                                   
Foreign
    144       0.48       226       0.75       75       0.24  
 
                                   
Total nonaccrual loans
    20,869       2.61       15,798       1.92       10,516       1.25  
 
                                   

Foreclosed assets:
                                               
Legacy Wells Fargo
    1,756               1,741               1,421          
Wachovia
    771               783               641          
 
                                         
Total foreclosed assets
    2,527               2,524               2,062          
 
                                         
Real estate and other nonaccrual investments
    55               20               34          
 
                                         
Total nonaccrual loans and other nonperforming assets
  $ 23,451       2.93 %   $ 18,342       2.23 %   $ 12,612       1.50 %
   
Change from prior quarter
  $ 5,109             $ 5,730             $ 3,603          
   
While commercial and commercial real estate nonaccrual loans were up in third quarter 2009, the dollar amount of the increase declined in third quarter 2009 and the rate of growth slowed considerably. Legacy Wells Fargo’s commercial and commercial real estate nonaccrual loans increased $777 million, or 15%, from second quarter 2009, compared with $1.4 billion, or 36%, in second quarter 2009 from first quarter 2009. Legacy Wachovia commercial and commercial real estate nonaccrual loans increased $1.9 billion, or 81%, from second quarter 2009, compared with $1.7 billion, or 262%, in second quarter 2009 from first quarter 2009. Similarly, the growth rate in consumer nonaccrual loans also slowed in third quarter 2009. Legacy Wells Fargo’s consumer nonaccrual loans increased $606 million, or 11%, from second quarter 2009, compared with $717 million, or 14%, in second quarter 2009 from first quarter 2009. Legacy Wachovia’s consumer nonaccrual loans increased $1.9 billion, or 82%, from second quarter 2009, compared with $1.3 billion, or 137%, in second quarter 2009 from first quarter 2009. Wachovia’s Pick-a-Pay portfolio represents the largest portion of consumer nonaccrual loans and were up $1.2 billion in third quarter 2009 from second quarter 2009.
Total consumer TDRs amounted to $7.2 billion at September 30, 2009, compared with $5.6 billion at June 30, 2009. Of the TDRs, $1.8 billion at September 30, 2009, and $1.2 billion at June 30, 2009, were classified as nonaccrual. We strive to identify troubled loans and work with the customer to modify to more affordable terms before their loan reaches nonaccrual status. We establish an impairment reserve when a loan is restructured in a TDR.
We expect nonperforming asset balances to continue to grow, reflecting some continued deterioration in credit, 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

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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. PCI loans are excluded from the disclosure of loans 90 days or more past due and still accruing interest. Even though certain PCI loans 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 and not to contractual interest payments.
The total of loans 90 days or more past due and still accruing was $18,911 million at September 30, 2009, and $11,830 million at December 31, 2008. The total included $12,897 million and $8,184 million for the same dates, 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 following table 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)
                 
   
    Sept. 30 ,   Dec. 31 ,
(in millions)   2009     2008 (1)
   
Commercial and commercial real estate:
               
Commercial
  $ 458       218  
Real estate mortgage
    693       88  
Real estate construction
    930       232  
   
Total commercial and commercial real estate
    2,081       538  
   
Consumer:
               
Real estate 1-4 family first mortgage (2)
    1,552       883  
Real estate 1-4 family junior lien mortgage
    484       457  
Credit card
    683       687  
Other revolving credit and installment
    1,138       1,047  
   
Total consumer
    3,857       3,074  
   
Foreign
    76       34  
   
Total
  $ 6,014       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 PCI 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 BY LEGACY WELLS FARGO AND WACHOVIA
                                                 
   
    Quarter ended  
    Sept. 30, 2009     June 30, 2009     March 31, 2009  
            As a             As a             As a  
    Net loan     % of     Net loan     % of     Net loan     % of  
    charge-     average     charge-     average     charge-     average  
(in millions)   offs     loans (1)   offs     loans (1)   offs     loans (1)
 
Commercial and commercial real estate:
                                               
Legacy Wells Fargo
  $ 862       1.96 %   $ 897       2.01 %   $ 667       1.48 %
Wachovia
    602       1.57       246       0.61       30       0.07  
 
                                         
Total commercial and commercial real estate
    1,464       1.78       1,143       1.35       697       0.80  
 
                                         
Consumer:
                                               
Legacy Wells Fargo
    2,480       4.50       2,462       4.44       2,175       3.90  
Wachovia
    1,107       1.87       735       1.22       341       0.56  
 
                                         
Total consumer
    3,587       3.13       3,197       2.77       2,516       2.16  
 
                                         
Foreign:
                                               
Legacy Wells Fargo
    43       3.00       43       3.05       45       3.13  
Wachovia
    17       0.28       3       0.05              
 
                                         
Total foreign
    60       0.79       46       0.61       45       0.56  
 
                                         
Total Legacy Wells Fargo
    3,385       3.37       3,402       3.35       2,887       2.82  
 
                                         
Total Wachovia
    1,726       1.66       984       0.92       371       0.34  
 
                                         
Total net charge-offs
  $ 5,111       2.50 %   $ 4,386       2.11 %   $ 3,258       1.54 %
   
   
 
(1)   Annualized.
Net charge-offs in third quarter 2009 were $5.1 billion (2.50% of average total loans outstanding, annualized), including $1.7 billion in the Wachovia portfolio, compared with $4.4 billion (2.11%) in second quarter 2009. The increases in net charge-offs this quarter were predominantly from the Wachovia portfolios. The increase in commercial and commercial real estate losses was entirely in the Wachovia portfolio, in part reflecting the fact that charge-offs are just now coming through Wachovia’s portfolio after having eliminated nonaccruals through purchase accounting at the end of 2008. The overall loss rate in third quarter for Wachovia’s non-PCI commercial and commercial real estate portfolio was similar to Wells Fargo’s commercial portfolio, which we believe was underwritten to conservative credit standards. Over 40% of the increase in Wachovia consumer loan losses came from the non-PCI Pick-a-Pay portfolio, in large part reflecting the lagging effect of purchase accounting.
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. Our allowance evaluation methodology generally involves individual evaluation for large credits and the application of statistical evaluation for individually smaller credits. For individually graded (typically commercial) portfolios, we generally use loan-level credit quality ratings, which are based on borrower information

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and strength of collateral, combined with historically-based grade specific loss factors. The allowance for individually-rated nonaccruing commercial loans with an outstanding balance of $5 million or greater is determined through an individual impairment analysis consistent with accounting guidance for loan impairment. For statistically evaluated portfolios (typically consumer), we generally leverage models which 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 and the resultant estimated cash flows discounted at the pre-modification yield of the loan. While the allowance is determined using product and business segment estimates, it is available to absorb losses in the entire loan portfolio.
At September 30, 2009, the allowance for credit losses totaled $24.5 billion (3.07% of total loans), compared with $21.7 billion (2.51%) at December 31, 2008. The allowance for loan losses was $24.0 billion (3.00%) at September 30, 2009, compared with $21.0 billion (2.43%) at December 31, 2008. The allowance for credit losses at September 30, 2009, included $233 million related to PCI loans acquired from Wachovia. The reserve for unfunded credit commitments was $500 million at September 30, 2009, compared with $698 million at December 31, 2008.
Total provision expense in the third quarter and first nine months of 2009 was $6.1 billion and $15.8 billion, respectively, and included a net build to the allowance for credit losses of $1.0 billion and $3.0 billion, respectively. About $900 million of the allowance build was for our commercial portfolios with $400 million for continued deterioration in commercial loans, $300 million for expected life-of-loan losses on impaired commercial loans and nearly $200 million for additional impairment on PCI commercial loans. The consumer portfolio added approximately $100 million of allowance build with $400 million added for loan modifications offset by $345 million for release of allowance on performing loans. Based on our current expectation that consumer related losses will peak in the first half of 2010 and then begin to gradually decline, the allowance build for consumer loan losses has decreased when compared to the allowance build at June 30, 2009.
The accounting for loans acquired from Wachovia with credit impairment affects reported net charge-offs and nonaccrual loans as described on page 5 in this Report. 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 118% at September 30, 2009, and 319% at December 31, 2008, and the ratio of the allowance for credit losses to annualized net charge-offs was 121% and 134% for the quarters ended September 30, 2009, and June 30, 2009, respectively. The decrease in the allowance ratio from December 31, 2008, and June 30, 2009, continued to be primarily related to the increase in Wachovia nonaccrual loans emerging from the portfolio of those loans that were not designated as PCI loans at the acquisition date.
We believe the allowance for credit losses of $24.5 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at September 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 September 30, 2009, our most recent simulation indicated estimated earnings at risk of approximately 5% of our most likely earnings plan using a scenario in which the federal funds rate rises to 3.75% and the 10-year Constant Maturity Treasury bond yield rises to 5.90% by September 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 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. 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 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.
In accordance with the fair value option measurement provisions of the Codification, 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 nine months 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 the Transfers and Servicing topic of the Codification, we elected to use the fair value measurement method to initially measure and carry our residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are recorded at fair value at the time we sell or securitize the related mortgage loans. The carrying value of MSRs reflects changes in fair value at the end of each quarter and

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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 third quarter 2009, a $2.1 billion decrease in the fair value of our MSRs and $3.6 billion of gains on free-standing derivatives used to hedge the MSRs resulted in a net gain of $1.5 billion. This net gain was largely due to hedge-carry income reflecting the current low short-term interest rate environment. The low short-term interest rate environment is likely to continue into fourth quarter 2009.
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 $15.7 billion at September 30, 2009, and $16.2 billion at December 31, 2008. The weighted-average note rate on the owned servicing portfolio was 5.72% at September 30, 2009, and 5.92% at December 31, 2008. Our total MSRs were 0.83% of mortgage loans serviced for others at September 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 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 third quarter 2009 was $42 million, with a lower bound of $25 million and an upper bound of $54 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 September 30, 2009, and $3.0 billion at December 31, 2008, and principal investments of $1.3 billion for both periods. 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 $5.1 billion, respectively, at September 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.
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

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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 September 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 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 September 30, 2009, the Parent had outstanding short-term, long-term and total debt under these authorities of $10.6 billion, $121.6 billion and $132.2 billion, respectively. During the first nine months 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 nine months 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 nine months of 2009, Wells Fargo Bank, N.A. issued $14.5 billion in short-term notes. At September 30, 2009, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $50.0 billion in short-term senior notes and $50.0 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.

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Wachovia Bank, N.A. Wachovia Bank, N.A. had $49.0 billion available for issuance under a global note program at September 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 September 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 September 30, 2009, CAD$6.5 billion remained available for future issuance. On October 27, 2009, WFFCC issued CAD$1.0 billion in medium-term notes. 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.
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 nine months of 2009, we repurchased approximately 3 million shares of our common stock. At September 30, 2009, the total remaining common stock repurchase authority was approximately 11 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

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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 nine months of 2009, retained earnings increased $4.9 billion, primarily from Wells Fargo net income of $9.5 billion, less common and preferred dividends and accretion of $3.4 billion. In the first nine months of 2009, we issued approximately 454 million shares, or $9.6 billion, of common stock, including 392 million shares ($8.6 billion) in a common stock offering and 5 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.
Prior to October 2011, unless we have redeemed the preferred securities or the Treasury Department has transferred the preferred securities to a third party, the consent of the Treasury Department will be required for us to increase our common stock dividend (currently, $0.05 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

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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 September 30, 2009, we had exceeded this requirement by $6 billion. We accomplished this through an $8.6 billion (gross proceeds) common stock offering, and internally generated capital, which has been tracking above the Company’s internal SCAP estimates and 35% above supervisory adverse economic scenario estimate.
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 third quarter 2009. Tier 1 common equity was $53.0 billion at September 30, 2009, an increase of $5.9 billion from June 30, 2009. Tier 1 common equity was 5.18% of risk-weighted assets. At September 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. The adoption of FAS 166/167 in January, 2010, will require us to consolidate certain off-balance sheet assets not currently included in our consolidated financial statements. Currently, we estimate that FAS 166/167 will cause us to add approximately $48 billion in assets, or $25 billion in risk-weighted assets, based on information as of the end of third quarter 2009. See the “Current Accounting Developments” section in this Report for additional information.
The following table provides the detail of our Tier 1 common equity. As noted below, at September 30, 2009, our deferred tax asset was not limited by regulatory capital guidelines.
TIER 1 COMMON EQUITY (1)
                     
   
        Sept. 30 ,   June 30 ,
(in billions)       2009     2009  
   
Total equity
      $ 128.9       121.4  
Less: Noncontrolling interests
        (6.8 )     (6.8 )
   
Total Wells Fargo stockholders’ equity
        122.1       114.6  
   
Less:  Preferred equity
        (31.1 )     (31.0 )
Goodwill and intangible assets (other than MSRs)
        (37.5 )     (38.7 )
Applicable deferred assets
        5.3       5.5  
Deferred tax asset limitation
              (2.0 )
MSRs over specified limitations
        (1.5 )     (1.6 )
Cumulative other comprehensive income
        (4.0 )     0.6  
Other
        (0.3 )     (0.3 )
   
Tier 1 common equity
  (A)   $ 53.0       47.1  
   
Total risk-weighted assets (2)
  (B)   $ 1,023.8       1,047.7  
   
Tier 1 common equity to total risk-weighted assets
  (A)/(B)     5.18 %     4.49  
   
   
 
(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.

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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 following the process prescribed in the joint venture agreements for appraising the value of the joint venture as of a date immediately prior to the A.G. Edwards contribution. This value will determine the purchase price for Prudential’s interests in the joint venture. We have notified Prudential that we will pay the purchase price for Prudential’s joint venture interests with a combination of cash and Wells Fargo common stock. This payment could be a combination that is substantially comprised of common stock or substantially comprised of cash. We do not currently expect to determine this mix until later in the fourth quarter of 2009. 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 and Second 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, our First Quarter 2009 Form 10-Q or our Second 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,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “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 are on track to realize annual run-rate savings of $5 billion upon completion of the Wachovia integration;
 
  we currently expect cumulative merger integration costs of approximately $5.5 billion;
 
  we expect credit losses to remain elevated in the near term, but, assuming no further economic deterioration, current projections show credit losses peaking in the first half of 2010 in our consumer portfolios and later in 2010 in our commercial and commercial real estate portfolios;
 
  short-term rates, for purposes of hedge-carry income, are likely to continue into fourth quarter 2009;
 
  to the extent nonperforming loans return to accrual status, NPA growth should moderate;
 
  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;
 
  we currently estimate that recently announced overdraft policy changes will reduce our 2010 fee revenue by approximately $300 million (after tax);
 
  we believe life-of-loan loss estimates in our Pick-a-Pay portfolio have decreased;
 
  we believe there is little recast risk over the next three years in our Pick-a-Pay portfolio and we expect certain specified Pick-a-Pay loan balances to recast and/or start fully amortizing in the remaining quarter of 2009 and through 2012;
 
  we expect nonperforming asset balances to continue to grow, and we will continue to increase staffing in our workout and collection organizations to ensure troubled borrowers receive the attention and help they need;

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  we believe the allowance for credit losses was adequate to cover credit losses inherent in our loan portfolio, including unfunded credit commitments at September 30, 2009;
 
  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 expect the closing of the Prudential put transaction to occur on or about January 1, 2010;
 
  we expect to recover the entire amortized cost basis of certain specified securities;
 
  we believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in OCI;
 
  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 $212 million of deferred net gains on derivatives in OCI at September 30, 2009, will be reclassified as earnings during the next twelve months; and
  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 fourth quarter 2009 by approximately $188 million.
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;
 
  the terms of capital investments or other financial assistance provided by the U.S. government;
 
  our capital requirements and the ability to raise capital on favorable terms;
 
  legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;
 
  legislative and regulatory developments relating to overdraft fees, credit cards, and other bank services, as well as changes to our overdraft practices, which could have a negative effect on our revenue and other financial results;
 
  the extent of our success in our loan modification efforts;
 
  our ability to successfully integrate the Wachovia merger and realize the expected cost savings and other benefits and the effects of any delays or disruptions in systems conversions relating to the Wachovia integration;
 
  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 mortgage 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;
 
  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 or interpreted;
 
  mergers, acquisitions and divestitures;

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  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.
In addition to the above factors, we also caution that 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 or improve. 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 as to when and how we will repay the government’s investment under its Capital Purchase Program (CPP) or that we will be able to repay the investment in a manner that does not require or result in the issuance of equity securities. As discussed under “Prudential Joint Venture” above, we have notified Prudential that we will pay the purchase price for Prudential’s joint venture interest with a combination of cash and Wells Fargo common stock, which payment could be a combination substantially comprised of common stock or substantially comprised of cash. The issuance of Wells Fargo common stock to repay the government’s CPP investment or to pay the portion of the purchase price for Prudential’s joint venture interest that is not paid in cash may result 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. There is no assurance that the actual impact on our 2010 fee revenue from recent changes to our overdraft policy will not materially vary from our estimate.

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CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of September 30, 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 September 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 third 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 Sept. 30 ,   Nine months ended Sept. 30 ,
(in millions, except per share amounts)   2009     2008     2009     2008  
   

Interest income
                               
Trading assets
  $ 216       41       688       126  
Securities available for sale
    2,947       1,397       8,543       3,753  
Mortgages held for sale
    524       394       1,484       1,211  
Loans held for sale
    34       12       151       34  
Loans
    10,170       6,888       31,467       20,906  
Other interest income
    77       42       249       140  
   
Total interest income
    13,968       8,774       42,582       26,170  
   
Interest expense
                               
Deposits
    905       1,019       2,861       3,676  
Short-term borrowings
    32       492       210       1,274  
Long-term debt
    1,301       882       4,565       2,801  
Other interest expense
    46             122        
   
Total interest expense
    2,284       2,393       7,758       7,751  
   
Net interest income
    11,684       6,381       34,824       18,419  
Provision for credit losses
    6,111       2,495       15,755       7,535  
   
Net interest income after provision for credit losses
    5,573       3,886       19,069       10,884  
   
Noninterest income
                               
Service charges on deposit accounts
    1,478       839       4,320       2,387  
Trust and investment fees
    2,502       738       7,130       2,263  
Card fees
    946       601       2,722       1,747  
Other fees
    950       552       2,814       1,562  
Mortgage banking
    3,067       892       8,617       2,720  
Insurance
    468       439       1,644       1,493  
Net gains (losses) on debt securities available for sale (includes impairment losses of $273 and $850, consisting of $314 and $1,889 of total other-than-temporary impairment losses, net of $41 and $1,039 recognized in other comprehensive income, for the quarter and nine months ended September 30, 2009, respectively)
    (40 )     84       (237 )     316  
Net gains (losses) from equity investments
    29       (509 )     (88 )     (149 )
Other
    1,382       360       4,244       1,642  
   
Total noninterest income
    10,782       3,996       31,166       13,981  
   
Noninterest expense
                               
Salaries
    3,428       2,078       10,252       6,092  
Commission and incentive compensation
    2,051       555       5,935       2,005  
Employee benefits
    1,034       486       3,545       1,666  
Equipment
    563       302       1,825       955  
Net occupancy
    778       402       2,357       1,201  
Core deposit and other intangibles
    642       47       1,935       139  
FDIC and other deposit assessments
    228       37       1,547       63  
Other
    2,960       1,594       8,803       4,667  
   
Total noninterest expense
    11,684       5,501       36,199       16,788  
   
Income before income tax expense
    4,671       2,381       14,036       8,077  
Income tax expense
    1,355       730       4,382       2,638  
   
Net income before noncontrolling interests
    3,316       1,651       9,654       5,439  
Less: Net income from noncontrolling interests
    81       14       202       50  
   
Wells Fargo net income
  $ 3,235       1,637       9,452       5,389  
   
Wells Fargo net income applicable to common stock
  $ 2,637       1,637       7,596       5,389  
   
Per share information
                               
Earnings per common share
  $ 0.56       0.49       1.70       1.63  
Diluted earnings per common share
    0.56       0.49       1.69       1.62  
Dividends declared per common share
    0.05       0.34       0.44       0.96  
Average common shares outstanding
    4,678.3       3,316.4       4,471.2       3,309.6  
Diluted average common shares outstanding
    4,706.4       3,331.0       4,485.3       3,323.4  
   
The accompanying notes are an integral part of these statements.
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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
                 
   
    Sept. 30 ,   Dec. 31 ,
(in millions, except shares)   2009     2008  
   

Assets
               
Cash and due from banks
  $ 17,233       23,763  
Federal funds sold, securities purchased under
resale agreements and other short-term investments
    17,491       49,433  
Trading assets
    43,198       54,884  
Securities available for sale
    183,814       151,569  
Mortgages held for sale (includes $33,435 and $18,754 carried at fair value)
    35,538       20,088  
Loans held for sale (includes $201 and $398 carried at fair value)
    5,846       6,228  
Loans
    799,952       864,830  
Allowance for loan losses
    (24,028 )     (21,013 )
   
Net loans
    775,924       843,817  
   
Mortgage servicing rights:
               
Measured at fair value (residential MSRs)
    14,500       14,714  
Amortized
    1,162       1,446  
Premises and equipment, net
    11,040       11,269  
Goodwill
    24,052       22,627  
Other assets
    98,827       109,801  
   
Total assets
  $ 1,228,625       1,309,639  
   
Liabilities
               
Noninterest-bearing deposits
  $ 165,260       150,837  
Interest-bearing deposits
    631,488       630,565  
   
Total deposits
    796,748       781,402  
Short-term borrowings
    30,800       108,074  
Accrued expenses and other liabilities
    57,861       50,689  
Long-term debt
    214,292       267,158  
   
Total liabilities
    1,099,701       1,207,323  
   
Equity
               
Wells Fargo stockholders’ equity:
               
Preferred stock
    31,589       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
    40,343       36,026  
Retained earnings
    41,485       36,543  
Cumulative other comprehensive income (loss)
    4,088       (6,869 )
Treasury stock - 76,876,271 shares and 135,290,540 shares
    (2,771 )     (4,666 )
Unearned ESOP shares
    (511 )     (555 )
   
Total Wells Fargo stockholders’ equity
    122,150       99,084  
Noncontrolling interests
    6,774       3,232  
   
Total equity
    128,924       102,316  
   
Total liabilities and equity
  $ 1,228,625       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 from change in accounting for postretirement benefits
                               
Adjustment for change of measurement date related to pension and other postretirement benefits
                               
   
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 $107 million of net losses included in net income
                               
Net unrealized losses on derivatives and hedging activities, net of reclassification of $115 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
                    49,454,756          
Common stock repurchased
                    (37,327,260 )        
Preferred stock issued to ESOP
    520,500       521                  
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (344,860 )     (346 )     11,988,925          
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
    175,640       175       24,116,421        
   

Balance September 30, 2008
    625,444     $ 625       3,321,218,629     $ 5,788  
   

Balance December 31, 2008
    10,111,821     $ 31,332       4,228,630,889     $ 7,273  
   
Cumulative effect from change in accounting for other-than-temporary impairment on debt securities
                               
Effect of change in accounting for noncontrolling interests
                               
   
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 $45 million of net gains included in net income
                               
Net unrealized losses on derivatives and hedging activities, net of reclassification of $257 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
                    451,324,822       654  
Common stock repurchased
                    (3,353,597 )        
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (41,280 )     (41 )     2,593,044          
Common stock dividends
                               
Preferred stock dividends and accretion
            298                  
Tax benefit upon exercise of stock options
                               
Stock option compensation expense
                               
Net change in deferred compensation and related plans
                               
   
Net change
    (41,280 )     257       450,564,269       654  
   

Balance September 30, 2009
    10,070,541     $ 31,589       4,679,195,158     $ 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  
   
 
                                                               
 
            5,389                               5,389       50       5,439  
 
                                                               
 
                    (20 )                     (20 )             (20 )

 
                    (3,485 )                     (3,485 )             (3,485 )

 
                    (6 )                     (6 )             (6 )
 
                    3                       3               3  
   
 
                                            1,881       50       1,931  
 
                                                  (34 )     (34 )
 
    (41 )     (300 )             1,610               1,269               1,269  
 
                            (1,162 )             (1,162 )             (1,162 )
 
    30                               (551 )                    
 
    (20 )                             366       346               346  
 
    (46 )                     392                              
 
            (3,178 )                             (3,178 )             (3,178 )
 
    106                                       106               106  
 
    134                                       134               134  
 
    32                       (12 )             20               20  
 
    (59 )                                     (59 )             (59 )
   
 
    136       1,911       (3,508 )     828       (185 )     (643 )     16       (627 )
   

                                                               
 
    8,348       40,853       (2,783 )     (5,207 )     (667 )     46,957       302     $ 47,259  
   

 
    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  
   

                                                               
 
            9,452                               9,452       202       9,654  

                                                               
 
                    63                       63       (5 )     58  

                                                               
 
                    (654 )                     (654 )             (654 )

                                                               
 
                    11,220                       11,220       64       11,284  

 
                    (189 )                     (189 )             (189 )
 
                    570                       570               570  
   
 
                                            20,462       261       20,723  
 
    21                                       21       (435 )     (414 )
 
    7,845       (816 )             1,907               9,590               9,590  
 
                            (80 )             (80 )             (80 )
 
    (3 )                             44       41               41  
 
    (42 )                     83                              
 
            (1,891 )                             (1,891 )             (1,891 )
 
            (1,856 )                             (1,558 )             (1,558 )
 
    9                                       9               9  
 
    180                                       180               180  
 
    23                       (15 )             8               8  
   
 
    8,033       4,889       11,010       1,895       44       26,782       (174 )     26,608  
   

 
    40,343       41,485       4,088       (2,771 )     (511 )     122,150       6,774     $ 128,924  
   
   

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
                 
   
    Nine months ended Sept. 30 ,
(in millions)   2009     2008  
   

Cash flows from operating activities:
               
Net income before noncontrolling interests
  $ 9,654       5,439  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    15,755       7,535  
Changes in fair value of MSRs (residential), MHFS and LHFS carried at fair value
    1,366       (1,301 )
Depreciation and amortization
    2,437       1,154  
Other net gains
    (2,261 )     (999 )
Preferred shares released to ESOP
    41       346  
Stock option compensation expense
    180       134  
Excess tax benefits related to stock option payments
    (9 )     (104 )
Originations of MHFS
    (321,098 )     (163,797 )
Proceeds from sales of and principal collected on mortgages originated for sale
    306,882       171,809  
Originations of LHFS
    (8,641 )      
Proceeds from sales of LHFS
    15,937        
Purchases of LHFS
    (6,461 )      
Net change in:
               
Trading assets
    13,834       (1,360 )
Deferred income taxes
    4,835       1,146  
Accrued interest receivable
    948       63  
Accrued interest payable
    (1,157 )     (176 )
Other assets, net
    (6,159 )     (8,319 )
Other accrued expenses and liabilities, net
    (833 )     631  
   
Net cash provided by operating activities
    25,250       12,201  
   

Cash flows from investing activities:
               
Net change in:
               
Federal funds sold, securities purchased under resale agreements and other short-term investments
    31,942       (5,301 )
Securities available for sale:
               
Sales proceeds
    46,337       39,698  
Prepayments and maturities
    28,746       15,879  
Purchases
    (89,395 )     (74,381 )
Loans:
               
Decrease (increase) in banking subsidiaries’ loan originations, net of collections
    44,337       (32,006 )
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries
    4,569       1,843  
Purchases (including participations) of loans by banking subsidiaries
    (2,007 )     (4,329 )
Principal collected on nonbank entities’ loans
    10,224       15,462  
Loans originated by nonbank entities
    (7,117 )     (13,880 )
Net cash paid for acquisitions
    (132 )     (590 )
Proceeds from sales of foreclosed assets
    2,708       1,299  
Changes in MSRs from purchases and sales
    (9 )     71  
Net change in noncontrolling interests
    (355 )     (34 )
Other, net
    4,951       (1,341 )
   
Net cash provided (used) by investing activities
    74,799       (57,610 )
   

Cash flows from financing activities:
               
Net change in:
               
Deposits
    15,212       7,370  
Short-term borrowings
    (77,274 )     31,798  
Long-term debt:
               
Proceeds from issuance
    4,803       22,751  
Repayment
    (55,332 )     (15,439 )
Preferred stock:
               
Cash dividends paid
    (1,616 )      
Common stock:
               
Proceeds from issuance
    9,590       1,269  
Repurchased
    (80 )     (1,162 )
Cash dividends paid
    (1,891 )     (3,178 )
Excess tax benefits related to stock option payments
    9       104  
   
Net cash provided (used) by financing activities
    (106,579 )     43,513  
   
Net change in cash and due from banks
    (6,530 )     (1,896 )
Cash and due from banks at beginning of period
    23,763       14,757  
   
Cash and due from banks at end of period
  $ 17,233       12,861  
   

Supplemental cash flow disclosures:
               
Cash paid for interest
  $ 8,915       7,927  
Cash paid for income taxes
    2,834       2,431  
   
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
See page 145-146 for the Glossary of Acronyms for terms used throughout the Financial Statements and related Notes of this Form 10-Q and page 147 for the Codification Cross Reference for cross references from accounting standards under the recently adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification) to pre-Codification accounting standards.
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 purchased credit-impaired (PCI) loans (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 new accounting guidance on noncontrolling interests on a retrospective basis for disclosure as required in FASB ASC 810, Consolidation. Accordingly, prior period information reflects the adoption. The guidance requires that noncontrolling interests be reported as a component of total equity. In addition, the consolidated income statement must 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).
Effective July 1, 2009, the FASB established the Codification as the source of authoritative GAAP for companies to use in the preparation of financial statements. Securities and Exchange Commission (SEC) rules and interpretive releases are also authoritative GAAP for SEC registrants. The guidance contained in the Codification supersedes all existing non-SEC accounting and reporting standards. We adopted the Codification, as required, in third quarter 2009. As a result, references to accounting literature contained in our financial statement disclosures have been updated to reflect the new Accounting Standards Codification (ASC) structure. References to superseded authoritative literature are shown parenthetically below, and cross-references to pre-Codification accounting standards are included on page 147.
Current Accounting Developments
In first quarter 2009, we adopted new guidance related to the following Codification topics:
  FASB ASC 815-10, Derivatives and Hedging (FAS 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133);
  FASB ASC 810-10, Consolidation (FAS 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51);
  FASB ASC 805-10, Business Combinations (FAS 141R (revised 2007), Business Combinations);
  FASB ASC 820-10, Fair Value Measurements and Disclosures (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);
  FASB ASC 320-10, Investments — Debt and Equity Securities (FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments); and
  FASB ASC 260-10, Earnings Per Share (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 new guidance related to the following Codification topics:
  FASB ASC 825-10, Financial Instruments (FSP FAS 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments); and
  FASB ASC 855-10, Subsequent Events (FAS 165, Subsequent Events).
In third quarter 2009, we adopted new guidance related to the following Codification topic:
  FASB ASC 105-10, Generally Accepted Accounting Principles (FAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162).
Information about these pronouncements is described in more detail below.
FASB ASC 815-10 (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 this pronouncement for first quarter 2009 reporting. See Note 11 for complete disclosures on derivatives and hedging activities. This standard

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does not affect our consolidated financial statements since it amends only the disclosure requirements for derivative instruments and hedged items.
FASB ASC 810-10 (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 our adoption of this standard, noncontrolling interests were classified outside of equity. This new guidance 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. When a subsidiary is deconsolidated, a parent is required to recognize a gain or loss with any remaining interest 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. This new guidance was effective on January 1, 2009, with prospective application to all noncontrolling interests including those that arose prior to the adoption. Retrospective adoption was 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 on the Prudential joint venture, see the “Capital Management” section in this Report. 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 new accounting guidance for noncontrolling interests, related interpretive guidance, and Prudential’s 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.
FASB ASC 805-10 (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. FASB ASC 805-10 was applicable prospectively to business combinations completed on or after January 1, 2009.
FASB ASC 820-10 (FSP FAS 157-4) addresses measuring fair value in situations where markets are inactive and transactions are not orderly. The guidance acknowledges that in these circumstances quoted prices may not be determinative of fair value; however, 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 pronouncement, many companies, including Wells Fargo, interpreted accounting guidance on fair value measurements 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 this pronouncement, price quotes for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly.

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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 Fair Value Measurements and Disclosures topic in the Codification 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 new measurement provisions of FASB ASC 820-10 were 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 (OCI), and trading assets of $18 million, which was reflected in earnings. See the “Critical Accounting Policies” section in this Report for more information.
FASB ASC 320-10 (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 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 OCI. The new accounting prescribed for recording OTTI on debt securities was 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 OCI for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had this accounting guidance been effective for those periods.
FASB ASC 260-10 (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 the Earnings per Share topic of the Codification. This pronouncement was effective on January 1, 2009, with retrospective adoption required. The adoption of this standard did not have a material effect on our consolidated financial statements.
FASB ASC 825-10 (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. Entities must also disclose 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 new provisions in FASB ASC 825-10 amend only the disclosure requirements related to the fair value of financial instruments, the adoption of this pronouncement does not affect our consolidated financial statements.

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FASB ASC 855-10 (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. Companies are also required to disclose the date through which management has evaluated subsequent events, which for public entities is the date that financial statements are issued. The requirements for disclosing subsequent events were effective in second quarter 2009 with prospective application. Our adoption of this standard did not have a material impact on our consolidated financial statements.
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).
                 
   
    Nine months ended Sept. 30 ,
(in millions)   2009     2008  
   

Transfers from trading assets to securities available for sale
  $ 845        
Transfers from securities available for sale to loans
    258        
Transfers from MHFS to trading assets
    2,993        
Transfers from MHFS to securities available for sale
          544  
Transfers from MHFS to MSRs
    5,088       2,659  
Transfers from MHFS to foreclosed assets
    125       105  
Transfers from (to) loans (from) to MHFS
    60       (507 )
Transfers from LHFS to loans
    6       677  
Transfers from loans to foreclosed assets
    5,067       2,203  
   
Subsequent Events
We have evaluated the effects of subsequent events that have occurred subsequent to period end September 30, 2009, and through November 6, 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 third quarter 2009 consolidated financial statements or disclosure in the Notes to 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 nine months 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 September 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 $1.4 billion in the first nine months 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
    19,390       (4 )     19,394  
Adjustments to reflect assets acquired and liabilities assumed at fair value:
                       
Loans and leases, net
    (17,921 )     (1,524 )     (16,397 )
Premises and equipment, net
    (695 )     (239 )     (456 )
Intangible assets
    14,582       (158 )     14,740  
Other assets
    (3,211 )     233       (3,444 )
Deposits
    (4,568 )     (134 )     (4,434 )
Accrued expenses and other liabilities (exit, termination and other liabilities)
    (2,586 )     (987 )     (1,599 )
Long-term debt
    (227 )     (37 )     (190 )
Deferred taxes
    8,171       1,495       6,676  
   
Fair value of net assets acquired
    12,935       (1,355 )     14,290  
   
Goodwill resulting from the merger
  $ 10,157       1,355       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 (1)
    327       20       13       360  
Cash payments / utilization
    (220 )           (102 )     (322 )
   
Balance, September 30, 2009
  $ 164       33       40       237  
   
   
(1)   Certain purchase accounting adjustments have been refined during 2009 as additional information became available.
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS
The following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
                 
   
    Sept. 30 ,   Dec. 31 ,
(in millions)   2009     2008  
   

Federal funds sold and securities purchased under resale agreements
  $ 9,432       8,439  
Interest-earning deposits
    6,879       39,890  
Other short-term investments
    1,180       1,104  
   
Total
  $ 17,491       49,433  
   
   
For resale agreements, which represent collateralized financing transactions, we hold collateral in the form of securities that we have the right to sell or repledge of $1.3 billion at September 30, 2009, and $1.6 billion at December 31, 2008. These amounts include securities we have sold or repledged to others with a fair value of $483 million and $343 million, as of the same dates, respectively.

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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 OCI. 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  
   

September 30, 2009
                               

Securities of U.S. Treasury and federal agencies
  $ 2,446       57       (7 )     2,496  
Securities of U.S. states and political subdivisions
    13,202       839       (411 )     13,630  
Mortgage-backed securities:
                               
Federal agencies
    83,888       3,615             87,503  
Residential (2)
    32,958       2,881       (1,747 )     34,092  
Commercial
    12,433       665       (1,834 )     11,264  
   
Total mortgage-backed securities
    129,279       7,161       (3,581 )     132,859  
   
Corporate debt securities
    8,400       932       (130 )     9,202  
Collateralized debt obligations
    3,194       451       (382 )     3,263  
Other (1)
    15,551       1,122       (214 )     16,459  
   
Total debt securities
    172,072       10,562       (4,725 )     177,909  
   
Marketable equity securities:
                               
Perpetual preferred securities
    3,918       315       (160 )     4,073  
Other marketable equity securities
    1,181       665       (14 )     1,832  
   
Total marketable equity securities
    5,099       980       (174 )     5,905  
   
Total
  $ 177,171       11,542       (4,899 )     183,814  
   
   
 
(1)   Included in the “Other” category are asset-backed securities collateralized by auto leases with a cost basis and fair value of $8.6 billion and $9.0 billion, respectively, at September 30, 2009, and $8.3 billion and $7.9 billion, respectively, at December 31, 2008. Also included in the “Other” category are asset-backed securities collateralized by home equity loans with a cost basis and fair value of $2.5 billion and $2.7 billion, respectively, at September 30, 2009, and $3.2 billion and $3.2 billion, respectively, at December 31, 2008. The remaining balances primarily include asset-backed securities collateralized by credit cards and student loans.
(2)   Foreign residential mortgage-backed securities with a fair value of $3.3 billion are included in residential mortgage-backed securities at September 30, 2009. These instruments were included in other debt securities at December 31, 2008, and had a fair value of $6.3 billion.
As part of our liquidity management strategy, we pledge securities to secure borrowings from the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank. We also pledge securities to secure trust and public deposits and for other purposes as required or permitted by law. The carrying value of pledged securities where the secured party has the right to sell or repledge totaled $1.4 billion at September 30, 2009, and $10.1 billion at December 31, 2008. Securities pledged where the secured party does not have the right to sell or repledge totaled $98.0 billion at September 30, 2009, and $71.6 billion at December 31, 2008.

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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  
   

September 30, 2009
                                               

Securities of U.S. Treasury and federal agencies
  $ (7 )     266                   (7 )     266  
Securities of U.S. states and political subdivisions
    (6 )     198       (405 )     3,474       (411 )     3,672  
Mortgage-backed securities:
                                               
Federal agencies
                                   
Residential
    (201 )     2,647       (1,546 )     10,591       (1,747 )     13,238  
Commercial
    (33 )     514       (1,801 )     6,908       (1,834 )     7,422  
   
Total mortgage-backed securities
    (234 )     3,161       (3,347 )     17,499       (3,581 )     20,660  
   
Corporate debt securities
    (30 )     229       (100 )     645       (130 )     874  
Collateralized debt obligations
    (37 )     329       (345 )     487       (382 )     816  
Other
    (82 )     691       (132 )     85       (214 )     776  
   
Total debt securities
    (396 )     4,874       (4,329 )     22,190       (4,725 )     27,064  
   
Marketable equity securities:
                                               
Perpetual preferred securities
    (11 )     176       (149 )     542       (160 )     718  
Other marketable equity securities
    (14 )     75                   (14 )     75  
   
Total marketable equity securities
    (25 )     251       (149 )     542       (174 )     793  
   
Total
  $ (421 )     5,125       (4,478 )     22,732       (4,899 )     27,857  
   
   
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 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.

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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, wider credit spreads and changes in interest rates. 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 for a security by forecasting the performance of 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 are also considered and, 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 and wider credit spreads. 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 September 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 September 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. There were no unrated securities included in investment grade in a loss position as of September 30, 2009. The unrealized losses and fair value of unrated securities categorized as investment grade were $543 million and $8,091 million as of December 31, 2008. Substantially all of the unrealized losses on unrated securities classified as investment grade as of December 31, 2008, were related to investments in asset-backed securities collateralized by auto leases that appreciated to an unrealized gain position at September 30, 2009, due to spread tightening. 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  
   

September 30, 2009

                               

Securities of U.S. Treasury and federal agencies

  $ (7 )     266              
Securities of U.S. states and political subdivisions
    (314 )     3,343       (97 )     329  
Mortgage-backed securities:
                               
Federal agencies
                       
Residential
    (284 )     5,810       (1,463 )     7,428  
Commercial
    (1,512 )     7,016       (322 )     406  
   
Total mortgage-backed securities
    (1,796 )     12,826       (1,785 )     7,834  
   
Corporate debt securities
    (47 )     165       (83 )     709  
Collateralized debt obligations
    (92 )     367       (290 )     449  
Other
    (30 )     432       (184 )     344  
   
Total debt securities
    (2,286 )     17,399       (2,439 )     9,665  
Perpetual preferred securities
    (153 )     690       (7 )     28  
   
Total
  $ (2,439 )     18,089       (2,446 )     9,693  
   
   

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Realized Gains and Losses
The following table shows the gross realized gains and losses on sales from the securities available-for-sale portfolio, including marketable equity securities. Realized losses include OTTI write-downs.
                                 
   
    Quarter ended Sept. 30,     Nine months ended Sept. 30,  
(in millions)   2009     2008     2009     2008  
   

Gross realized gains

  $ 378       549       1,088       1,003  
Gross realized losses
    (300 )     (948 )     (1,018 )     (1,175 )
   
Net realized gains (losses)
  $ 78       (399 )     70       (172 )
   
   
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.
                 
   
    Sept. 30, 2009  
    Quarter     Nine months  
(in millions)   ended     ended  
   

OTTI write-downs (included in earnings)

               
Debt securities
  $ 273       850  
Equity securities:
               
Marketable equity securities
    4       74  
Nonmarketable equity securities
    119       451  
   
Total equity securities
    123       525  
   
Total OTTI write-downs
  $ 396       1,375  
   

OTTI on debt securities

               
Recorded as part of gross realized losses:
               
Credit-related OTTI
  $ 251       821  
Securities we intend to sell
    22       29  
Recorded directly to other comprehensive income for non-credit-related impairment (1)
    41       1,039  
   
Total OTTI on debt securities
  $ 314       1,889  
   
   
(1)   Represents amounts recorded to OCI on debt securities (predominantly residential mortgage-backed securities) in periods OTTI write-downs have been incurred. Changes in fair value in subsequent periods on such securities, to the extent not subsequently impaired in those periods, is not reflected in this balance.
The following table provides detail of OTTI recognized in earnings for debt and equity securities available for sale by major security type.
                                 
   
    Quarter ended Sept. 30,     Nine months ended Sept. 30,  
(in millions)   2009     2008     2009     2008  
   

Debt securities:

                               
U.S. states and political subdivisions
  $ 1             6        
Residential mortgage-backed securities
    134       26       526       99  
Commercial mortgage-backed securities
    67       23       78       23  
Corporate debt securities
    5       93       58       124  
Collateralized debt obligations
    25       120       121       124  
Other debt securities
    41             61        
   
Total debt securities
    273       262       850       370  
   

Marketable equity securities:

                               
Perpetual preferred securities
    2       594       47       627  
Other marketable equity securities
    2       37       27       98  
   
Total marketable equity securities
    4       631       74       725  
   
Total OTTI losses recognized in earnings
  $ 277       893       924       1,095  
   
   

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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.
Other-Than-Temporarily Impaired Debt Securities
We recognize OTTI for debt securities classified as available for sale in accordance with FASB ASC 320, which requires that 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 OCI. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in OCI.
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 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     Nine months ended  
(in millions)   Sept. 30, 2009     Sept. 30, 2009