EX-13 6 f56816exv13.htm EX-13 exv13
EXHIBIT 13

         
    Financial Review
       
 
34   Overview
       
 
38   Earnings Performance
       
 
49   Balance Sheet Analysis
       
 
52   Off-Balance Sheet Arrangements
       
 
54   Risk Management
       
 
82   Capital Management
       
 
84   Critical Accounting Policies
       
 
90   Current Accounting Developments
       
 
90   Forward-Looking Statements
       
 
92   Risk Factors
       
 
    Controls and Procedures
       
 
102   Disclosure Controls and Procedures
       
 
102   Internal Control over Financial Reporting
       
 
102   Management’s Report on Internal Control over Financial Reporting
       
 
103   Report of Independent Registered Public Accounting Firm
       
 
    Financial Statements
       
 
104   Consolidated Statement of Income
       
 
105   Consolidated Balance Sheet
       
 
106   Consolidated Statement of Changes in Equity and Comprehensive Income
       
 
110   Consolidated Statement of Cash Flows
       
 
    Notes to Financial Statements
       
 
111   1  
Summary of Significant Accounting Policies
       
 
121   2  
Business Combinations
         
122   3  
Cash, Loan and Dividend Restrictions
       
 
122   4  
Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments
       
 
123   5  
Securities Available for Sale
       
 
131   6  
Loans and Allowance for Credit Losses
       
 
145   7  
Premises, Equipment, Lease Commitments and Other Assets
       
 
146   8  
Securitizations and Variable Interest Entities
       
 
156   9  
Mortgage Banking Activities
       
 
159   10  
Intangible Assets
       
 
161   11  
Deposits
       
 
162   12  
Short-Term Borrowings
       
 
163   13  
Long-Term Debt
       
 
166   14  
Guarantees and Legal Actions
       
 
172   15  
Derivatives
       
 
179   16  
Fair Values of Assets and Liabilities
       
 
194   17  
Preferred Stock
       
 
196   18  
Common Stock and Stock Plans
       
 
201   19  
Employee Benefits and Other Expenses
       
 
209   20  
Income Taxes
       
 
211   21  
Earnings Per Common Share
       
 
212   22  
Other Comprehensive Income
       
 
213   23  
Operating Segments
       
 
215   24  
Condensed Consolidating Financial Statements
       
 
220   25  
Regulatory and Agency Capital Requirements
       
 
221   Report of Independent Registered Public Accounting Firm
       
 
222   Quarterly Financial Data
       
 
223   Glossary of Acronyms


33


 

This Annual Report, including the Financial Review and the Financial Statements and related Notes, contains 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 may differ materially from our forward-looking statements 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 “Forward-Looking Statements” and “Risk Factors” sections in this Report and the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
See the Glossary of Acronyms at the end of this Report for terms used throughout this Report.
Financial Review
Overview
 

Wells Fargo & Company is a $1.3 trillion diversified financial services company providing banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores, the internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia (D.C.) and in other countries. We ranked fourth in assets and second in the market value of our common stock among our large bank peers at December 31, 2010. 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 offer them all of the financial products that fulfill their needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses. We continued to earn more of our customers’ business in 2010 in both our retail and commercial banking businesses and in our equally customer-centric securities brokerage and investment banking businesses.
     Reflecting solid growth in a variety of businesses, Wells Fargo net income was a record $12.4 billion in 2010. Diluted earnings per common share were $2.21. Pre-tax pre-provision profit (PTPP) was $34.8 billion in 2010, which covered almost 2.0 times annual net charge-offs. 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.
     Our combined company retail bank household cross-sell, reported for the first time in December 2010, was 5.70 products per household, up from 5.47 a year ago. Cross-sell for the
combined company, which is lower than legacy Wells Fargo stand-alone cross-sell, indicates the opportunity to earn more business from our Wachovia customers. The cross-sell for customers in the West was 6.14 products, compared with 5.11 for customers in the East. Our goal is eight products per customer, which is approximately half of our estimate of potential demand for an average U.S. household. One of every four of our retail banking households has eight or more products. Business banking cross-sell offers another potential opportunity for growth, with cross-sell of 4.04 products in our Western footprint (including legacy Wells Fargo and converted Wachovia customers).
     Wells Fargo remained one of the largest providers of credit to the U.S. economy. We continued to lend to creditworthy customers and, during 2010, made $665 billion in new loan commitments to consumer, small business and commercial customers, including $386 billion of residential mortgage originations. We are an industry leader in loan modifications for homeowners. As of December 31, 2010, more than 620,000 Wells Fargo mortgage customers were in active trial or had completed the loan modifications since the beginning of 2009. We also continued to support our communities by making a $400 million charitable contribution to the Wells Fargo Foundation in 2010, covering three years of estimated future funding.
     Our core deposits grew 2% from December 31, 2009. Average core deposits funded 100% of total average loans in 2010, up from 93% in 2009. We continue to attract high quality core deposits in the form of checking and savings deposits, which grew 6% to $720.9 billion at December 31, 2010, from $679.9 billion a year ago, as we continued to gain new customers and deepen our relationships with existing customers.
     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 financial information, as well as our consolidated average balances, include Wachovia.
     We are beginning our third year of the Wachovia integration, which we expect to substantially complete by the end of 2011.


34


 

     Our progress to date remains on track and on schedule, with business and revenue synergies exceeding our expectations at the time the merger was announced. The Wachovia merger has already proven to be a financial success, with substantially all of the expected savings already realized and growing revenue synergies reflecting market share gains in many businesses, including mortgage, auto dealer services and investment banking.
     We continued to invest in core businesses while maintaining a strong balance sheet. In 2010, we opened 47 retail banking stores for a retail network total of 6,314 stores. We converted a total of 749 Wachovia banking stores in Alabama, Arizona, California, Georgia, Illinois, Kansas, Mississippi, Nevada, Tennessee and Texas, as well as the Wachovia credit card business and ATM network. The conversion of the remaining Wachovia eastern markets is expected to be substantially completed by the end of 2011.
     We continued taking actions to further strengthen our balance sheet, including reducing our non-strategic and liquidating loan portfolios, which have declined $54.6 billion since the Wachovia acquisition, including $26.3 billion in 2010, to $115.7 billion at December 31, 2010. We significantly built capital in 2010, up $12.9 billion, or 12%, from a year ago. Our capital growth since our merger with Wachovia has been driven by record retained earnings and other sources of internal capital generation, as well as three common stock offerings between October 2008 and December 2009 totaling over $33 billion. This included the $12.2 billion offering in fourth quarter 2009, which allowed us to repay in full the U.S. Treasury’s Troubled Asset Relief Program (TARP) preferred stock investment. We substantially increased the size of the Company with the Wachovia merger, and experienced cyclically elevated credit costs. However, our capital ratios at December 31, 2010, were higher than they were prior to the Wachovia acquisition. Tier 1 common equity increased to $81.3 billion at December 31, 2010, or 8.30% of risk-weighted assets. The Tier 1 capital ratio increased to 11.16% and Tier 1 leverage ratio increased to 9.19%. See the “Capital Management” section in this Report for more information regarding Tier 1 common equity.
     We experienced continued and significant improvement in our credit portfolio, with most metrics showing positive movement by the end of 2010. Net charge-offs declined in 2010 from the peak in fourth quarter 2009, with almost every major loan category recording lower charge-offs by the end of 2010. Delinquencies continued to decline from the peak at the end of 2009 and, in the fourth quarter 2010, nonaccrual loans declined for the first time since the Wachovia merger. The improvement in credit quality was also evident in the portfolio of purchased credit-impaired (PCI) loans acquired through the Wachovia merger, which overall has performed better than originally expected. Reflecting improved performance in our loan portfolios, the provision for credit losses was $2.0 billion less than net charge-offs for 2010. Absent significant deterioration in the economy, we expect future reductions in the allowance for credit losses. The improvement in losses, a more favorable economic outlook and improved credit statistics in several portfolios further increase our confidence that our credit cycle is turning, provided economic conditions do not deteriorate.
     We believe it is important to maintain a well controlled operating environment as we complete the integration of the Wachovia businesses and grow the combined company. We manage our credit risk by establishing 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 established ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to facilitate future growth.
     As a result of PCI accounting for loans acquired in the merger with Wachovia, ratios of the Company, including the growth rate in nonperforming assets (NPAs) since December 31, 2008, may not be directly comparable with periods prior to the merger or with credit-related ratios of other financial institutions. In particular:
  Wachovia’s high risk loans were written down pursuant to PCI accounting at the time of merger. Therefore, the allowance for credit losses is lower than otherwise would have been required without PCI loan accounting; and
  Because we virtually eliminated Wachovia’s nonaccrual loans at December 31, 2008, quarterly growth in our nonaccrual loans during 2010 and 2009 was higher than it would have been without PCI loan accounting. Similarly, our net charge-offs rate was lower than it otherwise would have been.


35


 

Overview (continued)
Table 1:  Six-Year Summary of Selected Financial Data
                                                                 
   
   
                                                    %     Five-year  
                                                    Change     compound  
                                                    2010/     growth  
(in millions, except per share amounts)   2010     2009     2008     2007     2006     2005     2009     rate  
   
Income statement
                                                               
Net interest income
  $ 44,757       46,324       25,143       20,974       19,951       18,504       (3 )%     19  
Noninterest income
    40,453       42,362       16,734       18,546       15,817       14,591       (5 )     23  
                   
Revenue
    85,210       88,686       41,877       39,520       35,768       33,095       (4 )     21  
Provision for credit losses
    15,753       21,668       15,979       4,939       2,204       2,383       (27 )     46  
Noninterest expense
    50,456       49,020       22,598       22,746       20,767       18,943       3       22  
Net income before noncontrolling interests
    12,663       12,667       2,698       8,265       8,567       7,892             10  
Less: Net income from noncontrolling interests
    301       392       43       208       147       221       (23 )     6  
                   
Wells Fargo net income
    12,362       12,275       2,655       8,057       8,420       7,671       1       10  
Earnings per common share
    2.23       1.76       0.70       2.41       2.50       2.27       27        
Diluted earnings per common share
    2.21       1.75       0.70       2.38       2.47       2.25       26        
Dividends declared per common share
    0.20       0.49       1.30       1.18       1.08       1.00       (59 )     (28 )
   
Balance sheet (at year end)
                                                               
Securities available for sale
  $ 172,654       172,710       151,569       72,951       42,629       41,834       %     33  
Loans
    757,267       782,770       864,830       382,195       319,116       310,837       (3 )     19  
Allowance for loan losses
    23,022       24,516       21,013       5,307       3,764       3,871       (6 )     43  
Goodwill
    24,770       24,812       22,627       13,106       11,275       10,787             18  
Assets
    1,258,128       1,243,646       1,309,639       575,442       481,996       481,741       1       21  
Core deposits (1)
    798,192       780,737       745,432       311,731       288,068       253,341       2       26  
Long-term debt
    156,983       203,861       267,158       99,393       87,145       79,668       (23 )     15  
Wells Fargo stockholders’ equity
    126,408       111,786       99,084       47,628       45,814       40,660       13       25  
Noncontrolling interests
    1,481       2,573       3,232       286       254       239       (42 )     44  
Total equity
    127,889       114,359       102,316       47,914       46,068       40,899       12       26  
   
(1)   Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).

36


 

Table 2:  Ratios and Per Common Share Data
                         
   
   
    Year ended December 31 ,
    2010     2009     2008  
   
Profitability ratios
                       
Wells Fargo net income to average assets (ROA)
    1.01 %     0.97       0.44  
Wells Fargo net income applicable to common stock to average
                       
Wells Fargo common stockholders’ equity (ROE)
    10.33       9.88       4.79  
Efficiency ratio (1)
    59.2       55.3       54.0  
Capital ratios
                       
At year end:
                       
Wells Fargo common stockholders’ equity to assets
    9.41       8.34       5.21  
Total equity to assets
    10.16       9.20       7.81  
Risk-based capital (2)
                       
Tier 1 capital
    11.16       9.25       7.84  
Total capital
    15.01       13.26       11.83  
Tier 1 leverage (2)(3)
    9.19       7.87       14.52  
Tier 1 common equity (4)
    8.30       6.46       3.13  
Average balances:
                       
Average Wells Fargo common stockholders’ equity to average assets
    9.17       6.41       8.18  
Average total equity to average assets
    9.96       9.34       8.89  
Per common share data
                       
Dividend payout (5)
    9.0       27.9       185.4  
Book value
  $ 22.49       20.03       16.15  
Market price (6)
                       
High
    34.25       31.53       44.68  
Low
    23.02       7.80       19.89  
Year end
    30.99       26.99       29.48  
   
(1)   The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
 
(2)   See Note 25 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
 
(3)   Due to the Wachovia transaction that closed on December 31, 2008, the Tier 1 leverage ratio, which considers period-end Tier 1 capital and quarterly averages in the computation of the ratio, does not reflect average assets of Wachovia for the full period ended December 31, 2008.
 
(4)   See the “Capital Management” section in this Report for additional information.
 
(5)   Dividends declared per common share as a percentage of earnings per common share.
 
(6)   Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.

37


 

Earnings Performance
 

Net income for 2010 was $12.4 billion ($2.21 diluted per share) with $11.6 billion applicable to common stock, compared with net income of $12.3 billion ($1.75 diluted per share) with $8.0 billion applicable to common stock for 2009. Preferred stock dividends and accretion of preferred stock discount included $3.5 billion in 2009 for Series D preferred stock issued to the U.S. Treasury Department in 2008, which reduced 2009 diluted earnings by $0.76 per share. These preferred shares were redeemed December 23, 2009, when we repaid the U.S. Treasury Department’s TARP preferred stock investment.
     Our 2010 earnings were influenced by a slow recovery from the recession that dominated 2009 and most of 2008 and by a continuation of a low rate environment. These economic conditions caused declining loan demand, solid deposit generation and continued elevated credit losses. Earnings for 2009 were influenced by the worsening of the recession that began in 2008, and low market rates. Both 2010 and 2009 were affected by merger integration costs.
     Revenue, the sum of net interest income and noninterest income, was $85.2 billion in 2010 compared with $88.7 billion in 2009 and $41.9 billion in 2008. In 2010, net interest income of $44.8 billion represented 53% of revenue, compared with $46.3 billion (52%) in 2009 and $25.1 billion (60%) in 2008.
     Noninterest income was relatively stable in 2010 at $40.5 billion, representing 47% of revenue, compared with $42.4 billion (48%) in 2009 and $16.7 billion (40%) in 2008. The increase in 2009 to 48% from 40% in 2008 was primarily due to a higher percentage of trust and investment fees (11% in 2009, up from 7% in 2008) and very strong mortgage banking results (14% in 2009, up from 6% in 2008, predominantly from legacy Wells Fargo).
     Noninterest expense was $50.5 billion in 2010, compared with $49.0 billion in 2009 and $22.6 billion in 2008. Noninterest expense as a percentage of revenue was 59% in 2010, 55% in 2009 and 54% in 2008. Noninterest expense for 2010 included $1.9 billion of Wachovia merger-related integration expense compared with $895 million in 2009.
     Table 3 presents the components of revenue and noninterest expense as a percentage of revenue for year-over-year results.


38


 

Table 3:  Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
                                                 
   
   
    Year ended December 31 ,
            % of             % of             % of  
(in millions)   2010     revenue     2009     revenue     2008     revenue  
   
Interest income
                                               
Trading assets
  $ 1,121       1 %   $ 944       1 %   $ 189       %
Securities available for sale
    10,236       12       11,941       13       5,577       13  
Mortgages held for sale (MHFS)
    1,736       2       1,930       2       1,573       4  
Loans held for sale (LHFS)
    101             183             48        
Loans
    39,808       47       41,659       47       27,651       66  
Other interest income
    437       1       336             181        
                                         
Total interest income
    53,439       63       56,993       64       35,219       84  
                                       
Interest expense
                                               
Deposits
    2,832       3       3,774       4       4,521       11  
Short-term borrowings
    106             231             1,478       4  
Long-term debt
    4,888       6       5,786       7       3,789       9  
Other interest expense
    227             172                    
                                       
Total interest expense
    8,053       9       9,963       11       9,788       23  
                                       
Net interest income (on a taxable-equivalent basis)
    45,386       53       47,030       53       25,431       61  
                                       
Taxable-equivalent adjustment
    (629 )     (1 )     (706 )     (1 )     (288 )     (1 )
                                       
Net interest income
    44,757       53       46,324       52       25,143       60  
Noninterest income
                                               
Service charges on deposit accounts
    4,916       6       5,741       6       3,190       8  
Trust and investment fees (1)
    10,934       13       9,735       11       2,924       7  
Card fees
    3,652       4       3,683       4       2,336       6  
Other fees (1)
    3,990       5       3,804       4       2,097       5  
Mortgage banking (1)
    9,737       11       12,028       14       2,525       6  
Insurance
    2,126       2       2,126       2       1,830       4  
Net gains from trading activities
    1,648       2       2,674       3       275       1  
Net gains (losses) on debt securities available for sale
    (324 )           (127 )           1,037       2  
Net gains (losses) from equity investments
    779       1       185             (757 )     (2 )
Operating leases
    815       1       685       1       427       1  
Other
    2,180       3       1,828       2       850       2  
                                       
Total noninterest income
    40,453       47       42,362       48       16,734       40  
                                       
Noninterest expense
                                               
Salaries
    13,869       16       13,757       16       8,260       20  
Commission and incentive compensation
    8,692       10       8,021       9       2,676       6  
Employee benefits
    4,651       5       4,689       5       2,004       5  
Equipment
    2,636       3       2,506       3       1,357       3  
Net occupancy
    3,030       4       3,127       4       1,619       4  
Core deposit and other intangibles
    2,199       3       2,577       3       186        
FDIC and other deposit assessments
    1,197       1       1,849       2       120        
Other (2)
    14,182       17       12,494       14       6,376       15  
                                       
Total noninterest expense
    50,456       59       49,020       55       22,598       54  
                                       
Revenue
  $ 85,210             $ 88,686             $ 41,877          
                                       
   
(1)   See Table 7 – Noninterest Income in this Report for additional detail.
 
(2)   See Table 8 – Noninterest Expense in this Report for additional detail.

39


 

Earnings Performance (continued)

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 in Table 5 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 $45.4 billion in 2010, compared with $47.0 billion in 2009, and $25.4 billion in 2008. The net interest margin was 4.26% in 2010, down 2 basis points from 4.28% in 2009 and 2009 was down 55 basis points from 4.83% in 2008. During 2010, net interest income was affected by prepayments of higher yielding mortgage-backed securities, relatively soft commercial loan demand, and planned runoff of liquidating loan portfolios. The impact of these factors was mitigated by disciplined deposit pricing and reduced market funding costs. For 2009, changes in net interest income from 2008 were primarily due to the impact of acquiring Wachovia. Although the addition of Wachovia increased earning assets and net interest income, it decreased the net interest margin because Wachovia’s net interest margin was lower than that of legacy Wells Fargo.
     Table 4 presents the components of earning assets and funding sources as a percentage of earning assets to provide a more meaningful analysis of year-over-year changes that influenced net interest income.
     The mix of earning assets and their yields are important drivers of net interest income. During 2010, there were slight shifts in our earning asset mix from loans and investments to more liquid assets. Although total loans increased during fourth quarter 2010, the soft loan demand earlier in 2010 and in 2009, as well as the impact of liquidating certain loan portfolios, reduced average loans in 2010 to 72% of average earning assets from 75% for 2009 and from 76% in 2008. Also, average mortgage-backed securities (MBS) dropped to 10% in 2010 from 12% in 2009 and 13% in 2008. Average short-term investments and trading account assets increased to 9% in 2010 from 4% in 2009 and 2% in 2008.
     Average interest-bearing deposits increased to 59% of average earning assets for 2010, from 58% for 2009 and 51% for 2008. Average short-term borrowings decreased to 4% of average earning assets from 5% for 2009 and 13% for 2008. Average interest-bearing deposits increased as a percentage of funding for earning assets in 2010, yet the cost of deposits declined significantly as the mix shifted from higher cost certificates of deposit to checking and savings products, which were at lower yields in 2010 due to the prolonged low interest rate environment. Core deposits are a low-cost source of funding and thus an important contributor to growth in net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $772.0 billion in 2010 from $762.5 billion in 2009 and funded 100% and 93% of average loans, respectively. In 2008, core deposits of legacy Wells Fargo funded 82% of average loans. About 90% of our core deposits are now in checking and savings deposits, one of the highest percentages in the industry.
     Table 5 presents the individual components of net interest income and the net interest margin. The effect on interest income and costs of earning asset and funding mix changes described above, combined with rate changes during 2010, are analyzed in Table 6.


40


 

Table 4:  Average Earning Assets and Funding Sources as a Percentage of Average Earning Assets
                                 
   
   
    Year ended December 31 ,
    2010     2009  
            % of             % of  
    Average     earning     Average     earning  
(in millions)   balance     assets     balance     assets  
   
Earning assets
                               
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 62,961       6 %   $ 26,869       2 %
Trading assets
    29,920       3       21,092       2  
Debt securities available for sale:
                               
Securities of U.S. Treasury and federal agencies
    1,926             2,480        
Securities of U.S. states and political subdivisions
    16,392       2       12,702       1  
Mortgage-backed securities:
                               
Federal agencies
    75,875       7       87,197       8  
Residential and commercial
    33,191       3       41,618       4  
       
Total mortgage-backed securities
    109,066       10       128,815       12  
Other debt securities (1)
    34,752       3       32,011       3  
       
Total debt securities available for sale (1)
    162,136       15       176,008       16  
Mortgages held for sale (2)
    36,716       3       37,416       3  
Loans held for sale (2)
    3,773             6,293       1  
Loans:
                               
Commercial:
                               
Commercial and industrial
    149,576       14       180,924       16  
Real estate mortgage
    98,497       9       96,273       9  
Real estate construction
    31,286       3       40,885       4  
Lease financing
    13,451       1       14,751       1  
Foreign
    29,726       3       30,661       3  
       
Total commercial
    322,536       30       363,494       33  
       
Consumer:
                               
Real estate 1-4 family first mortgage
    235,568       22       238,359       22  
Real estate 1-4 family junior lien mortgage
    101,537       10       106,957       10  
Credit card
    22,375       2       23,357       2  
Other revolving credit and installment
    88,585       8       90,666       8  
       
Total consumer
    448,065       42       459,339       42  
       
Total loans (2)
    770,601       72       822,833       75  
Other
    5,849       1       6,113       1  
       
Total earning assets
  $ 1,071,956       100 %   $ 1,096,624       100 %
       
Funding sources
                               
Deposits:
                               
Interest-bearing checking
  $ 60,941       6 %   $ 70,179       6 %
Market rate and other savings
    416,877       39       351,892       32  
Savings certificates
    87,133       8       140,197       13  
Other time deposits
    14,654       1       20,459       2  
Deposits in foreign offices
    55,097       5       53,166       5  
       
Total interest-bearing deposits
    634,702       59       635,893       58  
Short-term borrowings
    46,824       4       51,972       5  
Long-term debt
    185,426       18       231,801       21  
Other liabilities
    6,863       1       4,904        
       
Total interest-bearing liabilities
    873,815       82       924,570       84  
Portion of noninterest-bearing funding sources
    198,141       18       172,054       16  
       
Total funding sources
  $ 1,071,956       100 %   $ 1,096,624       100 %
       
Noninterest-earning assets
                               
Cash and due from banks
  $ 17,618               19,218          
Goodwill
    24,824               23,997          
Other
    112,540               122,515          
                           
Total noninterest-earning assets
  $ 154,982               165,730          
                         
Noninterest-bearing funding sources
                               
Deposits
  $ 183,008               171,712          
Other liabilities
    47,877               48,193          
Total equity
    122,238               117,879          
Noninterest-bearing funding sources used to fund earning assets
    (198,141 )             (172,054 )        
                           
Net noninterest-bearing funding sources
  $ 154,982               165,730          
                         
Total assets
  $ 1,226,938               1,262,354          
                         
   
(1)   Includes certain preferred securities.
 
(2)   Nonaccrual loans are included in their respective loan categories.

41


 

Earnings Performance (continued)
Table 5:  Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)(3)
                                                 
   
   
    2010     2009  
                    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
  $ 62,961       0.36 %   $ 230       26,869       0.56 %   $ 150  
Trading assets
    29,920       3.75       1,121       21,092       4.48       944  
Debt securities available for sale (4):
                                               
Securities of U.S. Treasury and federal agencies
    1,926       3.24       61       2,480       2.83       69  
Securities of U.S. states and political subdivisions
    16,392       6.09       980       12,702       6.42       840  
Mortgage-backed securities:
                                               
Federal agencies
    75,875       5.14       3,697       87,197       5.45       4,591  
Residential and commercial
    33,191       10.67       3,396       41,618       9.09       4,150  
                                       
Total mortgage-backed securities
    109,066       6.84       7,093       128,815       6.73       8,741  
Other debt securities (5)
    34,752       6.45       2,102       32,011       7.16       2,291  
                                       
Total debt securities available for sale (5)
    162,136       6.63       10,236       176,008       6.73       11,941  
Mortgages held for sale (6)
    36,716       4.73       1,736       37,416       5.16       1,930  
Loans held for sale (6)
    3,773       2.67       101       6,293       2.90       183  
Loans:
                                               
Commercial:
                                               
Commercial and industrial
    149,576       4.80       7,186       180,924       4.22       7,643  
Real estate mortgage
    98,497       3.89       3,836       96,273       3.50       3,365  
Real estate construction
    31,286       3.36       1,051       40,885       2.91       1,190  
Lease financing
    13,451       9.21       1,239       14,751       9.32       1,375  
Foreign
    29,726       3.49       1,037       30,661       3.95       1,212  
                                       
Total commercial
    322,536       4.45       14,349       363,494       4.07       14,785  
                                       
Consumer:
                                               
Real estate 1-4 family first mortgage
    235,568       5.18       12,206       238,359       5.45       12,992  
Real estate 1-4 family junior lien mortgage
    101,537       4.45       4,519       106,957       4.76       5,089  
Credit card
    22,375       13.35       2,987       23,357       12.16       2,841  
Other revolving credit and installment
    88,585       6.49       5,747       90,666       6.56       5,952  
                                       
Total consumer
    448,065       5.68       25,459       459,339       5.85       26,874  
                                       
Total loans (6)
    770,601       5.17       39,808       822,833       5.06       41,659  
Other
    5,849       3.56       207       6,113       3.05       186  
                                       
Total earning assets
  $ 1,071,956       5.02 %   $ 53,439       1,096,624       5.19 %   $ 56,993  
                                     
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 60,941       0.12 %   $ 72       70,179       0.14 %   $ 100  
Market rate and other savings
    416,877       0.26       1,088       351,892       0.39       1,375  
Savings certificates
    87,133       1.43       1,247       140,197       1.24       1,738  
Other time deposits
    14,654       2.07       302       20,459       2.03       415  
Deposits in foreign offices
    55,097       0.22       123       53,166       0.27       146  
                                     
Total interest-bearing deposits
    634,702       0.45       2,832       635,893       0.59       3,774  
Short-term borrowings
    46,824       0.22       106       51,972       0.44       231  
Long-term debt
    185,426       2.64       4,888       231,801       2.50       5,786  
Other liabilities
    6,863       3.31       227       4,904       3.50       172  
                                     
Total interest-bearing liabilities
    873,815       0.92       8,053       924,570       1.08       9,963  
Portion of noninterest-bearing funding sources
    198,141                   172,054              
                                     
Total funding sources
  $ 1,071,956       0.76       8,053       1,096,624       0.91       9,963  
                                     
Net interest margin and net interest income on a taxable-equivalent basis (7)
            4.26 %   $ 45,386               4.28 %   $ 47,030  
                             
Noninterest-earning assets
                                               
Cash and due from banks
  $ 17,618                       19,218                  
Goodwill
    24,824                       23,997                  
Other (8)
    112,540                       122,515                  
                                           
Total noninterest-earning assets
  $ 154,982                       165,730                  
                                           
Noninterest-bearing funding sources
                                               
Deposits
  $ 183,008                       171,712                  
Other liabilities
    47,877                       48,193                  
Total equity
    122,238                       117,879                  
Noninterest-bearing funding sources used to fund earning assets
    (198,141 )                     (172,054 )                
                                           
Net noninterest-bearing funding sources
  $ 154,982                       165,730                  
                                         
Total assets
  $ 1,226,938                       1,262,354                  
                                         
   
(1)   Because the Wachovia acquisition was completed at the end of 2008, Wachovia’s assets and liabilities are included in average balances, and Wachovia’s results are reflected in interest income/expense beginning in 2009.
 
(2)   Our average prime rate was 3.25%, 3.25%, 5.09%, 8.05%, and 7.96% for 2010, 2009, 2008, 2007, and 2006, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 0.34%, 0.69%, 2.93%, 5.30%, and 5.20% for the same years, respectively.
 
(3)   Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
 
(4)   Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts include the effects of any unrealized gain or loss marks but those marks carried in other comprehensive income are not included in yield determination of affected earning assets. Thus yields are based on amortized cost balances computed on a settlement date basis.

42


 

 
Table 5:  Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)(3)
                                                                         
   
   
    2008     2007     2006  
                    Interest                     Interest                     Interest  
    Average     Yields/     income/     Average     Yields/     income/     Average     Yields/     income/  
    balance     rates     expense     balance     rates     expense     balance     rates     expense  
   
 
                                                                       
 
 
  $ 5,293       1.71 %   $ 90       4,468       4.99 %   $ 223       5,515       4.80 %   $ 265  
 
    4,971       3.80       189       4,291       4.37       188       4,958       4.95       245  
 
 
    1,083       3.84       41       848       4.26       36       875       4.36       39  
 
    6,918       6.83       501       4,740       7.37       342       3,192       7.98       245  
 
                                                                       
 
    44,777       5.97       2,623       38,592       6.10       2,328       36,691       6.04       2,206  
 
    20,749       6.04       1,412       6,548       6.12       399       6,640       6.57       430  
 
                                                           
 
    65,526       5.99       4,035       45,140       6.10       2,727       43,331       6.12       2,636  
 
    12,818       7.17       1,000       6,295       7.52       477       6,204       7.10       439  
 
                                                           
 
    86,345       6.22       5,577       57,023       6.34       3,582       53,602       6.31       3,359  
 
    25,656       6.13       1,573       33,066       6.50       2,150       42,855       6.41       2,746  
 
    837       5.69       48       896       7.76       70       630       7.40       47  
 
                                                                       
 
                                                                       
 
    98,620       6.12       6,034       77,965       8.17       6,367       65,720       8.13       5,340  
 
    41,659       5.80       2,416       32,722       7.38       2,414       29,344       7.32       2,148  
 
    19,453       5.08       988       16,934       7.80       1,321       14,810       7.94       1,175  
 
    7,141       5.62       401       5,921       5.84       346       5,437       5.72       311  
 
    7,127       10.50       748       7,321       11.68       855       6,343       12.39       786  
 
                                                           
 
    174,000       6.08       10,587       140,863       8.02       11,303       121,654       8.02       9,760  
 
                                                           
 
                                                                       
 
    75,116       6.67       5,008       61,527       7.25       4,463       57,509       7.27       4,182  
 
    75,375       6.55       4,934       72,075       8.12       5,851       64,255       7.98       5,126  
 
    19,601       12.13       2,378       15,874       13.58       2,155       12,571       13.29       1,670  
 
    54,368       8.72       4,744       54,436       9.71       5,285       50,922       9.60       4,889  
 
                                                           
 
    224,460       7.60       17,064       203,912       8.71       17,754       185,257       8.57       15,867  
 
                                                           
 
    398,460       6.94       27,651       344,775       8.43       29,057       306,911       8.35       25,627  
 
    1,920       4.73       91       1,402       5.07       71       1,357       4.97       68  
 
                                                           
 
  $ 523,482       6.69 %   $ 35,219       445,921       7.93 %   $ 35,341       415,828       7.79 %   $ 32,357  
 
                                                           
 
                                                                       
 
                                                                       
 
  $ 5,650       1.12 %   $ 64       5,057       3.16 %   $ 160       4,302       2.86 %   $ 123  
 
    166,691       1.32       2,195       147,939       2.78       4,105       134,248       2.40       3,225  
 
    39,481       3.08       1,215       40,484       4.38       1,773       32,355       3.91       1,266  
 
    6,656       2.83       187       8,937       4.87       435       32,168       4.99       1,607  
 
    47,578       1.81       860       36,761       4.57       1,679       20,724       4.60       953  
 
                                                           
 
    266,056       1.70       4,521       239,178       3.41       8,152       223,797       3.21       7,174  
 
    65,826       2.25       1,478       25,854       4.81       1,245       21,471       4.62       992  
 
    102,283       3.70       3,789       93,193       5.18       4,824       84,035       4.91       4,124  
 
                                                     
 
                                                           
 
    434,165       2.25       9,788       358,225       3.97       14,221       329,303       3.73       12,290  
 
    89,317                   87,696                   86,525              
 
                                                           
 
  $ 523,482       1.86       9,788       445,921       3.19       14,221       415,828       2.96       12,290  
 
                                                           
 
 
            4.83 %   $ 25,431               4.74 %   $ 21,120               4.83 %   $ 20,067  
                                           
 
                                                                       
 
  $ 11,175                       11,806                       12,466                  
 
    13,353                       11,957                       11,114                  
 
    56,386                       51,068                       46,615                  
 
                                                                 
 
  $ 80,914                       74,831                       70,195                  
 
                                                                 
 
                                                                       
 
  $ 87,820                       88,907                       89,117                  
 
    28,658                       26,287                       24,221                  
 
    53,753                       47,333                       43,382                  
 
 
    (89,317 )                     (87,696 )                     (86,525 )                
 
                                                                 
 
  $ 80,914                       74,831                       70,195                  
 
                                                                 
 
  $ 604,396                       520,752                       486,023                  
 
                                                                 
   
(5)   Includes certain preferred securities.
 
(6)   Nonaccrual loans and related income are included in their respective loan categories.
 
(7)   Includes taxable-equivalent adjustments of $629 million, $706 million, $288 million, $146 million and $116 million for 2010, 2009, 2008, 2007 and 2006, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.
 
(8)   See Note 7 (Premises, Equipment, Lease Commitments and Other Assets) to Financial Statements in this Report for detail of balances of other noninterest-earning assets at December 31, 2010 and 2009.

43


 

Earnings Performance (continued)

     Table 6 allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is
not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.


Table 6:  Analysis of Changes in Net Interest Income
                                                 
   
   
    Year ended December 31 ,
 
    2010 over 2009     2009 over 2008  
 
(in millions)   Volume     Rate     Total     Volume     Rate     Total  
 
Increase (decrease) in interest income:
                                               
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 148       (68 )     80       156       (96 )     60  
Trading assets
    349       (172 )     177       715       40       755  
Debt securities available for sale:
                                               
Securities of U.S. Treasury and federal agencies
    (17 )     9       (8 )     41       (13 )     28  
Securities of U.S. states and political subdivisions
    190       (50 )     140       369       (30 )     339  
Mortgage-backed securities:
                                               
Federal agencies
    (622 )     (272 )     (894 )     2,229       (261 )     1,968  
Residential and commercial
    (1,113 )     359       (754 )     1,823       915       2,738  
         
Total mortgage-backed securities
    (1,735 )     87       (1,648 )     4,052       654       4,706  
Other debt securities
    123       (312 )     (189 )     1,292       (1 )     1,291  
         
Total debt securities available for sale
    (1,439 )     (266 )     (1,705 )     5,754       610       6,364  
Mortgages held for sale
    (35 )     (159 )     (194 )     635       (278 )     357  
Loans held for sale
    (69 )     (13 )     (82 )     169       (34 )     135  
Loans:
                                               
Commercial:
                                               
Commercial and industrial
    (1,425 )     968       (457 )     3,904       (2,295 )     1,609  
Real estate mortgage
    81       390       471       3,278       (2,329 )     949  
Real estate construction
    (306 )     167       (139 )     1,140       (938 )     202  
Lease financing
    (120 )     (16 )     (136 )     602       372       974  
Foreign
    (36 )     (139 )     (175 )     1,176       (712 )     464  
         
Total commercial
    (1,806 )     1,370       (436 )     10,100       (5,902 )     4,198  
         
Consumer:
                                               
Real estate 1-4 family first mortgage
    (150 )     (636 )     (786 )     9,055       (1,071 )     7,984  
Real estate 1-4 family junior lien mortgage
    (249 )     (321 )     (570 )     1,727       (1,572 )     155  
Credit card
    (123 )     269       146       457       6       463  
Other revolving credit and installment
    (140 )     (65 )     (205 )     2,594       (1,386 )     1,208  
         
Total consumer
    (662 )     (753 )     (1,415 )     13,833       (4,023 )     9,810  
         
Total loans
    (2,468 )     617       (1,851 )     23,933       (9,925 )     14,008  
         
Other
    (8 )     29       21       137       (42 )     95  
         
Total increase (decrease) in interest income
    (3,522 )     (32 )     (3,554 )     31,499       (9,725 )     21,774  
         
Increase (decrease) in interest expense:
                                               
Deposits:
                                               
Interest-bearing checking
    (13 )     (15 )     (28 )     136       (100 )     36  
Market rate and other savings
    224       (511 )     (287 )     1,396       (2,216 )     (820 )
Savings certificates
    (729 )     238       (491 )     1,601       (1,078 )     523  
Other time deposits
    (121 )     8       (113 )     294       (66 )     228  
Deposits in foreign offices
    5       (28 )     (23 )     91       (805 )     (714 )
         
Total interest-bearing deposits
    (634 )     (308 )     (942 )     3,518       (4,265 )     (747 )
Short-term borrowings
    (21 )     (104 )     (125 )     (259 )     (988 )     (1,247 )
Long-term debt
    (1,209 )     311       (898 )     3,544       (1,547 )     1,997  
Other liabilities
    65       (10 )     55       172             172  
         
Total increase (decrease) in interest expense
    (1,799 )     (111 )     (1,910 )     6,975       (6,800 )     175  
         
Increase (decrease) in net interest income on a taxable-equivalent basis
  $ (1,723 )     79       (1,644 )     24,524       (2,925 )     21,599  
   

44


 

Noninterest Income
Table 7:  Noninterest Income
                         
   
   
    Year ended December 31 ,
 
(in millions)   2010     2009     2008  
   
Service charges on deposit accounts
  $ 4,916       5,741       3,190  
Trust and investment fees:
                       
Trust, investment and IRA fees
    4,038       3,588       2,161  
Commissions and all other fees
    6,896       6,147       763  
   
Total trust and investment fees
    10,934       9,735       2,924  
   
Card fees
    3,652       3,683       2,336  
Other fees:
                       
Cash network fees
    260       231       188  
Charges and fees on loans
    1,690       1,801       1,037  
All other fees
    2,040       1,772       872  
   
Total other fees
    3,990       3,804       2,097  
   
Mortgage banking:
                       
Servicing income, net
    3,340       5,791       1,233  
Net gains on mortgage loan origination/sales activities
    6,397       6,237       1,292  
   
Total mortgage banking
    9,737       12,028       2,525  
   
Insurance
    2,126       2,126       1,830  
Net gains from trading activities
    1,648       2,674       275  
Net gains (losses) on debt securities available for sale
    (324 )     (127 )     1,037  
Net gains (losses) from equity investments
    779       185       (757 )
Operating leases
    815       685       427  
All other
    2,180       1,828       850  
   
Total
  $ 40,453       42,362       16,734  
   
Noninterest income of $40.5 billion represented 47% of revenue for 2010 compared with $42.4 billion or, 48%, for 2009. The decrease from 2009 was primarily the net result of an increase in trust and investment fees to 13% of 2010 revenues from 11% for 2009, offset by the decrease in mortgage banking to 11% of 2010 revenues from 14% for 2009.
     Our service charges on deposit accounts decreased in 2010 by $825 million from 2009, although the deposit account portfolio increased for the year. This decrease was related to regulatory changes to debit card and ATM overdraft practices announced by the Federal Reserve Board (FRB) in fourth quarter 2009. In third quarter 2009, we also announced policy changes to help customers limit overdraft and returned item fees. The combination of these changes reduced our 2010 fee revenue by approximately $810 million.
     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 December 31, 2010, these assets totaled $2.1 trillion, up 11% from $1.9 trillion at December 31, 2009. Trust, investment and IRA fees are largely based on a tiered scale relative to the market value of the assets under management or administration. The fees increased to $4.0 billion in 2010 from $3.6 billion a year ago.
     We receive commissions and other fees for providing services to full-service and discount brokerage customers. These fees increased to $6.9 billion in 2010 from $6.1 billion 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. Brokerage client assets totaled $1.2 trillion at December 31, 2010, up 6% from a year ago. Commissions and other fees also include fees from investment banking activities including equity and bond underwriting.
     Card fees were $3.7 billion in 2010, essentially flat from 2009. Legislative and regulatory changes enacted in 2010 caused a reduction in card fee income, which was offset by growth in purchase volume driven by improvements in the economy. The effect of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Card Act) on card fees is fully reflected in our 2010 results.
     Mortgage banking noninterest income is generated by servicing activities and loan origination/sales activities. This income was $9.7 billion in 2010, compared with $12.0 billion for 2009. The reduction in mortgage banking noninterest income was primarily driven by a $2.5 billion decline in net servicing income, partially offset by a $160 million increase in net gains on mortgage origination/sales.
     Net servicing income includes both changes in the fair value of mortgage servicing rights (MSRs) during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income for 2010 included a $1.5 billion net MSR valuation gain that was recorded to earnings ($3.0 billion decrease in the fair value of the MSRs offset by a $4.5 billion hedge gain) and for 2009 included a $5.3 billion net MSR valuation gain ($1.5 billion decrease in the fair value of MSRs offset by a $6.8 billion hedge gain). The $3.8 billion decline in the net MSR valuation gain results for 2010 compared with 2009 was primarily due to a decline in hedge carry income. See the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section of this Report for a detailed discussion of our MSRs risks and hedging approach. Our portfolio of loans serviced for others was $1.84 trillion at December 31, 2010, and $1.88 trillion at December 31, 2009. At December 31, 2010, the ratio of MSRs to related loans serviced for others was 0.86%, compared with 0.91% at December 31, 2009.
     Income from loan origination/sale activities was $6.4 billion in 2010 compared with $6.2 billion for 2009. The slight increase in 2010 was driven by higher margins on loan originations, offset by lower loan origination volume and higher provision for loan repurchase losses. Residential real estate originations were $386 billion in 2010 compared with $420 billion a year ago and mortgage applications were $620 billion in 2010 compared with $651 billion in 2009. The 1-4 family first mortgage unclosed pipeline was $73 billion at December 31, 2010, and $57 billion at December 31, 2009. For additional detail, see the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section and Note 1 (Summary of Significant Accounting Policies), Note 9 (Mortgage Banking Activities) and Note 16 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.


45


 

Earnings Performance (continued)

     Net gains on mortgage loan origination/sales activities include the cost of any additions to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties and early payment default clauses in mortgage sale contracts. Additions to the mortgage repurchase liability that were charged against net gains on mortgage loan origination/sales activities during 2010 totaled $1.6 billion ($927 million for 2009), of which $144 million ($302 million for 2009) was related to our estimate of loss content associated with loan sales during the year and $1.5 billion ($625 million for 2009) was for subsequent increases in estimated losses on prior year’s loan sales because of the current economic environment. For additional information about mortgage loan repurchases, see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section in this Report.
     Income from trading activities was $1.6 billion in 2010, down from $2.7 billion a year ago. This decrease reflects a return to a more normal trading environment from a year ago as well as a continued reduction in risk levels while we continue to prioritize support for our customer-related activities.
     Net gains on debt and equity securities totaled $455 million for 2010 and $58 million for 2009, after other-than-temporary impairment (OTTI) write-downs of $940 million for 2010 and $1.7 billion for 2009.
     Noninterest income of $42.4 billion in 2009 represented 48% of revenue, up from $16.7 billion (40%) in 2008. The increase in noninterest income as a percentage of revenue was due to a higher percentage of trust and investment fees (11% in 2009, up from 7% in 2008) with the addition of Wells Fargo Advisors (formerly Wachovia Securities) retail brokerage business, Wachovia wealth management and retirement, and reinsurance businesses, and also due to strong mortgage banking results, primarily from legacy Wells Fargo (14% in 2009, up from 6% in 2008).
Noninterest Expense
Table 8:  Noninterest Expense
                         
   
   
    Year ended December 31 ,
(in millions)   2010     2009     2008  
   
Salaries
  $ 13,869       13,757       8,260  
Commission and incentive compensation
    8,692       8,021       2,676  
Employee benefits
    4,651       4,689       2,004  
Equipment
    2,636       2,506       1,357  
Net occupancy
    3,030       3,127       1,619  
Core deposit and other intangibles
    2,199       2,577       186  
FDIC and other deposit assessments
    1,197       1,849       120  
Outside professional services
    2,370       1,982       847  
Contract services
    1,642       1,088       407  
Foreclosed assets
    1,537       1,071       414  
Operating losses
    1,258       875       142  
Outside data processing
    1,046       1,027       480  
Postage, stationery and supplies
    944       933       556  
Travel and entertainment
    783       575       447  
Advertising and promotion
    630       572       378  
Telecommunications
    596       610       321  
Insurance
    464       845       725  
Operating leases
    109       227       389  
All other
    2,803       2,689       1,270  
   
Total
  $ 50,456       49,020       22,598  
   
Noninterest expense increased $1.4 billion (3%) in 2010 over 2009, primarily due to merger integration costs, Wells Fargo Financial restructuring costs and a charitable donation to the Wells Fargo Foundation. The increase in 2009 over 2008 was predominantly due to the acquisition of Wachovia, increased staffing and other costs related to problem loan modifications and workouts, special deposit assessments and operating losses.
     Merger integration costs totaled $1.9 billion in 2010 and $1.1 billion in 2009, and primarily contributed to the increases in outside professional and contract services for both years. The acquisition of Wachovia resulted in an expanded geographic platform in our banking businesses and added capabilities in businesses such as retail brokerage, asset management and investment banking. As part of our integration investment to enhance both the short- and long-term benefits to our customers, we added platform team members in the Eastern market to align Wachovia’s banking stores with Wells Fargo’s sales and service model. We completed the second year of our merger integration, converting 749 Wachovia stores in Alabama, Arizona, California, Georgia, Illinois, Kansas, Mississippi, Nevada, Tennessee and Texas. We migrated major processing systems for credit card, mortgage, trust, and mutual funds. We expect to substantially complete our integration of Wachovia by the end of 2011.
     In July 2010, we announced the restructuring of our Wells Fargo Financial consumer finance division, including the closing of 638 Wells Fargo Financial stores, realigning this business into other Wells Fargo business units and transitioning employees into other parts of our organization. The restructuring costs totaled $161 million, predominantly for severance and store closures.


46


 

     Commission and incentive compensation expense increased proportionately more than salaries in both 2010 and 2009, due to higher revenues generated by businesses with revenue-based compensation, including the retail securities, brokerage and mortgage businesses.
     Federal Deposit Insurance Corporation (FDIC) and other deposit assessments decreased in 2010 from 2009, predominantly due to a midyear 2009 FDIC special assessment of $565 million.
     Problem loans and foreclosures increased workout-related salaries and foreclosure costs in both 2010 and 2009. Workout-related costs were influenced in both years by the higher volume of mortgage loan modifications driven by both federal and our own proprietary loan modification programs designed to help customers stay in their homes. Foreclosure costs have been affected by the high volume of foreclosed properties and the length of time the properties remained in inventory. During 2010, we began to see a decline in nonperforming loans and other indications of improvement in credit quality.
     Operating losses increased in 2010 predominantly due to additional litigation accruals.
     We continued to support our communities by making a $400 million charitable contribution to the Wells Fargo Foundation in 2010, covering three years of estimated future funding.
Income Tax Expense
The 2010 annual effective tax rate was 33.9% compared with 30.3% in 2009 and 18.5% in 2008. The increase in 2010 was primarily due to the new health care legislation and fewer favorable settlements with tax authorities. The increase in 2009 was primarily due to higher pre-tax earnings and increased tax expense (with a comparable increase in interest income) associated with purchase accounting for leveraged leases, partially offset by higher levels of tax exempt income, tax credits and the impact of changes in our liability for uncertain tax positions. We recognized a net tax benefit of approximately $150 million and $200 million during the fourth quarter and year-ended December 31, 2009, respectively, primarily related to changes in our uncertain tax positions, due to federal and state income tax settlements.
     Effective January 1, 2009, we adopted new accounting guidance that changed the way noncontrolling interests are presented in the income statement such that the consolidated income statement includes amounts from both Wells Fargo interests and the noncontrolling interests. As a result, our effective tax rate is calculated by dividing income tax expense by income before income tax expense less the net income from noncontrolling interests.


47


 

Earnings Performance (continued)

Operating Segment Results
We define our operating segments by product and customer. In first quarter 2010, we conformed certain funding and allocation methodologies of Wachovia to those of Wells Fargo; in addition integration expense related to mergers other than the Wachovia merger is now included in the segment results. In fourth quarter 2010, we aligned certain lending businesses into Wholesale Banking from Community Banking to reflect our previously
announced restructuring of Wells Fargo Financial. Prior periods have been revised to reflect these changes. Table 9 and the following discussion present our results by operating segment. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 23 (Operating Segments) to Financial Statements in this Report.


Table 9:  Operating Segment Results – Highlights
                                                 
   
   
    Year ended December 31 ,
                                    Wealth, Brokerage  
    Community Banking     Wholesale Banking     and Retirement  
(in billions)   2010     2009     2010     2009     2010     2009  
   
Revenue
  $ 54.7       60.5       22.2       20.6       11.7       10.8  
Net income
    7.1       8.9       5.8       3.9       1.0       0.5  
   
Average loans
    530.1       552.7       230.5       260.2       43.0       45.7  
Average core deposits
    536.4       552.8       170.0       147.3       121.2       114.2  
   

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. through its Regional Banking and Wells Fargo Home Mortgage business units.
     Community Banking reported net income of $7.1 billion and revenue of $54.7 billion in 2010. Revenue declined from 2009 driven primarily by a decrease in mortgage banking income compared with a record year in 2009 (originations of $420 billion in 2009 compared with $384 billion in 2010), as well as lower deposit service charges due to changes to Regulation E and the planned reduction in certain liquidating loan portfolios. Core deposits declined due to planned certificates of deposit (CD) run-off; however, we continued to grow low cost deposits. We saw strong growth in the number of consumer and business checking accounts (up 7.5% and 4.8%, respectively, from December 31, 2009). Noninterest expense was flat from 2009, with Wells Fargo Financial restructuring costs and higher charitable contributions offset by continued expense management and realization of merger synergies. To benefit our customers we continued to add platform team members in regional banking’s Eastern markets as we aligned Wachovia banking stores with the Wells Fargo sales and service model. The provision for credit losses decreased $4.1 billion from 2009 and credit quality indicators in most of our consumer and commercial loan portfolios were either stable or continued to improve. Net credit losses declined in almost all portfolios and we released $1.4 billion in reserves in 2010 compared with a $2.2 billion reserve build in 2009.
Wholesale Banking provides financial solutions across the U.S. and globally to middle market and large corporate customers with annual revenue generally in excess of $20 million. Products and businesses include commercial banking, investment banking and capital markets, securities investment, government and institutional banking, corporate
banking, commercial real estate, treasury management, capital finance, international, insurance, real estate capital markets, commercial mortgage servicing, corporate trust, equipment finance, asset backed finance, and asset management.
     On the strength of increasing credit demands from middle market and international businesses, solid investment banking and capital markets performance, and a modest rebound in commercial mortgages, Wholesale Banking generated earnings of $5.8 billion, up 49% from 2009, with revenue of $22.2 billion, up 8% from 2009. Growth in core deposits, up 15% from 2009, and the related increase in fees and commissions, helped offset the impact on loan revenues of lower loan balances in 2010. Total noninterest expense increased 5% as continued focus on expense management helped keep the rate of expense growth below the rate of revenue growth, resulting in an overall operating efficiency ratio of 51% versus 52% in 2009. Loan loss rates also improved from 2009 levels, which allowed for a $561 million release of the allowance for loan losses in 2010.
     Our financial results in 2010 were driven by the performance of our many diverse businesses, including the real estate capital markets group, which re-entered the commercial MBS securitization market with its first deal in three years; investment banking, which helped drive more than $172 million of growth in trust and investment fees; commercial mortgage servicing, which capitalized on its strong competitive position to win the servicing rights on more than 70% of new commercial MBS deals; and commercial real estate, where re-pricing efforts lifted loan portfolio yields 49 basis points to add $180 million in revenue growth.
     Wholesale Banking’s performance was also supported by additional efficiencies created by the merger with Wachovia. Key achievements included funds management group consolidations, leasing and equipment finance system migrations, Commercial Electronic Office® (CEO®) access for Wachovia Global Connect customers, and building of treasury product solutions to prepare for full customer migrations in 2011.


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Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients using a planning approach to meet each client’s needs. 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 and trust. Family Wealth meets the unique needs of the ultra high net worth customers. Brokerage serves customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement is a national leader in providing institutional retirement and trust services (including 401(k) and pension plan record keeping) for businesses, retail retirement solutions for individuals, and reinsurance services for the life insurance industry.
     Wealth, Brokerage and Retirement earned net income of $1.0 billion in 2010. Revenue of $11.7 billion included a mix of brokerage commissions, asset-based fees and net interest income. Net interest income growth was dampened by the continued low short-term interest rate environment. Equity market gains helped drive growth in fee income. During 2010 client assets grew 6% from a year ago, including managed account asset growth of 20%. Deposit balances grew 10% during 2010. Expenses increased slightly from the prior year due to growth in broker commissions partially offset by the realization of merger synergies during the year and the loss reserve for the auction rate securities (ARS) legal settlement in 2009. The wealth, brokerage and retirement businesses have strengthened partnerships across the Company, working with Community Banking and Wholesale Banking to provide financial solutions for clients.


Balance Sheet Analysis
 

During 2010, our total assets grew 1%, funded by core deposit growth of 2% and internal capital generation, partially offset by a reduction in our long-term borrowings. As a result of continued soft loan demand, our loans decreased 3% and most of our asset growth was therefore in more liquid earning assets. However, the strength of our business model continued to produce high rates of internal capital generation as reflected in our improved capital ratios. Tier 1 capital increased to 11.16% as a percentage of total risk-weighted assets, total capital to 15.01%, Tier 1 leverage to 9.19% and Tier 1 common equity to 8.30% at

December 31, 2010, up from 9.25%, 13.26%, 7.87% and 6.46%, respectively, at December 31, 2009. At December 31, 2010, core deposits funded 105% of the loan portfolio, and we have significant capacity to add loans and higher yielding long-term MBS to generate future revenue and earnings growth.
     The following discussion provides additional information about the major components of our balance sheet. Information about changes in our asset mix and about our capital is included in the “Earnings Performance – Net Interest Income” and “Capital Management” sections of this Report.


Securities Available for Sale
Table 10:  Securities Available for Sale – Summary
                                                 
   
   
    December 31 ,
    2010     2009  
            Net                     Net          
            unrealized     Fair             unrealized     Fair  
(in millions)   Cost     gain     value     Cost     gain     value  
   
Debt securities available for sale
  $ 160,071       7,394       167,465       162,314       4,804       167,118  
Marketable equity securities
    4,258       931       5,189       4,749       843       5,592  
   
Total securities available for sale
  $ 164,329       8,325       172,654       167,063       5,647       172,710  
   

     Table 10 presents a summary of our securities available-for-sale portfolio. 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 MBS. The total net unrealized gains on securities available for sale were $8.3 billion at December 31, 2010, up from net unrealized gains of $5.6 billion at December 31, 2009, due to a general decline in long-term yields and narrowing of credit spreads.
     We analyze securities for OTTI quarterly, or more often if a potential loss-triggering event occurs. Of the $692 million OTTI write-downs in 2010, $672 million related to debt securities and

$20 million to equity securities. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies – Securities) and Note 5 (Securities Available for Sale) to Financial Statements in this Report.
     At December 31, 2010, debt securities available for sale included $19 billion of municipal bonds, of which 84% were rated “A-” or better, based on external, and in some cases internal, ratings. Additionally, some of these bonds are guaranteed against loss by bond insurers. These bonds are predominantly investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in making the investment decision. These municipal bonds will continue to be monitored as part of


49


 

Balance Sheet Analysis (continued)

our on-going impairment analysis of our securities available for sale.
     The weighted-average expected maturity of debt securities available for sale was 6.1 years at December 31, 2010. Because 69% of this portfolio is MBS, the expected remaining maturity may differ from contractual maturity because borrowers generally 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 MBS available for sale are shown in Table 11.

Table 11:  Mortgage-Backed Securities
                         
   
   
                    Expected  
            Net     remaining  
    Fair     unrealized     maturity  
(in billions)   value     gain (loss)     (in years)  
   
At December 31, 2010
  $ 115.8       5.9       4.5  
At December 31, 2010, assuming a 200 basis point:
                       
Increase in interest rates
    105.8       (4.1)     5.7  
Decrease in interest rates
    124.3       14.4       3.3  
   

     See Note 5 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.


Loan Portfolio
Table 12:  Loan Portfolios
                                         
   
   
    December 31 ,
(in millions)   2010     2009     2008     2007     2006  
   
Commercial
  $ 322,058       336,465       389,964       160,282       128,731  
Consumer
    435,209       446,305       474,866       221,913       190,385  
   
Total loans
  $ 757,267       782,770       864,830       382,195       319,116  
   

Balances decreased during 2010 for nearly all types of loans as demand remained soft in response to economic conditions. Non-strategic and liquidating loan portfolios decreased by $26.3 billion from 2009. Table 12 provides a breakdown by loan portfolio.
     A discussion of average loan balances and a comparative detail of average loan balances is included in Table 5 under “Earnings Performance – Net Interest Income” earlier in this Report. Year-end balances and other loan related information are in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

     Effective June 30, 2010, real estate construction outstanding balances and all other related data include certain commercial real estate (CRE) secured loans acquired from Wachovia previously classified as real estate mortgage. Balances for 2009 and 2008 have been revised to conform with the current presentation.
     Table 13 shows contractual loan maturities for selected loan categories and sensitivities of those loans to changes in interest rates.


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Table 13:  Maturities for Selected Loan Categories
                                                                 
   
   
    December 31 ,
    2010     2009  
            After                             After              
    Within     one year     After             Within     one year     After        
    one     through     five             one     through     five        
(in millions)   year     five years     years     Total     year     five years     years     Total  
   
Selected loan maturities:
                                                               
Commercial and industrial
  $ 39,576       90,497       21,211       151,284       44,919       91,951       21,482       158,352  
Real estate mortgage
    27,544       44,627       27,264       99,435       25,339       42,179       30,009       97,527  
Real estate construction
    15,009       9,189       1,135       25,333       23,362       12,188       1,428       36,978  
Foreign
    25,087       5,508       2,317       32,912       21,266       5,715       2,417       29,398  
   
Total selected loans
  $ 107,216       149,821       51,927       308,964       114,886       152,033       55,336       322,255  
   
Distribution of loans due after one year to changes in interest rates:
                                                               
Loans at fixed interest rates
          $ 29,886       14,543                       26,373       18,921          
Loans at floating/variable interest rates
            119,935       37,384                       125,660       36,415          
   
Total selected loans
          $ 149,821       51,927                       152,033       55,336          
   

Deposits
Deposits totaled $847.9 billion at December 31, 2010, compared with $824.0 billion at December 31, 2009. Table 14 provides additional detail regarding deposits. Comparative detail of average deposit balances is provided in Table 5 under “Earnings Performance – Net Interest Income” earlier in this
Report. Total core deposits were $798.2 billion at December 31, 2010, up $17.5 billion from $780.7 billion at December 31, 2009. We continued to gain new deposit customers and deepen our relationships with existing customers.


Table 14:  Deposits
                                         
   
   
    December 31 ,      
            % of             % of        
            total             total     %  
(in millions)   2010     deposits     2009     deposits     Change  
   
Noninterest-bearing
  $ 191,231       23 %   $ 181,356       22 %     5  
Interest-bearing checking
    63,440       7       63,225       8        
Market rate and other savings
    431,883       51       402,448       49       7  
Savings certificates
    77,292       9       100,857       12       (23 )
Foreign deposits (1)
    34,346       4       32,851       4       5  
           
Core deposits
    798,192       94       780,737       95       2  
Other time and savings deposits
    19,412       2       16,142       2       20  
Other foreign deposits
    30,338       4       27,139       3       12  
           
Total deposits
  $ 847,942       100 %   $ 824,018       100 %     3  
   
(1)   Reflects Eurodollar sweep balances included in core deposits.

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Balance Sheet Analysis (continued)
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.
Off-Balance Sheet Transactions with Unconsolidated Entities
We routinely 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. For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.
Newly Consolidated VIE Assets and Liabilities
Effective January 1, 2010, we adopted new consolidation accounting guidance and, accordingly, consolidated certain variable interest entities (VIEs) that were not included in our consolidated financial statements at December 31, 2009. On January 1, 2010, we recorded the assets and liabilities of the newly consolidated VIEs and derecognized our existing interests in those VIEs. We also recorded a $183 million increase to beginning retained earnings as a cumulative effect adjustment and recorded a $173 million increase to other comprehensive income (OCI).
     Table 15 presents the net incremental assets recorded on our balance sheet by structure type upon adoption of new consolidation accounting guidance.
Table 15:  Net Incremental Assets Upon Adoption of New Consolidation Accounting Guidance
         
   
   
    Incremental  
    assets as of  
(in millions)   Jan. 1, 2010  
   
Structure type:
       
Residential mortgage loans - nonconforming (1)
  $ 11,479  
Commercial paper conduit
    5,088  
Other
    2,002  
 
Total
  $ 18,569  
   
(1)   Represents certain of our residential mortgage loans that are not guaranteed by government-sponsored entities (GSEs) (“nonconforming”).
     In accordance with the transition provisions of the new consolidation accounting guidance, we initially recorded newly consolidated VIE assets and liabilities on a basis consistent with our accounting for respective assets at their amortized cost basis, except for those VIEs for which the fair value option was elected. The carrying amount for loans approximates the outstanding unpaid principal balance, adjusted for allowance for loan losses. Short-term borrowings and long-term debt approximate the outstanding principal amount due to creditors.
     Upon adoption of new consolidation accounting guidance on January 1, 2010, we elected fair value option accounting for certain nonconforming residential mortgage loan securitization VIEs. This election requires us to recognize the VIE’s eligible assets and liabilities on the balance sheet at fair value with changes in fair value recognized in earnings.
     Such eligible assets and liabilities consisted primarily of loans and long-term debt, respectively. The fair value option was elected for those newly consolidated VIEs for which our interests, prior to January 1, 2010, were predominantly carried at fair value with changes in fair value recorded to earnings. Accordingly, the fair value option was elected to effectively continue fair value accounting through earnings for those interests. Conversely, fair value option was not elected for those newly consolidated VIEs that did not share these characteristics. At January 1, 2010, the fair value for both loans and long-term debt for which the fair value option was elected was $1.0 billion each. The incremental impact of electing fair value option (compared to not electing) on the cumulative effect adjustment to retained earnings was an increase of $15 million.
Guarantees and Certain Contingent Arrangements
Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of standby letters of credit, securities lending and other indemnifications, liquidity agreements, written put options, recourse obligations, residual value guarantees and contingent consideration.
     For more information on guarantees and certain contingent arrangements, see Note 14 (Guarantees and Legal Actions) to Financial Statements in this Report.


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Contractual Obligations
In addition to the contractual commitments and arrangements previously described, which, depending on the nature of the obligation, may or may not require use of our resources, we enter into other contractual obligations in the ordinary course of business, including debt issuances for the funding of operations and leases for premises and equipment.
     Table 16 summarizes these contractual obligations as of December 31, 2010, excluding obligations for short-term borrowing arrangements and pension and postretirement benefit plans. More information on those obligations is in Note 12 (Short-Term Borrowings) and Note 19 (Employee Benefits and Other Expenses) to Financial Statements in this Report.


Table 16:  Contractual Obligations
                                                         
   
   
    Note(s) to                             More            
    Financial     Less than     1-3     3-5     than     Indeterminate        
(in millions)   Statements     1 year     years     years     5 years     maturity     Total  
   
Contractual payments by period:
                                                       
Deposits
    11     $ 108,232       33,601       10,855       2,500       692,754  (1)     847,942  
Long-term debt (2)
    7,13       36,223       35,529       19,585       65,646             156,983  
Operating leases
    7       1,134       2,334       1,732       3,405             8,605  
Unrecognized tax obligations
    20       22                         2,630       2,652  
Commitments to purchase debt securities
            1,153       650                         1,803  
Purchase obligations (3)
            383       278       40       1             702  
   
Total contractual obligations
          $         147,147       72,392       32,212       71,552       695,384       1,018,687  
   
 
(1)   Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
 
(2)   Includes obligations under capital leases of $26 million.
 
(3)   Represents agreements to purchase goods or services.

     We are subject to the income tax laws of the U.S., its states and municipalities, and those of the foreign jurisdictions in which we operate. We have various unrecognized tax obligations related to these operations that may require future cash tax payments to various taxing authorities. Because of their uncertain nature, the expected timing and amounts of these payments generally are not reasonably estimable or determinable. We attempt to estimate the amount payable in the next 12 months based on the status of our tax examinations and settlement discussions. See Note 20 (Income Taxes) to Financial Statements in this Report for more information.
     We enter into derivatives, which create contractual obligations, as part of our interest rate risk management process for our customers or for other trading activities. See the “Risk Management – Asset/Liability” section and Note 15 (Derivatives) to Financial Statements in this Report for more information.
Transactions with Related Parties
The Related Party Disclosures topic of the Codification requires disclosure of material related party transactions, other than compensation arrangements, expense allowances and other similar items in the ordinary course of business. We had no related party transactions required to be reported for the years ended December 31, 2010, 2009 and 2008.


53


 

Risk Management
 

All financial institutions must manage and control a variety of business risks that can significantly affect their financial performance. Key among those are credit, asset/liability and market risk.

Credit Risk Management
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, banking regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes.
     A key to our credit risk management is adhering to 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 approve applications and make loans only 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 includes 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 used in underwriting to support property values on loan originations only 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.
     We continually evaluate and modify our credit policies to address appropriate levels of risk. 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 as we actively work to limit losses and reduce our exposures.
     Table 17 identifies our non-strategic and liquidating loan portfolios as of December 31, 2010, 2009 and 2008. These portfolios have decreased 32% since the merger with Wachovia at December 31, 2008, and decreased 19% from the end of 2009. The portfolios consist primarily of the Pick-a-Pay mortgages portfolio and PCI loans acquired in our acquisition of Wachovia as well as some portfolios from legacy Wells Fargo home equity and Wells Fargo Financial. The legacy Wells Fargo

Financial debt consolidation portfolio included $1.2 billion and $1.6 billion at December 31, 2010 and 2009, respectively, that was considered prime based on secondary market standards. The remainder is non-prime but was originated with standards to reduce credit risk. These loans were originated through our retail channel with documented income, LTV limits based on credit quality and property characteristics, and risk-based pricing. In addition, the loans were originated without teaser rates, interest-only or negative amortization features. Credit losses in the portfolio have increased in the current economic environment compared with historical levels, but performance has remained similar to prime portfolios in the industry with overall loss rates of 4.15% in 2010 on the entire portfolio. Analysis of the Pick-a-Pay and the commercial and industrial and CRE domestic PCI portfolios is presented later in this section.

Table 17:  Non-Strategic and Liquidating Loan Portfolios
                         
   
   
    Outstanding balance  
    December 31 ,
(in billions)   2010     2009     2008  
   
Commercial and industrial, CRE and foreign PCI
loans (1)(2)
  $ 7.9       13.0       18.7  
Pick-a-Pay mortgage (1)
    74.8       85.2       95.3  
Liquidating home equity
    6.9       8.4       10.3  
Legacy Wells Fargo Financial indirect auto
    6.0       11.3       18.2  
Legacy Wells Fargo Financial debt consolidation (2)(3)
    19.0       22.4       25.3  
Other PCI loans (1)(2)
    1.1       1.7       2.5  
 
Total non-strategic and liquidating loan portfolios
  $ 115.7       142.0       170.3  
   
(1)   Net of purchase accounting adjustments related to PCI loans.
 
(2)   These portfolios were designated as non-strategic and liquidating in 2010. Prior periods have been adjusted to reflect this change.
 
(3)   In July 2010, we announced the restructuring of our Wells Fargo Financial division and the exiting of the origination of non-prime portfolio mortgage loans.

     Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, FICO scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an adequate allowance for credit losses. The following analysis reviews the relevant concentrations and certain credit metrics of our significant portfolios. See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.


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COMMERCIAL REAL ESTATE (CRE) The CRE portfolio consists of both CRE mortgages and CRE construction loans. The combined CRE loans outstanding totaled $124.8 billion at December 31, 2010, or 16% of total loans. Of the $124.8 billion, approximately $5.8 billion represents the net balance of PCI CRE loans. CRE construction loans totaled $25.3 billion at December 31, 2010, or 3% of total loans. CRE mortgage loans totaled $99.4 billion at December 31, 2010, or 13% of total loans, of which over 40% is to owner-occupants, who historically have a low level of default. The portfolio is diversified both geographically and by property type. The largest geographic concentrations are found in California and Florida, which represented 23% and 11% of the total CRE portfolio, respectively. By property type, the largest concentrations are office buildings at 23% and industrial/warehouse at 11% of the portfolio.
     The underwriting of CRE loans primarily focuses on cash flows and creditworthiness, in addition to collateral valuations. 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 put in place to manage problem assets. At December 31, 2010, the recorded investment in PCI CRE loans totaled $5.8 billion, down from $12.3 billion since the Wachovia acquisition at December 31, 2008, reflecting the reduction resulting from loan resolutions and write-downs.
     Table 18 summarizes CRE loans by state and property type with the related nonaccrual totals. At December 31, 2010, the highest concentration of total loans by state was $28.2 billion in California, more than double the next largest state concentration, and the related nonaccrual loans totaled about $1.5 billion, or 5% of CRE loans in California. Office buildings, at $28.7 billion, were the largest property type concentration, more than double the next largest, and the related nonaccrual loans totaled $1.4 billion, or 5% of total CRE loans for office buildings. In aggregate, nonaccrual loans totaled 7% of the non-PCI outstanding balance at December 31, 2010.


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Risk Management – Credit Risk Management (continued)
Table 18:  CRE Loans by State and Property Type
                                                         
   
   
    December 31, 2010  
    Real estate mortgage     Real estate construction     Total     % of  
    Nonaccrual     Outstanding     Nonaccrual     Outstanding     Nonaccrual     Outstanding     total  
(in millions)   loans     balance (1)     loans     balance (1)     loans     balance (1)     loans  
 
By state:
                                                       
PCI loans:
                                                       
Florida
  $       459             578             1,037       * %
California
          588             193             781       *  
Georgia
          301             250             551       *  
North Carolina
          180             353             533       *  
New York
          226             225             451       *  
Other
          1,101             1,350             2,451  (2)     *  
 
Total PCI loans
  $       2,855             2,949             5,804       * %
 
All other loans:
                                                       
California
  $ 1,172       23,780       375       3,648       1,547       27,428       4 %
Florida
    912       10,023       412       2,286       1,324       12,309       2  
Texas
    376       6,523       165       2,186       541       8,709       1  
North Carolina
    346       4,663       254       1,477       600       6,140       *  
New York
    56       4,440       17       1,111       73       5,551       *  
Virginia
    49       3,574       147       1,512       196       5,086       *  
Georgia
    374       3,726       181       885       555       4,611       *  
Arizona
    259       3,445       140       726       399       4,171       *  
Colorado
    106       2,868       76       698       182       3,566       *  
New Jersey
    109       2,641       40       513       149       3,154       *  
Other
    1,468       30,897       869       7,342       2,337       38,239  (3)     5  
 
Total all other loans
  $ 5,227       96,580       2,676       22,384       7,903       118,964       16 %
 
Total
  $ 5,227       99,435       2,676       25,333       7,903       124,768       16 %
 
By property:
                                                       
PCI loans:
                                                       
Office buildings
  $       953             317             1,270       * %
Apartments
          565             704             1,269       *  
1-4 family land
          249             559             808       *  
Retail (excluding shopping center)
          341             90             431       *  
1-4 family structure
          29             353             382       *  
Other
          718             926             1,644       *  
 
Total PCI loans
  $       2,855             2,949             5,804       * %
 
All other loans:
                                                       
Office buildings
  $ 1,214       24,841       233       2,598       1,447       27,439       4 %
Industrial/warehouse
    730       13,058       76       931       806       13,989       2  
Real estate - other
    576       11,853       61       691       637       12,544       2  
Apartments
    368       8,309       305       3,451       673       11,760       2  
Retail (excluding shopping center)
    591       9,628       126       868       717       10,496       1  
Shopping center
    363       6,578       270       1,622       633       8,200       1  
Land (excluding 1-4 family)
    41       524       671       7,013       712       7,537       1  
Hotel/motel
    469       5,916       74       999       543       6,915       *  
Institutional
    112       2,646       9       179       121       2,825       *  
1-4 family land
    157       328       514       2,255       671       2,583       *  
Other
    606       12,899       337       1,777       943       14,676       2  
 
Total all other loans
  $ 5,227       96,580       2,676       22,384       7,903       118,964       16 %
 
Total
  $ 5,227       99,435  (4)     2,676       25,333       7,903       124,768       16 %
 
 
*   Less than 1%.
 
(1)   For PCI loans, amounts represent carrying value.
 
(2)   Includes 35 states; no state had loans in excess of $436 million.
 
(3)   Includes 40 states; no state had loans in excess of $3.1 billion.
 
(4)   Includes $40.0 billion of loans to owner-occupants where 51% or more of the property is used in the conduct of their business.

56


 

COMMERCIAL AND INDUSTRIAL LOANS AND LEASE FINANCING For purposes of portfolio risk management, we aggregate commercial and industrial loans and lease financing according to market segmentation and standard industry codes. Table 19 summarizes commercial and industrial loans and lease financing by industry with the related nonaccrual totals. While this portfolio has experienced deterioration in the current credit cycle, we believe this portfolio has experienced less credit deterioration than our CRE portfolios. For the year ended December 31, 2010, the commercial and industrial loans and lease financing portfolios had (1) a lower percentage of loans 90 days or more past due and still accruing (0.19% at year end; 0.24% for CRE), (2) a lower percentage of nonperforming loans to total loans outstanding (2.02% at year end; 6.33% for CRE), and (3) a lower loss rate to average total loans (1.50% for the year; 1.67% for CRE). We believe this portfolio is well underwritten and is diverse in its risk with relatively even concentrations across several industries. A majority of our commercial and industrial loans and lease financing portfolio is secured by short-term liquid assets, such as accounts receivable, inventory and securities, as well as long-lived assets, such as equipment and other business assets. Our credit risk management process for this portfolio primarily focuses on a customer’s ability to repay the loan through their cash flow. Generally, the collateral securing this portfolio represents a secondary source of repayment.
Table 19:  Commercial and Industrial Loans and Lease Financing by Industry
                         
   
   
    December 31, 2010  
                    % of  
    Nonaccrual     Outstanding     total  
(in millions)   loans     balance (1)     loans  
   
PCI loans:
                       
Investors
  $       111       * %
Media
          107       *  
Insurance
          91       *  
Technology
          65       *  
Healthcare
          47       *  
Residential construction
          41       *  
Other
          256 (2)     *  
   
Total PCI loans
  $       718       * %
   
All other loans:
                       
Financial institutions
  $         167       10,468       1 %
Cyclical retailers
    67       8,804       1  
Food and beverage
    32       8,392       1  
Oil and gas
    156       8,140       1  
Healthcare
    87       7,885       1  
Transportation
    34       6,427       *  
Industrial equipment
    113       6,284       *  
Real estate - other
    90       5,713       *  
Business services
    66       5,632       *  
Technology
    28       5,609       *  
Investors
    114       5,326       *  
Utilities
    107       4,793       *  
Other
    2,260       80,187 (3)     11  
   
Total all other loans
  $ 3,321       163,660       22 %
   
Total
  $ 3,321       164,378       22 %
   
 
*   Less than 1%.
 
(1)   For PCI loans, amounts represent carrying value.
 
(2)   No other single category had loans in excess of $35 million.
 
(3)   No other single category had loans in excess of $4.6 billion. The next largest categories included public administration, hotel/restaurant, media, non-residential construction and securities firms.


57


 

Risk Management – Credit Risk Management (continued)

     During the recent credit cycle, we have experienced an increase in requests for extensions of commercial and industrial and CRE loans, which have repayment guarantees. All extensions granted are based on a re-underwriting of the loan and our assessment of the borrower’s ability to perform under the agreed-upon terms. At the time of extension, borrowers are generally performing in accordance with the contractual loan terms. Extension terms generally range from six to thirty-six months and may require that the borrower provide additional economic support in the form of partial repayment, amortization or additional collateral or guarantees. In cases where the value of collateral or financial condition of the borrower is insufficient to repay our loan, we may rely upon the support of an outside repayment guarantee in providing the extension. In considering the impairment status of the loan, we evaluate the collateral and future cash flows as well as the anticipated support of any repayment guarantor. When performance under a loan is not reasonably assured, including the performance of the guarantor, we place the loan on nonaccrual status and we charge-off all or a portion of a loan based on the fair value of the collateral securing the loan.
     Our ability to seek performance under the guarantee is directly related to the guarantor’s creditworthiness, capacity and willingness to perform, which is evaluated on an annual basis, or more frequently as warranted. Our evaluation is based on the most current financial information available and is focused on various key financial metrics, including net worth, leverage, and current and future liquidity. We consider the guarantor’s reputation, creditworthiness, and willingness to work with us based on our analysis as well as other lenders’ experience with the guarantor. Our assessment of the guarantor’s credit strength is reflected in our loan risk ratings for such loans. The loan risk rating is an important factor in our allowance methodology for commercial and industrial and CRE loans.
REAL ESTATE 1-4 FAMILY FIRST MORTGAGE LOANS The concentrations of real estate 1-4 family mortgage loans by state are presented in Table 20. Our real estate 1-4 family mortgage loans to borrowers in California represented approximately 14% of total loans (3% of this amount were PCI loans from Wachovia) at both December 31, 2010 and 2009, mostly within the larger metropolitan areas, with no single area consisting of more than 3% of total loans. Changes in real estate values and underlying economic or market conditions for these areas are monitored continuously within our credit risk management process.
     Some of our real estate 1-4 family mortgage loans (representing first mortgage and home equity products) include an interest-only feature as part of the loan terms. At December 31, 2010, these loans were approximately 25% of total loans, compared with 26% at the end of 2009. Substantially all of these loans are considered to be prime or near prime. We believe we have manageable adjustable-rate mortgage (ARM) reset risk across our Wells Fargo originated and owned mortgage loan portfolios.
Table 20:  Real Estate 1-4 Family Mortgage Loans by State
                                 
   
   
    December 31, 2010  
    Real estate     Real estate     Total real        
    1-4 family     1-4 family     estate 1-4     % of  
    first     junior lien     family     total  
(in millions)   mortgage     mortgage     mortgage     loans  
   
PCI loans:
                               
California
  $ 21,630       49       21,679       3 %
Florida
    3,076       56       3,132       *  
New Jersey
    1,293       36       1,329       *  
Other (1)
    7,246       109       7,355       *  
   
Total PCI loans
  $ 33,245       250       33,495       4 %
   
All other loans:
                               
California
  $ 55,794       26,612       82,406       11 %
Florida
    17,296       7,782       25,078       3  
New Jersey
    8,908       6,403       15,311       2  
New York
    8,169       3,709       11,878       2  
Virginia
    6,145       4,622       10,767       1  
Pennsylvania
    6,233       4,066       10,299       1  
North Carolina
    5,860       3,552       9,412       1  
Texas
    6,645       1,519       8,164       1  
Georgia
    4,886       3,472       8,358       1  
Other (2)
    77,054       34,162       111,216       15  
   
Total all other loans
  $ 196,990       95,899       292,889       39 %
   
Total
  $ 230,235       96,149       326,384       43 %
   
 
*   Less than 1%.
 
(1)   Consists of 45 states; no state had loans in excess of $759 million.
 
(2)   Consists of 41 states; no state had loans in excess of $7.2 billion. Includes $15.5 billion in Government National Mortgage Association (GNMA) pool buyouts.


58


 

PURCHASED CREDIT-IMPAIRED (PCI) LOANS As of December 31, 2008, certain of the loans acquired from Wachovia had evidence of credit deterioration since their 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 PCI loans. PCI loans were recorded at fair value at the date of acquisition, and the historical allowance for credit losses related to these loans was not 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).
     A nonaccretable difference was established in purchase accounting for PCI loans to absorb losses expected at that time on those loans. Amounts absorbed by the nonaccretable difference do not affect the income statement or the allowance for credit losses.
     Substantially all commercial and industrial, CRE and foreign PCI loans are accounted for as individual loans. Conversely, Pick-a-Pay and other consumer PCI loans have been aggregated into several pools based on common risk characteristics. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
     Resolutions of loans may include sales of loans to third parties, receipt of payments in settlement with the borrower, or
foreclosure of the collateral. Our policy is to remove an individual loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference. This removal method assumes that the amount received from resolution approximates pool performance expectations. The remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method is addressed by our quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan. Modified PCI loans are not removed from a pool even if those loans would otherwise be deemed troubled debt restructurings (TDRs). Modified PCI loans that are accounted for individually are considered TDRs, and removed from PCI accounting, if there has been a concession granted in excess of the original nonaccretable difference.
     During 2010, we recognized in income $989 million of nonaccretable difference related to commercial PCI loans due to payoffs and dispositions of these loans. We also transferred $3.4 billion from the nonaccretable difference to the accretable yield, of which $2.4 billion was due to sustained positive performance in the Pick-a-Pay portfolio evidenced through an increase in expected cash flows. Table 21 provides an analysis of changes in the nonaccretable difference related to principal that is not expected to be collected.


Table 21:  Changes in Nonaccretable Difference for PCI Loans
                                 
   
   
                    Other        
(in millions)   Commercial     Pick-a-Pay     consumer     Total  
   
Balance at December 31, 2008
  $ 10,410       26,485       4,069       40,964  
Release of nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
    (330 )                 (330 )
Loans resolved by sales to third parties (2)
    (86 )           (85 )     (171 )
Reclassification to accretable yield for loans with improving cash flows (3)
    (138 )     (27 )     (276 )     (441 )
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (4)
    (4,853 )     (10,218 )     (2,086 )     (17,157 )
   
Balance at December 31, 2009
    5,003       16,240       1,622       22,865  
Release of nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
    (817 )                 (817 )
Loans resolved by sales to third parties (2)
    (172 )                 (172 )
Reclassification to accretable yield for loans with improving cash flows (3)
    (726 )     (2,356 )     (317 )     (3,399 )
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (4)
    (1,698 )     (2,959 )     (391 )     (5,048 )
   
Balance at December 31, 2010
  $ 1,590       10,925       914       13,429  
   
 
(1)   Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.
 
(2)   Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
 
(3)   Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.
 
(4)   Write-downs to net realizable value of PCI loans are absorbed by the nonaccretable difference when severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

59


 

Risk Management – Credit Risk Management (continued)

     Since the Wachovia acquisition, we have released $5.3 billion in nonaccretable difference for certain PCI loans and pools of loans, including $3.8 billion transferred from the nonaccretable difference to the accretable yield and $1.5 billion released through loan resolutions. We have provided $1.6 billion in the allowance for credit losses for certain PCI loans or pools of loans that have had loss-related decreases to cash flows expected to be collected. The net result is a $3.7 billion improvement in our initial projected losses on all PCI loans.

     At December 31, 2010, the allowance for credit losses in excess of nonaccretable difference on certain PCI loans was $298 million. The allowance is necessary to absorb decreases in cash flows expected to be collected since acquisition and primarily relates to individual PCI loans. Table 22 analyzes the actual and projected loss results on PCI loans since the acquisition of Wachovia on December 31, 2008, through December 31, 2010.


Table 22:  Actual and Projected Loss Results on PCI Loans
                                 
   
   
                    Other        
(in millions)   Commercial     Pick-a-Pay     consumer     Total  
   
Release of unneeded nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
  $ 1,147                   1,147  
Loans resolved by sales to third parties (2)
    258             85       343  
Reclassification to accretable yield for loans with improving cash flows (3)
    864       2,383       593       3,840  
 
Total releases of nonaccretable difference due to better than expected losses
    2,269       2,383       678       5,330  
Provision for worse than originally expected losses (4)
    (1,562 )           (62 )     (1,624 )
 
Actual and projected losses on PCI loans better than originally expected
  $ 707       2,383       616       3,706  
 
 
 
(1)   Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.
 
(2)   Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
 
(3)   Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.
 
(4)   Provision for additional losses recorded as a charge to income, when it is estimated that the cash flows expected to be collected for a PCI loan or pool of loans have decreased subsequent to the acquisition.

     For further detail on PCI loans, see Note 1 (Summary of Significant Accounting Policies – Loans) and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
      


60


 

PICK-A-PAY PORTFOLIO The Pick-a-Pay portfolio was one of the consumer residential first mortgage portfolios we acquired from Wachovia. We considered a majority of the Pick-a-Pay loans to be PCI loans.
     The Pick-a-Pay portfolio had an outstanding balance of $84.2 billion and a carrying value of $74.8 billion at December 31, 2010. It is a liquidating portfolio, as Wachovia ceased originating new Pick-a-Pay loans in 2008.
     Real estate 1-4 family junior lien mortgages and lines of credit associated with Pick-a-Pay loans are reported in the Home Equity core portfolio. The Pick-a-Pay portfolio includes loans

that offer payment options (Pick-a-Pay option payment loans), loans that were originated without the option payment feature, loans that no longer offer the option feature as a result of our modification efforts since the acquisition, and loans where the customer voluntarily converted to a fixed-rate product. The Pick-a-Pay portfolio is included in the consumer real estate 1-4 family first mortgage class of loans in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report. Table 23 provides balances over time related to the types of loans included in the portfolio.


Table 23:  Pick-a-Pay Portfolio - Balances Over Time
                                                 
   
   
    December 31 ,
    2010     2009     2008  
    Unpaid             Unpaid             Unpaid        
    principal             principal             principal        
(in millions)   balance     % of total     balance     % of total     balance     % of total  
 
Option payment loans (1)
  $ 49,958       59 %   $ 67,170       69 %   $ 99,937       86 %
Non-option payment adjustable-rate and fixed-rate loans (1)
    11,070       13       13,926       14       15,763       14  
Full-term loan modifications (1)
    23,132       28       16,378       17              
 
Total unpaid principal balance (1)
  $ 84,160       100 %   $ 97,474       100 %   $ 115,700       100 %
 
Total carrying value
  $ 74,815             $ 85,238             $ 95,315          
 
 
 
(1)   Unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

     PCI loans in the Pick-a-Pay portfolio had an outstanding balance of $41.9 billion and a carrying value of $32.4 billion at December 31, 2010. The carrying value of the PCI loans is net of remaining purchase accounting write-downs, which reflected their fair value at acquisition. Upon acquisition, we recorded a $22.4 billion write-down in purchase accounting on Pick-a-Pay loans that were impaired.
     Due to the sustained positive performance observed on the Pick-a-Pay portfolio compared to the original acquisition estimates, we have reclassified $2.4 billion from the nonaccretable difference to the accretable yield since the Wachovia merger. This improvement in the lifetime credit outlook for this portfolio is primarily attributable to the significant modification efforts as well as the portfolio’s delinquency stabilization. This improvement in the credit outlook is expected to be realized over the remaining life of the portfolio, which is estimated to have a weighted-average life of approximately nine years. The accretable yield percentage at the end of 2010 was 4.54% compared with 5.34% at the end of 2009. Fluctuations in the accretable yield are driven by changes in interest rate indices for variable rate PCI loans, prepayment assumptions, and expected principal and interest payments over the estimated life of the portfolio. Changes in the projected timing of cash flow events, including loan liquidations, modifications and short sales, can also affect the accretable yield percentage and the estimated weighted-average life of the portfolio.
     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 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 $2.7 billion at December 31, 2010, was down from $3.7 billion at December 31, 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. At December 31, 2010, approximately 75% of customers choosing the minimum payment option did not defer interest.
     Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to or below 85% have a cap of 125% of the original loan balance, and these loans represent substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the


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Risk Management – Credit Risk Management (continued)

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. For a small population of Pick-a-Pay loans, the recast occurs at the five-year anniversary. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.
     Due to the terms of the Pick-a-Pay portfolio, there is little recast risk over the next three years. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balances of loans to recast based on reaching the principal cap: $3 million in 2011, $4 million in 2012 and $32 million in 2013. In 2010, the amount of loans recast based on reaching the principal cap was $1 million. In addition, we would expect the following balances of 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: $34 million in 2011, $69 million in 2012 and $275 million in 2013. In 2010, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $39 million.
     Table 24 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 a useful metric in predicting future real estate 1-4 family first mortgage loan performance, including potential charge-offs. Because PCI loans were initially recorded at fair value, including write-downs for expected credit losses, the ratio of the carrying value to the current collateral value will be lower compared with the LTV based on the unpaid principal balance. For informational purposes, we have included both ratios in the following table.


Table 24:  Pick-a-Pay Portfolio (1)
                                                         
   
   
    December 31, 2010  
    PCI loans     All other loans  
                            Ratio of                    
                            carrying                    
    Unpaid     Current             value to     Unpaid     Current        
    principal     LTV     Carrying     current     principal     LTV     Carrying  
(in millions)   balance (2)     ratio (3)     value (4)     value     balance (2)     ratio (3)     value (4)  
 
California
  $ 28,451       117 %   $ 21,623       88 %   $ 20,782       81 %   $ 20,866  
Florida
    3,925       122       2,960       88       4,317       100       4,335  
New Jersey
    1,432       91       1,242       78       2,568       77       2,578  
Texas
    371       78       337       72       1,725       64       1,732  
Washington
    525       96       488       89       1,288       80       1,293  
Other states
    7,189       106       5,726       83       11,587       84       11,635  
                                             
Total Pick-a-Pay loans
  $ 41,893             $ 32,376             $ 42,267             $ 42,439  
                                             
 
 
(1)   The individual states shown in this table represent the top five states based on the total net carrying value of the Pick-a-Pay loans at the beginning of 2010.
 
(2)   Unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
 
(3)   The current LTV ratio is calculated as the unpaid principal balance 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.
 
(4)   Carrying value, which does not reflect the allowance for loan losses, includes remaining purchase accounting adjustments, which, for PCI loans may include 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 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, forbearance of principal, and, in geographies with substantial property value declines, we may offer permanent principal reductions.
     In 2009, we rolled out the U.S. Treasury Department’s Home Affordability Modification Program (HAMP) to the customers in
this portfolio. As of December 31, 2010, more than 11,000 HAMP applications were being reviewed by our loan servicing department and more than 7,000 loans have been approved for the HAMP trial modification. We believe a key factor to successful loss mitigation is tailoring the revised loan payment to the customer’s sustainable income. We continually reassess our loss mitigation strategies and may adopt additional or different strategies in the future.
     In 2010, we completed more than 27,700 proprietary and HAMP loan modifications and have completed more than 80,400 modifications since the Wachovia acquisition, resulting in $3.7 billion of principal forgiveness to our customers. The majority of the loan modifications were concentrated in our PCI Pick-a-Pay loan portfolio. Approximately 49,000 modification offers were proactively sent to customers in 2010. As part of the modification process, the loans are re-underwritten, income is documented and the negative amortization feature is eliminated.


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Most of the modifications result in material payment reduction to the customer. Because of the write-down of the PCI 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. To the extent we modify loans not in the PCI Pick-a-Pay portfolio, we may establish an allowance for consumer loans modified in a TDR.


      

HOME EQUITY PORTFOLIOS The deterioration in specific segments of the legacy Wells Fargo Home Equity portfolios, which began in 2007, required a targeted approach to managing these assets. In fourth quarter 2007, a liquidating portfolio was identified, consisting of home equity loans generated through the wholesale channel not behind a Wells Fargo first mortgage, and home equity loans acquired through correspondents. The liquidating portfolio was $6.9 billion at December 31, 2010, compared with $8.4 billion at December 31, 2009. The loans in this liquidating portfolio represent less than 1% of our total loans outstanding at December 31, 2010, and contain some of the highest risk in our $117.5 billion Home Equity portfolio, with a loss rate of 10.90% compared with 3.62% 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 $110.6 billion at December 31, 2010, of which 98% was originated through the retail channel and approximately 19% of the outstanding balance was in a first lien position. Table 25 includes the credit attributes of the Home Equity 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.


Table 25:  Home Equity Portfolios (1)
                                                 
 
 
                    % of loans        
                    two payments        
    Outstanding balance     or more past due     Loss rate  
    December 31 ,   December 31 ,   December 31 ,
(in millions)   2010     2009     2010     2009     2010     2009  
 
Core portfolio (2)
                                               
California
  $ 27,850       30,264       3.30 %     4.12       4.92       5.42  
Florida
    12,036       12,038       5.46       5.48       6.13       4.73  
New Jersey
    8,629       8,379       3.44       2.50       1.95       1.30  
Virginia
    5,667       5,855       2.33       1.91       1.86       1.06  
Pennsylvania
    5,432       5,051       2.48       2.03       1.24       1.49  
Other
    50,976       53,811       2.83       2.85       3.04       2.44  
                                   
Total
    110,590       115,398       3.24       3.35       3.62       3.28  
                                   
Liquidating portfolio
                                               
California
    2,555       3,205       6.66       8.78       15.19       16.74  
Florida
    330       408       8.85       9.45       13.72       16.90  
Arizona
    149       193       6.91       10.46       20.89       18.57  
Texas
    125       154       2.02       1.94       2.81       2.56  
Minnesota
    91       108       5.39       4.15       9.57       7.58  
Other
    3,654       4,361       4.53       5.06       7.48       6.46  
                                   
Total
    6,904       8,429       5.54       6.74       10.90       11.17  
                                   
Total core and liquidating portfolios
  $ 117,494       123,827       3.37       3.58       4.08       3.88  
                                   
 
 
(1)   Consists predominantly of real estate 1-4 family junior lien mortgages and first and junior lines of credit secured by real estate, excluding PCI loans.
 
(2)   Includes $1.7 billion and $1.8 billion at December 31, 2010 and 2009, respectively, associated with the Pick-a-Pay portfolio.

CREDIT CARDS Our credit card portfolio totaled $22.3 billion at December 31, 2010, which represented 3% of our total outstanding loans and was smaller than the credit card portfolios of each of our large bank peers. Delinquencies of 30 days or more were 4.4% of credit card outstandings at December 31, 2010, down from 5.5% a year ago. Net charge-offs were 9.7% for 2010, down from 10.8% in 2009, reflecting previous risk mitigation efforts and overall economic improvements.
 


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Risk Management – Credit Risk Management (continued)

NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
Table 26 shows the five-year trend for nonaccrual loans and other NPAs. We generally place loans on nonaccrual status when:
  the full and timely collection of interest or principal becomes uncertain;
 
  they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest or principal, unless both well-secured and in the process of collection; or
 
  part of the principal balance has been charged off and no restructuring has occurred.
     Note 1 (Summary of Significant Accounting Policies – Loans) to Financial Statements in this Report describes our accounting policy for nonaccrual and impaired loans.
     Wachovia nonaccrual loans were virtually eliminated at December 31, 2008 (acquisition date), due to the purchase accounting adjustments. As a result, the rate of growth for nonaccrual loans since acquisition has been higher than it would have been without the PCI loan accounting. The impact of purchase accounting on our credit data will diminish over time. Table 27 summarizes NPAs for each of the four quarters of 2010 and shows a decline in the total balance in fourth quarter 2010 for the first quarter since the acquisition of Wachovia.


Table 26:  Nonaccrual Loans and Other Nonperforming Assets
                                         
   
   
    December 31 ,
(in millions)   2010     2009     2008     2007     2006  
   
Nonaccrual loans:
                                       
Commercial:
                                       
Commercial and industrial
    $      3,213       4,397       1,253       432       331  
Real estate mortgage
    5,227       3,696       594       128       105  
Real estate construction
    2,676       3,313       989       293       78  
Lease financing
    108       171       92       45       29  
Foreign
    127       146       57       45       43  
   
Total commercial (1)
    11,351       11,723       2,985       943       586  
   
Consumer:
                                       
Real estate 1-4 family first mortgage (2)
    12,289       10,100       2,648       1,272       688  
Real estate 1-4 family junior lien mortgage
    2,302       2,263       894       280       212  
Other revolving credit and installment
    300       332       273       184       180  
   
Total consumer
    14,891       12,695       3,815       1,736       1,080  
   
Total nonaccrual loans (3)(4)
    26,242       24,418       6,800       2,679       1,666  
   
As a percentage of total loans
    3.47 %     3.12       0.79       0.70       0.52  
Foreclosed assets:
                                       
GNMA (5)
  $ 1,479       960       667       535       322  
Other
    4,530       2,199       1,526       649       423  
Real estate and other nonaccrual investments (6)
    120       62       16       5       5  
   
Total nonaccrual loans and other nonperforming assets
  $ 32,371       27,639       9,009       3,868       2,416  
   
As a percentage of total loans
    4.27 %     3.53       1.04       1.01       0.76  
   
(1)   Includes LHFS of $3 million and $27 million at December 31, 2010 and 2009, respectively.
 
(2)   Includes MHFS of $426 million, $339 million, $193 million, $222 million, and $82 million at December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
 
(3)   Excludes loans acquired from Wachovia that are accounted for as PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
 
(4)   See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
 
(5)   Consistent with regulatory reporting requirements, foreclosed real estate securing 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).
 
(6)   Includes real estate investments (loans with non-traditional interest terms 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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Table 27:  Nonaccrual Loans and Other Nonperforming Assets During 2010
                                                                 
 
 
    December 31, 2010     September 30, 2010     June 30, 2010     March 31, 2010  
            % of             % of             % of             % of  
            total             total             total             total  
($ in millions)   Balances     loans     Balances     loans     Balances     loans     Balances     loans  
 
Commercial:
                                                               
Commercial and industrial
  $ 3,213       2.12 %   $ 4,103       2.79 %   $ 3,843       2.63 %   $ 4,273       2.84 %
Real estate mortgage
    5,227       5.26       5,079       5.14       4,689       4.71       4,345       4.44  
Real estate construction
    2,676       10.56       3,198       11.46       3,429       11.10       3,327       9.64  
Lease financing
    108       0.82       138       1.06       163       1.21       185       1.33  
Foreign
    127       0.39       126       0.42       115       0.38       135       0.48  
                                                     
Total commercial
    11,351       3.52       12,644       3.99       12,239       3.82       12,265       3.77  
                                                     
Consumer:
                                                               
Real estate 1-4 family first mortgage
    12,289       5.34       12,969       5.69       12,865       5.50       12,347       5.13  
Real estate 1-4 family junior lien mortgage
    2,302       2.39       2,380       2.40       2,391       2.36       2,355       2.27  
Other revolving credit and installment
    300       0.35       312       0.35       316       0.36       334       0.37  
                                                     
Total consumer
    14,891       3.42       15,661       3.58       15,572       3.49       15,036       3.30  
                                                   
Total nonaccrual loans
    26,242       3.47       28,305       3.76       27,811       3.63       27,301       3.49  
                                                     
Foreclosed assets:
                                                               
GNMA
    1,479               1,492               1,344               1,111          
All other
    4,530               4,635               3,650               2,970          
                                                     
Total foreclosed assets
    6,009               6,127               4,994               4,081          
                                                     
Real estate and other nonaccrual investments
    120               141               131               118          
                                                     
Total nonaccrual loans and other nonperforming assets
  $ 32,371       4.27 %   $ 34,573       4.59 %   $ 32,936       4.30 %   $ 31,500       4.03 %
                                                     
Change from prior quarter
  $ (2,202 )             1,637               1,436               3,861          
 

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Risk Management – Credit Risk Management (continued)

     Total NPAs were $32.4 billion (4.27% of total loans) at December 31, 2010, and included $26.2 billion of nonaccrual loans and $6.0 billion of foreclosed assets. The growth rate in nonaccrual loans slowed in 2010, peaking in third quarter. Growth occurred in the real estate portfolios (commercial and

residential) which consist of secured loans. Nonaccruals in all other loan portfolios were essentially flat or down year over year. New inflows to nonaccrual loans continued to decline. Table 28 provides an analysis of the changes in nonaccrual loans.


Table 28:  Analysis of Changes in Nonaccrual Loans
                                         
   
   
    Quarter ended  
    Dec. 31   Sept. 30   June 30   Mar. 31   Dec. 31 ,
(in millions)   2010     2010     2010     2010     2009  
   
Commercial nonaccrual loans
                                       
Balance, beginning of quarter
  $ 12,644       12,239       12,265       11,723       10,408  
Inflows
    2,329       2,807       2,560       2,763       3,856  
Outflows
    (3,622 )     (2,402 )     (2,586 )     (2,221 )     (2,541 )
   
Balance, end of quarter
    11,351       12,644       12,239       12,265       11,723  
   
Consumer nonaccrual loans
                                       
Balance, beginning of quarter
    15,661       15,572       15,036       12,695       10,461  
Inflows
    4,357       4,866       4,733       6,169       5,626  
Outflows
    (5,127 )     (4,777 )     (4,197 )     (3,828 )     (3,392 )
   
Balance, end of quarter
    14,891       15,661       15,572       15,036       12,695  
   
Total nonaccrual loans
    26,242       28,305       27,811       27,301       24,418  
   

     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. We have increased our loan modification activity to assist homeowners and other borrowers in the current difficult economic cycle. Loans are re-underwritten at the time of the modification in accordance with underwriting guidelines established for governmental and proprietary loan modification programs. For an 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 generally until the borrower has made six consecutive months of payments, or equivalent, inclusive of consecutive payments made prior to modification.
     Loss expectations for nonaccrual loans are driven by delinquency rates, default probabilities and severities. While nonaccrual loans are not free of loss content, we believe the estimated loss exposure remaining in these balances is significantly mitigated by four factors. First, 99% of consumer nonaccrual loans and 95% of commercial nonaccrual loans are secured. Second, losses have already been recognized on 52% of the remaining balance of consumer nonaccruals and commercial nonaccruals have been written down by $2.6 billion. Residential nonaccrual loans are written down to net realizable value at 180 days past due, except for loans that go into trial modification prior to becoming 180 days past due, and which are not written down in the trial period (three months) as long as trial payments are being made on time. Third, as of December 31, 2010, 57% of commercial nonaccrual loans were current on interest. Fourth, the inherent risk of loss

in all nonaccruals is adequately covered by the allowance for loan losses.
     Commercial nonaccrual loans, net of write-downs, amounted to $11.4 billion at December 31, 2010, compared with $11.7 billion a year ago. Consumer nonaccrual loans amounted to $14.9 billion at December 31, 2010, compared with $12.7 billion a year ago. The $2.2 billion increase in nonaccrual consumer loans from a year ago was due to an increase in 1-4 family first mortgage loans. Residential mortgage nonaccrual loans increased largely due to slower disposition and assets brought on the balance sheet upon consolidation of VIEs. Federal government programs, such as HAMP, and Wells Fargo proprietary programs, such as the Company’s Pick-a-Pay Mortgage Assistance program, require customers to provide updated documentation, and to demonstrate sustained performance by completing trial payment periods, before the loan can be removed from nonaccrual status. In addition, for loans in foreclosure, many states, including California and Florida, have enacted legislation that significantly increases the time frames to complete the foreclosure process, meaning that loans will remain in nonaccrual status for longer periods. At the conclusion of the foreclosure process, we continue to sell real estate owned in a timely fashion.
     When a consumer real estate loan is 120 days past due, we move it to nonaccrual status. When the loan reaches 180 days past due it is our policy to write these loans down to net realizable value, except for modifications in their trial period. Thereafter, we revalue each loan regularly and recognize additional charges if needed. Of the $14.9 billion of consumer nonaccrual loans at December 31, 2010, 98% are secured by real estate and 33% have a combined LTV (CLTV) ratio of 80% or below.
     Table 29 provides a summary of foreclosed assets.


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Table 29:  Foreclosed Assets
                                         
   
   
    Dec. 31 ,   Sept. 30 ,   June 30 ,   Mar. 31 ,   Dec. 31 ,
(in millions)   2010     2010     2010     2010     2009  
 
GNMA
  $ 1,479       1,492       1,344       1,111       960  
PCI loans:
                                       
Commercial
    967       1,043       940       697       405  
Consumer
    1,068       1,109       722       490       336  
 
Total PCI loans
    2,035       2,152       1,662       1,187       741  
 
All other loans:
                                       
Commercial
    1,412       1,343       1,087       820       655  
Consumer
    1,083       1,140       901       963       803  
 
Total all other loans
    2,495       2,483       1,988       1,783       1,458  
 
Total foreclosed assets
  $ 6,009       6,127       4,994       4,081       3,159  
 

     NPAs at December 31, 2010, included $1.5 billion of foreclosed real estate that is FHA insured or VA guaranteed and expected to have little to no loss content, and $4.5 billion of foreclosed assets, which have been written down to the value of the underlying collateral. Foreclosed assets increased $2.9 billion, or 90%, in 2010 from the prior year. Of this increase, $1.3 billion were foreclosed loans from the PCI portfolio that are now recorded as foreclosed assets. At December 31, 2010, substantially all of our foreclosed assets of $6.0 billion have been in the portfolio one year or less.
     Given our real estate-secured loan concentrations and current economic conditions, we anticipate continuing to hold a high level of NPAs on our balance sheet. The loss content in the nonaccrual loans has been recognized through charge-offs or provided for in the allowance for credit losses at December 31, 2010. The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors affecting a particular borrower. We increased staffing in our workout and collection organizations to ensure troubled borrowers receive the attention and help they need. See the “Risk Management – Allowance for Credit Losses” section in this Report for additional information.

     We process foreclosures on a regular basis for the loans we service for others as well as those we hold in our loan portfolio. However, we utilize foreclosure only as a last resort for dealing with borrowers who are experiencing financial hardships. We employ extensive contact and restructuring procedures to attempt to find other solutions for our borrowers, and on average we attempt to contact borrowers over 75 times by phone and nearly 50 times by letter during the period from first delinquency to foreclosure sale.
     We employ the same foreclosure procedures for loans we service for others as we use for loans that we hold in our portfolio. We transmit customer and loan data directly from our system of record to outside foreclosure counsel to help ensure the quality of the customer and loan data included in our foreclosure affidavits. We continuously test this process to confirm the proper transmission of the data. Completed foreclosure affidavits that are submitted to the courts are reviewed, signed, and notarized as one of the last steps in a multi-step process intended to comply with applicable law and help ensure the quality of customer and loan data. As previously disclosed, in the course of completing a thorough review of our foreclosure affidavit preparation and execution procedures, we did identify practices where final steps relating to the execution of foreclosure affidavits, as well as some aspects of the notarization process were not adhered to. However, we do not believe that any of these practices led to unwarranted foreclosures. In addition, we have enhanced those procedures to help ensure that foreclosure affidavits are properly prepared, reviewed, and signed.


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Risk Management – Credit Risk Management (continued)

TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 30:  Troubled Debt Restructurings (TDRs)
                                         
   
   
    Dec. 31 ,   Sept. 30 ,   June 30 ,   Mar. 31 ,   Dec. 31 ,
(in millions)   2010     2010     2010     2010     2009  
   
Consumer TDRs:
                                       
Real estate 1-4 family first mortgage
  $ 11,603       10,951       9,525       7,972       6,685  
Real estate 1-4 family junior lien mortgage
    1,626       1,566       1,469       1,563       1,566  
Other revolving credit and installment
    778       674       502       310       17  
   
Total consumer TDRs
    14,007       13,191       11,496       9,845       8,268  
   
Commercial TDRs
    1,751       1,350       656       386       265  
   
Total TDRs
  $ 15,758       14,541       12,152       10,231       8,533  
   
TDRs on nonaccrual status
  $ 5,185       5,177       3,877       2,738       2,289  
TDRs on accrual status
    10,573       9,364       8,275       7,493       6,244  
   
Total TDRs
  $ 15,758       14,541       12,152       10,231       8,533  
   

     Table 30 provides information regarding the recorded investment of loans modified in TDRs. We establish an allowance for loan losses when a loan is modified in a TDR, which was $3.9 billion and $1.8 billion at December 31, 2010 and 2009, respectively. Total charge-offs related to loans modified in a TDR were $812 million in 2010 and $479 million in 2009.
     Our nonaccrual policies are generally the same for all loan types when a restructuring is involved. We underwrite loans at the time of restructuring to determine whether there is sufficient evidence of sustained repayment capacity based on the borrower’s documented income, debt to income ratios, and other factors. Any loans lacking sufficient evidence of sustained repayment capacity at the time of modification are charged down to the fair value of the collateral, if applicable. If the borrower has demonstrated performance under the previous terms and the underwriting process 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 nonaccrual status generally until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments, or equivalent, inclusive of consecutive payments made prior to modification. Loans will also be placed on nonaccrual, and a corresponding charge-off is recorded to the loan balance, if we believe that principal and interest contractually due under the modified agreement will not be collectible.

     We do not forgive principal for a majority of our TDRs, but in those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged off. When a TDR performs in accordance with its modified terms, the loan either continues to accrue interest (for performing loans), or will return to accrual status after the borrower demonstrates a sustained period of performance.
     If interest due on all nonaccrual loans (including loans that were, but are no longer on nonaccrual at year end) had been accrued under the original terms, approximately $1.3 billion of interest would have been recorded as income in 2010, compared with $362 million recorded as interest income.


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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 mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $11.6 billion at December 31, 2010, and $16.1 billion at December 31, 2009, are excluded from this disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.
     Non-PCI loans 90 days or more past due and still accruing were $18.5 billion at December 31, 2010, and $22.2 billion at
December 31, 2009. Those balances include $14.7 billion and $15.3 billion, respectively, in loans whose repayments are insured by the FHA or guaranteed by the VA.
     Excluding these insured/guaranteed loans, loans 90 days or more past due and still accruing at December 31, 2010, were down $3.1 billion, or 45%, from December 31, 2009. The decline was due to loss mitigation activities including modifications and increased collection capacity/process improvements, charge-offs, lower early stage delinquency levels and credit stabilization.
     Table 31 reflects loans 90 days or more past due and still accruing excluding the insured/guaranteed loans.


Table 31:  Loans 90 Days or More Past Due and Still Accruing (Excluding Insured/Guaranteed Loans)
                                         
   
   
    December 31
(in millions)   2010     2009     2008     2007     2006  
   
Commercial:
                                       
Commercial and industrial
  $ 308       590       218       32       15  
Real estate mortgage
    104       1,014       70       10       3  
Real estate construction
    193       909       250       24       3  
Foreign
    22       73       34       52       44  
   
Total commercial
    627       2,586       572       118       65  
   
Consumer:
                                       
Real estate 1-4 family first mortgage (1)
    941       1,623       883       286       154  
Real estate 1-4 family junior lien mortgage (1)
    366       515       457       201       63  
Credit card
    516       795       687       402       262  
Other revolving credit and installment
    1,305       1,333       1,047       552       616  
   
Total consumer
    3,128       4,266       3,074       1,441       1,095  
   
Total
  $ 3,755       6,852       3,646       1,559       1,160  
   
(1)   Includes MHFS 90 days or more past due and still accruing.

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Risk Management – Credit Risk Management (continued)

NET CHARGE-OFFS
Table 32:  Net Charge-offs
                                                                                 
 
 
    Year ended     Quarter ended  
    December 31 ,   December 31 ,   September 30   June 30 ,   March 31 ,
    Net loan     % of     Net loan     % of     Net loan     % of     Net loan     % of     Net loan     % of  
    charge-     avg.     charge-     avg.     charge-     avg.     charge-     avg.     charge-     avg.  
($ in millions)   offs     loans     offs     loans (1)     offs     loans (1)     offs     loans (1)     offs     loans (1)  
 
2010
                                                                               
Commercial:
                                                                               
Commercial and industrial
  $ 2,348       1.57 %   $ 500       1.34 %   $ 509       1.38 %   $ 689       1.87 %   $ 650       1.68 %
Real estate mortgage
    1,083       1.10       234       0.94       218       0.87       360       1.47       271       1.12  
Real estate construction
    1,079       3.45       171       2.51       276       3.72       238       2.90       394       4.45  
Lease financing
    100       0.74       21       0.61       23       0.71       27       0.78       29       0.85  
Foreign
    145       0.49       28       0.36       39       0.52       42       0.57       36       0.52  
                                                                   
Total commercial
    4,755       1.47       954       1.19       1,065       1.33       1,356       1.69       1,380       1.68  
                                                                   
Consumer:
                                                                               
Real estate 1-4 family first mortgage
    4,378       1.86       1,024       1.77       1,034       1.78       1,009       1.70       1,311       2.17  
Real estate 1-4 family junior lien mortgage
    4,723       4.65       1,005       4.08       1,085       4.30       1,184       4.62       1,449       5.56  
Credit card
    2,178       9.74       452       8.21       504       9.06       579       10.45       643       11.17  
Other revolving credit and installment
    1,719       1.94       404       1.84       407       1.83       361       1.64       547       2.45  
                                                                   
Total consumer
    12,998       2.90       2,885       2.63       3,030       2.72       3,133       2.79       3,950       3.45  
                                                                   
Total
  $ 17,753       2.30 %   $ 3,839       2.02 %   $ 4,095       2.14 %   $ 4,489       2.33 %   $ 5,330       2.71 %
                                                                   
 
2009
                                                                               
Commercial:
                                                                               
Commercial and industrial
  $ 3,111       1.72 %   $ 927       2.24 %   $ 924       2.09 %   $ 704       1.51 %   $ 556       1.15 %
Real estate mortgage
    637       0.66       315       1.29       184       0.77       119       0.49       19       0.08  
Real estate construction
    1,047       2.56       409       4.23       274       2.67       259       2.48       105       0.99  
Lease financing
    209       1.42       49       1.37       82       2.26       61       1.68       17       0.43  
Foreign
    197       0.64       46       0.62       60       0.79       46       0.61       45       0.56  
                                                                   
Total commercial
    5,201       1.43       1,746       2.02       1,524       1.70       1,189       1.29       742       0.78  
                                                                   
Consumer:
                                                                               
Real estate 1-4 family first mortgage
    3,133       1.31       1,018       1.74       966       1.63       758       1.26       391       0.65  
Real estate 1-4 family junior lien mortgage
    4,638       4.34       1,329       5.09       1,291       4.85       1,171       4.33       847       3.12  
Credit card
    2,528       10.82       634       10.61       648       10.96       664       11.59       582       10.13  
Other revolving credit and installment
    2,668       2.94       686       3.06       682       3.00       604       2.66       696       3.05  
                                                                   
Total consumer
    12,967       2.82       3,667       3.24       3,587       3.13       3,197       2.77       2,516       2.16  
                                                                   
Total
  $ 18,168       2.21 %   $ 5,413       2.71 %   $ 5,111       2.50 %   $ 4,386       2.11 %   $ 3,258       1.54 %
                                                                   
 
(1)   Quarterly net charge-offs as a percentage of average loans are annualized.

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     Table 32 presents net charge-offs for the four quarters and full year of 2010 and 2009. Net charge-offs in 2010 were $17.8 billion (2.30% of average total loans outstanding) compared with $18.2 billion (2.21%) in 2009. Total net charge-offs decreased in 2010 in part due to lower average loan balances and as a result of modestly improving economic conditions, aggressive loss mitigation activities aimed at working with our customers through their financial challenges, and a depletion of the pool of the most challenged vintages/relationships in the portfolio. Total net charge-offs decreased each quarter throughout the year from the peak loss level in fourth quarter of 2009. While loss levels remained elevated, the broad-based improvement across the portfolio was an encouraging trend.
     Net charge-offs in the 1-4 family first mortgage portfolio totaled $4.4 billion in 2010. Our relatively high quality 1-4 family first mortgage portfolio continued to reflect relatively low loss rates, although until housing prices fully stabilize, these credit losses will continue to remain elevated.
     Net charge-offs in the real estate 1-4 family junior lien portfolio were $4.7 billion in 2010. Loss levels increased throughout 2009 and peaked in the first quarter of 2010. Loss levels will remain elevated, however, until conditions in the real estate markets improve. More information about the Home Equity portfolio, which includes substantially all of our real estate 1-4 family junior lien mortgage loans, is available in Table 25 in this Report and the related discussion.
     Credit card charge-offs decreased $350 million to $2.2 billion in 2010. Delinquency and loss levels improved in 2010 as the economy showed signs of stabilization.
     Commercial and CRE net charge-offs were $4.8 billion in 2010 compared with $5.2 billion a year ago. Wholesale credit results improved from 2009 as market liquidity and improving market conditions helped stabilize performance results. Increased lending activity in fourth quarter 2010 in the majority of our commercial business lines further supported our belief of a turn in the demand for credit.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio and unfunded credit commitments at the balance sheet date, excluding loans carried at fair value. The detail of the changes in the allowance for credit losses by portfolio segment (including charge-offs and recoveries by loan class) is in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
     We employ a disciplined process and methodology to establish our allowance for credit losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific loss factors. The process involves subjective as well as complex judgments. In addition, we review a variety of credit metrics and trends. However, these trends do not solely determine the adequacy of the allowance as we use several analytical tools in determining its adequacy. For additional information on our allowance for credit losses, see the “Critical Accounting Policies — Allowance for Credit Losses” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
     At December 31, 2010, the allowance for loan losses totaled $23.0 billion (3.04% of total loans), compared with $24.5 billion (3.13%), at December 31, 2009. The allowance for credit losses was $23.5 billion (3.10% of total loans) at December 31, 2010, and $25.0 billion (3.20%) at December 31, 2009. The allowance for credit losses included $298 million and $333 million at December 31, 2010 and 2009, respectively, related to PCI loans acquired from Wachovia. The allowance for unfunded credit commitments was $441 million and $515 million at December 31, 2010 and 2009, respectively. In addition to the allowance for credit losses there was $13.4 billion and $22.9 billion of nonaccretable difference at December 31, 2010 and 2009, respectively, to absorb losses for PCI loans. For additional information on PCI loans, see the “Risk Management — Credit Risk Management – Purchased Credit-Impaired Loans” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
     The ratio of the allowance for credit losses to total nonaccrual loans was 89% and 103% at December 31, 2010 and 2009, respectively. This ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, borrower credit strength and the value and marketability of collateral. Over half of nonaccrual loans were home mortgages, auto and other consumer loans at December 31, 2010.
     The ratio of the allowance for loan losses to annual net charge-offs was 130% and 135% at December 31, 2010 and 2009, respectively. The $1.5 billion decline in the allowance for loan losses in 2010 reflected lower loan balances and lower levels of inherent credit loss in the portfolio compared with previous year-end levels. When anticipated charge-offs are projected to decline from current levels, this ratio will decrease. As more of the portfolio experiences charge-offs, charge-off levels continue to increase and the remaining portfolio is anticipated to consist of higher quality vintage loans subjected to tightened underwriting standards administered during the downturn in the credit cycle. As charge-off levels peak, we anticipate coverage levels will decrease until charge-off levels return to more normalized levels. This ratio may fluctuate significantly from period to period due to many factors, including general economic conditions, customer credit strength and the marketability of collateral.


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Risk Management – Credit Risk Management (continued)

     Total provision for credit losses was $15.8 billion in 2010, $21.7 billion in 2009 and $16.0 billion in 2008. The 2010 provision was $2.0 billion less than credit losses, compared with a provision that was $3.5 billion in excess of credit losses in 2009. Absent significant deterioration in the economy, we expect future reductions in the allowance for credit losses.
     Primary drivers of the 2010 provision reduction were continued improvement in the consumer portfolios and related loss estimates and improvement in management’s view of economic conditions. These drivers were partially offset by an increase in impaired loans and related allowance primarily associated with increased consumer loan modification efforts and a $693 million adjustment due to adoption of consolidation accounting guidance on January 1, 2010.
     In 2009, the provision of $21.7 billion included a provision in excess of credit losses of $3.5 billion, which was primarily driven by three factors: (1) deterioration in economic conditions that increased the projected losses in our commercial portfolios, (2) additional allowance associated with loan modification programs designed to keep qualifying borrowers in their homes, and (3) the establishment of additional allowance for PCI loans.
     In 2008, the provision of $16.0 billion included a provision in excess of credit losses of $8.1 billion, which included $3.9 billion to conform loss emergence coverage periods to the most conservative of legacy Wells Fargo and Wachovia within Federal Financial Institutions Examination Council guidelines. The remainder of the allowance build was attributable to higher projected loss rates across the majority of the consumer credit businesses, and some credit deterioration and growth in the wholesale portfolios.
     In determining the appropriate allowance attributable to our residential real estate portfolios, the loss rates used in our analysis include the impact of our established loan modification programs. When modifications occur or are probable to occur, our allowance considers the impact of these modifications, taking into consideration the associated credit cost, including re-defaults of modified loans and projected loss severity. The loss content associated with existing and probable loan modifications has been considered in our allowance reserving methodology.
     Changes in the allowance reflect changes in statistically derived loss estimates, historical loss experience, current trends in borrower risk and/or general economic activity on portfolio performance, and management’s estimate for imprecision and uncertainty.
     We believe the allowance for credit losses of $23.5 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at December 31, 2010. 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 allowance for credit losses is discussed in the “Critical Accounting Policies – Allowance for Credit Losses” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES We sell residential mortgage loans to various parties, including (1) Freddie Mac and Fannie Mae (GSEs) who include the mortgage loans in GSE-guaranteed mortgage securitizations, (2) SPEs that issue private label MBS, and (3) other financial institutions that purchase mortgage loans for investment or private label securitization. In addition, we pool FHA-insured and VA-guaranteed mortgage loans that back securities guaranteed by GNMA. We may be required to repurchase these mortgage loans, indemnify the securitization trust, investor or insurer, or reimburse the securitization trust, investor or insurer for credit losses incurred on loans (collectively “repurchase”) in the event of a breach of such contractual representations or warranties that is not remedied within a period (usually 90 days or less) after we receive notice of the breach.
     We establish mortgage repurchase liabilities related to various representations and warranties that reflect management’s estimate of losses for loans for which we could have repurchase obligation, whether or not we currently service those loans, based on a combination of factors. Currently, repurchase demands primarily relate to 2006 through 2008 vintages and to GSE-guaranteed MBS.
     During 2010, we continued to experience elevated levels of repurchase activity measured by number of loans, investor repurchase demands and our level of repurchases. We repurchased or reimbursed investors for incurred losses on mortgage loans with balances of $2.6 billion. Additionally, in 2010, we negotiated global settlements on pools of mortgage loans of $675 million, which effectively eliminates the risk of repurchase on these loans from our outstanding servicing portfolio. We incurred net losses on repurchased loans, investor reimbursements and loan pool global settlements totaling $1.4 billion in 2010.
     Adjustments made to our mortgage repurchase liability in recent periods have incorporated the increase in repurchase demands, mortgage insurance rescissions, and higher than anticipated losses on repurchased loans that we have experienced. Table 33 provides the number of unresolved repurchase demands and mortgage insurance rescissions. We generally do not have unresolved repurchase demands from the FHA and VA for loans in GNMA-guaranteed securities because those demands are relatively few and we quickly resolve them.


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Table 33:  Unresolved Repurchase Demands and Mortgage Insurance Recissions
                                                           
   
      Government                       Mortgage insurance        
      sponsored entities (1)       Private       recissions with no demand (2)       Total  
      Number of       Original loan       Number of       Original loan       Number of       Original loan       Number of       Original loan  
($ in millions)     loans       balance (3)       loans       balance (3)       loans       balance (3)       loans       balance (3)  
 
2010
                                                               
December 31
    6,501     $ 1,467       2,899     $ 680       3,248     $ 801       12,648     $ 2,948  
September 30
    9,887       2,212       3,605       882       3,035       748       16,527       3,842  
June 30
    12,536       2,840       3,160       707       2,979       760       18,675       4,307  
March 31
    10,804       2,499       2,320       519       2,843       737       15,967       3,755  
December 31, 2009
    8,354       1,911       2,929       886       2,965       859       14,248       3,656  
 
(1) Includes repurchase demands on 1,495 loans totaling $291 million and 1,536 loans totaling $322 million at December 31, 2010, and December 31, 2009, respectively, received from investors on mortgage servicing rights acquired from other originators. We have the right of recourse against the seller for these repurchase demands and would incur a loss only for counterparty risk associated with the seller.
 
(2)   As part of our representations and warranties in our loan sales contracts, we represent that certain loans have mortgage insurance. To the extent the mortgage insurance is rescinded by the mortgage insurer, the lack of insurance may result in a repurchase demand from an investor.
 
(3)   While original loan balance related to these demands is presented above, the establishment of the repurchase reserve is based on a combination of factors, such as our appeals success rates, reimbursement by correspondent and other third party originators, and projected loss severity, which is driven by the difference between the current loan balance and the estimated collateral value less costs to sell the property.

     The level of repurchase demands outstanding at December 31, 2010, was down from a year ago in both number of outstanding loans and in total dollar balances as we continued to work through the demands. Customary with industry practice, we have the right of recourse against correspondent lenders with respect to representations and warranties. Of the repurchase demands presented in Table 33, approximately 20% relate to loans purchased from correspondent lenders. Due primarily to the financial difficulties of some correspondent lenders, we typically recover on average approximately 50% of losses from these lenders. Historical recovery rates as well as projected lender performance are incorporated in the establishment of our mortgage repurchase liability.
     Our liability for repurchases, included in “Accrued expenses and other liabilities” in our consolidated financial statements, was $1.3 billion and $1.0 billion at December 31, 2010 and 2009, respectively. In 2010, $1.6 billion of additions to the liability were recorded, which reduced net gains on mortgage loan origination/sales activities. Our additions to the repurchase liability in 2010 reflect updated assumptions about the losses we expect on repurchases and future demands, particularly on the 2006-2008 vintages.
     We believe we have a high quality residential mortgage loan servicing portfolio. Of the $1.8 trillion in the residential mortgage loan servicing portfolio at December 31, 2010, 92% was current, less than 2% was subprime at origination, and approximately 1% was home equity securitizations. Our combined delinquency and foreclosure rate on this portfolio was 8.02% at December 31, 2010, compared with 8.96% at December 31, 2009. In this portfolio 7% are private securitizations where we originated the loan and therefore have some repurchase risk; 58% of these loans are from 2005 vintages or earlier (weighted average age of 63 months); 81% were prime at origination; and approximately 70% are jumbo loans. The weighted-average LTV as of December 31, 2010, was 72%. In addition, the highest risk segment of these private securitizations are the subprime loans originated in 2006 and 2007. These subprime loans have seller representations and warranties and currently have LTVs close to or exceeding 100%, and represent 8% of the 7% private securitization portion of the residential mortgage servicing portfolio. We had only $114 million of repurchases related to private securitizations in 2010. Of the servicing portfolio, 4% is non-agency acquired servicing and 3% is private whole loan sales. We did not underwrite and securitize the non-agency acquired servicing and therefore we have no obligation on that portion of our servicing portfolio to the investor for any repurchase demands arising from origination practices.
     Table 34 summarizes the changes in our mortgage repurchase reserve.


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Table 34:  Changes in Mortgage Repurchase Liability
                                                 
   
   
    Quarter ended        
    Dec. 31 ,   Sept. 30 ,   June 30 ,   Mar. 31 ,   Year ended December 31 ,
(in millions)   2010     2010     2010     2010     2010     2009  
   
Balance, beginning of period
  $ 1,331       1,375       1,263       1,033       1,033       620  (1)
Provision for repurchase losses:
                                               
Loan sales
    35       29       36       44       144       302   
Change in estimate - primarily due to credit deterioration
    429       341       346       358       1,474       625   
   
Total additions
    464       370       382       402       1,618       927   
Losses
    (506 )     (414 )     (270 )     (172 )     (1,362 )     (514)
   
Balance, end of period
  $ 1,289       1,331       1,375       1,263       1,289       1,033   
   
(1)   Reflects purchase accounting refinements.

     The mortgage repurchase liability of $1.3 billion at December 31, 2010, represents our best estimate of the probable loss that we may incur for various representations and warranties in the contractual provisions of our sales of mortgage loans. There may be a range of reasonably possible losses in excess of the estimated liability that cannot be estimated with confidence. Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. We maintain regular contact with the GSEs and other significant investors to monitor and address their repurchase demand practices and concerns. For additional information on our repurchase liability, see the “Critical Accounting Policies – Liability for Mortgage Loan Repurchase Losses” section and Note 9 (Mortgage Banking Activities) to Financial Statements in this Report.
     The repurchase liability is only applicable to loans we originated and sold with representations and warranties. Most of these loans are included in our servicing portfolio. Our repurchase liability estimate involves consideration of many factors that influence the key assumptions of what our repurchase volume may be and what loss on average we may incur. Those key assumptions and the sensitivity of the liability to immediate adverse changes in them at December 31, 2010, are presented in Table 35.

Table 35:  Mortgage Repurchase Liability – Sensitivity/Assumptions
           
   
   
      Mortgage  
      repurchase  
(in millions)     liability  
   
Balance at December 31, 2010
    $ 1,289  
Loss on repurchases (1)
      36.0 %
Increase in liability from:
         
10% higher losses
    $ 145  
25% higher losses
      362  
Repurchase rate assumption
      0.3 %
Increase in liability from:
         
10% higher repurchase rates
    $ 108  
25% higher repurchase rates
      269  
   
(1)   Represents total estimated average loss rate on repurchased loans, net of recovery from third party originators, based on historical experience and current economic conditions. The average loss rate includes the impact of repurchased loans for which no loss is expected to be realized.

     To the extent that economic conditions and the housing market do not recover or future investor repurchase demands and appeals success rates differ from past experience, we could continue to have increased demands and increased loss severity on repurchases, causing future additions to the repurchase liability. However, some of the underwriting standards that were permitted by the GSEs for conforming loans in the 2006 through 2008 vintages, which significantly contributed to recent levels of repurchase demands, were tightened starting in mid to late 2008. Accordingly, we do not expect a similar rate of repurchase requests from the 2009 and prospective vintages, absent deterioration in economic conditions or changes in investor behavior.


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RISKS RELATING TO SERVICING ACTIVITIES In addition to servicing loans in our portfolio, we act as servicer and/or master servicer of residential mortgage loans included in GSE-guaranteed mortgage securitizations, GNMA-guaranteed mortgage securitizations and private label mortgage securitizations, as well as for unsecuritized loans owned by institutional investors. The loans we service were originated by us or by other mortgage loan originators. As servicer, our primary duties are typically to (1) collect payment due from borrowers, (2) advance certain delinquent payments of principal and interest, (3) maintain and administer any hazard, title or primary mortgage insurance policies relating to the mortgage loans, (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments, and (5) foreclose on defaulted mortgage loans or, to the extent consistent with the documents governing a securitization, consider alternatives to foreclosure, such as loan modifications or short sales. As master servicer, our primary duties are typically to (1) supervise, monitor and oversee the servicing of the mortgage loans by the servicer, (2) consult with each servicer and use reasonable efforts to cause the servicer to observe its servicing obligations, (3) prepare monthly distribution statements to security holders and, if required by the securitization documents, certain periodic reports required to be filed with the Securities and Exchange Commission (SEC), (4) if required by the securitization documents, calculate distributions and loss allocations on the mortgage-backed securities, (5) prepare tax and information returns of the securitization trust, and (6) advance amounts required by non-affiliated servicers who fail to perform their advancing obligations.
     Each agreement under which we act as servicer or master servicer generally specifies a standard of responsibility for actions we take in such capacity and provides protection against expenses and liabilities we incur when acting in compliance with the specified standard. For example, most private label securitization agreements under which we act as servicer or master servicer typically provide that the servicer and the master servicer are entitled to indemnification by the securitization trust for taking action or refraining from taking action in good faith or for errors in judgment. However, we are not indemnified, but rather are required to indemnify the securitization trustee, against any failure by us, as servicer or master servicer, to perform our servicing obligations or any of our acts or omissions that involve willful misfeasance, bad faith or gross negligence in the performance of, or reckless disregard of, our duties. In addition, if we commit a material breach of our obligations as servicer or master servicer, we may be subject to termination if the breach is not cured within a specified period following notice, which can generally be given by the securitization trustee or a specified percentage of security holders. Whole loan sale contracts under which we act as servicer generally include similar provisions with respect to our actions as servicer. The standards governing servicing in GSE-guaranteed securitizations, and the possible remedies for violations of such standards, vary, and those standards and remedies are determined by servicing guides maintained by the GSEs, contracts between the GSEs and individual servicers and topical guides published by the GSEs from time to time. Such remedies could include indemnification or repurchase of an affected mortgage loan.
     During fourth quarter 2010, we completed our review of our foreclosure procedures related to affidavit preparation and execution. We identified practices where final steps relating to the execution of foreclosure affidavits, as well as some aspects of the notarization process were not adhered to. However, we do
not believe that any of these practices led to unwarranted foreclosures. In addition, we have enhanced those procedures to help ensure that foreclosure affidavits are properly prepared, reviewed, and signed.
     Any re-execution or redelivery of any documents in connection with foreclosures will involve costs that may not be legally or otherwise reimbursable to us to the extent they relate to securitized mortgage loans. Further, if the validity of any foreclosure action is challenged by a borrower, whether successfully or not, we may incur significant litigation costs, which may not be reimbursable to us to the extent they relate to securitized mortgage loans. In addition, if a court were to overturn a foreclosure due to errors or deficiencies in the foreclosure process, we may have liability to the borrower if the required process was not followed and such failure resulted in damages to the borrower. We could also have liability to a title insurer that insured the title to the property sold in foreclosure. Any such liabilities may not be reimbursable to us to the extent they relate to a securitized mortgage loan.
     Other concerns cited within recent press reports are that securitization loan files may be lacking mortgage notes, assignments or other critical documents required to be produced on behalf of the trust. Although we believe that we delivered all documents in accordance with the requirements of each securitization involving our mortgage loans, if any required document with respect to a securitized mortgage loan sold by us is missing or defective, we would be obligated to cure the defect or to repurchase the loan.
     Some commentators also have suggested that the common industry practice of recording a mortgage in the name of Mortgage Electronic Registration Systems, Inc. (MERS) creates issues regarding whether a securitization trust has good title to the mortgage loan. MERS is a company that acts as mortgagee of record and as agent for the owner of the related mortgage note. When mortgage notes are assigned, such as between an originator and a securitization trust, the change of ownership is recorded electronically on a register maintained by MERS, which then acts as agent for the new owner. The purpose of MERS is to save borrowers and lenders from having to record assignments of mortgages in county land offices each time ownership of the mortgage note is assigned. Although MERS has been in existence and used for many years, it has recently been suggested by some commentators that having a mortgagee of record that is different from the owner of the mortgage note “breaks the chain of title” and clouds the ownership of the loan. We do not believe that to be the case, and believe that the operative legal principle is that the ownership of a mortgage follows the ownership of the mortgage note, and that a securitization trust should have good title to a mortgage loan if the note is endorsed and delivered to it, regardless of whether MERS is the mortgagee of record or whether an assignment of mortgage is recorded to the trust.


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Risk Management – Credit Risk Management (continued)

However, in order to foreclose on the mortgage loan, it may be necessary for an assignment of the mortgage to be completed by MERS to the trust, in order to comply with state law requirements governing foreclosure. A delay by a servicer in processing any related assignment of mortgage to the trust could delay foreclosure, with adverse effects to security holders and potential for servicer liability. Our practice is to obtain assignments of mortgages from MERS during the foreclosure process.
     The FRB and OCC have completed a joint interagency horizontal examination of foreclosure processing at large mortgage servicers, including Wells Fargo, to evaluate the adequacy of their controls and governance over bank foreclosure processes, including compliance with applicable federal and state law. The OCC and other federal banking regulators are finalizing actions that will incorporate remedial requirements and sanctions with respect to servicers within their relevant jurisdictions for identified deficiencies.
 


Asset/Liability Management
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee (Corporate ALCO), which oversees these risks and reports periodically to the Finance Committee of the Board of Directors (Board), consists of senior financial and business executives. Each of our principal business groups has its own asset/liability management committee and process 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, MBS 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 December 31, 2010, our most recent simulation indicated estimated earnings at risk of approximately 5% of our most likely earnings plan over the next 12 months using a scenario in which the federal funds rate rises to 4.25% and the 10-year Constant Maturity Treasury bond yield rises to 5.10%. 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 “Risk Management – Mortgage Banking Interest Rate and Market Risk” section in this Report for more information.
     We use exchange-traded and over-the-counter (OTC) interest rate derivatives to hedge our interest rate exposures. The notional or contractual amount, credit risk amount and estimated net fair value of these derivatives as of December 31, 2010 and 2009, are presented in Note 15 (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 and MSRs using interest rate swaps, swaptions, futures, forwards and options.
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 remained strong, reflecting the complementary origination and servicing


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strengths of the business. The secondary market for agency-conforming mortgages functioned well during the year.
     Interest rate and market risk can be substantial in the mortgage business. Changes in interest rates may potentially reduce 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 affect 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 affect 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.
     We measure MHFS at fair value for prime MHFS originations for which an active secondary market and readily available market prices exist to reliably support fair value pricing models used for these loans. At December 31, 2008, we measured at fair value similar MHFS acquired from Wachovia. Loan origination fees on these loans are recorded when earned, and related direct loan origination costs are recognized when incurred. We also measure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe fair value measurement for prime MHFS and other interests held, which we hedge with free-standing derivatives (economic hedges) along with our MSRs measured at fair value, 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 2009 and 2010, 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. In addition, in 2010, we have originated certain prime agency-eligible loans to be held for investment as part of our asset/liability management strategy.
     We initially measure all of our MSRs at fair value and carry substantially all of them at fair value depending on our strategy for managing interest rate risk. 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 carried at fair value reflects changes in fair value at the end of each quarter and changes are included in net servicing income, a component of mortgage banking noninterest income. If the fair value of the MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs and periodically benchmark our estimates to independent appraisals. The valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are
inherently unpredictable. See “Critical Accounting Policies – Valuation of Residential Mortgage Servicing Rights” section of this Report for additional information. 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 for MSRs carried at fair value, net of any gains on free-standing derivatives (economic hedges) used to hedge MSRs. We may choose not to fully hedge all 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.
     The price risk associated with our MSRs is economically hedged with a combination of highly liquid interest rate forward instruments including mortgage forward contracts, interest rate swaps and interest rate options. All of the instruments included in the hedge are marked to market daily. Because the hedging instruments are traded in highly liquid markets, their prices are readily observable and are fully reflected in each quarter’s mark to market. Quarterly MSR hedging results include a combination of directional gain or loss due to market changes as well as any carry income generated. If the economic hedge is effective, its overall directional hedge gain or loss will offset the change in the valuation of the underlying MSR asset. Consistent with our longstanding approach to hedging interest rate risk in the mortgage business, the size of the hedge and the particular combination of forward hedging instruments at any point in time is designed to reduce the volatility of the mortgage business’s earnings over various time frames within a range of mortgage interest rates. Because market factors, the composition of the mortgage servicing portfolio and the relationship between the origination and servicing sides of our mortgage business change continually, the types of instruments used in our hedging are reviewed daily and rebalanced based on our evaluation of current market factors and the interest rate risk inherent in our MSRs portfolio. Throughout 2010, our economic hedging strategy generally used forward mortgage purchase contracts that were effective at offsetting the impact of interest rates on the value of the MSR asset.
     Mortgage forward contracts are designed to pass the full economics of the underlying reference mortgage securities to the holder of the contract, including both the directional gain or loss


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Risk Management – Asset/Liability Management (continued)

from the forward delivery of the reference securities and the corresponding carry income. Carry income represents the contract’s price accretion from the forward delivery price to the current spot price including both the yield earned on the reference securities and the market implied cost of financing during the period. The actual amount of carry income earned on the hedge each quarter will depend on the amount of the underlying asset that is hedged and the particular instruments included in the hedge. The level of carry income is driven by the slope of the yield curve and other market driven supply and demand factors affecting the specific reference securities. A steep yield curve generally produces higher carry income while a flat or inverted yield curve can result in lower or potentially negative carry income. The level of carry income is also affected by the type of instrument used. In general, mortgage forward contracts tend to produce higher carry income than interest rate swap contracts. Carry income is recognized over the life of the mortgage forward as a component of the contract’s mark to market gain or loss.
     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:
  Valuation changes for MSRs 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 valuation changes for MSRs 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 affected by many factors. Such factors include the mix of new business between ARMs and fixed-rate mortgages, the relationship between short-term and long-term interest rates, the degree of volatility in interest rates, the relationship between mortgage interest rates and other interest rate markets, and other interest rate factors. Many of these factors are hard to predict and we may not be able to directly or perfectly hedge their effect.
 
  While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in 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, we shift composition of the hedge to more interest rate swaps, or there are other
    changes in the market for mortgage forwards that affect the implied carry.
     The total carrying value of our residential and commercial MSRs was $15.9 billion and $17.1 billion at December 31, 2010 and 2009, respectively. The weighted-average note rate on our portfolio of loans serviced for others was 5.39% and 5.66% at December 31, 2010 and 2009, respectively. Our total MSRs were 0.86% of mortgage loans serviced for others at December 31, 2010, compared with 0.91% at December 31, 2009.
     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. The fair value of these commitments 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 employ forwards and options, Eurodollar futures and options, and Treasury futures, forwards and options 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


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differences between financial instruments and markets, subject to risk limits established and monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions and derivatives used in our trading businesses are carried at fair value. The Institutional Risk Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated net fair value of all customer accommodation derivatives at December 31, 2010 and 2009 are included in Note 15 (Derivatives) to Financial Statements in this Report. Open, “at risk” positions for all trading businesses 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 2010 was $32 million, with a lower bound of $22 million and an upper bound of $52 million. The average VaR for fourth quarter 2010 was $30 million, with a lower bound of $22 million and an upper bound of $38 million.
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 OTTI. 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 include private equity investments accounted for under the cost method and equity method. Private equity investments are subject to OTTI. Principal investments are carried at fair value with net unrealized gains and losses reported in noninterest income.
     As part of our business to support our customers, we trade public equities, listed/OTC equity derivatives and convertible bonds. We have risk mandates that govern these activities. 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 OTTI charges.
     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.
      Table 36 provides information regarding our marketable and nonmarketable equity investments.
Table 36:  Marketable and Nonmarketable Equity Investments
                 
   
   
    December 31 ,
(in millions)   2010     2009  
   
Nonmarketable equity investments:
               
Private equity investments:
               
Cost method
  $ 3,240       3,808  
Equity method
    7,624       5,138  
Federal bank stock
    5,254       5,985  
Principal investments
    305       1,423  
   
Total nonmarketable equity investments (1)
  $ 16,423       16,354  
   
Marketable equity securities:
               
Cost
  $ 4,258       4,749  
Net unrealized gains
    931       843  
   
Total marketable equity securities (2)
  $ 5,189       5,592  
   
(1)    Included in other assets on the balance sheet. See Note 7 (Premises, Equipment, Lease Commitments and Other Assets) to Financial Statements in this Report for additional information.
 
(2)   Included in securities available for sale. See Note 5 (Securities Available for Sale) to Financial Statements in this Report for additional information.


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Risk Management – Asset/Liability Management (continued)

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, the 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.
     Unencumbered debt and equity 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. The weighted-average expected remaining maturity of the debt securities within this portfolio was 6.1 years at December 31, 2010. Of the $160.1 billion (cost basis) of debt securities in this portfolio at December 31, 2010, $32.6 billion (20%) is expected to mature or be prepaid in 2011 and an additional $20.4 billion (13%) in 2012. 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 (FHLB) and the FRB. In 2010, we sold mortgage loans of $363 billion. The amount of mortgage loans and other consumer loans available to be sold, securitized or pledged was approximately $236 billion at December 31, 2010.
     Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. Average core deposits funded 62.9% and 60.4% of average total assets in 2010 and 2009, respectively.
     Additional funding is provided by long-term debt (including trust preferred securities), other foreign deposits, and short-term borrowings. Long-term debt averaged $185.4 billion in 2010 and $231.8 billion in 2009. Short-term borrowings averaged $46.8 billion in 2010 and $52.0 billion in 2009.
     We anticipate making capital expenditures of approximately $1.5 billion in 2011 for our stores, relocation and remodeling of our facilities, and routine replacement of furniture, equipment and servers. We fund expenditures from various sources, including retained earnings and 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. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, the level and quality of earnings, and rating agency assumptions regarding the probability and extent of Federal financial assistance or support for certain large financial institutions. Adverse changes in these factors could
result in a reduction of our credit rating; however, a reduction in credit rating would not cause us to violate any of our debt covenants. See the “Risk Factors” section of this Report for additional information regarding recent legislative developments and our credit ratings.
     We continue to evaluate the potential impact on liquidity management of regulatory proposals, including Basel III and those required under the Dodd-Frank Act, as they move closer to the final rule-making process.
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. 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. During 2010, the Parent issued $1.3 billion in non-guaranteed registered senior notes. In February 2011, the Parent remarketed $2.5 billion of junior subordinated notes in connection with Wachovia’s 2006 issuance of 5.80% Fixed-to-floating rate Wachovia Income Trust hybrid securities. The junior subordinated notes were exchanged with Wells Fargo for newly issued senior notes.
     The proceeds from securities issued in 2010 were used for general corporate purposes, and we expect that the proceeds from securities issued in the future will also be used for the same purposes. The Parent also issues commercial paper from time to time, subject to its short-term debt limit.
     Table 37 provides information regarding the Parent’s medium-term note (MTN) programs. The Parent may issue senior and subordinated debt securities under Series I & J, and the European and Australian programmes. Under Series K, the Parent may issue senior debt securities linked to one or more indices.


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Table 37:  Medium-Term Note (MTN) Programs
                         
   
   
            December 31, 2010  
            Debt     Available  
    Date     issuance     for  
(in billions)   established     authority     issuance  
   
MTN program:
                       
Series I & J (1)
  August 2009     $ 25.0       21.8  
Series K (1)
  April 2010       25.0       24.7  
European (2)
  December 2009       25.0       25.0  
Australian (2)(3)
  June 2005       10.0       6.8  
 
(1)   SEC registered.
(2)    Not registered with the SEC. May not be offered in the United States without applicable exemptions from registration. The Australian MTN amounts are presented in Australian dollars.
(3)   As amended in October 2005 and March 2010.

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 $125 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. At December 31, 2010, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $50 billion in short-term senior notes and $50 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.

Wells Fargo Financial Canada Corporation In January 2010, 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 December 31, 2010, CAD$7.0 billion remained available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.
FEDERAL HOME LOAN BANK MEMBERSHIP We are a member of the Federal Home Loan Banks based in Dallas, Des Moines and San Francisco (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.


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Capital Management
 

We have an active program for managing stockholders’ equity and regulatory capital and we maintain a comprehensive process for assessing the Company’s overall capital adequacy. We generate capital internally primarily through the retention of earnings net of dividends. Our objective is to maintain capital levels at the Company and its bank subsidiaries above the regulatory “well-capitalized” thresholds by an amount commensurate with our risk profile. Our potential sources of stockholders’ equity include retained earnings and issuances of common and preferred stock. Retained earnings increased $10.4 billion from December 31, 2009, predominantly from Wells Fargo net income of $12.4 billion, less common and preferred dividends of $1.8 billion. During 2010, we issued approximately 87 million shares of common stock, with net proceeds of $1.4 billion, including 28 million shares during the period under various employee benefit (including our employee stock option plan) and director plans, as well as under our dividend reinvestment and direct stock purchase programs.
     On April 29, 2010, following stockholder approval, the Company amended its certificate of incorporation to provide for an increase in the number of shares of the Company’s common stock authorized for issuance from 6 billion to 9 billion.
     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 regulatory and legal considerations. The FRB published clarifying supervisory guidance in first quarter 2009 and amended in December 2009, SR 09-4 Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies, pertaining to the FRB’s criteria, assessment and approval process for reductions in capital. As with all 19 participants in the FRB’s Supervisory Capital Assessment Program (SCAP), under this supervisory letter, before repurchasing our common shares, we must consult with the FRB staff and demonstrate that the proposed actions are consistent with the existing supervisory guidance, including demonstrating that our internal capital assessment process is consistent with the complexity of our activities and risk profile. In 2008, the Board authorized the repurchase of up to 25 million additional shares of our outstanding common stock. During 2010, we repurchased 3 million shares of our common stock, all from our employee benefit plans. At December 31, 2010, the total remaining common stock repurchase authority from the 2008 authorization was approximately 3 million shares.
     Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities Exchange Act of 1934 including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume
limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.
     In connection with our participation in the TARP Capital Purchase Program (CPP), we issued to the U.S. Treasury Department warrants to purchase 110,261,688 shares of our common stock with an exercise price of $34.01 per share expiring on October 28, 2018. On May 26, 2010, in an auction by the U.S. Treasury, we purchased 70,165,963 of the warrants at a price of $7.70 per warrant. In addition, we purchased 651,244 warrants from the open market throughout the year. At December 31, 2010, 39,444,481 warrants were outstanding and exercisable. In June 2010, the Board authorized the purchase of up to $1 billion of the warrants, including the warrants purchased in the auction. As of December 31, 2010, $455 million of that authority remained. Depending on market conditions, we may purchase from time to time additional warrants and/or our outstanding debt securities in privately negotiated or open market transactions, by tender offer or otherwise.
     The Company and each of our subsidiary banks are subject to various regulatory capital adequacy requirements administered by the FRB and the OCC. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. At December 31, 2010, the Company and each of our subsidiary banks were “well capitalized” under applicable regulatory capital adequacy guidelines. See Note 25 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
     Current regulatory RBC rules are based primarily on broad credit-risk considerations and limited market-related risks, but do not take into account other types of risk a financial company may be exposed to. Our capital adequacy assessment process contemplates a wide range of risks that the Company is exposed to and also takes into consideration our performance under a variety of economic conditions, as well as regulatory expectations and guidance, rating agency viewpoints and the view of capital market participants.
     Wells Fargo was a participant in the FRB’s Capital Plan Review in December 2010. We submitted a Capital Plan Review including proposed future dividends and share repurchase programs to the FRB on January 7, 2011. We cannot guarantee whether or when the FRB will approve our Capital Plan Review or what other conditions the FRB may impose on us in order to increase our common stock dividend or repurchase shares.
     In July 2009, the Basel Committee on Bank Supervision published an additional set of international guidelines for review known as Basel III and finalized these guidelines in December 2010. The additional guidelines were developed in response to the financial crisis of 2009 and 2010 and address many of the weaknesses identified in the banking sector as contributing to


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the crisis including excessive leverage, inadequate and low quality capital and insufficient liquidity buffers. The U.S. regulatory bodies are reviewing the final international standards and final U.S. rulemaking is expected to be completed in 2011. Although uncertainty exists regarding the final rules, we are evaluating the impact of Basel III on our capital ratios based on our interpretation of the proposed capital requirements and expect to be above a 7% Tier 1 common equity ratio under Basel III within the next few quarters.
     We are well underway toward Basel II and Basel III implementation and are currently on schedule to enter the
parallel run phase of Basel II in 2012 with regulatory approval. Our delayed entry into the parallel run phase was approved by the FRB in 2010 as a result of the acquisition of Wachovia.
     At December 31, 2010, stockholders’ equity and Tier 1 common equity levels were higher than the quarter ending prior to the Wachovia acquisition. During 2009, as regulators and the market focused on the composition of regulatory capital, the Tier 1 common equity ratio gained significant prominence as a metric of capital strength. There is no mandated minimum or “well capitalized” standard for Tier 1 common equity; instead the RBC rules state voting common stockholders’ equity should be the dominant element within Tier 1 common equity. Tier 1 common equity was $81.3 billion at December 31, 2010, or 8.30% of risk-weighted assets, an increase of $15.8 billion from December 31, 2009. Table 38 provides the details of the Tier 1 common equity calculation.


Table 38:  Tier 1 Common Equity (1)
                     
   
        December 31 ,
(in billions)       2010     2009  
   
Total equity
      $ 127.9       114.4  
Noncontrolling interests
        (1.5 )     (2.6 )
   
Total Wells Fargo stockholders’ equity
        126.4       111.8  
   
Adjustments:
                   
Preferred equity
        (8.1 )     (8.1 )
Goodwill and intangible assets (other than MSRs)
        (35.5 )     (37.7 )
Applicable deferred taxes
        4.3       5.3  
Deferred tax asset limitation
              (1.0 )
MSRs over specified limitations
        (0.9 )     (1.6 )
Cumulative other comprehensive income
        (4.6 )     (3.0 )
Other
        (0.3 )     (0.2 )
   
Tier 1 common equity
  (A)   $ 81.3       65.5  
   
Total risk-weighted assets (2)
  (B)   $ 980.0       1,013.6  
   
Tier 1 common equity to total risk-weighted assets
  (A)/(B)     8.30 %     6.46  
   
(1)   Tier 1 common equity is a non-generally accepted accounting principle (GAAP) financial measure that is used by investors, analysts and bank regulatory agencies 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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Critical Accounting Policies
 

Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report) 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 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;
 
  purchased credit-impaired (PCI) loans;
 
  the valuation of residential mortgage servicing rights (MSRs);
 
  liability for mortgage loan repurchase losses;
 
  the fair valuation of financial instruments; and
 
  income taxes.
     Management has reviewed and approved these critical accounting policies and has discussed these policies with the Board’s Audit and Examination Committee.
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date, excluding loans carried at fair value. We develop and document our allowance methodology at the portfolio segment level. Our loan portfolio consists of a commercial loan portfolio segment and a consumer loan portfolio segment.
     We employ a disciplined process and methodology to establish our allowance for credit losses. The total allowance for credit losses considers both impaired and unimpaired loans. While our methodology attributes portions of the allowance to specific portfolio segments, the entire allowance for credit losses is available to absorb credit losses inherent in the total loan portfolio. No single statistic or measurement determines the adequacy of the allowance for credit losses.
COMMERCIAL PORTFOLIO SEGMENT The allowance for credit losses for unimpaired commercial loans is estimated through the application of loss factors to loans based on credit risk rating for each loan. In addition, the allowance for credit losses for unfunded commitments, including letters of credit, is estimated by applying these loss factors to loan equivalent exposures. The loss factors reflect the estimated default probability and quality of the underlying collateral. The loss factors used are statistically derived through the observation of historical losses incurred for loans within each credit risk rating over a relevant specified period of time. As appropriate, we adjust or supplement these loss factors and estimates to reflect other risks that may be identified from current conditions and developments in selected portfolios.
     The allowance also includes an amount for estimated credit losses on impaired loans such as nonaccrual loans and loans that have been modified in a TDR, whether on accrual or nonaccrual status.
CONSUMER PORTFOLIO SEGMENT Loans are pooled generally by product type with similar risk characteristics. Losses are estimated using forecasted losses to represent our best estimate of inherent loss based on historical experience, quantitative and other mathematical techniques over the loss emergence period. Each business group exercises significant judgment in the determination of the credit loss estimation model that fits the credit risk characteristics of its portfolio. We use both internally developed and vendor supplied models in this process. We often use roll rate or net flow models for near-term loss projections, and vintage-based models, behavior score models, and time series or statistical trend models for longer-term projections. Management must use judgment in establishing additional input metrics for the modeling processes, considering further stratification into sub-product, origination channel, vintage, loss type, geographic location and other predictive characteristics. In addition, we establish an allowance for consumer loans modified in a TDR, whether on accrual or nonaccrual status.
     The models used to determine the allowance are validated by an independent internal model validation group operating in accordance with Company policies.
OTHER ACL MATTERS An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on an estimate of cash flows, both principal and interest, expected to be collected or an assessment of the fair value of collateral underlying the impaired loan, if applicable. Management exercises significant judgment to develop these estimates.
     Commercial and consumer PCI loans may require an allowance subsequent to their acquisition. This allowance requirement is due to probable decreases in expected principal and interest cash flows (other than due to decreases in interest rate indices and changes in prepayment assumptions).
     The allowance for credit losses for both portfolio segments includes an amount for imprecision or uncertainty that may change from period to period. This amount represents management’s judgment of risks inherent in the processes and assumptions used in establishing the allowance. This imprecision considers economic environmental factors, modeling assumptions and performance, process risk, and other subjective factors, including industry trends.
SENSITIVITY TO CHANGES Changes in the allowance for credit losses and, therefore, in the related provision expense can materially affect net income. The establishment of the allowance for credit losses relies on a consistent quarterly process that requires significant management review and judgment. Management considers changes in economic conditions, customer behavior, and collateral value, among other influences. From time to time, economic factors or business decisions, such


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as the addition or liquidation of a loan product or business unit, may affect the loan portfolio, causing management to provide or release amounts from the allowance for credit losses.
     The allowance for credit losses for commercial loans, including unfunded credit commitments (individually risk weighted) is sensitive to credit risk ratings assigned to each credit exposure. Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an independent internal team of credit specialists.
     The allowance for credit losses for consumer loans (statistically modeled) is sensitive to economic assumptions and delinquency trends. Forecasted losses are modeled using a range of economic scenarios.
     Assuming a one risk rating downgrade throughout our commercial portfolio segment, a stressed economic scenario for modeled losses on our consumer portfolio segment and incremental deterioration in our PCI portfolio could imply an additional allowance requirement of approximately $10.7 billion.
     Assuming a one risk rating upgrade throughout our commercial portfolio segment and a strong recovery economic scenario for modeled losses on our consumer portfolio segment could imply a reduced allowance requirement of approximately $4.5 billion.
     The sensitivity analyses provided are hypothetical scenarios and are not considered probable. They do not represent management’s view of inherent losses in the portfolio as of the balance sheet date. Because significant judgment is used, it is possible that others performing similar analyses could reach different conclusions.
     See the “Risk Management – Credit Risk Management” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further discussion of our allowance.
Purchased Credit-Impaired (PCI) Loans
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Our PCI loans represent loans acquired in the Wachovia merger that were deemed to be credit-impaired. PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the historical allowance for credit losses related to these loans was not carried over.
     Management evaluated whether there was evidence of credit quality deterioration as of the purchase date using indicators such as past due and nonaccrual status, commercial risk ratings, recent borrower credit scores and recent loan-to-value percentages.
     The fair value at acquisition was based on an estimate of cash flows, both principal and interest, expected to be collected, discounted at the prevailing market rate of interest. We estimated the cash flows expected to be collected at acquisition using our internal credit risk, interest rate risk and prepayment
risk models, which incorporate our best estimate of current key assumptions, such as property values, default rates, loss severity and prepayment speeds.
     Substantially all commercial and industrial, CRE and foreign PCI loans are accounted for as individual loans. Conversely, Pick-a-Pay and other consumer PCI loans have been aggregated into several pools based on common risk characteristics. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
     The excess of cash flows expected to be collected over the carrying value (estimated fair value at acquisition date) is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
     Subsequent to acquisition, we regularly evaluate our estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued usage of key assumptions and estimates, similar to our initial estimate of fair value. We must apply judgment to develop our estimates of cash flows for PCI loans given the impact of home price and property value changes, changing loss severities, modification activity, and prepayment speeds.
     If we have probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices and changes in prepayment assumptions), we charge the provision for credit losses, resulting in an increase to the allowance for loan losses. If we have probable and significant increases in cash flows expected to be collected, we first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the loan, or pool of loans. Estimates of cash flows are impacted by changes in interest rate indices for variable rate loans and prepayment assumptions, both of which are treated as prospective yield adjustments included in interest income.
     Resolutions of loans may include sales of loans to third parties, receipt of payments in settlement with the borrower, or foreclosure of the collateral. Our policy is to remove an individual loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference for the entire pool. This removal method assumes that the amount received from resolution approximates pool performance expectations. The remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method is addressed by our quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan. Modified PCI loans are not removed from a pool even if those loans would otherwise be deemed TDRs. Modified PCI loans that are accounted for individually are considered TDRs, and removed from PCI accounting if there has been a concession granted in excess of the original nonaccretable difference.


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Critical Accounting Policies (continued)

     The amount of cash flows expected to be collected and, accordingly, the adequacy of the allowance for loan loss due to certain decreases in cash flows expected to be collected, is particularly sensitive to changes in loan credit quality. The sensitivity of the overall allowance for credit losses, including PCI loans, is presented in the preceding section, “Critical Accounting Policies – Allowance for Credit Losses.”
     PCI loans that were classified as nonperforming loans by Wachovia are no longer classified as nonperforming because, at acquisition, we believe we will fully collect the new carrying value of these loans and due to the existence of the accretable yield. It is important to note that judgment is required to classify PCI loans as performing and is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected, even if the loan is contractually past due.
     See the “Risk Management – Credit Risk Management” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further discussion of PCI loans.
Valuation of Residential Mortgage Servicing Rights
Mortgage servicing rights (MSRs) are assets that represent the rights to service mortgage loans for others. We recognize MSRs when we purchase servicing rights from third parties, or retain servicing rights in connection with the sale or securitization of loans we originate (asset transfers). We also have MSRs acquired in the past under co-issuer agreements that provide for us to service loans that were originated and securitized by third-party correspondents. We initially measure and carry substantially all of our MSRs related to residential mortgage loans at fair value.
     At the end of each quarter, we determine the fair value of MSRs using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds (including housing price volatility), discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, ancillary income and late fees.
     To reduce the sensitivity of earnings to interest rate and market value fluctuations, we may use securities available for sale and free-standing derivatives (economic hedges) to hedge the risk of changes in the fair value of MSRs, with the resulting gains or losses reflected in income. Changes in the fair value of the MSRs from changing mortgage interest rates are generally offset by gains or losses in the fair value of the derivatives and the particular instruments used to hedge the MSRs. In addition, we also consider origination volume in our risk management strategy as it tends to act as a “natural hedge.” For example, as interest rates decline, servicing values generally decrease and fees from origination volume tend to increase. Conversely, as interest rates increase, the fair value of the MSRs generally increases, while fees from origination volume tend to decline. See the “Risk Management – Mortgage Banking Interest Rate and
Market Risk” section in this Report for discussion of the timing of the effect of changes in mortgage interest rates.
     Net servicing income, a component of mortgage banking noninterest income, includes the changes from period to period in fair value of both our residential MSRs and the free-standing derivatives (economic hedges) used to hedge our residential MSRs. Changes in the fair value of residential MSRs from period to period result from (1) changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates and costs to service, including delinquency and foreclosure costs), and (2) other changes, representing changes due to collection/realization of expected cash flows.
     We use a dynamic and sophisticated model to estimate the value of our MSRs. The model is validated by an independent internal model validation group operating in accordance with Company policies. Senior management reviews all significant assumptions quarterly. Mortgage loan prepayment speed – a key assumption in the model – is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income – another key assumption in the model – is the required rate of return investors in the market would expect for an asset with similar risk. To determine the discount rate, we consider the risk premium for uncertainties from servicing operations (e.g., possible changes in future servicing costs, ancillary income and earnings on escrow accounts). Both assumptions can, and generally will, change quarterly as market conditions and interest rates change. For example, an increase in either the prepayment speed or discount rate assumption results in a decrease in the fair value of the MSRs, while a decrease in either assumption would result in an increase in the fair value of the MSRs. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and the discount rate. These fluctuations can be rapid and may be significant in the future. Therefore, estimating prepayment speeds within a range that market participants would use in determining the fair value of MSRs requires significant management judgment.
     The valuation and sensitivity of MSRs is discussed further in Note 1 (Summary of Significant Accounting Policies), Note 8 (Securitizations and Variable Interest Entities), Note 9 (Mortgage Banking Activities) and Note 16 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Liability for Mortgage Loan Repurchase Losses
We sell residential mortgage loans to various parties, including (1) Freddie Mac and Fannie Mae (GSEs), which include the mortgage loans in GSE-guaranteed mortgage securitizations, (2) special purpose entities that issue private label MBS, and (3) other financial institutions that purchase mortgage loans for investment or private label securitization. In addition, we pool FHA-insured and VA-guaranteed mortgage loans, which back securities guaranteed by GNMA. The agreements under which we sell mortgage loans and the insurance or guaranty agreements with FHA and VA contain provisions that include various representations and warranties regarding the origination and characteristics of the mortgage loans. Although the specific representations and warranties vary among different sales, insurance or guarantee agreements, they typically cover ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan,


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absence of delinquent taxes or liens against the property securing the loan, compliance with applicable origination laws, and other matters. For more information about these loan sales and the related risks that may result in liability see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section in this Report.
     We may be required to repurchase mortgage loans, indemnify the securitization trust, investor or insurer, or reimburse the securitization trust, investor or insurer for credit losses incurred on loans (collectively “repurchase”) in the event of a breach of contractual representations or warranties that is not remedied within a period (usually 90 days or less) after we receive notice of the breach. Typically, we would only be required to repurchase securitized loans if any such breach is deemed to have material and adverse effect on the value of the mortgage loan or to the interests of the security holders in the mortgage loan. The time periods specified in our mortgage loan sales contracts to respond to repurchase requests vary, but are generally 90 days or less. While many contracts do not include specific remedies if the applicable time period for a response is not met, contracts for mortgage loan sales to the GSEs include various types of specific remedies and penalties that could be applied to inadequate responses to repurchase requests. Similarly, the agreements under which we sell mortgage loans require us to deliver various documents to the securitization trust or investor, and we may be obligated to repurchase any mortgage loan for which the required documents are not delivered or are defective. Upon receipt of a repurchase request, we work with securitization trusts, investors or insurers to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the securitization trust, investor or insurer, and to determine whether a contractually required repurchase event occurred. Occasionally, in lieu of conducting the loan level evaluation, we may negotiate global settlements in order to resolve a pipeline of demands in lieu of repurchasing the loans. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
     We establish mortgage repurchase liabilities related to various representations and warranties that reflect management’s estimate of losses for loans for which we could have repurchase obligation, whether or not we currently service those loans, based on a combination of factors. Such factors incorporate estimated levels of defects based on internal quality assurance sampling, default expectations, historical investor repurchase demand and appeals success rates (where the investor rescinds the demand based on a cure of the defect or acknowledges that the loan satisfies the investor’s applicable representations and warranties), reimbursement by correspondent and other third party originators, and projected
loss severity. We establish a liability at the time loans are sold and continually update our liability estimate during their life. Although investors may demand repurchase at any time, the majority of repurchase demands occur in the first 24 to 36 months following origination of the mortgage loan and can vary by investor. Most repurchases under our representation and warranty provisions are attributable to borrower misrepresentations and appraisals obtained at origination that investors believe do not fully comply with applicable industry standards.
     Although, to date, repurchase demands with respect to private label mortgage-backed securities have been more limited than with respect to GSE-guaranteed securities, it is possible that requests to repurchase mortgage loans in private label securitizations may increase in frequency as investors explore every possible avenue to recover losses on their securities. In addition, the Federal Housing Finance Agency, as conservator of Freddie Mac and Fannie Mae, recently used its subpoena power to request loan applications, property appraisals and other documents from large mortgage securitization industry participants, including us, relating to private label MBS in order to determine whether breaches of representations and warranties exist in those securities owned by the GSEs. We believe the risk of repurchase in our private label securitizations is substantially reduced, relative to other private label securitizations, because approximately half of the private label securitizations that include our mortgage loans do not contain representations and warranties regarding borrower or other third party misrepresentations related to the mortgage loan, general compliance with underwriting guidelines, or property valuation, which are commonly asserted bases for repurchase. We evaluate the validity and materiality of any claim of breach of representations and warranties in private label MBS that is brought to our attention and work with securitization trustees to resolve any repurchase requests. Nevertheless, we may be subject to legal and other expenses if private label securitization trustees or investors choose to commence legal proceedings in the event of disagreements.
     The mortgage loan repurchase liability at December 31, 2010, represents our best estimate of the probable loss that we may incur for various representations and warranties in the contractual provisions of our sales of mortgage loans. Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. We maintain regular contact with the GSEs and other significant investors to monitor and address their repurchase demand practices and concerns. For additional information on our repurchase liability, including an adverse impact analysis, see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section in this Report.
Fair Valuation of Financial Instruments
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, derivatives, prime residential MHFS, certain commercial LHFS, principal investments and securities sold but not yet purchased (short sale liabilities) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as certain MHFS and LHFS, loans held for investment and certain


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Critical Accounting Policies (continued)

other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Additionally, for financial instruments not recorded at fair value we disclose the estimate of their fair value.
     Fair value represents the price that would be received to sell the financial asset or paid to transfer the financial liability in an orderly transaction between market participants at the measurement date.
     The accounting provisions for fair value measurements include a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.
  Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury and other U.S. government securities that are traded by dealers or brokers in active OTC markets.
 
  Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques, such as matrix pricing, for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in functioning dealer or broker markets, plain-vanilla interest rate derivatives and MHFS that are valued based on prices for other mortgage whole loans with similar characteristics.
 
  Level 3 – Valuation is generated primarily from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
     When developing fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted prices in active markets to measure fair value. If quoted prices in active markets are not available, fair value measurement is based upon models that use primarily market-based or independently sourced market parameters, including interest rate yield curves, prepayment speeds, option volatilities and currency rates. However, in certain cases, when market observable inputs for model-based
valuation techniques are not readily available, we are required to make judgments about assumptions market participants would use to estimate the fair value.
     The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted prices in active markets or observable market parameters. For financial instruments with quoted market prices or observable market parameters in active markets, there is minimal subjectivity involved in measuring fair value. When quoted prices and observable data in active markets are not fully available, management judgment is necessary to estimate fair value. Changes in the market conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of quoted prices or observable data used to determine fair value. When significant adjustments are required to price quotes or inputs, it may be appropriate to utilize an estimate based primarily on unobservable inputs. When an active market for a financial instrument does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, adjusted for an appropriate risk premium, is acceptable.
     When markets for our financial assets and liabilities become inactive because the level and volume of activity has declined significantly relative to normal conditions, it may be appropriate to adjust quoted prices. The methodology we use to adjust the quoted prices generally involves weighting the quoted prices 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 quoted prices. The less active and orderly markets are determined to be, the less weighting we assign to quoted prices.
     We may use independent pricing services and brokers to obtain fair values based on quoted prices. We determine the most appropriate and relevant pricing service for each security class and generally obtain one quoted price for each security. For certain securities, we may use internal traders to obtain quoted prices. Quoted prices are subject to our internal price verification procedures. We validate prices received using a variety of methods, including, but not limited to, comparison to pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by Company personnel familiar with market liquidity and other market-related conditions.
     Significant judgment is also required to determine whether certain assets measured at fair value are included in Level 2 or Level 3. When making this judgment, 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. Otherwise, the classification of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and 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.
     Our financial assets valued using Level 3 measurements consisted of certain asset-backed securities, including those


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collateralized by auto leases or loans and cash reserves, private collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), auction-rate securities, certain derivative contracts such as credit default swaps related to CMO, CDO and CLO exposures and certain MHFS and MSRs.
     Table 39 presents the summary of the fair value of financial instruments recorded at fair value on a recurring basis, and the amounts measured using significant Level 3 inputs (before derivative netting adjustments). The fair value of the remaining assets and liabilities were measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.
Table 39:  Fair Value Level 3 Summary
                                   
   
   
    December 31 ,
    2010     2009  
    Total             Total        
($ in billions)   balance     Level 3 (1)     balance     Level 3 (1)  
   
Assets carried at fair value
  $ 293.1       47.9       277.4       52.0  
As a percentage of total assets
    23 %     4       22       4  
Liabilities carried at fair value
  $ 21.2       6.4       21.7       6.9  
As a percentage of total liabilities
    2 %     1       2       1  
   
(1)   Before derivative netting adjustments.
     See Note 16 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for a complete discussion on our use of fair valuation of financial instruments, our related measurement techniques and its impact to our financial statements.
Income Taxes
We are subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we operate. Our income tax expense consists of two components: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period and includes income tax expense related to our uncertain tax positions. We determine deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognized enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to management’s judgment that realization is “more likely than not.” Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Foreign taxes paid are generally applied as credits to reduce federal income taxes payable. We account for interest and penalties as a component of income tax expense.
     The income tax laws of the jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions by the government taxing authorities, both domestic and foreign. Our interpretations may be subjected to review during examination by taxing authorities and disputes may arise over the respective tax positions. We attempt to resolve these disputes during the tax examination and audit process and ultimately through the court systems when applicable.
     We monitor relevant tax authorities and revise our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities on a quarterly basis. Revisions of our estimate of accrued income taxes also may result from our own income tax planning and from the resolution of income tax controversies. Such revisions in our estimates may be material to our operating results for any given quarter.
     See Note 20 (Income Taxes) to Financial Statements in this Report for a further description of our provision for income taxes and related income tax assets and liabilities.


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Current Accounting Developments
 

The following accounting pronouncement has been issued by the Financial Accounting Standards Board (FASB):
  Accounting Standards Update (ASU) 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.
ASU 2011-01 defers the effective date for disclosures on TDRs. The deferral is intended to provide the FASB with additional
time to complete a separate TDRs project, with new disclosures expected to be effective for second quarter 2011. For more information on the disclosure requirements for TDRs, see the discussion on ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, in Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.


Forward-Looking Statements
 

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. Examples of forward-looking statements in this Report include, but are not limited to, statements we make about: (i) future results of the Company; (ii) future credit quality and expectations regarding future loan losses in our loan portfolios and life-of-loan estimates, including our belief that quarterly total credit losses have peaked and that our credit cycle is turning; the level and loss content of NPAs and nonaccrual loans as well as the level of inflows and outflows into NPAs; the adequacy of the allowance for credit losses, including our current expectation of future reductions in the allowance for credit losses; and the reduction or mitigation of risk in our loan portfolios and the effects of loan modification programs; (iii) the merger integration of the Company and Wachovia, including expense savings, merger costs and revenue synergies; (iv) our mortgage repurchase exposure and exposure relating to our foreclosure practices; (v) future capital levels and our expectations that we will be above a 7% Tier 1 common equity ratio under proposed Basel III capital standards within the next few quarters; (vi) the expected outcome and impact of legal, regulatory and legislative developments; and (vii) the Company’s plans, objectives and strategies.
     Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
  current and future economic and market conditions, including the effects of further declines in housing prices and high unemployment rates;
 
  our capital and liquidity requirements (including under regulatory capital standards, such as the proposed Basel III capital standards, as determined and interpreted by applicable regulatory authorities) and our ability to generate capital internally or raise capital on favorable terms;
 
  financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and legislation and regulation relating to overdraft fees (and changes to our overdraft practices as a result thereof), debit card interchange fees, credit cards, and other bank services;
 
  legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;
 
  the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications or changes in such requirements or guidance;
 
  the amount of mortgage loan repurchase demands that we receive and our ability to satisfy any such demands without having to repurchase loans related thereto or otherwise indemnify or reimburse third parties, and the credit quality of or losses on such repurchased mortgage loans;
 
  negative effects relating to mortgage foreclosures, including changes in our procedures or practices and/or industry standards or practices, regulatory or judicial requirements, penalties or fines, increased costs, or delays or moratoriums on foreclosures;
 
  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;
 
  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, MSRs and MHFS;
  hedging gains or losses;


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  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;
 
  changes in the Company’s credit ratings and changes in the credit quality of the Company’s customers or counterparties;
 
  reputational damage from negative publicity, fines, penalties and other negative consequences from regulatory violations and legal actions;
 
  the loss of checking and savings 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;
 
  fiscal and monetary policies of the FRB; and
 
  the other risk factors and uncertainties described under “Risk Factors” in this Report.
     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 continue to 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.
     Any forward-looking statement made by us in this Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.


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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 below and elsewhere 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 and “Forward-Looking Statements” sections and Financial Statements (and related Notes) in this Report for more information about credit, interest rate, market, litigation and other risks and to the “Regulation and Supervision” section of our 2010 Form 10-K for more information about legislative and regulatory risks. Any factor described below or elsewhere in this Report or in our 2010 Form 10-K could by itself, or together with other factors, adversely affect our financial results and condition. Refer to our quarterly reports on Form 10-Q filed with the SEC in 2011 for material changes to the discussion of risk factors. There are factors not discussed below or elsewhere in this Report that could adversely affect our financial results and condition.
RISKS RELATING TO CURRENT ECONOMIC AND MARKET CONDITIONS
Our financial results and condition may be adversely affected by difficult business and economic conditions, particularly if home prices continue to fall or unemployment does not improve or continues to increase. Our financial performance is affected by general business and economic conditions in the U.S. and abroad, and a worsening of current business and economic conditions could adversely affect our business, results of operations, and financial condition. For example, significant declines in home prices over the last several years and continued high unemployment have resulted in elevated credit costs and have adversely affected our credit performance, financial results, and capital levels. If home prices continue to fall or unemployment does not improve or rises we would expect to incur higher than normal charge-offs and provision expense from increases in our allowance for credit losses. These conditions may adversely affect not only consumer loan performance but also commercial and CRE loans, especially those business borrowers that rely on the health of industries or properties that may experience deteriorating economic conditions. A deterioration in business and economic conditions, which may erode consumer and investor confidence levels, also could adversely affect financial results for our fee-based businesses, including our mortgage, investment advisory, securities brokerage, wealth management, and investment banking businesses.
Financial and credit markets may experience a disruption or become volatile, making it more difficult to access capital markets on favorable terms. Financial and credit markets have experienced unprecedented disruption
and volatility during the past several years. While market conditions have stabilized and, in many cases, improved, a disruption in, or worsening of, financial and credit market conditions, or increased volatility in financial and credit markets, may adversely affect our ability to access capital markets on favorable terms and could negatively affect our liquidity. We may raise additional capital through the issuance of common stock, which could dilute existing stockholders, or further reduce or even eliminate our common stock dividend to preserve capital or in order to raise additional capital.
Enacted legislation and regulation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as well as future legislation and/or regulation, could require us to change certain of our business practices, reduce our revenue, impose additional costs on us or otherwise adversely affect our business operations and/or competitive position. Economic, financial, market and political conditions during the past few years have led to new legislation and regulation in the United States and in other jurisdictions outside of the United States where we conduct business. These laws and regulations may affect the manner in which we do business and the products and services that we provide, affect or restrict our ability to compete in our current businesses or our ability to enter into or acquire new businesses, reduce or limit our revenue in businesses or impose additional fees, assessments or taxes on us, intensify the regulatory supervision of us and the financial services industry, and adversely affect our business operations or have other negative consequences.
     For example, in 2009 several legislative and regulatory initiatives were adopted that will have an impact on our businesses and financial results, including FRB amendments to Regulation E, which, among other things, affect the way we may charge overdraft fees beginning on July 1, 2010, and the enactment of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Card Act), which, among other things, affects our ability to change interest rates and assess certain fees on card accounts. The impact of the Regulation E amendments and the Card Act could vary materially due to a variety of factors, including changes in customer behavior, economic conditions and other potential offsetting factors.
     On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act, among other things, (i) establishes a new Financial Stability Oversight Council to monitor systemic risk posed by financial firms and imposes additional and enhanced FRB regulations on certain large, interconnected bank holding companies and systemically significant nonbanking firms intended to promote financial stability; (ii) creates a liquidation framework for the resolution of covered financial companies, the costs of which would be paid through assessments on surviving covered financial companies; (iii) makes significant changes to the structure of bank and bank holding company regulation and activities in a variety of areas, including prohibiting proprietary trading and private fund investment activities, subject to certain exceptions; (iv) creates a new framework for the regulation of over-the-counter derivatives and new regulations for the securitization market and strengthens the regulatory oversight of


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securities and capital markets by the SEC; (v) establishes the Bureau of Consumer Financial Protection within the FRB, which will have sweeping powers to administer and enforce a new federal regulatory framework of consumer financial regulation; (vi) may limit the existing pre-emption of state laws with respect to the application of such laws to national banks, makes federal pre-emption no longer applicable to operating subsidiaries of national banks, and gives state authorities, under certain circumstances, the ability to enforce state laws and federal consumer regulations against national banks; (vii) provides for increased regulation of residential mortgage activities; (viii) revises the FDIC’s assessment base for deposit insurance by changing from an assessment base defined by deposit liabilities to a risk-based system based on total assets; (ix) authorizes the FRB to issue regulations regarding the amount of any interchange transaction fee that an issuer may receive to ensure that it is reasonable and proportional to the cost incurred; and (x) includes several corporate governance and executive compensation provisions and requirements, including mandating an advisory stockholder vote on executive compensation.
     Although the Dodd-Frank Act became generally effective in July 2010, many of its provisions have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities as well as require more than 60 studies to be conducted over the next one to two years. Accordingly, in many respects the ultimate impact of the Dodd-Frank Act and its effects on the U.S. financial system and the Company will not be known for an extended period of time. Nevertheless, the Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, could result in a loss of revenue, require us to change certain of our business practices, limit our ability to pursue certain business opportunities, increase our capital requirements and impose additional assessments and costs on us, and otherwise adversely affect our business operations and have other negative consequences, including to our credit ratings to the extent the legislation reduces the probability of future Federal financial assistance or support currently assumed by the rating agencies in their credit ratings. A reduction in one or more of our credit ratings could adversely affect our ability to borrow funds and raise the costs of our borrowings substantially and could cause creditors and business counterparties to raise collateral requirements or take other actions, which could adversely affect our ability to raise capital.
     Recently, the Obama Administration delivered a report to Congress regarding proposals to reform the housing finance market in the United States. The report, among other things, outlined various potential proposals to wind down the GSEs and reduce or eliminate over time the role of the GSEs in guaranteeing mortgages and providing funding for mortgage loans, as well as proposals to implement reforms relating to borrowers, lenders, and investors in the mortgage market,
including reducing the maximum size of a loan that the GSEs can guarantee, phasing in a minimum down payment requirement for borrowers, improving underwriting standards, and increasing accountability and transparency in the securitization process. The extent and timing of any regulatory reform regarding the GSEs and the home mortgage market, as well as any effect on the Company’s business and financial results, are uncertain.
     Any other future legislation and/or regulation, if adopted, also could have a material adverse effect on our business operations, income, and/or competitive position and may have other negative consequences.
     For more information, refer to the “Regulation and Supervision” section in our 2010 Form 10-K.
Bank regulators and other regulations, including proposed Basel capital standards and FRB guidelines, may require higher capital levels, limiting our ability to pay common stock dividends or repurchase our common stock. Federal banking regulators continually monitor the capital position of banks and bank holding companies. In July 2009, the Basel Committee on Bank Supervision published a set of international guidelines for determining regulatory capital known as Basel III. These guidelines, which were finalized in December 2010, followed earlier guidelines by the Basel Committee and are designed to address many of the weaknesses identified in the banking sector as contributing to the financial crisis of 2008 – 2010 by, among other things, increasing minimum capital requirements, increasing the quality of capital, increasing the risk coverage of the capital framework, and increasing standards for the supervisory review process and public disclosure.
     In 2010, the FRB issued guidelines for evaluating proposals by large bank holding companies, including the Company, to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock. Pursuant to those FRB guidelines, the Company submitted a proposed Capital Plan Review to the FRB. The FRB is expected to undertake these capital plan reviews on a regular basis in the future. There can be no assurance that the FRB will respond favorably to the Company’s current Capital Plan Review, or future capital plan reviews, and the FRB, the Basel standards or other regulatory capital requirements may limit or otherwise restrict how we utilize our capital, including common stock dividends and stock repurchases. Although not currently anticipated, our regulators may require us to raise additional capital in the future. Issuing additional common stock may dilute existing stockholders.
Bankruptcy laws may be changed to allow mortgage “cram-downs,” or court-ordered modifications to our mortgage loans including the reduction of principal balances. Under current bankruptcy laws, courts cannot force a modification of mortgage and home equity loans secured by primary residences. In response to the current financial crisis, legislation has been proposed to allow mortgage loan “cram-downs,” which would empower courts to modify the terms of mortgage and home equity loans including a reduction in the principal amount to reflect lower underlying property values. This could result in writing down the balance of our mortgage and home equity loans to reflect their lower loan values. There is also risk that home equity loans in a second lien position (i.e., behind a mortgage) could experience significantly higher losses to the extent they become unsecured as a result of a cram-down. The availability of principal reductions or other modifications to


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Risk Factors (continued)

mortgage loan terms could make bankruptcy a more attractive option for troubled borrowers, leading to increased bankruptcy filings and accelerated defaults.
RISKS RELATING TO THE WACHOVIA MERGER
Our financial results and condition could be adversely affected if we fail to realize all of the expected benefits of the Wachovia merger or it takes longer than expected to realize those benefits. The merger with Wachovia requires the integration of the businesses of Wachovia and Wells Fargo. The integration process may result in the loss of key employees, the disruption of ongoing businesses and the loss of customers and their business and deposits. It may also divert management attention and resources from other operations and limit the Company’s ability to pursue other acquisitions. There is no assurance that we will realize all of the cost savings and other financial benefits of the merger when and in the amounts expected.
We may incur losses on loans, securities and other acquired assets of Wachovia that are materially greater than reflected in our preliminary fair value adjustments. We accounted for the Wachovia merger under the purchase method of accounting, recording the acquired assets and liabilities of Wachovia at fair value based on preliminary purchase accounting adjustments. Under purchase accounting, we had until one year after the merger date to finalize the fair value adjustments, meaning we could adjust the preliminary fair value estimates of Wachovia’s assets and liabilities based on new or updated information that provided a better estimate of the fair value at merger date.
     We recorded at fair value all PCI loans acquired in the merger based on the present value of their expected cash flows. We estimated cash flows using internal credit, interest rate and prepayment risk models using assumptions about matters that are inherently uncertain. We may not realize the estimated cash flows or fair value of these loans. In addition, although the difference between the pre-merger carrying value of the credit-impaired loans and their expected cash flows – the “nonaccretable difference” – is available to absorb future charge-offs, we may be required to increase our allowance for credit losses and related provision expense because of subsequent additional credit deterioration in these loans.
     For more information, refer to the “Overview” and “Critical Accounting Policies – Purchased Credit-Impaired Loans” sections in this Report.
GENERAL RISKS RELATING TO OUR BUSINESS
Higher charge-offs and worsening credit conditions could require us to increase our allowance for credit losses through a charge to earnings. When we loan money or commit to loan money we incur credit risk, or the risk of losses if our borrowers do not repay their loans. We reserve for credit losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of credit losses inherent in our loan portfolio (including unfunded credit commitments). The process for determining the amount of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans.
     We might underestimate the credit losses inherent in our loan portfolio and have credit losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions, including falling home prices and higher unemployment, or other factors such as changes in borrower behavior. As an example, borrowers may be less likely to continue making payments on their real estate-secured loans if the value of the real estate is less than what they owe, even if they are still financially able to make the payments.
     While we believe that our allowance for credit losses was adequate at December 31, 2010, there is no assurance that it will be sufficient to cover future credit losses, especially if housing and employment conditions worsen. We may be required to build reserves in 2011, thus reducing earnings.
     For more information, refer to the “Risk Management – Credit Risk Management” and “Critical Accounting Policies – Allowance for Credit Losses” sections in this Report.
     We may have more credit risk and higher credit losses to the extent our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. Our credit risk and credit losses can increase if our loans are concentrated to borrowers engaged in the same or similar activities or to borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions. We experienced the effect of concentration risk in 2009 and 2010 when we incurred greater than expected losses in our Home Equity loan portfolio due to a housing slowdown and greater than expected deterioration in residential real estate values in many markets, including the Central Valley California market and several Southern California metropolitan statistical areas. As California is our largest banking state in terms of loans and deposits, continued deterioration in real estate values and underlying economic conditions in those markets or elsewhere in California could result in materially higher credit losses. As a result of the Wachovia merger, we have increased our exposure to California, as well as to Arizona and Florida, two states that have also suffered significant declines in home values. Continued deterioration in housing conditions and real estate values in these states and generally across the country could result in materially higher credit losses.


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     For more information, refer to the “Risk Management – Credit Risk Management” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
Loss of customer deposits and market illiquidity could increase our funding costs. We rely on bank deposits to be a low cost and stable source of funding for the loans we make. We compete with banks and other financial services companies for deposits. If our competitors raise the rates they pay on deposits our funding costs may increase, either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources of funding. Higher funding costs reduce our net interest margin and net interest income. As discussed above, the integration of Wells Fargo and Wachovia may result in the loss of customer deposits.
     We sell most of the mortgage loans we originate in order to reduce our credit risk and provide funding for additional loans. We rely on GSEs to purchase loans that meet their conforming loan requirements and on other capital markets investors to purchase loans that do not meet those requirements – referred to as “nonconforming” loans. Since 2007, investor demand for nonconforming loans has fallen sharply, increasing credit spreads and reducing the liquidity for those loans. In response to the reduced liquidity in the capital markets, we may retain more nonconforming loans. When we retain a loan not only do we keep the credit risk of the loan but we also do not receive any sale proceeds that could be used to generate new loans. Continued lack of liquidity could limit our ability to fund – and thus originate – new mortgage loans, reducing the fees we earn from originating and servicing loans. In addition, we cannot assure that GSEs will not materially limit their purchases of conforming loans due to capital constraints or change their criteria for conforming loans (e.g., maximum loan amount or borrower eligibility). As previously noted, the Obama Administration recently outlined proposals to reform the housing finance market in the United States, including the role of the GSEs in the housing finance market. The extent and timing of any such regulatory reform regarding the housing finance market and the GSEs, as well as any effect on the Company’s business and financial results, are uncertain.
Changes in interest rates could reduce our net interest income and earnings. Our net interest income is the interest we earn on loans, debt securities and other assets we hold less the interest we pay on our deposits, long-term and short-term debt, and other liabilities. Net interest income is a measure of both our net interest margin – the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding – and the amount of earning assets we hold. Changes in either our net interest margin or the amount of earning assets we hold could affect our net interest income and our earnings. Changes in interest rates can affect our net interest margin. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our
liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. When interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up.
     The amount and type of earning assets we hold can affect our yield and net interest margin. We hold earning assets in the form of loans and investment securities, among other assets. If current economic conditions persist, we may continue to see lower demand for loans by credit worthy customers, reducing our yield. In addition, we may invest in lower yielding investment securities for a variety of reasons, including in anticipation that interest rates are likely to increase.
     Changes in the slope of the “yield curve” – or the spread between short-term and long-term interest rates – could also reduce our net