10-Q 1 f52324e10vq.htm 10-Q e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware   No. 41-0449260
(State of incorporation)   (I.R.S. Employer Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 1-866-249-3302
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     
Yes þ
  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     
Yes o
  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
         
Large accelerated filer
  þ   Accelerated filer o
 
       
Non-accelerated filer
  o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     
Yes o
  No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
    Shares Outstanding
    April 30, 2009
Common stock, $1-2/3 par value
    4,263,860,323  

 


 

FORM 10-Q
CROSS-REFERENCE INDEX
             
 
PART I          
Item 1.  
Financial Statements
  Page
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Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
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Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
    39  
             
Item 4.       53  
             
PART II          
             
Item 1.       123  
             
Item 1A.       123  
             
Item 2.       124  
             
Item 6.       124  
             
Signature     124  
             
Exhibit Index     125  
 
 EX-10.(A)
 EX-10.(B)
 EX-12.(A)
 EX-12.(B)
 EX-31.(A)
 EX-31.(B)
 EX-32.(A)
 EX-32.(B)

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PART I – FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA (1)(2)
                         
 
    Quarter ended  
    Mar. 31 ,   Dec. 31 ,   Mar. 31 ,
($ in millions, except per share amounts)   2009     2008     2008  
 

For the Quarter

                       
Wells Fargo net income (loss)
  $ 3,045     $ (2,734 )   $ 1,999  
Wells Fargo net income (loss) applicable to common stock
    2,384       (3,020 )     1,999  
Diluted earnings (loss) per common share
    0.56       (0.84 )     0.60  

Profitability ratios (annualized):

                       
Wells Fargo net income (loss) to average assets (ROA)
    0.96 %     (1.72 )%     1.40 %
Net income (loss) to average assets
    0.97       (1.72 )     1.41  
Wells Fargo net income (loss) applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
    14.49       (22.32 )     16.86  
Net income (loss) to average total equity
    11.97       (15.53 )     16.93  

Efficiency ratio (3)

    56.2       61.3       51.5  

Total revenue

  $ 21,017     $ 9,477     $ 10,563  
Pre-tax pre-provision profit (4)
    9,199       3,667       5,121  

Dividends declared per common share

    0.34       0.34       0.31  

Average common shares outstanding

    4,247.4       3,582.4       3,302.4  
Diluted average common shares outstanding
    4,249.3       3,593.6       3,317.9  

Average loans

  $ 855,591     $ 413,940     $ 383,919  
Average assets
    1,289,716       633,223       574,994  
Average core deposits (5)
    753,928       344,957       317,278  
Average retail core deposits (6)
    590,502       243,464       228,448  

Net interest margin

    4.16 %     4.90 %     4.69 %

At Quarter End

                       
Securities available for sale
  $ 178,468     $ 151,569     $ 81,787  
Loans
    843,579       864,830       386,333  
Allowance for loan losses
    22,281       21,013       5,803  
Goodwill
    23,825       22,627       13,148  
Assets
    1,285,891       1,309,639       595,221  
Core deposits (5)
    756,183       745,432       327,360  
Wells Fargo stockholders’ equity
    100,295       99,084       48,159  
Total equity
    107,057       102,316       48,439  
Tier 1 capital (7)
    88,977       86,397       39,211  
Total capital (7)
    131,820       130,318       54,522  

Capital ratios:

                       
Wells Fargo common stockholders’ equity to assets
    5.40 %     5.21 %     8.09 %
Total equity to assets
    8.33       7.81       8.14  
Average Wells Fargo common stockholders’ equity to average assets
    5.17       8.50       8.29  
Average total equity to average assets
    8.11       11.09       8.34  
Risk-based capital (7)
                       
Tier 1 capital
    8.30       7.84       7.92  
Total capital
    12.30       11.83       11.01  
Tier 1 leverage (7)
    7.09       14.52       7.04  

Book value per common share

  $ 16.28     $ 16.15     $ 14.58  

Team members (active, full-time equivalent)

    272,800       270,800       160,900  

Common stock price:

                       
High
  $ 30.47     $ 38.95     $ 34.56  
Low
    7.80       19.89       24.38  
Period end
    14.24       29.48       29.10  
 
(1)   Wells Fargo & Company (Wells Fargo) acquired Wachovia Corporation (Wachovia) on December 31, 2008. Because the acquisition was completed on December 31, 2008, Wachovia’s results are included in the income statement, average balances and related metrics beginning in 2009. Wachovia’s assets and liabilities are included in the consolidated balance sheet beginning on December 31, 2008.
(2)   On January 1, 2009, we adopted Statement of Financial Accounting Standards (FAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity.
(3)   The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(4)   Total revenue less noninterest expense.
(5)   Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
(6)   Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
(7)   Because the Wachovia acquisition was completed on December 31, 2008, the Tier 1 leverage ratio at December 31, 2008, which considers period-end Tier 1 capital and quarterly average assets in the computation of the ratio, does not reflect average assets of Wachovia for 2008. See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

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This Report on Form 10-Q for the quarter ended March 31, 2009, including the Financial Review and the Financial Statements and related Notes, has forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results might differ significantly from our forecasts and expectations due to several factors. Some of these factors are described in the Financial Review and in the Financial Statements and related Notes. For a discussion of other factors, refer to the “Risk Factors” section in this Report and to the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SEC’s website at www.sec.gov.
OVERVIEW
Wells Fargo & Company is a $1.3 trillion diversified financial services company providing banking, insurance, investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia and in other countries. We ranked fourth in assets and second in market value of our common stock among our peers at March 31, 2009. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia).
Wells Fargo net income was a record $3.05 billion in first quarter 2009, with net income applicable to common stock of $2.38 billion. Earnings per common share were $0.56, after merger-related and restructuring expense of $206 million ($0.03 per common share) and a $1.3 billion credit reserve build ($0.19 per common share).
On December 31, 2008, Wells Fargo acquired Wachovia. Because the acquisition was completed at the end of 2008, Wachovia’s results are included in the income statement, average balances and related metrics beginning in 2009. Wachovia’s assets and liabilities are included, at fair value, in the consolidated balance sheet beginning on December 31, 2008, but not in averages.
On January 1, 2009, we adopted Statement of Financial Accounting Standards (FAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts attributable to both Wells Fargo interests and the noncontrolling interests.
Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to give them all of the financial products that fulfill their needs. Our cross-sell strategy and diversified business model facilitate growth in both strong and weak economic cycles, as we can grow by expanding the number of products our current

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customers have with us. We continued to earn more of our customers’ business in 2009 in both our retail and commercial banking businesses.
Despite the continuing turmoil in the credit markets, we continued to lend to credit-worthy customers. We extended significant credit to U.S. taxpayers in first quarter 2009, $190 billion in mortgage applications and $101 billion in mortgage originations – we helped over 450,000 homeowners purchase a home or refinance. We have extended more than $225 billion in credit to U.S. taxpayers since last October. The fundamentals of our time-tested business model are as sound as ever. In first quarter 2009, our average core deposits were $754 billion. Our cross-sell at legacy Wells Fargo set records for the tenth consecutive year – our average retail banking household now has 5.81 products, almost one of every four has eight or more products, 6.4 products for Wholesale Banking customers, and our average middle-market commercial banking customer has almost eight products. Business banking cross-sell reached 3.66 products at legacy Wells Fargo. Our goal is eight products per customer, which is currently half of our estimate of potential demand.
We have stated in the past that to consistently grow over the long term, successful companies must invest in their core businesses and maintain strong balance sheets. In first quarter 2009, we opened 14 banking stores throughout the combined Company for a retail network total of 6,638 stores. Conversion of Wachovia stores to the Wells Fargo platform is scheduled to begin later this year.
We believe it is important to maintain a well-controlled environment as we continue to grow our businesses and integrate the Wachovia businesses. We manage our credit risk by setting what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to provide for future growth.
Wachovia Merger
On December 31, 2008, Wells Fargo acquired Wachovia, one of the nation’s largest diversified financial services companies. Wachovia’s assets and liabilities were included in the December 31, 2008, consolidated balance sheet at their respective acquisition date fair values. Because the acquisition was completed on December 31, 2008, Wachovia’s results of operations were not included in our 2008 income statement, and Wachovia’s assets and liabilities did not contribute to the consolidated averages. Beginning in 2009, our consolidated results and our consolidated average balances include Wachovia.
Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on preliminary data as of an interim period with estimates through year end. Accordingly, we are re-validating and, where necessary, refining our December 31, 2008, fair value estimates and other purchase accounting adjustments. The impact of these refinements was recorded as an adjustment to goodwill in first quarter 2009. Based on the purchase price of $23.1 billion and the $13.1 billion fair value of net assets acquired, inclusive of refinements identified in first quarter 2009, the transaction resulted in goodwill of $9.9 billion.

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The more significant fair value adjustments in our purchase accounting for the Wachovia acquisition were to loans. Certain of the loans acquired from Wachovia have evidence of credit deterioration since origination, and it is probable that we will not collect all contractually required principal and interest payments. Such loans are accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses.
Loans subject to SOP 03-3 are written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual even though they may be contractually past due because we expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Loans subject to SOP 03-3 are also excluded from the disclosure of loans 90 days or more past due and still accruing interest even though certain of them are 90 days or more contractually past due.
As a result of the application of SOP 03-3 to certain of Wachovia’s loans, certain ratios of the combined Company cannot be used to compare a portfolio that includes acquired credit-impaired loans accounted for under SOP 03-3 against ones that do not, for example, in comparing peer companies, and cannot be used to compare ratios across periods such as periods that include the Wachovia acquisition against prior periods that do not. The ratios particularly affected by the accounting under SOP 03-3 include the allowance for loan losses and allowance for credit losses as percentages of loans, of nonaccrual loans and of nonperforming assets; nonaccrual loans and nonperforming assets as a percentage of total loans; and net charge-offs as a percentage of average loans.
For further detail on the merger see “Loan Portfolio” in this section and Note 2 (Business Combinations) to Financial Statements in this Report.
Summary Results
Wells Fargo net income in first quarter 2009 was $3.05 billion ($0.56 per share), compared with $2.00 billion ($0.60 per share) in first quarter 2008. Wells Fargo return on average total assets (ROA) was 0.96% and return on average common stockholders’ equity (ROE) was 14.49% in first quarter 2009, compared with 1.40% and 16.86%, respectively, in first quarter 2008. Revenue, the sum of net interest income and noninterest income, of $21.02 billion in first quarter 2009 included another quarter of record, double-digit revenue growth at legacy Wells Fargo, up 16% year over year, as well as a strong contribution from Wachovia, which accounted for 41% of the Company’s combined revenue. Our results also reflected growth at legacy Wells Fargo in both net interest income and fee income resulting from our diversified business model. The breadth and depth of our business model resulted in strong and balanced growth in loans, deposits and fee-based products.
Our balance sheet is well positioned given the current economic environment. Our allowance for credit losses was $22.8 billion at March 31, 2009, compared with $21.7 billion at December 31, 2008. Our allowance was adequate to cover expected consumer losses for at least the next 12 months and to provide approximately 24 months of anticipated loss coverage for the commercial and commercial real estate portfolios. We reduced risk in our balance sheet

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through write-downs taken at December 31, 2008, on Wachovia’s higher-risk loan and securities portfolios. We recorded $516 million of other-than-temporary impairment on securities in first quarter 2009. Our ratio of capitalized mortgage servicing rights (MSRs) to owned servicing declined to 74 basis points, the lowest ratio since 2003. Since year-end 2008, our higher risk portfolios (home equity loans originated through third party channels, Pick-a-Pay and indirect auto at legacy Wells Fargo) were reduced by $4.5 billion and trading assets by $8.4 billion.
Our financial results included the following:
Net interest income on a taxable-equivalent basis was $11.55 billion in first quarter 2009, with approximately 40% contributed by Wachovia, up from $5.81 billion in first quarter 2008, reflecting a strong combined net interest margin on average earnings assets of $1.11 trillion. At 4.16% in first quarter 2009, our net interest margin remained strong and the highest among our large bank peers, due in part to continued growth in core deposits and deposit pricing discipline.
Noninterest income reached $9.6 billion in first quarter 2009, up from $4.8 billion a year ago, driven by continued success in satisfying customers’ financial needs and the combined Company’s expanded breadth of products and services. Noninterest income included:
  Mortgage banking noninterest income of $2.5 billion:
    $1.6 billion in revenue from mortgage loan originations/sales activities on $101 billion in new originations, includes a reduction to revenue of $138 million to increase the mortgage repurchase reserve and a write-down of the mortgage warehouse for spread and other liquidity-related valuation adjustments
    Unclosed application pipeline of $100 billion, up 41% from prior quarter, indicates solid origination momentum heading into second quarter 2009
    $875 million MSRs mark-to-market net of hedge results, reflecting a $2.8 billion reduction in the fair value of the MSRs offset by a $3.7 billion hedge gain, with the net difference largely due to hedge carry income due to low short-term interest rates
  Trust and investment fees of $2.2 billion reflected solid results in retail brokerage commissions, managed account fees and asset management fees
  Service charges on deposit accounts of $1.4 billion reflected continued growth in checking accounts and the effect of higher average checking account balances
  Trading revenue of $787 million; approximately two-thirds from customer business, including revenue earned on sales of foreign exchange and interest rate products and services
  $516 million write-down through earnings for other-than-temporary impairment on debt and equity securities, with an additional $334 million (pre tax) of non-credit-related impairment on debt securities charged directly to equity through other comprehensive income
Net unrealized losses on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Of the improvement, $4.5 billion was due to the early adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which clarified the use of trading prices in determining fair value for securities in illiquid markets, thus moderating the need to use distressed prices in valuing these securities in illiquid markets as we had done in prior periods. See “Current Accounting Developments” in this Report for more information on

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FSP 157-4. The remaining $700 million of the improvement was due to declining interest rates and narrower credit spreads.
Noninterest expense was $11.82 billion in first quarter 2009, up from $5.44 billion in first quarter 2008, largely attributable to the Wachovia acquisition. Noninterest expense reflected our expanded geographic platform and capabilities in businesses such as retail brokerage, asset management and investment banking, which, like mortgage banking, typically include higher revenue-based incentive expense than the more traditional banking businesses. Our efficiency ratio was 56.2% in first quarter 2009.
We expect to generate $5 billion of annual merger-related expense savings, which will begin to emerge in the second quarter and are expected to be fully realized upon completion of the integration. We further expect additional efficiency initiatives to lower expenses over the remainder of 2009. After refining our initial models, we now expect total integration expense to be less than our original estimate of $7.9 billion and to be spread over the integration period rather than all by year-end 2009.
Net charge-offs in first quarter 2009 were $3.3 billion (1.54% of average total loans outstanding, annualized), including $371 million in the Wachovia portfolio, compared with $2.8 billion (2.69%) in fourth quarter 2008 and $1.5 billion (1.60%) in first quarter 2008. Wachovia loans accounted for under SOP 03-3 were written down to fair value at December 31, 2008, and accordingly charge-offs on that portfolio will only occur if the portfolio deteriorates subsequent to the acquisition. All first quarter 2009 charge-offs were on non-SOP 03-3 loans. Commercial and commercial real estate loan losses remained at relatively low levels reflecting the historically disciplined underwriting standards applied by Wells Fargo and the customer-relationship focus in this portfolio. Losses in residential real estate and credit cards rose modestly in the quarter, in line with expectations, while other credit losses, principally in indirect auto lending, declined due to seasonality and our risk reduction actions in indirect auto over the last two years.
As long as the U.S. economy remains weak, losses on the combined portfolio will increase. Over the last two years, we have taken and will continue to take actions to enable us to navigate through this current economic and credit cycle. In addition to the significant write-downs taken to reduce risk in the Wachovia portfolio at close, we ceased originations and are liquidating certain higher-risk, lower-return portfolios, such as Pick-a-Pay and legacy Wells Fargo indirect auto and liquidating home equity portfolios. In addition, during first quarter 2009, we incorporated Wells Fargo’s risk policies and procedures into Wachovia, which is essential to our ability to properly manage risk as we continue to meet our customers’ needs. We believe these risk reduction actions better position us for continued credit deterioration and economic headwinds.
The provision for credit losses was $4.6 billion in first quarter 2009, $8.4 billion in fourth quarter 2008 and $2.0 billion in first quarter 2008. The provision in first quarter 2009 included a $1.3 billion credit reserve build due to higher credit losses inherent in the loan portfolio. The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $22.8 billion (2.71% of total loans) at March 31, 2009, compared with $21.7 billion (2.51%) at December 31, 2008, and $6.0 billion (1.56%) at March 31, 2008. Wachovia’s allowance related to loans not within the scope of SOP 03-3 of $9.3 billion was carried over and was included in our allowance as of December 31, 2008.

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Total nonaccrual loans were $10.52 billion (1.25% of total loans) at March 31, 2009, compared with $6.80 billion (0.79%) at December 31, 2008, and $3.26 billion (0.84%) at March 31, 2008. Nonaccrual loans exclude loans acquired from Wachovia accounted for under SOP 03-3. The $3.7 billion increase in nonaccrual loans from December 31, 2008, represented increases in both the commercial and retail segments, with $1.5 billion related to Wachovia. The increases in nonaccrual loans were concentrated in portfolios secured by real estate or with borrowers dependent on the housing industry. Total nonperforming assets (NPAs) were $12.61 billion (1.50% of total loans) at March 31, 2009, compared with $9.01 billion (1.04%) at December 31, 2008, and $4.50 billion (1.16%) at March 31, 2008. Foreclosed assets were $2.06 billion at March 31, 2009, $2.19 billion at December 31, 2008, and $1.22 billion at March 31, 2008.
We have strengthened our capital position in first quarter 2009. Tangible common equity (TCE) was $41.1 billion at quarter end, an increase of $4.5 billion. The ratio of TCE to tangible assets was 3.28%, up from 2.86% at December 31, 2008. TCE was 3.84% of risk-weighted assets. At March 31, 2009, Tier 1 capital was $89.0 billion and the Tier 1 capital ratio was 8.30%, up from 7.84% at December 31, 2008.
The Company and each of its subsidiary banks continued to remain well-capitalized. Our total risk-based capital (RBC) ratio at March 31, 2009, was 12.30% and our Tier 1 RBC ratio was 8.30%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our total RBC ratio was 11.83% and our Tier 1 RBC ratio was 7.84% at December 31, 2008. Our Tier 1 leverage ratio was 7.09% and 14.52% at March 31, 2009, and December 31, 2008, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.
On May 7, 2009, the Federal Reserve confirmed that under its adverse stress test scenario the Company’s Tier 1 capital exceeded the minimum level needed for well-capitalized institutions. In conjunction with the stress test, the Company has agreed with the Federal Reserve to increase common equity by $13.7 billion by November 9, 2009. On May 8, 2009, the Company agreed to issue 341 million shares of its common stock at a price of $22 per share. Also on May 8, 2009, the underwriters in the offering exercised their option to purchase up to an additional 51.15 million shares of common stock from the Company at $22 per share to cover over-allotments. The Company will receive net proceeds of $8.4 billion from the offering including the exercise of the over-allotment option. The Company expects to satisfy the remainder of the capital requirement through profits and other internally generated sources. The Company can satisfy any part of the capital requirement by exchanging up to $13.7 billion of its $25 billion of Capital Purchase Program (CPP) funds for the Treasury’s Capital Assistance Program (CAP) on a dollar-for-dollar basis.

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Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
  FAS 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133;
  FAS 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51;
  FAS 141R (revised 2007), Business Combinations;
  FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly;
  FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments; and
  FASB Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
In addition, FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, was issued by the FASB, but is not yet effective. Each of these pronouncements is described in more detail below.
FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. We adopted FAS 161 for first quarter 2009 reporting. See Note 12 (Derivatives) to Financial Statements in this Report for complete disclosures under FAS 161. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 does not affect our consolidated financial results.
FAS 160 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160, they were classified outside of equity. This new standard also changes the way a noncontrolling interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. FAS 160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The remaining interest is initially recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions. FAS 160 was effective for us on January 1, 2009. Adoption is applied prospectively to all noncontrolling interests including those that arose prior to the adoption of FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.
We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). For more information, see “Contractual Obligations” in our 2008 Form 10-K. In connection with the adoption of FAS 160 on January 1, 2009, we reclassified Prudential’s noncontrolling interest to equity. Under the terms of the original agreement under which the joint venture was established between Wachovia and Prudential, each party has certain rights such that changes in our ownership interest can occur. Prudential has stated its intention to exercise its option to put its

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

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FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment (OTTI) write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective in second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to accumulated other comprehensive income for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had the FSP been effective for those periods.
EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents be treated as participating securities and, therefore, included in the computation of earnings per share under the two-class method described in FAS 128, Earnings per Share. This pronouncement is effective on January 1, 2009, with retrospective adoption required. The adoption of EITF 03-6-1 did not have a material effect on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The provisions of the FSP are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt this FSP for June 30, 2009, reporting. Because the FSP amends only the disclosure requirements related to the fair value of financial instruments, the adoption of the FSP will not affect our consolidated financial results.

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CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities, and our financial results. Six of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:
  the allowance for credit losses;
  acquired loans accounted for under SOP 03-3;
  the valuation of residential mortgage servicing rights (MSRs);
  the fair valuation of financial instruments;
  pension accounting; and
  income taxes.
Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee. These policies are described in “Financial Review – Critical Accounting Policies” and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2008 Form 10-K. Due to the adoption of FSP FAS 157-4, which affects the measurement of fair value of certain assets, principally securities and trading assets, we have updated and provided herein the policy on the fair value of financial instruments, as described below.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We use fair value measurements to record fair value adjustments to certain financial instruments and to develop fair value disclosures. See our 2008 Form 10-K for the complete critical accounting policy related to fair value of financial instruments.
In connection with the adoption of FSP FAS 157-4, we developed policies and procedures to determine when the level and volume of activity for our assets and liabilities requiring fair value measurements have declined significantly relative to normal conditions. For items that use price quotes, such as certain security classes within securities available for sale, the degree of market inactivity and distressed transactions is estimated to determine the appropriate adjustment to the price quotes. The methodology we use to adjust the quotes generally involves weighting the price quotes and results of internal pricing techniques, such as the net present value of future expected cash flows (with observable inputs, where available) discounted at a rate of return market participants require. The more active and orderly markets for particular security classes were determined to be, the more weighting we assign to price quotes. The less active and the orderly markets were determined to be, the less weighting we assign to price quotes. Applying these policies to securities available for sale within the scope of the FSP of $40.0 billion (22% of the securities available-for-sale portfolio) at March 31, 2009, resulted in a $4.5 billion ($2.8 billion after tax) reduction in the net unrealized loss, which is reflected in equity. The more significant components of the $4.5 billion included $2.3 billion related to residential mortgage-backed securities and $1.3 billion related to commercial mortgage-backed securities. In addition, applying these policies to trading assets resulted in an $18 million increase in the fair value of certain trading assets, which is reflected in first quarter earnings.

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Approximately 22% of total assets ($285.3 billion) at March 31, 2009, and 19% of total assets ($247.5 billion) at December 31, 2008, consisted of financial instruments recorded at fair value on a recurring basis. Assets for which fair values were measured using significant Level 3 inputs (before derivative netting adjustments) represented approximately 22% of these financial instruments (5% of total assets) at March 31, 2009, and approximately 22% (4% of total assets) at December 31, 2008. The fair value of the remaining assets were measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.
In first quarter 2009, $5.6 billion of debt securities available for sale were transferred from Level 2 to Level 3 because significant inputs to the valuation became unobservable, largely due to reduced levels of market liquidity.
Approximately 2% of total liabilities ($20.6 billion) at March 31, 2009, and 2% ($18.8 billion) at December 31, 2008, consisted of financial instruments recorded at fair value on a recurring basis. Liabilities valued using Level 3 measurements (before derivative netting adjustments) were $8.6 billion and $9.3 billion at March 31, 2009, and December 31, 2008, respectively.

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EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits and long-term and short-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
Net interest income on a taxable-equivalent basis was $11.55 billion in first quarter 2009, with approximately 40% contributed by Wachovia, and $5.81 billion in first quarter 2008. Net interest income reflected a strong combined net interest margin of 4.16%, due in part to continued growth in core deposits and deposit pricing discipline.
Average earning assets increased to $1.1 trillion in first quarter 2009 from $496.9 billion in first quarter 2008. Average loans increased to $855.6 billion in first quarter 2009 from $383.9 billion a year ago. Average mortgages held for sale increased to $31.1 billion in first quarter 2009 from $26.3 billion a year ago. Average debt securities available for sale increased to $160.4 billion in first quarter 2009 from $75.2 billion a year ago.
Core deposits are a low-cost source of funding and thus an important contributor to growth in net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $753.9 billion in first quarter 2009 from $317.3 billion in first quarter 2008, with over half of the increase from Wachovia, and funded 88% and 83% of average loans in first quarter 2009 and 2008, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, grew $362.1 billion to $590.5 billion for first quarter 2009 from $228.4 billion a year ago. Average mortgage escrow deposits were $24.7 billion in first quarter 2009, up $4.3 billion from $20.4 billion a year ago. Average savings certificates of deposits increased to $170.1 billion in first quarter 2009 from $41.9 billion a year ago and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings) increased to $554.1 billion in first quarter 2009 from $250.0 billion a year ago. Total average interest-bearing deposits increased to $635.4 billion in first quarter 2009 from $258.4 billion a year ago.
The following table presents the individual components of net interest income and the net interest margin.

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AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2)
                                                 
   
    Quarter ended March 31 ,
    2009     2008  
                  Interest                   Interest  
    Average     Yields/   income/   Average     Yields/   income/  
(in millions)   balance     rates   expense   balance     rates   expense  
   

EARNING ASSETS

                                               
Federal funds sold, securities purchased under
resale agreements and other short-term investments
  $ 24,074       0.84 %   $ 50     $ 3,888       3.30 %   $ 32  
Trading assets
    22,203       4.97       275       5,129       3.73       48  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    2,899       0.93       7       975       3.86       9  
Securities of U.S. states and political subdivisions
    12,213       6.43       213       6,290       7.43       120  
Mortgage-backed securities:
                                               
Federal agencies
    76,545       5.71       1,068       36,097       6.10       535  
Residential and commercial
    38,690       8.57       1,017       20,994       6.08       324  
 
                                       
Total mortgage-backed securities
    115,235       6.82       2,085       57,091       6.09       859  
Other debt securities (4)
    30,080       6.81       551       10,825       6.93       196  
 
                                       
Total debt securities available for sale (4)
    160,427       6.69       2,856       75,181       6.30       1,184  
Mortgages held for sale (5)
    31,058       5.34       415       26,273       6.00       394  
Loans held for sale (5)
    7,949       3.40       67       647       7.54       12  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    196,923       3.87       1,884       91,085       6.92       1,569  
Other real estate mortgage
    104,271       3.47       894       37,426       6.44       600  
Real estate construction
    34,493       3.03       258       18,932       6.06       285  
Lease financing
    15,810       8.77       347       6,825       5.77       98  
 
                                       
Total commercial and commercial real estate
    351,497       3.89       3,383       154,268       6.65       2,552  
Consumer:
                                               
Real estate 1-4 family first mortgage
    245,494       5.64       3,444       72,308       6.90       1,246  
Real estate 1-4 family junior lien mortgage
    110,128       5.05       1,375       75,263       7.31       1,368  
Credit card
    23,295       12.10       704       18,776       12.33       579  
Other revolving credit and installment
    92,820       6.68       1,527       55,910       9.09       1,264  
 
                                       
Total consumer
    471,737       6.03       7,050       222,257       8.05       4,457  
Foreign
    32,357       4.36       349       7,394       11.27       207  
 
                                       
Total loans (5)
    855,591       5.09       10,782       383,919       7.55       7,216  
Other
    6,140       2.87       43       1,825       4.54       20  
 
                                       
Total earning assets
  $ 1,107,442       5.22       14,488     $ 496,862       7.19       8,906  
 
                                       
FUNDING SOURCES
                                               
Deposits:
                                               
Interest-bearing checking
  $ 80,393       0.15       30     $ 5,226       1.92       25  
Market rate and other savings
    313,445       0.54       419       159,865       1.97       784  
Savings certificates
    170,122       0.92       387       41,915       3.96       413  
Other time deposits
    25,555       1.97       124       4,763       3.53       42  
Deposits in foreign offices
    45,896       0.35       39       46,641       2.84       330  
 
                                       
Total interest-bearing deposits
    635,411       0.64       999       258,410       2.48       1,594  
Short-term borrowings
    76,068       0.66       123       52,970       3.23       425  
Long-term debt
    258,957       2.77       1,783       100,686       4.29       1,077  
Other liabilities
    3,778       3.88       36       --       --       --  
 
                                       
Total interest-bearing liabilities
    974,214       1.22       2,941       412,066       3.02       3,096  
Portion of noninterest-bearing funding sources
    133,228       --       --       84,796       --       --  
 
                                       
Total funding sources
  $ 1,107,442       1.06       2,941     $ 496,862       2.50       3,096  
 
                                       

Net interest margin and net interest income on
a taxable-equivalent basis
 (6)

            4.16 %   $ 11,547               4.69 %   $ 5,810  
 
                                       

NONINTEREST-EARNING ASSETS

                                               
Cash and due from banks
  $ 20,255                     $ 11,648                  
Goodwill
    23,183                       13,161                  
Other
    138,836                       53,323                  
 
                                           
Total noninterest-earning assets
  $ 182,274                     $ 78,132                  
 
                                           

NONINTEREST-BEARING FUNDING SOURCES

                                               
Deposits
  $ 160,308                     $ 84,886                  
Other liabilities
    50,566                       30,062                  
Total equity
    104,628                       47,980                  
Noninterest-bearing funding sources used to
fund earning assets
    (133,228 )                     (84,796 )                
 
                                           
Net noninterest-bearing funding sources
  $ 182,274                     $ 78,132                  
 
                                           
TOTAL ASSETS
  $ 1,289,716                     $ 574,994                  
 
                                           
   
(1)   Our average prime rate was 3.25% and 6.22% for the quarters ended March 31, 2009 and 2008, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.24% and 3.29% for the same quarters, respectively.
(2)   Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3)   Yields are based on amortized cost balances computed on a settlement date basis.
(4)   Includes certain preferred securities.
(5)   Nonaccrual loans and related income are included in their respective loan categories.
(6)   Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.

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NONINTEREST INCOME
                 
   
    Quarter  
    ended March 31 ,
(in millions)   2009     2008  
   
Service charges on deposit accounts
  $ 1,394     $ 748  

               
Trust and investment fees:
               
Trust, investment and IRA fees
    722       559  
Commissions and all other fees
    1,493       204  
 
           
Total trust and investment fees
    2,215       763  

               
Card fees
    853       558  
Other fees:
               
Cash network fees
    58       48  
Charges and fees on loans
    433       248  
All other fees
    410       203  
 
           
Total other fees
    901       499  

               
Mortgage banking:
               
Servicing income, net
    843       273  
Net gains on mortgage loan origination/sales activities
    1,582       267  
All other
    79       91  
 
           
Total mortgage banking
    2,504       631  

               
Insurance
    581       504  
Net gains from trading activities
    787       103  
Net gains (losses) on debt securities available for sale
    (119 )     323  
Net gains (losses) from equity investments
    (157 )     313  
Operating leases
    130       143  
All other
    552       218  
 
           

               
Total
  $ 9,641     $ 4,803  
 
           
   
We earn trust, investment and IRA fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At March 31, 2009, these assets totaled $1.53 trillion, including $474 billion from Wachovia, up from $1.13 trillion at March 31, 2008. Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of the assets under management or administration. The fees increased to $722 million in first quarter 2009 from $559 million a year ago.
We also receive commissions and other fees for providing services to full-service and discount brokerage customers. Generally, these fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, or asset-based fees, which are based on the market value of the customer’s assets. At March 31, 2009, brokerage balances totaled $910 billion, including $812 billion from Wachovia, compared with $126 billion at March 31, 2008. The fees increased to $1,493 million from $204 million a year ago.
Card fees increased to $853 million in first quarter 2009 from $558 million a year ago, predominantly due to $268 million in card fees from the Wachovia portfolio.
Mortgage banking noninterest income was $2,504 million in first quarter 2009, compared with $631 million a year ago. Net gains on mortgage loan origination/sales activities of $1,582 million in first quarter 2009 were up from $267 million a year ago. Business performance was very strong in first quarter 2009, reflecting strong refinance activity due to the low interest rate environment, with residential real estate originations of $101 billion compared with $66 billion a

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year ago. The 1-4 family first mortgage unclosed pipeline was $100 billion (including $4 billion from Wachovia) at March 31, 2009, $71 billion (including $5 billion from Wachovia) at December 31, 2008, and $61 billion at March 31, 2008. For additional detail, see “Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate and Market Risk” and Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities include changes in the fair value of loans in the mortgage warehouse and additions to the mortgage repurchase reserve. Mortgage loans are repurchased based on standard representations and warranties. A $78 million increase in the repurchase reserve in first quarter 2009 from December 31, 2008, was due to higher defaults and loss severities and overall deterioration in the market. To the extent the market does not recover, the residential mortgage business could continue to have increased loss severity on repurchases, causing future increases in the repurchase reserve. In addition, there were $60 million in warehouse valuation adjustments in first quarter 2009 related to credit and liquidity losses. Due to the deterioration in the overall credit market and related secondary market liquidity challenges, losses on unsalable loans have been significant. Similar losses on unsalable loans could be possible in the future until the housing market recovers.
Within mortgage banking noninterest income, servicing income includes both changes in the fair value of MSRs during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income in first quarter 2009 included an $875 million net MSRs valuation gain recorded in earnings (a $2.8 billion reduction in the fair value of the MSRs offset by a $3.7 billion hedge gain) and in first quarter 2008 included a $94 million net MSRs valuation gain ($1.8 billion reduction in the fair value of MSRs offset by a $1.9 billion hedge gain). Our portfolio of loans serviced for others was $1.85 trillion at March 31, 2009, and $1.86 trillion at December 31, 2008, which included $379 billion acquired from Wachovia. At March 31, 2009, the ratio of MSRs to related loans serviced for others was 0.74%.
Insurance revenue was $581 million in first quarter 2009, up from $504 million a year ago, primarily due to the addition of Wachovia.
Income from trading activities was $787 million in first quarter 2009, up from $103 million a year ago, with the increase largely from Wachovia. Approximately two-thirds of the income this quarter was from customer-related business, with much of the remainder from economic hedging. Trading results included $18 million in first quarter 2009 from the application of FSP FAS 157-4.
Net investment losses (debt and equity) totaled $276 million in first quarter 2009 and included other-than-temporary impairment write-downs of $516 million. Net losses on debt securities available for sale were $119 million in first quarter 2009, compared with net gains of $323 million a year ago. Net losses from equity investments were $157 million in first quarter 2009, compared with net gains of $313 million a year ago, which reflected the $334 million gain from our ownership interest in Visa, which completed its initial public offering in March 2008. For additional detail, see “Balance Sheet Analysis – Securities Available for Sale” in this Report.

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NONINTEREST EXPENSE
                 
   
    Quarter  
    ended March 31 ,
(in millions)   2009     2008  
   
Salaries
  $ 3,386     $ 1,984  
Commission and incentive compensation
    1,824       644  
Employee benefits
    1,284       587  
Equipment
    687       348  
Net occupancy
    796       399  
Core deposit and other intangibles
    647       46  
FDIC and other deposit assessments
    338       8  
Outside professional services
    410       171  
Insurance
    267       161  
Postage, stationery and supplies
    250       141  
Outside data processing
    212       109  
Travel and entertainment
    105       105  
Foreclosed assets
    248       107  
Contract services
    216       108  
Operating leases
    70       116  
Advertising and promotion
    125       85  
Telecommunications
    158       78  
Operating losses (reduction in losses)
    172       (73 )
All other
    623       318  
 
           
Total
  $ 11,818     $ 5,442  
 
           
   
Noninterest expense more than doubled to $11.8 billion in first quarter 2009 from a year ago, primarily due to the acquisition of Wachovia, which resulted in an expanded geographic platform and capabilities in businesses such as retail brokerage, asset management and investment banking, which, like mortgage banking, typically include higher revenue-based incentive expense than the more traditional banking businesses. FDIC and other deposit assessments increased to $338 million in first quarter 2009, due to additional assessments related to the FDIC Transaction Account Guarantee Program, compared with $8 million a year ago. See “Liquidity and Funding” in this Report for additional information on this program. Noninterest expense in first quarter 2009 included $122 million of additional insurance reserve at our captive mortgage reinsurance operation and $206 million of merger-related costs.
INCOME TAX EXPENSE
Our effective income tax rate was 33.8% in first quarter 2009, down from 34.9% in first quarter 2008. The decrease is primarily attributable to higher tax-exempt income and tax credits, partially offset by increased tax expense (with a comparable increase in interest income) associated with the purchase accounting for leveraged leases. Effective January 1, 2009, we adopted FAS 160, which changes the way noncontrolling interests are presented in the income statement such that the consolidated income statement includes amounts from both Wells Fargo interests and the noncontrolling interests. As a result, our effective tax rate is calculated by dividing income tax expense by income before income tax expense less the net income from noncontrolling interests.

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OPERATING SEGMENT RESULTS
Wells Fargo defines its operating segments by product type and customer segment. As a result of the combination of Wells Fargo and Wachovia, management realigned its business segments into the following three lines of business: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement Services. Our management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with other similar information for other financial services companies. We revised prior period information to reflect the realignment of our operating segments; however, because the acquisition was completed on December 31, 2008, Wachovia’s results are included in segment results beginning in 2009. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 17 (Operating Segments) to Financial Statements in this Report.
Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. Wachovia added expanded product capability as well as expanded channels to better serve our customers. In addition, with the realignment of the operating segments, Community Banking now includes Wells Fargo Financial.
Community Banking net income increased to $1.84 billion in first quarter 2009 from $1.52 billion a year ago. The growth in net income and average assets for Community Banking was largely due to the addition of Wachovia businesses, as well as double-digit growth in legacy Wells Fargo businesses driven by strong balance sheet growth and mortgage banking income. Revenue increased to $13.95 billion from $8.20 billion a year ago. Net interest income increased to $8.50 billion in first quarter 2009 from $4.72 billion a year ago. Average loans increased to $552.8 billion in first quarter 2009 from $282.7 billion a year ago. Average core deposits increased to $538.0 billion in first quarter 2009 from $246.6 billion a year ago due to Wachovia, as well as double-digit growth in legacy Wells Fargo. Noninterest income increased to $5.46 billion in first quarter 2009 from $3.48 billion a year ago. Noninterest expense increased to $7.16 billion from $3.91 billion a year ago. The provision for credit losses increased to $4.00 billion in first quarter 2009 from $1.87 billion a year ago.
Wholesale Banking provides financial solutions to businesses across the United States with annual sales generally in excess of $10 million and financial institutions globally. Products include middle market banking, corporate banking, commercial real estate, treasury management, asset-based lending, insurance brokerage, foreign exchange, correspondent banking, trade services, specialized lending, equipment finance, corporate trust, investment banking, capital markets, and asset management. Wachovia added expanded product capabilities across the segment, including investment banking, mergers and acquisitions, equity trading, equity structured products, fixed-income sales and trading, and equity and fixed income research.
Wholesale Banking net income increased to $1.18 billion in first quarter 2009 from $483 million a year ago. The growth in net income and average assets for Wholesale Banking was largely due to the addition of Wachovia businesses. Revenue increased to a record $4.91 billion in first quarter 2009 from $2.18 billion a year ago. Net interest income increased to $2.37 billion in first quarter 2009 from $1.03 billion a year ago. Average loans increased to $271.9 billion in first

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quarter 2009 from $100.8 billion a year ago. Average core deposits increased to $138.5 billion in first quarter 2009 from $68.2 billion a year ago. Noninterest income increased to $2.54 billion in first quarter 2009 from $1.15 billion a year ago, primarily due to Wachovia, as well as strong growth in service charges on deposits and loan fees. Noninterest expense increased to $2.53 billion in first quarter 2009 from $1.34 billion a year ago. The provision for credit losses increased to $545 million in first quarter 2009, from $161 million a year ago.
Wealth, Brokerage and Retirement Services provides a full range of financial advisory services to clients using a comprehensive planning approach to meet each client’s needs. The Wealth Management Group 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 Office Services meets the unique needs of the ultra high net worth customers. Retail brokerage’s financial advisors serve customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the U.S. The Retirement Group provides retirement services for individual investors and is a national leader in 401(k) and pension record keeping. The addition of Wachovia in first quarter 2009 added the following businesses to this operating segment: Wachovia Securities (retail brokerage), Wachovia Wealth Management, including its family office business and Wachovia’s retirement services and reinsurance group.
Wealth, Brokerage and Retirement Services net income was $259 million in first quarter 2009 up from $93 million a year ago. The growth in net income and average assets for the segment is due to the addition of Wachovia businesses. Revenue increased to $2.64 billion in first quarter 2009 from $637 million a year ago. Net interest income increased to $737 million in first quarter 2009 from $154 million a year ago. Average loans increased to $46.7 billion in first quarter 2009 from $13.7 billion a year ago. The provision for credit losses was $25 million in first quarter 2009. Noninterest expense increased to $2.22 billion in first quarter 2009 from $485 million a year ago. First quarter 2009 noninterest expense includes $166 million of intangible amortization expense related to the Wachovia acquisition.

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BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily of very liquid, high-quality federal agency debt and privately issued mortgage-backed securities. At March 31, 2009, we held $173.3 billion of debt securities available for sale, with net unrealized losses of $4.1 billion, compared with $145.4 billion at December 31, 2008, including $63.7 billion acquired from Wachovia, with net unrealized losses of $9.8 billion. We also held $5.2 billion of marketable equity securities available for sale at March 31, 2009, with net unrealized losses of $646 million compared with $6.1 billion at December 31, 2008, including $3.7 billion acquired from Wachovia, with net unrealized losses of $160 million. Following application of purchase accounting to the Wachovia portfolio, the net unrealized losses in cumulative other comprehensive income at December 31, 2008, related entirely to the legacy Wells Fargo portfolio.
The decrease in net unrealized losses on debt securities available for sale to $4.1 billion at March 31, 2009, from $9.8 billion at December 31, 2008, was predominantly due to the early adoption of FSP FAS 157-4, which clarified the use of trading prices in determining fair value for securities in illiquid markets, thus moderating the need to use distressed prices in valuing these securities in illiquid markets as we had done in prior periods. The remainder of the change was due to declining interest rates and narrower credit spreads.
We analyze securities for other-than-temporary impairment (OTTI) on a quarterly basis, or more often if a potential loss-triggering event occurs. We recognize OTTI when it is probable that we will be unable to collect all amounts due according to the contractual terms of the security, and the fair value of the investment security is less than its amortized cost. The initial indication of OTTI for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions within its industry, and whether it is more likely than not that we will be required to sell the security before a recovery in value.
For marketable equity securities, in addition to the above factors, we also consider the issuer’s financial condition, capital strength and near-term prospects. For debt securities and for certain perpetual preferred securities, which are treated as debt securities for the purpose of OTTI analysis, we also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, any change in agency ratings at evaluation date from acquisition date and any likely imminent action. For asset-backed securities, we consider the credit performance of the underlying collateral, including delinquency rates, cumulative losses to date, and the remaining credit enhancement compared to expected credit losses of the security.

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For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we recognize OTTI in accordance with FSP FAS 115-2 and FAS 124-2, which we early adopted on January 1, 2009. Under this FSP, we separate the amount of the OTTI into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other comprehensive income.
Of the first quarter 2009 OTTI write-downs of $516 million, $269 million related to debt securities and $247 million to equity securities. Under FSP FAS 115-2 and FAS 124-2, which we adopted this quarter, total OTTI on debt securities amounted to $603 million, which includes $263 million of credit-related OTTI and $6 million related to securities we intend to sell, both of which were recorded as part of gross realized losses, and $334 million recorded directly to other comprehensive income for non-credit related impairment on securities.
At March 31, 2009, we had approximately $6 billion of securities, primarily municipal bonds, that are guaranteed against loss by bond insurers. These securities are almost exclusively investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee. These securities will continue to be monitored as part of our ongoing impairment analysis of our securities available for sale, but are expected to perform, even if the rating agencies reduce the credit ratings of the bond insurers.
The weighted-average expected maturity of debt securities available for sale was 4.9 years at March 31, 2009. Since 77% of this portfolio is mortgage-backed securities, the expected remaining maturity may differ from contractual maturity because borrowers may have the right to prepay obligations before the underlying mortgages mature. The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the mortgage-backed securities available for sale is shown below.
MORTGAGE-BACKED SECURITIES
                         
 
    Fair     Net unrealized     Remaining  
(in billions)   value     gain (loss)     maturity  
 

At March 31, 2009

  $ 132.9     $   (2.4 )   3.1 yrs.  

At March 31, 2009, assuming a 200 basis point:

                       
Increase in interest rates
    121.5       (13.8 )   6.7 yrs.  
Decrease in interest rates
    137.9       2.6     2.2 yrs.  
 
See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.

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LOAN PORTFOLIO
A discussion of average loan balances is included in “Earnings Performance – Net Interest Income” on page 14 and a comparative schedule of average loan balances is included in the table on page 15.
The major categories of loans outstanding showing those subject to SOP 03-3 are presented in the following table.
                                                 
 
    March 31, 2009     December 31, 2008  
            All                     All        
    SOP 03-3     other             SOP 03-3     other        
(in millions)   loans     loans     Total     loans     loans     Total  
 

Commercial and commercial real estate:

                                               
Commercial
  $ 3,088     $ 188,623     $ 191,711     $ 4,580     $ 197,889     $ 202,469  
Other real estate mortgage
    6,597       98,337       104,934       7,762       95,346       103,108  
Real estate construction
    4,507       29,405       33,912       4,503       30,173       34,676  
Lease financing
    --       14,792       14,792       --       15,829       15,829  
 
                                   
Total commercial and commercial real estate
    14,192       331,157       345,349       16,845       339,237       356,082  
Consumer:
                                               
Real estate 1-4 family first mortgage
    41,520       201,427       242,947       39,214       208,680       247,894  
Real estate 1-4 family junior lien mortgage
    615       109,133       109,748       728       109,436       110,164  
Credit card
    --       22,815       22,815       --       23,555       23,555  
Other revolving credit and installment
    32       91,220       91,252       151       93,102       93,253  
 
                                   
Total consumer
    42,167       424,595       466,762       40,093       434,773       474,866  
Foreign
    1,849       29,619       31,468       1,859       32,023       33,882  
 
                                   
Total loans
  $ 58,208     $ 785,371     $ 843,579     $ 58,797     $ 806,033     $ 864,830  
 
                                   
 
In first quarter 2009, we refined certain of our initial purchase accounting, which resulted in changes to the portfolio of loans subject to SOP 03-3 and updates to the December 31, 2008, fair value estimates. Based on updates to the initial purchase accounting, $95.8 billion of loans were determined to be within the scope of SOP 03-3, a net increase of $1.9 billion from initial year-end estimates, and the fair value of these loans was $59.7 billion at December 31, 2008. These adjustments are reflected in the March 31, 2009, loan balances, along with first quarter activity, in the table above.
For further detail on SOP 03-3 loans see Note 1 (Summary of Significant Accounting Policies – Loans) to Financial Statements in the 2008 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

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DEPOSITS
                         
 
    Mar. 31 ,   Dec. 31 ,   Mar. 31 ,
(in millions)   2009     2008     2008  
 

Noninterest-bearing
  $ 166,497     $ 150,837     $ 90,793  
Interest-bearing checking
    89,010       72,828       5,372  
Market rate and other savings
    315,209       306,255       163,230  
Savings certificates
    160,220       182,043       39,554  
Foreign deposits (1)
    25,247       33,469       28,411  
 
                 
Core deposits
    756,183       745,432       327,360  
Other time deposits
    23,329       28,498       6,033  
Other foreign deposits
    17,757       7,472       24,751  
 
                 
Total deposits
  $ 797,269     $ 781,402     $ 358,144  
 
                 
 
(1)   Reflects Eurodollar sweep balances included in core deposits.
Deposits at March 31, 2009, totaled $797.3 billion, compared with $781.4 billion at December 31, 2008. A comparative detail of average deposit balances is provided on page 15. Total core deposits were $756.2 billion at March 31, 2009, up $10.8 billion from December 31, 2008. High-rate certificates of deposit (CDs) of $33.6 billion at legacy Wachovia matured in the quarter, including $13.2 billion from CD-only households. Higher-rate CDs are maturing and we are successfully retaining many of these deposits at today’s lower rates. The combination of noninterest-bearing and interest-bearing transaction and savings deposits increased 31% (annualized) to $570.7 billion at March 31, 2009, from $529.9 billion at December 31, 2008. Deposit performance continued to benefit from deeper market penetration, flight to quality and mortgage escrow activity.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital. These are described below as off-balance sheet transactions with unconsolidated entities, and guarantees and certain contingent arrangements.
OFF-BALANCE SHEET TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. The majority of SPEs are formed in connection with securitization transactions. In a securitization transaction, assets from our balance sheet are transferred to an SPE, which then issues to investors various forms of interests in those assets and may also enter into derivative transactions. In a securitization transaction, we typically receive cash and/or other interests in an SPE as proceeds for the assets we transfer. Also, in certain transactions, we may retain the right to service the transferred receivables and to repurchase those receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing such receivables.

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In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:

  underwriting securities issued by SPEs and subsequently making markets in those securities;
  providing liquidity to support short-term obligations of SPEs issued to third party investors;
  providing credit enhancement to securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps;
  entering into other derivative contracts with SPEs;
  holding senior or subordinated interests in SPEs;
  acting as servicer or investment manager for SPEs; and
  providing administrative or trustee services to SPEs.

The SPEs we use are primarily either qualifying SPEs (QSPEs), which are not consolidated if the criteria described below are met, or variable interest entities (VIEs). To qualify as a QSPE, an entity must be passive and must adhere to significant limitations on the types of assets and derivative instruments it may own and the extent of activities and decision making in which it may engage. For example, a QSPE’s activities are generally limited to purchasing assets, passing along the cash flows of those assets to its investors, servicing its assets and, in certain transactions, issuing liabilities. Among other restrictions on a QSPE’s activities, a QSPE may not actively manage its assets through discretionary sales or modifications.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is the entity that, through its variable interests, absorbs the majority of a VIE’s variability. A variable interest is a contractual, ownership or other interest that changes with fluctuations in the fair value of the VIE’s net assets.

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The following table presents our significant continuing involvement with QSPEs and unconsolidated VIEs.
QUALIFYING SPECIAL PURPOSE ENTITIES AND UNCONSOLIDATED VARIABLE INTEREST ENTITIES
                                                 
   
    March 31, 2009     December 31, 2008  
    Total           Maximum     Total           Maximum  
    entity   Carrying   exposure     entity   Carrying   exposure  
(in millions)   assets   value   to loss     assets   value   to loss  
   

QSPEs

                                               
Residential mortgage loan securitizations
  $ 1,229,211     $ 32,143     $ 34,525     $ 1,144,775     $ 29,939     $ 31,438  
Commercial mortgage securitizations
    391,114       2,979       6,013       355,267       3,060       6,376  
Student loan securitizations
    2,776       220       220       2,765       133       133  
Auto loan securitizations
    3,580       115       115       4,133       115       115  
Other
    9,955       11       181       11,877       71       1,576  
 
                                   
Total QSPEs
  $ 1,636,636     $ 35,468     $ 41,054     $ 1,518,817     $ 33,318     $ 39,638  
 
                                   

Unconsolidated VIEs

                                               
CDOs
  $ 53,439     $ 15,603     $ 20,101     $ 48,802     $ 15,133     $ 20,443  
Wachovia administered ABCP (1) conduit
    9,894       --       10,092       10,767       --       15,824  
Asset-based lending structures
    15,158       8,939       10,256       11,614       9,096       9,482  
Tax credit structures
    27,197       4,162       5,040       22,882       3,850       4,926  
CLOs
    24,691       3,666       4,195       23,339       3,326       3,881  
Investment funds
    96,497       1,918       2,541       105,808       3,543       3,690  
Credit-linked note structures
    1,578       1,462       2,241       12,993       1,522       2,303  
Money market funds
    33,552       (9 )     51       31,843       60       101  
Other
    3,989       4,242       5,031       1,832       3,806       4,699  
 
                                   
Total unconsolidated VIEs
  $ 265,995     $ 39,983     $ 59,548     $ 269,880     $ 40,336     $ 65,349  
 
                                   
   
(1)   Asset-backed commercial paper.
The table above does not include SPEs and unconsolidated VIEs where our only involvement is in the form of investments in trading securities, investments in securities available for sale or loans underwritten by third parties, or administrative or trustee services. Also not included are investments accounted for in accordance with the AICPA Investment Company Audit Guide, investments accounted for under the cost method and investments accounted for under the equity method.
In the table above, the column titled “Total entity assets” represents the total assets of unconsolidated SPEs. “Carrying value” is the amount in our consolidated balance sheet related to our involvement with the unconsolidated SPEs. “Maximum exposure to loss” from our involvement with off-balance sheet entities is a required disclosure under generally accepted accounting principles and represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite its extremely remote possibility, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.
For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.

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We also have significant involvement with SPEs where the entity holding a majority of the voting interests consolidates the SPE. Wells Fargo Home Mortgage (Home Mortgage), in the ordinary course of business, originates a portion of its mortgage loans through unconsolidated joint ventures in which we own an interest of 50% or less. Loans made by these joint ventures are funded by Wells Fargo Bank, N.A. through an established line of credit and are subject to specified underwriting criteria. The total assets of these mortgage origination joint ventures were approximately $111 million and $46 million at March 31, 2009, and December 31, 2008, respectively. We provide liquidity to these joint ventures in the form of outstanding lines of credit and, at March 31, 2009, and December 31, 2008, these liquidity commitments totaled $128 million and $135 million, respectively.
We also hold interests in other unconsolidated joint ventures formed with unrelated third parties to provide efficiencies from economies of scale. A third party manages our real estate lending services joint ventures and provides customers with title, escrow, appraisal and other real estate-related services. Our fraud prevention services partnership facilitates the exchange of information between financial services organizations to detect and prevent fraud. Total assets of our real estate lending joint ventures and fraud prevention services partnership were approximately $150 million and $132 million at March 31, 2009, and December 31, 2008, respectively.

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RISK MANAGEMENT
CREDIT RISK MANAGEMENT PROCESS
Our credit risk management process provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes. We continually evaluate and modify our credit policies to address unacceptable levels of risk as they are identified.
Real Estate 1-4 Family Mortgage Loans
As part of the Wachovia acquisition, we acquired residential first and home equity loans that are very similar to the Wells Fargo core originated portfolio. We also acquired the Pick-a-Pay option ARM first mortgage portfolio. The nature of this product creates a potential opportunity for negative amortization. As part of our purchase accounting activities, the option ARM loans with the highest probability of default were identified as SOP 03-3. See “Pick-a-Pay Portfolio” in this Report for additional detail.
The deterioration in specific segments of the Home Equity portfolios required a targeted approach to managing these assets. A liquidating portfolio, consisting of home equity loans generated through third party wholesale channels not behind a Wells Fargo first mortgage, and home equity loans acquired through correspondents, was identified. While the $9.9 billion of loans in this liquidating portfolio represented about 1% of total loans outstanding at March 31, 2009, these loans represented some of the highest risk in the $128.9 billion Home Equity portfolios, with a loss rate of 9.27% compared with 2.09% 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 $119.1 billion at March 31, 2009, of which 97% was originated through the retail channel, and approximately 16% of the outstanding balance was in a first lien position. The table on the following page includes the credit attributes of these two portfolios.

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HOME EQUITY PORTFOLIO (1)
                                                 
   
                            % of loans                
                            two payments             Annualized  
    Outstanding balances     or more past due     loss rate (1)  
    Mar. 31 ,   Dec. 31 ,   Mar. 31 ,   Dec. 31 ,   Mar. 31 ,   Dec. 31 ,
(in millions)   2009     2008     2009     2008     2009     2008  
   

Core portfolio (2)(3)

                                               
California
  $ 31,784     $ 31,544       3.56 %     2.95 %     3.97 %     3.94 %
Florida
    12,067       11,781       3.73       3.36       2.03       4.39  
New Jersey
    8,086       7,888       1.58       1.41       0.45       0.78  
Virginia
    5,653       5,688       1.45       1.50       0.76       1.56  
Pennsylvania
    5,129       5,043       1.04       1.10       0.29       0.52  
Other
    56,342       56,415       2.06       1.97       1.59       1.59  
 
                                           
Total
    119,061       118,359       2.53       2.27       2.09       2.39  
 
                                           

Liquidating portfolio

                                               
California
    3,835       4,008       8.49       6.69       13.98       12.32  
Florida
    492       513       10.35       8.41       13.33       13.60  
Arizona
    233       244       8.37       7.40       15.04       13.19  
Texas
    179       191       1.40       1.27       2.66       1.67  
Minnesota
    122       127       3.88       3.79       6.92       5.25  
Other
    5,001       5,226       3.96       3.28       5.29       4.73  
 
                                           
Total
    9,862       10,309       6.10       4.93       9.27       8.27  
 
                                           
Total core and liquidating portfolios
  $ 128,923     $ 128,668       2.80       2.48       2.65       2.87  
 
                                           
   
(1)   Consists of real estate 1-4 family junior lien mortgages and lines of credit secured by real estate from all groups, excluding SOP 03-3 loans.
(2)   Loss rates for 2008 for the core portfolio in the table above reflect results for Wachovia (not included in the Wells Fargo reported results) and Wells Fargo. For fourth quarter 2008, the Wells Fargo core portfolio on a stand-alone basis, outstanding balances and related annualized loss rates were $29,399 million (3.81%) for California, $2,677 million (6.87%) for Florida, $1,925 million (1.29%) for New Jersey, $1,827 million (1.26%) for Virginia, $1,073 million (1.17%) for Pennsylvania, $38,934 million (1.77%) for all other states, and $75,835 million (2.71%) in total.
(3)   Includes equity lines of credit and closed end second liens associated with the Pick-a-Pay portfolio totaling $2.1 billion at March 31, 2009, and December 31, 2008. Related credit losses are reported separately with the Pick-a-Pay portfolio.
Pick-a-Pay Portfolio
We acquired the Pick-a-Pay loan portfolio from Wachovia. This is a liquidating portfolio as we stopped originating new Pick-a-Pay loans in 2008. At March 31, 2009, this portfolio, which excludes equity lines of credit, had an unpaid principal balance of $115.0 billion and a carrying value of $93.2 billion. The carrying value is net of $22.0 billion of purchase accounting net write-downs to reflect SOP 03-3 loans at fair value and a $215 million increase to reflect all other loans at a market rate of interest.
Pick-a-Pay loans are home mortgages on which the customer has the option each month to select from among four payment options: (1) a minimum payment as described below, (2) an interest-only payment, (3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment. Approximately 78% of the Pick-a-Pay portfolio has payment options calculated using a monthly adjustable interest rate; the rest of the portfolio is fixed rate.
The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The new minimum monthly payment amount usually cannot increase by more than 7.5% of the then-existing principal and interest payment amount. The minimum payment may not be sufficient to pay the monthly interest due and in those situations a loan on which the customer has made a minimum payment is subject to “negative amortization,” where unpaid interest is

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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.” Our Pick-a-Pay customers have been fairly constant in their utilization of the minimum payment option. At March 31, 2009, and December 31, 2008, customers representing 51% of the loan balances with the payment options feature elected the minimum payment option.
Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to or below 85% have a cap of 125% of the original loan balance, and these loans represent substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its principal cap, or the 10-year anniversary of the loan. There exists a small population of Pick-a-Pay loans for which recast occurs at the five-year anniversary. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.
Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012. In first quarter 2009, the amount of loans recast based on reaching the principal cap was de minimus. In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012. A payment change recast occurred on $4 million of loans during first quarter 2009.
Included in the Pick-a-Pay portfolio were loans accounted for under SOP 03-3 with a total unpaid principal balance of $61.6 billion and a carrying value of $39.7 billion at March 31, 2009. Loans that we acquired from Wachovia with evidence of credit quality deterioration since origination and for which it was probable at the date of the Wachovia acquisition that we will be unable to collect all contractually required payments are accounted for under SOP 03-3. SOP 03-3 requires that acquired credit-impaired loans be recorded at fair value and prohibits carrying over of the related allowance in the initial accounting.
The table on the following page reflects the geographic distribution of the Pick-a-Pay portfolio broken out between SOP 03-3 loans and all other loans. In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is a key metric in predicting future loan performance, including charge-offs. Because SOP 03-3 loans are carried at fair value, the carrying value LTV ratio for an SOP 03-3 loan will be lower as compared to the LTV based on the unpaid principal. For informational purposes, we have included the ratio of the carrying value to the current collateral value for SOP 03-3 loans in the following table.

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PICK-A-PAY PORTFOLIO
                                                         
   
    SOP 03-3 loans     All other loans  
                            Ratio of                    
                            carrying                    
  Unpaid     Current             value to   Unpaid     Current        
  principal     LTV   Carrying     current   principal     LTV   Carrying  
(in millions)   balance     ratio  (1)   value  (2)   value   balance     ratio  (1)   value  
   

March 31, 2009

                                                       

California

  $ 42,216       152 %   $ 26,907       98 %   $ 25,875       90 %   $ 25,979  
Florida
    6,260       129       3,779       79       5,412       92       5,433  
New Jersey
    1,750       101       1,271       74       3,358       76       3,372  
Texas
    475       76       336       54       2,204       60       2,213  
Arizona
    1,642       161       987       99       1,239       104       1,244  
Other states
    9,306       110       6,397       77       15,282       79       15,324  
 
                                               
Total Pick-a-Pay loans
  $ 61,649             $ 39,677             $ 53,370             $ 53,565  
 
                                               
   
(1)   Current LTV ratio is based on collateral values and is updated quarterly by an independent vendor. LTV ratio includes unpaid principal balance on equity lines of credit (included in the Home Equity Portfolio table on page 29 in this Report) that share common collateral and are junior to the above Pick-a-Pay loans.
(2)   Carrying value, which does not reflect the allowance for loan losses, includes purchase accounting adjustments, which, for SOP 03-3 loans, are a deduction of $25.9 billion nonaccretable difference and an addition of $3.9 billion accretable yield at March 31, 2009, and for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent charge-offs.
To maximize return and allow flexibility for customers to avoid foreclosure, we have in place several loss mitigation strategies for our Pick-a-Pay loan portfolio. We contact customers who are experiencing difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.
We also have in place proactive steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we will offer combinations of term extensions of up to 40 years, interest rate reductions, charge no interest on a portion of the principal for some period of time and, in geographies with substantial property value declines, we will even offer permanent principal reductions. We expect to continually reassess our loss mitigation strategies and may adopt additional strategies in the future.
Wells Fargo Financial
Wells Fargo Financial originates real estate secured debt consolidation loans, and both prime and non-prime auto secured loans, unsecured loans and credit cards.
Wells Fargo Financial had $28.8 billion and $29.1 billion in real estate secured loans at March 31, 2009, and December 31, 2008, respectively. Of this portfolio, $1.8 billion for each period is considered prime based on secondary market standards. The remaining portfolio is non-prime but has been originated with standards that effectively mitigate credit risk. It was originated through our retail channel with documented income, LTV limits based on credit quality and property characteristics, and risk-based pricing. In addition, the loans were originated without teaser rates, interest-only or negative amortization features. Credit losses in the portfolio have increased in the current economic environment compared with historical levels, but performance remained similar to prime portfolios in the industry with overall credit losses in first quarter 2009 of 2.39% (annualized) on the entire portfolio. Of the portfolio, $9.5 billion at

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March 31, 2009, was originated with customer FICO scores below 620, but these loans have further restrictions on LTV and debt-to-income ratios to limit the credit risk.
Wells Fargo Financial also had $21.6 billion and $23.6 billion in auto secured loans and leases at March 31, 2009, and December 31, 2008, respectively, of which $5.8 billion and $6.3 billion, respectively, were originated with customer FICO scores below 620. Net charge-offs in this portfolio in first quarter 2009 were 5.11% (annualized) for FICO scores of 620 and above, and 6.88% (annualized) for FICO scores below 620. Of this portfolio, $16.3 billion represented loans and leases originated through its indirect auto business, which Wells Fargo Financial ceased originating near the end of 2008.
Wells Fargo Financial had $7.9 billion and $8.4 billion in unsecured loans and credit card receivables at March 31, 2009, and December 31, 2008, respectively, of which $1.2 billion and $1.3 billion, respectively, was originated with customer FICO scores below 620. Net charge-offs in this portfolio in first quarter 2009 were 12.97% (annualized) for FICO scores of 620 and above, and 19.58% (annualized) for FICO scores below 620. Wells Fargo Financial has been actively tightening credit policies and managing credit lines to reduce exposure given current economic conditions.

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Nonaccrual Loans and Other Nonperforming Assets
The following table shows the comparative data for nonaccrual loans and other nonperforming assets. We generally place loans on nonaccrual status when:
  the full and timely collection of interest or principal becomes uncertain;
  they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages and auto loans) past due for interest or principal (unless both well-secured and in the process of collection); or
  part of the principal balance has been charged off.
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2008 Form 10-K describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
                         
   
    Mar. 31 , Dec. 31 , Mar. 31 ,
(in millions)   2009  (1)   2008  (1)   2008  
   

Nonaccrual loans:

                       
Commercial and commercial real estate:
                       
Commercial
  $ 1,696     $ 1,253     $ 588  
Other real estate mortgage
    1,324       594       152  
Real estate construction
    1,371       989       438  
Lease financing
    114       92       57  
 
                 
Total commercial and commercial real estate
    4,505       2,928       1,235  
Consumer:
                       
Real estate 1-4 family first mortgage (2)
    4,218       2,648       1,398  
Real estate 1-4 family junior lien mortgage
    1,418       894       381  
Other revolving credit and installment
    300       273       196  
 
                 
Total consumer
    5,936       3,815       1,975  
Foreign
    75       57       49  
 
                 
Total nonaccrual loans (3)
    10,516       6,800       3,259  
As a percentage of total loans
    1.25 %     0.79 %     0.84 %

Foreclosed assets:

                       
GNMA loans (4)
    768       667       578  
Other
    1,294       1,526       637  
Real estate and other nonaccrual investments (5)
    34       16       21  
 
                 
Total nonaccrual loans and other nonperforming assets
  $ 12,612     $ 9,009     $ 4,495  
 
                 

As a percentage of total loans

    1.50 %     1.04 %     1.16 %
 
                 
   
(1)   At March 31, 2009, and December 31, 2008, nonaccrual loans exclude loans acquired from Wachovia that are accounted for under SOP 03-3.
(2)   Includes nonaccrual mortgages held for sale.
(3)   Includes impaired loans of $4,126 million, $3,640 million and $859 million at March 31, 2009, December 31, 2008, and March 31, 2008, respectively. See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2008 Form 10-K for further information on impaired loans.
(4)   Consistent with regulatory reporting requirements, foreclosed real estate securing Government National Mortgage Association (GNMA) loans is classified as nonperforming. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs.
(5)   Includes real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if these assets were recorded as loans.
Total nonperforming assets were $12.6 billion (1.50% of total loans) at March 31, 2009, and included $10.5 billion of nonaccrual loans and $2.1 billion of foreclosed assets and repossessed real estate and vehicles. Nonaccrual loans increased $3.7 billion, or 46 basis points as a percentage of total loans, from December 31, 2008, with increases in both the commercial and retail segments. The increase included $1.5 billion related to Wachovia, which grew from a relatively low $97 million at year end as virtually all of the associated nonaccrual loans were no

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longer considered nonaccrual after applying required purchase accounting. Over 90% of nonaccrual loans are secured. The increases in nonaccrual loans were concentrated primarily in portfolios secured by real estate or with borrowers dependent on the housing industry.
The $2.1 billion increase in nonaccrual consumer loans from December 31, 2008, was due primarily to an increase of $884 million from Wachovia, $405 million in Wells Fargo Financial real estate, $383 million in Home Mortgage and $366 million from the legacy Wells Fargo Home Equity Group. Nonaccrual real estate 1-4 family loans included approximately $3.5 billion of loans at March 31, 2009, that have been modified. Our policy requires six consecutive months of payments on modified loans before they are returned to accrual status. Other foreclosed assets decreased $232 million to $1.3 billion at March 31, 2009, from $1.5 billion at December 31, 2008, which included $885 million from Wachovia. Until conditions improve in the residential real estate and liquidity markets, we will continue to hold more nonperforming assets on our balance sheet as it is currently the most economic option available. Increases in commercial nonperforming assets were also primarily a direct result of the conditions in the residential real estate markets and general consumer economy.
We expect nonperforming asset balances to continue to grow, reflecting an environment where retaining these assets is the most viable economic option, as well as our efforts to modify more real estate loans to reduce foreclosures and keep customers in their homes. We remain focused on proactively identifying problem credits, moving them to nonperforming status and recording the loss content in a timely manner. We have increased and will continue to increase staffing in our workout and collection organizations to ensure these troubled borrowers receive the attention and help they need. See “Financial Review – Allowance for Credit Losses” for additional discussion. The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors affecting a particular borrower.

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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 first mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual. Loans acquired from Wachovia that are subject to SOP 03-3 are excluded from the disclosure of loans 90 days or more past due and still accruing interest even though certain of them are 90 days or more contractually past due and they are considered to be accruing because the interest income on these loans relates to the establishment of an accretable yield in purchase accounting under the SOP and not to contractual interest payments.
The total of loans 90 days or more past due and still accruing was $14,736 million at March 31, 2009, $11,830 million at December 31, 2008, (Wachovia and Wells Fargo combined), and $6,919 million at March 31, 2008. The total included $9,509 million, $8,184 million and $5,288 million for the same periods, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools and similar loans whose repayments are insured by the FHA or guaranteed by the Department of Veterans Affairs.
The table below reflects loans 90 days or more past due and still accruing excluding the insured/guaranteed GNMA advances.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA AND SIMILAR LOANS)
                         
   
  Mar. 31 , Dec. 31 , Mar. 31 ,
(in millions)   2009     2008  (2)   2008  
   

Commercial and commercial real estate:

                       
Commercial
  $ 417     $ 218     $ 29  
Other real estate mortgage
    355       88       24  
Real estate construction
    624       232       15  
 
                 
Total commercial and commercial real estate
    1,396       538       68  
Consumer:
                       
Real estate 1-4 family first mortgage (1)
    1,361       883       314  
Real estate 1-4 family junior lien mortgage
    598       457       228  
Credit card
    738       687       449  
Other revolving credit and installment
    1,105       1,047       532  
 
                 
Total consumer
    3,802       3,074       1,523  
Foreign
    29       34       40  
 
                 
Total
  $ 5,227     $ 3,646     $ 1,631  
 
                 
   
(1)   Includes mortgage loans held for sale 90 days or more past due and still accruing.
(2)   The amount of real estate 1-4 family first and junior lien mortgage loan delinquencies as originally reported at December 31, 2008, included certain SOP 03-3 loans previously classified as nonaccrual by Wachovia. The December 31, 2008, amounts have been revised to exclude those loans.

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Net Charge-offs
Net charge-offs in first quarter 2009 were $3.3 billion (1.54% of average total loans outstanding, annualized), including $371 million in the Wachovia portfolio, compared with $2.8 billion (2.69%) in fourth quarter 2008 and $1.5 billion (1.60%) in first quarter 2008. Commercial and commercial real estate losses remained at relatively low levels reflecting the historically disciplined underwriting standards applied by Wells Fargo and the customer-relationship focus in this portfolio. Losses in residential real estate and credit cards rose modestly in the quarter, in line with expectations, while other credit losses, principally indirect auto, declined due to seasonality and our risk reduction actions in indirect auto over the last two years.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $391 million in first quarter 2009. These results included $310 million from legacy Wells Fargo, which increased $117 million linked quarter. Our relatively high-quality 1-4 family first mortgage portfolio continued to reflect relatively low loss rates although until housing prices fully stabilize, these credit results will continue to deteriorate. Credit card charge-offs increased $131 million linked quarter to $582 million in first quarter 2009, including $48 million relating to the $2.4 billion Wachovia portfolio. We continued to see increases in delinquency and loss levels in the consumer unsecured loan portfolios as a result of higher unemployment. Losses in the auto portfolio decreased $47 million linked quarter reflecting improvements from seasonality and portfolio balance reduction over the past several quarters.
Net charge-offs in the real estate 1-4 family junior lien portfolio of $847 million in first quarter 2009 included $801 million in the legacy Wells Fargo portfolio, which increased $99 million linked quarter as residential real estate values continued to be depressed. These results are not solely driven by declining home values. As more customers seek to modify their first mortgages, there may be an adverse effect on the credit performance of junior lien holders behind these modifications. More information about the Home Equity portfolio is available on page 29.
Commercial and commercial real estate net charge-offs of $697 million in first quarter 2009 included $667 million in the legacy Wells Fargo portfolio, down $175 million linked quarter, which included $294 million related to the customers of the Madoff investment firm. The linked-quarter trends also reflected a $100 million increase relating to our Business Direct portfolio while other commercial losses declined and remained at relatively low levels. Wholesale credit results continued to deteriorate. Commercial lending requests slowed during first quarter 2009 as borrowers reduced their receivable and inventory levels to conserve cash.

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Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date and excludes loans carried at fair value. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. It requires difficult, subjective and complex judgments, as a result of the need to make estimates about the effect of matters that are uncertain. See “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” in our 2008 Form 10-K for additional information.
We apply a consistent methodology to determine the allowance for credit losses, using both forecasted and historical loss trends, adjusted for underlying economic and market conditions. For individually graded (typically commercial) portfolios, we generally use loan-level credit quality ratings, which require knowledge about the borrower, industry and collateral value, combined with historically-based grade specific loss factors. For statistically managed portfolios (typically consumer), we generally leverage models which use credit-related characteristics such as delinquency rates and trends, vintages, and portfolio concentrations to estimate loss content. Additionally, individual commercial impaired loans greater than $5 million and troubled debt restructurings (TDRs) are reserved for individually. The level of the allowance for credit losses is affected by credit performance, changes in portfolio composition, and management’s assessment of the economic environment and related impact on underlying credit risk. While the allowance is built using product/business segment estimates, it is available to absorb losses for the entire loan portfolio.
At March 31, 2009, the allowance for loan losses totaled $22.3 billion (2.64% of total loans), compared with $21.0 billion (2.43%) at December 31, 2008, and $5.8 billion (Wells Fargo only) (1.50%) at March 31, 2008. The allowance for credit losses was $22.8 billion (2.71%) at March 31, 2009, $21.7 billion (2.51%) at December 31, 2008, and $6.0 billion (1.56%)(Wells Fargo only) at March 31, 2008. The allowance for credit losses at March 31, 2009, did not include any amounts related to credit-impaired loans acquired from Wachovia accounted for under SOP 03-3. The reserve for unfunded credit commitments was $565 million at March 31, 2009, $698 million at December 31, 2008, and $210 million at March 31, 2008.
Total provision expense in first quarter 2009 was $4.6 billion and included a credit reserve build of $1.3 billion. The $1.3 billion reserve build was primarily driven by two factors: (1) deterioration in economic conditions that increased the projected losses in our statistically managed portfolios, and (2) increases in specific reserves under FAS 114 for both commercial loans and TDRs. The increase in reserves for TDRs is associated with loan modification programs designed to keep qualifying borrowers in their homes. We anticipate further increases in TDR volumes as we continue to utilize government sponsored programs and other methods to minimize foreclosures and associated credit losses.
The application of SOP 03-3 to loans acquired from Wachovia affects net charge-offs and nonaccrual loans as described in “Loans” in this Report and, therefore, the allowance ratios associated with these measures should not be relied upon as a tool for determining adequacy of the allowance and should not be used to compare our allowance to peer banks or to compare our ratios for periods that include the application of SOP 03-3 to those that do not.

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The ratio of the allowance for credit losses to total nonaccrual loans was 217%, 319% and 185% at March 31, 2009, December 31, 2008, and March 31, 2008, respectively. The decrease in this ratio from December 31, 2008, was due to the 55% increase in nonaccrual loans. The increase in this ratio from a year ago reflects the addition of the Wachovia allowance for loan losses and the reduction of nonaccrual loans in the Wachovia portfolio resulting from the application of SOP 03-3.
The ratio of the allowance for credit losses to annualized net charge-offs was 173%, 191% and 97% for March 31, 2009, December 31, 2008, and March 31, 2008, respectively. The increase in this ratio from a year ago is largely a function of increased loss expectations. The decrease from December 31, 2008, is directly related to the addition of Wachovia charge-offs in first quarter 2009. Loan losses for the quarter excluded those losses from SOP 03-3 loans as these loans have already been reduced to their fair value, the result being significantly lower losses on the balance of the portfolio.
We believe the allowance for credit losses of $22.8 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2009. 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. We may need to significantly adjust the allowance for credit losses, considering current factors at the time, including economic or market conditions and ongoing internal and external examination processes. Our process for determining the adequacy of the allowance for credit losses is discussed in “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2008 Form 10-K.

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ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee (Corporate ALCO) – which oversees these risks and reports periodically to the Finance Committee of the Board of Directors – consists of senior financial and business executives. Each of our principal business groups has individual asset/liability management committees and processes linked to the Corporate ALCO process.
Interest Rate Risk
Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We are subject to interest rate risk because:
  assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally falling, earnings will initially decline);
  assets and liabilities may reprice at the same time but by different amounts (for example, when the general level of interest rates is falling, we may reduce rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates);
  short-term and long-term market interest rates may change by different amounts (for example, the shape of the yield curve may affect new loan yields and funding costs differently); or
  the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in the securities available-for-sale portfolio may prepay significantly earlier than anticipated – which could reduce portfolio income).
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage origination volume, the fair value of MSRs and other financial instruments, the value of the pension liability and other items affecting earnings.
We assess interest rate risk by comparing our most likely earnings plan with various earnings simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, as of March 31, 2009, our most recent simulation indicated estimated earnings at risk of approximately 4% of our most likely earnings plan using a scenario in which the federal funds rate rises to 2.75% and the 10-year Constant Maturity Treasury bond yield rises to 3.45% by the end of 2009. 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 “Mortgage Banking Interest Rate and Market Risk” in this Report.

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We use exchange-traded and over-the-counter interest rate derivatives to hedge our interest rate exposures. The notional or contractual amount and fair values of these derivatives as of March 31, 2009, and December 31, 2008, are presented in Note 12 (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 mortgages held for sale.
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity in the nonconforming secondary markets, our mortgage banking revenue growth continued to be positive, reflecting the complementary origination and servicing strengths of the business. The secondary market for agency-conforming mortgages functioned well during the quarter. The mortgage warehouse and pipeline, which predominantly consists of prime mortgage loans, incurred a $39 million liquidity related write-down in first quarter 2009. In addition, we further reduced mortgage origination gains by $78 million in first quarter 2009, primarily to reflect an increase to the repurchase reserve for higher projected losses due to the continuing deterioration in the housing market.
Interest rate and market risk can be substantial in the mortgage business. Changes in interest rates may potentially impact total origination and servicing fees, the value of our residential MSRs measured at fair value, the value of mortgages held for sale (MHFS) and the associated income and loss reflected in mortgage banking noninterest income, the income and expense associated with instruments (economic hedges) used to hedge changes in the fair value of MSRs and MHFS, and the value of derivative loan commitments (interest rate “locks”) extended to mortgage applicants.
Interest rates impact the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees and may also lead to an increase in servicing fee income, depending on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time

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required for processing a new application, providing the commitment, and securitizing and selling the loan, interest rate changes will impact origination and servicing fees with a lag. The amount and timing of the impact on origination and servicing fees will depend on the magnitude, speed and duration of the change in interest rates.
Under FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, which we adopted January 1, 2007, we elected to measure MHFS at fair value prospectively for new prime MHFS originations for which an active secondary market and readily available market prices existed to reliably support fair value pricing models used for these loans. At December 31, 2008, we elected to measure at fair value similar MHFS acquired from Wachovia. Loan origination fees on these loans are recorded when earned, and related direct loan origination costs and fees are recognized when incurred. We also elected to measure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe that the election for new prime MHFS and other interests held (which are now hedged with free-standing derivatives (economic hedges) along with our MSRs) reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. During 2008 and in first quarter 2009, in response to continued secondary market illiquidity, we continued to originate certain prime non-agency loans to be held for investment for the foreseeable future rather than to be held for sale.
Under FAS 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140, we elected to use the fair value measurement method to initially measure and carry our residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are recorded at fair value at the time we sell or securitize the related mortgage loans. The carrying value of MSRs reflects changes in fair value at the end of each quarter and changes are included in net servicing income, a component of mortgage banking noninterest income. If the fair value of the MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs and periodically benchmark our estimates to independent appraisals. The valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable. Changes in interest rates influence a variety of significant assumptions included in the periodic valuation of MSRs, including prepayment speeds, expected returns and potential risks on the servicing asset portfolio, the value of escrow balances and other servicing valuation elements.
A decline in interest rates generally increases the propensity for refinancing, reduces the expected duration of the servicing portfolio and therefore reduces the estimated fair value of MSRs. This reduction in fair value causes a charge to income (net of any gains on free-standing derivatives (economic hedges) used to hedge MSRs). We may choose not to fully hedge all of the potential decline in the value of our MSRs resulting from a decline in interest rates because the potential increase in origination/servicing fees in that scenario provides a partial “natural business hedge.” An increase in interest rates generally reduces the propensity for refinancing, extends the expected duration of the servicing portfolio and therefore increases the estimated fair value of the MSRs. However, an increase in interest rates can also reduce mortgage loan demand and therefore reduce origination income. In first quarter 2009, a $2.8 billion decrease in the fair value of our MSRs and $3.7 billion of gains on free-standing derivatives used to hedge the MSRs resulted in a net gain of $875 million.

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Hedging the various sources of interest rate risk in mortgage banking is a complex process that requires sophisticated modeling and constant monitoring. While we attempt to balance these various aspects of the mortgage business, there are several potential risks to earnings:
  MSRs valuation changes associated with interest rate changes are recorded in earnings immediately within the accounting period in which those interest rate changes occur, whereas the impact of those same changes in interest rates on origination and servicing fees occur with a lag and over time. Thus, the mortgage business could be protected from adverse changes in interest rates over a period of time on a cumulative basis but still display large variations in income from one accounting period to the next.
  The degree to which the “natural business hedge” offsets changes in MSRs valuations is imperfect, varies at different points in the interest rate cycle, and depends not just on the direction of interest rates but on the pattern of quarterly interest rate changes.
  Origination volumes, the valuation of MSRs and hedging results and associated costs are also impacted by many factors. Such factors include the mix of new business between ARMs and fixed-rated mortgages, the relationship between short-term and long-term interest rates, the degree of volatility in interest rates, the relationship between mortgage interest rates and other interest rate markets, and other interest rate factors. Many of these factors are hard to predict and we may not be able to directly or perfectly hedge their effect.
  While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in the value of ARMs production held for sale from changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR index-based financial instruments used as economic hedges for such ARMs.
The total carrying value of our residential and commercial MSRs was $13.6 billion at March 31, 2009, and $16.2 billion at December 31, 2008. The weighted-average note rate on the owned servicing portfolio was 5.83% at March 31, 2009, and 5.92% at December 31, 2008. Our total MSRs were 0.74% of mortgage loans serviced for others at March 31, 2009, compared with 0.87% at December 31, 2008.
As part of our mortgage banking activities, we enter into commitments to fund residential mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate lock that binds us to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. These loan commitments are derivative loan commitments if the loans that will result from the exercise of the commitments will be held for sale. These derivative loan commitments are recognized at fair value in the balance sheet with changes in their fair values recorded as part of mortgage banking noninterest income. We were required by Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings, to include at inception and during the life of the loan commitment, the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of derivative loan commitments. Changes subsequent to inception are based on changes in fair value of the underlying loan resulting from the exercise of the commitment and changes in the probability that the loan will not fund within the terms of the commitment (referred to as a fall-out factor). The value of the underlying loan commitment is affected primarily by changes in interest rates and the passage of time.

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Outstanding derivative loan commitments expose us to the risk that the price of the mortgage loans underlying the commitments might decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. To minimize this risk, we utilize forwards and options, Eurodollar futures and options, and Treasury futures, forwards and option contracts as economic hedges against the potential decreases in the values of the loans. We expect that these derivative financial instruments will experience changes in fair value that will either fully or partially offset the changes in fair value of the derivative loan commitments. However, changes in investor demand, such as concerns about credit risk, can also cause changes in the spread relationships between underlying loan value and the derivative financial instruments that cannot be hedged.
Market Risk – Trading Activities
From a market risk perspective, our net income is exposed to changes in interest rates, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The primary purpose of our trading businesses is to accommodate customers in the management of their market price risks. Also, we take positions based on market expectations or to benefit from price differences between financial instruments and markets, subject to risk limits established and monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions and derivatives used in our trading businesses are carried at fair value. The Institutional Risk Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated net fair value of all customer accommodation derivatives at March 31, 2009, and December 31, 2008, are included in Note 12 (Derivatives) to Financial Statements in this Report. Open “at risk” positions for all trading business are monitored by Corporate ALCO.
The standardized approach for monitoring and reporting market risk for the trading activities consists of value-at-risk (VAR) metrics complemented with factor analysis and stress testing. VAR measures the worst expected loss over a given time interval and within a given confidence interval. We measure and report daily VAR at a 99% confidence interval based on actual changes in rates and prices over the past 250 trading days. The analysis captures all financial instruments that are considered trading positions. The average one-day VAR throughout first quarter 2009 was $103 million, with a lower bound of $83 million and an upper bound of $130 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 of Directors (the Board). The Board’s policy is to review business developments, key risks and historical returns for the private equity investment portfolio at least annually. Management reviews the valuations of these investments at least quarterly and assesses them for possible other-than-temporary impairment. For nonmarketable investments, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment’s cash flows and capital needs, the viability of its business model and our exit strategy. Nonmarketable investments included private

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equity investments of $2.59 billion and $2.71 billion and principal investments of $1.27 billion and $1.28 billion at March 31, 2009, and December 31, 2008, respectively. Private equity investments are carried at cost subject to other-than-temporary impairment. Principal investments are carried at fair value with net unrealized gains and losses reported in noninterest income.
We also have marketable equity securities in the securities available-for-sale portfolio, including securities relating to our venture capital activities. We manage these investments within capital risk limits approved by management and the Board and monitored by Corporate ALCO. Gains and losses on these securities are recognized in net income when realized and periodically include other-than-temporary impairment charges. The fair value of marketable equity securities was $5.18 billion and cost was $5.83 billion at March 31, 2009, and $6.14 billion and $6.30 billion, respectively, at December 31, 2008.
Changes in equity market prices may also indirectly affect our net income by affecting (1) the value of third party assets under management and, hence, fee income, (2) particular borrowers whose ability to repay principal and/or interest may be affected by the stock market, or (3) brokerage activity, related commission income and other business activities. Each business line monitors and manages these indirect risks.

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Liquidity and Funding
The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Corporate ALCO establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. We set these guidelines for both the consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.
Debt securities in the securities available-for-sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks and federal funds sold, securities purchased under resale agreements and other short-term investments. Asset liquidity is further enhanced by our ability to sell or securitize loans in secondary markets and to pledge loans to access secured borrowing facilities through the Federal Home Loan Banks, the Federal Reserve Board or the United States Department of the Treasury (Treasury Department).
Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. Additional funding is provided by long-term debt (including trust preferred securities), other foreign deposits and short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).
Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding through issuances of registered debt securities, private placements and asset-backed secured funding. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, and level and quality of earnings. Material changes in these factors could result in a different debt rating; however, a change in debt rating would not cause us to violate any of our debt covenants. Wells Fargo Bank, N.A. is rated “Aa2,” by Moody’s Investors Service, and “AA+,” by Standard & Poor’s Rating Services.
Wells Fargo is participating in the Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program (TLGP). The TLGP has two components: the Debt Guarantee Program, which provides a temporary guarantee of newly issued senior unsecured debt issued by eligible entities; and the Transaction Account Guarantee Program, which provides a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC insured institutions. Under the Debt Guarantee Program, we had $88.2 billion of remaining capacity to
issue guaranteed debt as of March 31, 2009. Eligible entities are assessed fees payable to the FDIC for coverage under the program. This assessment is in addition to risk-based deposit insurance assessments currently imposed under FDIC rules and regulations.
Federal Home Loan Bank Membership
We are a member of the Federal Home Loan Bank of Atlanta, the Federal Home Loan Bank of Dallas, the Federal Home Loan Bank of Des Moines and the Federal Home Loan Bank of San Francisco (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a

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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.
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 2006, the Parent’s registration statement with the SEC for issuance of senior and subordinated notes, preferred stock and other securities became effective. The Parent’s ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. The Parent is currently authorized by the Board to issue $60 billion in outstanding short-term debt and $170 billion in outstanding long-term debt, subject to a total outstanding debt limit of $230 billion. At March 31, 2009, the Parent had outstanding debt under these authorities of $15.7 billion, $133.9 billion and $149.6 billion, respectively. During first quarter 2009, the Parent issued a total of $3.5 billion in registered senior notes guaranteed by the FDIC. We used the proceeds from securities issued in first quarter 2009 for general corporate purposes and expect that the proceeds from securities issued in the future will also be used for general corporate purposes. The Parent also issues commercial paper from time to time, subject to its short-term debt limit.
Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is authorized by its board of directors to issue $100 billion in outstanding short-term debt and $50 billion in outstanding long-term debt. In December 2007, Wells Fargo Bank, N.A. established a $100 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $50 billion in outstanding short-term senior notes and $50 billion in long-term senior or subordinated notes. During first quarter 2009, Wells Fargo Bank, N.A. issued $7.5 billion in short-term notes. At March 31, 2009, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $45.7 billion in short-term senior notes and $46.4 billion in long-term senior or subordinated notes, respectively. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations.
Wachovia Bank, N.A. Wachovia Bank, N.A. had $49.0 billion available for issuance under a global note program at March 31, 2009. Wachovia Bank, N.A. also has a $25 billion Euro medium-term note program (EMTN) under which it may issue senior and subordinated debt securities. These securities are not registered with the SEC and may not be offered in the U.S. without applicable exemptions from registration. Under the EMTN, Wachovia Bank, N.A. had up to $22.4 billion available for issuance at March 31, 2009. In addition, Wachovia Bank, N.A. has an A$10 billion Australian medium-term note program (AMTN), under which it may issue senior and subordinated debt securities. These securities are not registered with the SEC and may not be offered in the U.S. without applicable exemptions from registration. Up to A$8.5 billion was available for issuance at March 31, 2009.

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Wells Fargo Financial. In February 2008, Wells Fargo Financial Canada Corporation (WFFCC), an indirect wholly-owned Canadian subsidiary of the Parent, qualified with the Canadian provincial securities commissions CAD$7.0 billion in medium-term notes for distribution from time to time in Canada. At March 31, 2009, CAD$6.5 billion remained available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.
CAPITAL MANAGEMENT
We have an active program for managing stockholder capital. We use capital to fund organic growth, acquire banks and other financial services companies, pay dividends and repurchase our shares. Our objective is to produce above-market long-term returns by opportunistically using capital when returns are perceived to be high and issuing/accumulating capital when such costs are perceived to be low.
From time to time the Board of Directors authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for acquisitions and employee benefit plans, market conditions (including the trading price of our stock), and legal considerations. These factors can change at any time, and there can be no assurance as to the number of shares we will repurchase or when we will repurchase them.
In 2007, the Board authorized the repurchase of up to 200 million additional shares of our outstanding common stock and, in September 2008, the repurchase of up to 25 million additional shares. During first quarter 2009, we repurchased approximately 2 million shares of our common stock. At March 31, 2009, the total remaining common stock repurchase authority was approximately 12 million shares. For additional information regarding share repurchases and repurchase authorizations, see Part II Item 2 of this Report.
Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities Exchange Act including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.
Our potential sources of capital include retained earnings and issuances of common and preferred stock. In first quarter 2009, retained earnings increased $406 million, a major portion from Wells Fargo net income of $3.05 billion, less common and preferred dividends and accretion of $2.10 billion. In first quarter 2009, we issued approximately 35 million shares, or $543 million, of common stock (including shares issued for our ESOP plan) under various employee benefit and director plans and under our dividend reinvestment and direct stock repurchase programs.

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On October 28, 2008, at the request of the Treasury Department and pursuant to a Letter Agreement and related Securities Purchase Agreement dated October 26, 2008 (the Securities Purchase Agreements), we issued to the Treasury Department 25,000 shares of a new class of Wells Fargo’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value, having a liquidation amount per share equal to $1,000,000, for a total price of $25 billion. We pay cumulative dividends on the preferred securities at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Unless permitted under the provisions of the American Recovery and Reinvestment Act of 2009, we may not redeem the preferred securities during the first three years except with the proceeds from a “qualifying equity offering.” After three years, we may, at our option, redeem the preferred securities at par value plus accrued and unpaid dividends. The preferred securities are generally non-voting. Prior to October 28, 2011, unless we have redeemed the preferred securities or the Treasury Department has transferred the preferred securities to a third party, the consent of the Treasury Department will be required for us to increase our common stock dividend or repurchase our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreements. The terms of the Treasury Department’s purchase of the preferred securities include certain restrictions on certain forms of executive compensation and limits on the tax deductibility of compensation we pay to executive management. As part of its purchase of the preferred securities, the Treasury Department also received warrants to purchase 110,261,688 shares of our common stock at an initial per share exercise price of $34.01, subject to customary anti-dilution provisions. The warrants expire ten years from the issuance date. Both the preferred securities and warrants are accounted for as components of Tier 1 capital.
In March 2009, we reduced our common stock dividend by 85% to $0.05 per share, enhancing our ability to build capital.
At March 31, 2009, the Company and each of our subsidiary banks were “well capitalized” under the applicable regulatory capital adequacy guidelines. For additional information see Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.
On May 7, 2009, the Federal Reserve confirmed that under its adverse stress test scenario the Company’s Tier 1 capital exceeded the minimum level needed for well-capitalized institutions. In conjunction with the stress test, the Company has agreed with the Federal Reserve to increase common equity by $13.7 billion by November 9, 2009. On May 8, 2009, the Company agreed to issue 341 million shares of its common stock at a price of $22 per share. Also on May 8, 2009, the underwriters in the offering exercised their option to purchase up to an additional 51.15 million shares of common stock from the Company at $22 per share to cover over-allotments. The Company will receive net proceeds of $8.4 billion from the offering including the exercise of the over-allotment option. The Company expects to satisfy the remainder of the capital requirement through profits and other internally generated sources. The Company can satisfy any part of the capital requirement by exchanging up to $13.7 billion of its $25 billion of Capital Purchase Program (CPP) funds for the Treasury’s Capital Assistance Program (CAP) on a dollar-for-dollar basis.

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Tangible Common Equity
We strengthened our capital position in first quarter 2009. Tangible common equity (TCE) was $41.1 billion at quarter end, an increase of $4.5 billion. The ratio of TCE to tangible assets was 3.28%, up from 2.86% at December 31, 2008. TCE was 3.84% of risk-weighted assets. At March 31, 2009, Tier 1 capital was $89.0 billion and the Tier 1 capital ratio was 8.30%, up from 7.84% at December 31, 2008.
                                     
   
        Quarter ended  
                Mar. 31 ,           Dec. 31 ,
(in billions)               2009             2008  
   

Total equity

              $ 107.1             $ 102.3  
Less:  Preferred equity
                (30.9 )             (30.8 )
Goodwill and intangible assets (other than MSRs)
      $ (38.5 )           $ (38.1 )        
Applicable deferred taxes
        5.7               5.6          
 
                               
Goodwill and intangible assets, net of deferred taxes
                (32.8 )             (32.5 )
Noncontrolling interests
                (2.3 )             (2.4 )
 
                               
Tangible common equity (1)
  (A)           $ 41.1             $ 36.6  
 
                               

Total assets

              $ 1,285.9             $ 1,309.6  
Less:  Goodwill and intangible assets, net of deferred taxes
                (32.8 )             (32.5 )
 
                               
Tangible assets
  (B)           $ 1,253.1             $ 1,277.1  
 
                               

Tangible common equity ratio

  (A)/(B)             3.28 %             2.86 %
 
                               

Total risk-weighted assets (2)

  (C)           $ 1,071.5             $ 1,101.3  
 
                               

Tangible common equity to total risk-weighted assets

  (A)/(C)             3.84 %             3.32 %
 
                               
   
(1)   Tangible common equity, a non-GAAP financial measure, includes total equity, less preferred equity, goodwill and intangible assets (excluding MSRs), net of related deferred taxes, and the portion of noncontrolling interests accounted for under FAS 160 that does not have risk sharing attributes similar to common equity. Management reviews tangible common equity along with other measures of capital as part of its financial analyses and has included this information because of current interest on the part of market participants in tangible common equity as a measure of capital. The methodology of determining tangible common equity may differ among companies.
(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.
RISK FACTORS
An investment in the Company involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. We discuss in this Report, as well as in other documents we file with the SEC, risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in the Company. We refer you to the Financial Review section and Financial Statements (and related Notes) in this Report for more information about credit, interest rate, market and litigation risks, to the “Risk Factors” and “Regulation and Supervision” sections and Note 15 (Guarantees and Legal Actions) to Financial Statements in our 2008 Form 10-K for a detailed discussion of risk factors, and to the discussion below that supplements the “Risk Factors” section of the 2008 Form 10-K. Any factor described in this Report or in our 2008 Form 10-K could by itself, or together with other factors, adversely affect our financial results and condition. There are factors not discussed below or elsewhere in this Report that could adversely affect our financial results and condition.

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In accordance with the Private Securities Litigation Reform Act of 1995, we caution you that one or more of these same risk factors could cause actual results to differ significantly from projections or forecasts of our financial results and condition and expectations for our operations and business that we make in forward-looking statements in this Report and in presentations and other Company communications. We make forward-looking statements when we use words such as “believe,” “expect,” “anticipate,” “estimate,” “project,” “forecast,” “will,” “may,” “can” and similar expressions. Do not unduly rely on forward-looking statements, as actual results could differ significantly. Forward-looking statements speak only as of the date made, and we do not undertake to update them to reflect changes or events that occur after that date that may affect whether those forecasts and expectations continue to reflect management’s beliefs or the likelihood that the forecasts and expectations will be realized.
In this Report we make forward-looking statements that:
  we believe our allowance for credit losses at March 31, 2009, was adequate to cover expected consumer losses for at least the next 12 months and to provide approximately 24 months of anticipated loss coverage for the commercial and commercial real estate portfolios;
  we expect to generate $5 billion of annual merger-related expense savings, which will begin to emerge in the second quarter and are expected to be fully realized upon completion of the integration;
  we expect total integration expense to be substantially less than our original estimate of $7.9 billion and to be spread over the integration period rather than all by year-end 2009;
  we expect additional efficiency initiatives to lower expenses over the remainder of 2009;
  we expect to satisfy the remaining capital requirement relating to the recently completed stress test through profits and other internally generated sources;
  losses on the combined Wells Fargo and Wachovia loan portfolios will increase as long as the U.S. economy remains weak;
  we believe actions described in this Report that we have taken to reduce credit risk better position us for continued deterioration and economic headwinds;
  to the extent the market does not recover, the residential mortgage business could continue to have increased loss severity on repurchases, causing future increases in the repurchase reserve;
  we could have significant losses on unsaleable loans until the housing market recovers;
  we will continue to hold more nonperforming assets on our balance sheet until conditions improve in the residential real estate and liquidity markets;
  we expect nonperforming asset balances to continue to grow;
  charge-offs on Wachovia loans accounted for under SOP 03-3 are not expected to reduce income in future periods to the extent the original estimates used to determine the purchase accounting adjustments continue to be accurate;
  we expect changes in the fair value of derivative financial instruments used to hedge outstanding derivative loan commitments will fully or partially offset the changes in fair value of the commitments;
  we expect that $34 million of deferred net loss on derivatives in other comprehensive income at March 31, 2009, will be reclassified as earnings during the next twelve months;
  we do not expect that we will be required to make a minimum contribution in 2009 for the Cash Balance Plan; and

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  we expect actions taken with respect to the Wells Fargo qualified and supplemental Cash Balance Plans and the Wachovia Pension Plan will reduce pension cost by approximately $330 million in 2009.
Several factors could cause actual results to differ significantly from expectations including:
  current economic and market conditions;
  our capital requirements and ability to raise capital on favorable terms;
  the terms of capital investments or other financial assistance provided by the U.S. government;
  legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;
  our ability to successfully integrate the Wachovia merger and realize the expected cost savings and other benefits;
  our ability to realize the recently announced efficiency initiatives to lower expenses when and in the amount expected;
  the adequacy of our allowance for credit losses;
  recognition of other-than-temporary impairment on securities held in our available-for-sale portfolio;
  the effect of changes in interest rates on our net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
  hedging gains or losses; disruptions in the capital markets and reduced investor demand for mortgages loans;
  our ability to sell more products to our customers;
  the effect of the economic recession on the demand for our products and services;
  the effect of the fall in stock market prices on 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;
  mergers and acquisitions;
  federal and state regulations;
  reputational damage from negative publicity, fines, penalties and other negative consequences from regulatory violations;
  the loss of checking and saving account deposits to other investments such as the stock market; and
  fiscal and monetary policies of the Federal Reserve Board.
There is no assurance that our allowance for credit losses will be adequate to cover future credit losses, especially if credit markets, housing prices and unemployment do not stabilize. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially adversely affect our financial results and condition.

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The following risk factors supplement the discussion under “Risk Factors” contained in our 2008 Form 10-K.
The Company’s participation in government programs to modify first and second lien mortgage loans could adversely affect the amount and timing of the Company’s earnings and credit losses relating to those loans.
The Treasury Department recently announced guidelines for its first and second lien modification programs under its Making Home Affordable Program. Participation in the programs could result in a reduction in the principal balances of real estate 1-4 family first and second lien mortgage loans held by the Company and the acceleration of loss recognition on those loans. In addition to the principal reduction aspect of the programs, loan modification efforts can impact the interest rate and term of these loans which would have a correlated impact to total return on those assets and timing of those returns. Participation in the programs as a servicer could reduce servicing income to the extent the principal balance of a serviced loan is reduced or because it increases the cost of servicing a loan.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
As described under “Capital Management,” in connection with the completion of the Supervisory Capital Assessment Program, we have agreed with our federal banking regulators to increase our Tier 1 common equity by $13.7 billion by November 9, 2009. In addition to the 392.15 million shares of our common stock sold on May 8, 2009, we currently expect to increase our Tier 1 common equity through profits and other internally generated sources. Although not currently contemplated, we could also achieve any portion of the required increase in our Tier 1 common equity by exchanging (with the approval of the Department of the Treasury) a number of shares of the Series D Preferred Stock we issued to the Department of the Treasury under the Capital Purchase Program for shares of our mandatory convertible preferred stock under the Department of the Treasury’s Capital Assistance Program, or for common stock or another common equivalent security that the Department of the Treasury otherwise agrees to purchase, directly or indirectly. Such an exchange could also involve the issuance of warrants to the Department of the Treasury to purchase additional shares of our common stock as contemplated by the published terms of the Capital Assistance Program. The issuance of additional shares of common stock or common equivalent securities in future equity offerings, to the Department of the Treasury under the Capital Assistance Program or otherwise will dilute the ownership interest of our existing common stockholders. There can be no assurances that we will not in the future determine that it is advisable, or that we will not encounter circumstances where we determine it is necessary, to issue additional shares of common stock or common equivalent securities to fund strategic initiatives or other business needs or to build additional capital. The market price of our common stock could decline as a result of such offerings, as well as other sales of a large block of shares of our common stock or similar securities, including warrants, in the market thereafter, or the perception that such sales could occur.

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CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of March 31, 2009, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2009.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:
  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;
  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
On December 31, 2008, the Company completed its acquisition of Wachovia. The Company considers the acquisition reasonably likely to materially affect its internal control over financial reporting. The Company has extended its internal control oversight and monitoring processes to include Wachovia. Except as described above for the Wachovia acquisition, no change occurred during first quarter 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
                 
   
    Quarter ended March 31 ,
(in millions, except per share amounts)   2009     2008  
   

INTEREST INCOME

               
Trading assets
  $ 266     $ 47  
Securities available for sale
    2,709       1,132  
Mortgages held for sale
    415       394  
Loans held for sale
    67       12  
Loans
    10,765       7,212  
Other interest income
    91       52  
 
           
Total interest income
    14,313       8,849  
 
           

INTEREST EXPENSE

               
Deposits
    999       1,594  
Short-term borrowings
    123       425  
Long-term debt
    1,779       1,070  
Other interest expense
    36       --  
 
           
Total interest expense
    2,937       3,089  
 
           

NET INTEREST INCOME

    11,376       5,760  
Provision for credit losses
    4,558       2,028  
 
           
Net interest income after provision for credit losses
    6,818       3,732  
 
           

NONINTEREST INCOME

               
Service charges on deposit accounts
    1,394       748  
Trust and investment fees
    2,215       763  
Card fees
    853       558  
Other fees
    901       499  
Mortgage banking
    2,504       631  
Insurance
    581       504  
Net gains (losses) on debt securities available for sale (includes impairment losses of $269, consisting of $603 of total other-than-temporary impairment losses, net of $334 recognized in other comprehensive income, for the quarter ended March 31, 2009)
    (119 )     323  
Net gains (losses) from equity investments
    (157 )     313  
Other
    1,469       464  
 
           
Total noninterest income
    9,641       4,803  
 
           

NONINTEREST EXPENSE

               
Salaries
    3,386       1,984  
Commission and incentive compensation
    1,824       644  
Employee benefits
    1,284       587  
Equipment
    687       348  
Net occupancy
    796       399  
Core deposit and other intangibles
    647       46  
FDIC and other deposit assessments
    338       8  
Other
    2,856       1,426  
 
           
Total noninterest expense
    11,818       5,442  
 
           

INCOME BEFORE INCOME TAX EXPENSE

    4,641       3,093  
Income tax expense
    1,552       1,074  
 
           

NET INCOME BEFORE NONCONTROLLING INTERESTS

    3,089       2,019  
Less: Net income from noncontrolling interests
    44       20  
 
           

WELLS FARGO NET INCOME

  $ 3,045     $ 1,999  
 
           

WELLS FARGO NET INCOME APPLICABLE TO COMMON STOCK

  $ 2,384     $ 1,999  
 
           

EARNINGS PER COMMON SHARE

  $ 0.56     $ 0.61  

DILUTED EARNINGS PER COMMON SHARE

  $ 0.56     $ 0.60  

DIVIDENDS DECLARED PER COMMON SHARE

  $ 0.34     $ 0.31  

Average common shares outstanding

    4,247.4       3,302.4  
Diluted average common shares outstanding
    4,249.3       3,317.9  
   
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
                         
   
    March 31 ,   December 31 ,   March 31 ,
(in millions, except shares)   2009     2008     2008  
   

ASSETS

                       
Cash and due from banks
  $ 22,186     $ 23,763     $ 13,146  
Federal funds sold, securities purchased under
resale agreements and other short-term investments
    18,625       49,433       4,171  
Trading assets
    46,497       54,884       8,893  
Securities available for sale
    178,468       151,569       81,787  
Mortgages held for sale (includes $35,205, $18,754 and $27,927 carried at fair value)
    36,807       20,088       29,708  
Loans held for sale (includes $114 and $398 carried at fair value at March 31, 2009, and December 31, 2008)
    8,306       6,228       813  

Loans

    843,579       864,830       386,333  
Allowance for loan losses
    (22,281 )     (21,013 )     (5,803 )
 
                 
Net loans
    821,298       843,817       380,530  
 
                 

Mortgage servicing rights:

                       
Measured at fair value (residential MSRs)
    12,391       14,714       14,956  
Amortized
    1,257       1,446       455  
Premises and equipment, net
    11,215       11,269       5,056  
Goodwill
    23,825       22,627       13,148  
Other assets
    105,016       109,801       42,558  
 
                 

Total assets

  $ 1,285,891     $ 1,309,639     $ 595,221  
 
                 

LIABILITIES

                       
Noninterest-bearing deposits
  $ 166,497     $ 150,837     $ 90,793  
Interest-bearing deposits
    630,772       630,565       267,351  
 
                 
Total deposits
    797,269       781,402       358,144  
Short-term borrowings
    72,084       108,074       53,983  
Accrued expenses and other liabilities
    58,831       50,689       31,480  
Long-term debt
    250,650       267,158       103,175  
 
                 

Total liabilities

    1,178,834       1,207,323       546,782  
 
                 

EQUITY

                       
Wells Fargo stockholders’ equity:
                       
Preferred stock
    31,411       31,332       837  
Common stock – $1-2/3 par value, authorized 6,000,000,000 shares; issued 4,363,921,429 shares, 4,363,921,429 shares and 3,472,762,050 shares
    7,273       7,273       5,788  
Additional paid-in capital
    32,414       36,026       8,259  
Retained earnings
    36,949       36,543       39,896  
Cumulative other comprehensive income (loss)
    (3,624 )     (6,869 )     120  
Treasury stock – 102,524,177 shares, 135,290,540 shares and 170,411,704 shares
    (3,593 )     (4,666 )     (5,850 )
Unearned ESOP shares
    (535 )     (555 )     (891 )
 
                 
Total Wells Fargo stockholders’ equity
    100,295       99,084       48,159  
 
                 

Noncontrolling interests

    6,762       3,232       280  
 
                 

Total equity

    107,057       102,316       48,439  
 
                 

Total liabilities and equity

  $ 1,285,891     $ 1,309,639     $ 595,221  
 
                 
   
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
                                 
   
       
       
       
    Preferred stock     Common stock  
(in millions, except shares)   Shares   Amount     Shares     Amount  
   

BALANCE DECEMBER 31, 2007

    449,804     $ 450       3,297,102,208     $ 5,788  
 
                       
Cumulative effect of adoption of EITF 06-4 and EITF 06-10
                               
FAS 158 change of measurement date
                               
 
BALANCE JANUARY 1, 2008
    449,804       450       3,297,102,208       5,788  
 
                       
Comprehensive income:
                               
Net income
                               
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
Net unrealized gains (losses) on securities available for sale, net of reclassification of $180 million of net gains included in net income
                               
Net unrealized gains on derivatives and hedging activities, net of reclassification of $30 million of net gains on cash flow hedges included in net income
                               
Unamortized gains under defined benefit plans, net of amortization
                               
 
Total comprehensive income
                               
Noncontrolling interests
                               
Common stock issued
                    12,053,786          
Common stock repurchased
                    (11,404,468 )        
Preferred stock issued to ESOP
    520,500       521                  
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (133,756 )     (134 )     4,598,820          
Common stock dividends
                               
Tax benefit upon exercise of stock options
                               
Stock option compensation expense
                               
Net change in deferred compensation and related plans
                               
 
                       
Net change
    386,744       387       5,248,138       --  
 
                       

BALANCE MARCH 31, 2008

    836,548     $ 837       3,302,350,346     $ 5,788  
 
                       
 

BALANCE DECEMBER 31, 2008

    10,111,821     $ 31,332       4,228,630,889     $ 7,273  
 
                       
Cumulative effect of adoption of FSP FAS 115-2 and FAS 124-2
                               
Effect of adoption of FAS 160, as amended and interpreted
                               
BALANCE JANUARY 1, 2009
    10,111,821       31,332       4,228,630,889       7,273  
 
                       
Comprehensive income:
                               
Net income
                               
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
Securities available for sale:
                               
Unrealized losses related to factors other than credit
                               
All other net unrealized gains, net of reclassification of $48 million of net losses included in net income
                               
Net unrealized losses on derivatives and hedging activities, net of reclassification of $84 million of net gains on cash flow hedges included in net income
                               
Unamortized gains under defined benefit plans, net of amortization
                               
 
Total comprehensive income
                               
Noncontrolling interests
                               
Common stock issued
                    33,346,822          
Common stock repurchased
                    (2,294,746 )        
Preferred stock discount accretion
            98                  
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (18,830 )     (19 )     1,714,287          
Common stock dividends
                               
Preferred stock dividends and accretion
                               
Stock option compensation expense
                               
Net change in deferred compensation and related plans
                               
 
                       
Net change
    (18,830 )     79       32,766,363       --  
 
                       

BALANCE MARCH 31, 2009

    10,092,991     $ 31,411       4,261,397,252     $ 7,273  
 
                       
   
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
                                                                 
   
Wells Fargo stockholders' equity              
                  Cumulative                     Total              
  Additional             other           Unearned   Wells Fargo              
    paid-in     Retained   comprehensive   Treasury     ESOP   stockholders’   Noncontrolling     Total  
    capital     earnings     income     stock     shares     equity   interests     equity  
   

 

  $ 8,212     $ 38,970     $ 725     $ (6,035 )   $ (482 )   $ 47,628     $ 286     $ 47,914  
 
                                               
 
            (20 )                             (20 )             (20 )
 
            (8 )                             (8 )             (8 )
 
                                                         
 
    8,212       38,942       725       (6,035 )     (482 )     47,600       286       47,886  
 
                                               
 
                                                               
 
            1,999                               1,999       20       2,019  
 
                                                               
 
                    (7 )                     (7 )             (7 )
 
 
                    (783 )                     (783 )             (783 )
 
 
                    184                       184               184  
 
                    1                       1               1  
 
                                                         
 
                                            1,394       20       1,414  
 
                                            --       (26 )     (26 )
 
    (58 )     (21 )             396               317               317  
 
                            (351 )             (351 )             (351 )
 
    30                               (551 )     --               --  
 
    (8 )                             142       134               134  
 
    (16 )                     150               --               --  
 
            (1,024 )                             (1,024 )             (1,024 )
 
    15                                       15               15  
 
    71                                       71               71  
 
    13                       (10 )             3               3  
 
                                               
 
    47       954       (605 )     185       (409 )     559       (6 )     553  
 
                                               

 

  $ 8,259     $ 39,896     $ 120     $ (5,850 )   $ (891 )   $ 48,159     $ 280     $ 48,439  
 
                                               

 

  $ 36,026     $ 36,543     $ (6,869 )   $ (4,666 )   $ (555 )   $ 99,084     $ 3,232     $ 102,316  
 
                                               
 
            53       (53 )                     --               --  
 
    (3,716 )     --       --                       (3,716 )     3,716       --  
 
                                                   
 
    32,310       36,596       (6,922 )     (4,666 )     (555 )     95,368       6,948       102,316  
 
                                               
 
                                                               
 
            3,045                               3,045       44       3,089  
 
                                                               
 
                    (18 )                     (18 )     (5 )     (23 )
 
                                                               
 
                    (210 )                     (210 )             (210 )
 
 
                    3,473                       3,473       12       3,485  
 
 
                    (16 )                     (16 )             (16 )
 
                    69                       69               69  
 
                                                         
 
                                            6,343       51       6,394  
 
                                            --       (237 )     (237 )
 
    35       (588 )             1,077               524               524  
 
                            (54 )             (54 )             (54 )
 
                                            98               98  
 
    (1 )                             20       19               19  
 
    (36 )                     55               --               --  
 
            (1,443 )                             (1,443 )             (1,443 )
 
            (661 )                             (661 )             (661 )
 
    95                                       95               95  
 
    11                       (5 )             6               6  
 
                                               
 
    104       353       3,298       1,073       20       4,927       (186 )     4,741  
 
                                               

 

  $ 32,414     $ 36,949     $ (3,624 )   $ (3,593 )   $ (535 )   $ 100,295     $ 6,762     $ 107,057  
 
                                               
   

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
                 
   
    Quarter ended March 31 ,
(in millions)   2009     2008  
   

Cash flows from operating activities:

               
Wells Fargo net income
  $ 3,045     $ 1,999  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    4,558       2,028  
Changes in fair value of MSRs (residential) and MHFS carried at fair value
    2,141       1,812  
Depreciation and amortization
    981       368  
Other net gains
    (383 )     (158 )
Preferred shares released to ESOP
    19       134  
Stock option compensation expense
    95       71  
Excess tax benefits related to stock option payments
    --       (15 )
Originations of MHFS
    (98,613 )     (59,146 )
Proceeds from sales of and principal collected on mortgages originated for sale
    83,262       56,737  
Originations of LHFS
    (1,494 )     --  
Proceeds from sales of LHFS
    26,100       --  
Purchases of LHFS
    (26,167 )     --  
Net change in:
               
Trading assets
    7,821       (1,166 )
Deferred income taxes
    2,373       (200 )
Accrued interest receivable
    674       142  
Accrued interest payable
    (767 )     (63 )
Other assets, net
    6,372       (4,356 )
Other accrued expenses and liabilities, net
    5,818       1,423  
 
           
Net cash provided (used) by operating activities
    15,835       (390 )
 
           

Cash flows from investing activities:

               
Net change in:
               
Federal funds sold, securities purchased under resale agreements and other short-term investments
    30,808       (1,417 )
Securities available for sale:
               
Sales proceeds
    10,760       16,213  
Prepayments and maturities
    7,343       5,466  
Purchases
    (39,173 )     (30,947 )
Loans:
               
Decrease (increase) in banking subsidiaries’ loan originations, net of collections
    10,908       (3,519 )
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries
    419       325  
Purchases (including participations) of loans by banking subsidiaries
    (301 )     (2,656 )
Principal collected on nonbank entities’ loans
    3,175       5,015  
Loans originated by nonbank entities
    (1,995 )     (5,273 )
Net cash paid for acquisitions
    (123 )     (46 )
Proceeds from sales of foreclosed assets
    1,001       438  
Changes in MSRs from purchases and sales
    (4 )     37  
Net change in noncontrolling interests
    (186 )     6  
Other, net
    (4,117 )     (2,062 )
 
           
Net cash provided (used) by investing activities
    18,515       (18,420 )
 
           

Cash flows from financing activities:

               
Net change in:
               
Deposits
    15,725       13,684  
Short-term borrowings
    (35,990 )     728  
Long-term debt:
               
Proceeds from issuance
    3,811       8,137  
Repayment
    (17,877 )     (7,569 )
Preferred stock:
               
Cash dividends paid and accretion
    (623 )     --  
Common stock:
               
Proceeds from issuance
    524       317  
Repurchased
    (54 )     (351 )
Cash dividends paid
    (1,443 )     (1,024 )
Excess tax benefits related to stock option payments
    --       15  
Other, net
    --       3,262  
 
           
Net cash provided (used) by financing activities
    (35,927 )     17,199  
 
           
Net change in cash and due from banks
    (1,577 )     (1,611 )
Cash and due from banks at beginning of quarter
    23,763       14,757  
 
           
Cash and due from banks at end of quarter
  $ 22,186     $ 13,146  
 
           

Supplemental disclosures of cash flow information:

               
Cash paid during the quarter for:
               
Interest
  $ 3,704     $ 3,152  
Income taxes
    249       259  
Noncash investing and financing activities:
               
Transfers from trading assets to securities available for sale
  $ 786     $ --  
Transfers from MHFS to trading assets
    220       --  
Transfers from MHFS to securities available for sale
    --       268  
Transfers from MHFS to loans
    32       55  
Transfers from MHFS to MSRs
    1,451       802  
Transfers from MHFS to foreclosed assets
    33       --  
Net transfers from LHFS to loans
    --       176  
Transfers from loans to foreclosed assets
    1,479       775  
   
The accompanying notes are an integral part of these statements.

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NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Fargo & Company is a diversified financial services company. We provide banking, insurance, investments, mortgage banking, investment banking, retail banking, brokerage, and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia, and in other countries. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Form 10-Q, we mean Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company. We also hold a majority interest in a retail brokerage subsidiary and a real estate investment trust, which has publicly traded preferred stock outstanding.
Our accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2009 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates in several areas, including the evaluation of other-than-temporary impairment on investment securities (Note 4), allowance for credit losses and loans accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3) (Note 5), valuing residential mortgage servicing rights (MSRs) (Notes 7 and 8) and financial instruments (Note 13), pension accounting (Note 15) and income taxes. Actual results could differ from those estimates. Among other effects, such changes could result in future impairments of investment securities, increases to the allowance for loan losses, as well as increased future pension expense.
On December 31, 2008, Wells Fargo acquired Wachovia Corporation (Wachovia). Because the acquisition was completed at the end of 2008, Wachovia’s results of operations are included in the income statement and average balances beginning in 2009. Wachovia’s assets and liabilities are included in the consolidated balance sheet beginning on December 31, 2008. The accounting policies of Wachovia have been conformed to those of Wells Fargo as described herein.
On January 1, 2009, the Company adopted Statement of Financial Accounting Standards (FAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts attributable to both Wells Fargo interests and the noncontrolling interests.

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The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K).
Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
  FAS 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133;
  FAS 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51;
  FAS 141R (revised 2007), Business Combinations;
  FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly;
  FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments; and
  FASB Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. We adopted FAS 161 for first quarter 2009 reporting. See Note 12 for complete disclosures under FAS 161. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 does not affect our consolidated financial results.
FAS 160 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160, they were classified outside of equity. This new standard also changes the way a noncontrolling interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. FAS 160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The remaining interest is initially recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions. FAS 160 was effective for us on January 1, 2009. Adoption is applied prospectively to all noncontrolling interests including those that arose prior to the adoption of FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.
We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). In connection with the adoption of FAS 160 on January 1, 2009, we reclassified Prudential’s noncontrolling interest to equity. Under the terms of the original agreement under which the joint

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

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The following table provides the detail of the first quarter 2009 $4.5 billion (pre tax) increase in fair value of securities available for sale under FSP FAS 157-4.
         
   
(in millions)        
   

Mortgage-backed securities:

       
Residential
  $ 2,311  
Commercial
    1,329  
Collateralized debt obligations
    492  
Other (1)
    394  
 
     

Total

  $ 4,526  
 
     
   
(1)   Primarily consists of home equity asset-backed securities and credit card-backed securities.
FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment (OTTI) write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective in second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to accumulated other comprehensive income for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had the FSP been effective for those periods. As a result of the adoption of the FSP, $334 million of OTTI remained in other comprehensive income that would have been reported in the income statement under the prior guidance.
EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents be treated as participating securities and, therefore, included in the computation of earnings per share under the two-class method described in FAS 128, Earnings per Share. This pronouncement is effective on January 1, 2009, with retrospective adoption required. The adoption of EITF 03-6-1 did not have a material effect on our consolidated financial statements.

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2. BUSINESS COMBINATIONS
We regularly explore opportunities to acquire financial services companies and businesses. Generally, we do not make a public announcement about an acquisition opportunity until a definitive agreement has been signed.
In first quarter 2009, we completed the acquisitions of a factoring business with total assets of $74 million and an insurance brokerage business with total assets of $23 million.
At March 31, 2009, we had no pending business combinations.
On December 31, 2008, we acquired all outstanding shares of Wachovia common stock in a stock-for-stock transaction. Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on data as of an interim period with estimates through year end. Accordingly, we have re-validated and, where necessary, have refined our purchase accounting adjustments. We will continue to update the fair value of net assets acquired for a period of up to one year from the date of the acquisition as we further refine acquisition date fair values. The impact of the first quarter 2009 refinements were recorded to goodwill and increased goodwill by $1.14 billion in first quarter 2009. The refined allocation of the purchase price at December 31, 2008, is presented in the following table.
Purchase Price and Goodwill
                         
   
    Dec. 31 ,              
    2008             Dec. 31 ,
(in millions)   (refined)   Refinements     2008  
   

Purchase price:

                       
Value of common shares
  $ 14,621     $ --     $ 14,621  
Value of preferred shares
    8,409       --       8,409  
Other (value of share-based awards and direct acquisition costs)
    62       --       62  
 
                 
Total purchase price
    23,092       --       23,092  
Allocation of the purchase price:
                       
Wachovia tangible stockholders’ equity, less prior purchase accounting adjustments and other basis adjustments eliminated in purchase accounting
    19,319       (75 )     19,394  
Adjustments to reflect assets acquired and liabilities assumed at fair value:
                       
Loans and leases, net
    (17,139 )     (742 )     (16,397 )
Premises and equipment, net
    (656 )     (200 )     (456 )
Intangible assets
    14,590       (150 )     14,740  
Other assets
    (3,675 )     (231 )     (3,444 )
Deposits
    (4,576 )     (142 )     (4,434 )
Accrued expenses and other liabilities (exit, termination and other liabilities)
    (2,153 )     (554 )     (1,599 )
Long-term debt
    (199 )     (9 )     (190 )
Deferred taxes
    7,635       959       6,676  
 
                 
Fair value of net assets acquired
    13,146       (1,144 )     14,290  
 
                 
Goodwill resulting from the merger
  $ 9,946     $ 1,144     $ 8,802  
 
                 
   

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The increase in goodwill includes the recognition of additional costs associated with involuntary employee termination, contract terminations and closing duplicate facilities and have been allocated to the purchase price. These costs will be recorded throughout 2009 as part of the further integration of Wachovia’s employees, locations and operations with Wells Fargo as management finalizes integration plans. The following table summarizes exit reserves associated with the Wachovia acquisition:
                                 
   
  Employee   Contract   Facilities        
(in millions) termination   termination   related   Total  
   

Balance, December 31, 2008

  $ 57     $ 13     $ 129     $ 199  
Purchase accounting adjustments
    100       200       60       360  
Cash payments
    (50 )     --       (8 )     (58 )
 
                       
Balance, March 31, 2009
  $ 107     $ 213     $ 181     $ 501  
 
                       
   
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS
The following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
                         
   
    Mar. 31 ,   Dec. 31 ,   Mar. 31 ,
(in millions)   2009     2008     2008  
   

Federal funds sold and securities purchased under resale agreements

  $ 4,114     $ 8,439     $ 2,209  
Interest-earning deposits
    13,359       39,890       994  
Other short-term investments
    1,152       1,104       968  
 
                 
Total
  $ 18,625     $ 49,433     $ 4,171  
 
                 
   

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4. SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major categories of securities available for sale carried at fair value. The net unrealized gains (losses) are reported on an after-tax basis as a component of cumulative other comprehensive income. There were no securities classified as held to maturity as of the periods presented.
                                 
   
            Gross     Gross        
          unrealized   unrealized     Fair  
(in millions)   Cost     gains     losses     value  
   

March 31, 2008

                               

Securities of U.S. Treasury and federal agencies

  $ 983     $ 33     $ --     $ 1,016  
Securities of U.S. states and political subdivisions
    7,453       109       (382 )     7,180  
Mortgage-backed securities:
                               
Federal agencies
    37,468       1,145       (36 )     38,577  
Residential
    15,625       55       (217 )     15,463  
Commercial
    7,755       85       (718 )     7,122  
 
                       
Total mortgage-backed securities
    60,848       1,285       (971 )     61,162  
Corporate debt securities
    2,045       24       (162 )     1,907  
Collateralized debt obligations
    1,086       4       (273 )     817  
Other (1)
    6,711       57       (28 )     6,740  
 
                       
Total debt securities
    79,126       1,512       (1,816 )     78,822  
Marketable equity securities:
                               
Perpetual preferred securities
    2,533       3       (386 )     2,150  
Other marketable equity securities
    726       115       (26 )     815  
 
                       
Total marketable equity securities
    3,259       118       (412 )     2,965  
 
                       
Total
  $ 82,385     $ 1,630     $ (2,228 )   $ 81,787  
 
                       

December 31, 2008

                               

Securities of U.S. Treasury and federal agencies

  $ 3,187     $ 62     $ --     $ 3,249  
Securities of U.S. states and political subdivisions
    14,062       116       (1,520 )     12,658  
Mortgage-backed securities:
                               
Federal agencies
    64,726       1,711       (3 )     66,434  
Residential
    29,536       11       (4,717 )     24,830  
Commercial
    12,305       51       (3,878 )     8,478  
 
                       
Total mortgage-backed securities
    106,567       1,773       (8,598 )     99,742  
Corporate debt securities
    7,382       81       (539 )     6,924  
Collateralized debt obligations
    2,634       21       (570 )     2,085  
Other (1) (2)
    21,363       14       (602 )     20,775  
 
                       
Total debt securities
    155,195       2,067       (11,829 )     145,433  
Marketable equity securities:
                               
Perpetual preferred securities
    5,040       13       (327 )     4,726  
Other marketable equity securities
    1,256       181       (27 )     1,410  
 
                       
Total marketable equity securities
    6,296       194       (354 )     6,136  
 
                       
Total
  $ 161,491     $ 2,261     $ (12,183 )   $ 151,569  
 
                       

March 31, 2009

                               

Securities of U.S. Treasury and federal agencies

  $ 2,837     $ 68     $ (2 )   $ 2,903  
Securities of U.S. states and political subdivisions
    12,738       281       (1,173 )     11,846  
Mortgage-backed securities:
                               
Federal agencies
    87,721       2,931       (4 )     90,648  
Residential (2)
    34,853       1,287       (3,658 )     32,482  
Commercial
    12,762       280       (3,267 )     9,775  
 
                       
Total mortgage-backed securities
    135,336       4,498       (6,929 )     132,905  
Corporate debt securities
    7,531       157       (702 )     6,986  
Collateralized debt obligations
    2,761       221       (596 )     2,386  
Other (1)
    16,159       660       (556 )     16,263  
 
                       
Total debt securities
    177,362       5,885       (9,958 )     173,289  
Marketable equity securities:
                               
Perpetual preferred securities
    4,483       41       (754 )     3,770  
Other marketable equity securities
    1,342       190       (123 )     1,409  
 
                       
Total marketable equity securities
    5,825       231       (877 )     5,179  
 
                       
Total
  $ 183,187     $ 6,116     $ (10,835 )   $ 178,468  
 
                       
   
(1)   The “Other” category includes certain asset-backed securities collateralized by auto leases with a cost basis and fair value of $8,407 million and $8,309 million, respectively, at March 31, 2009, $8,310 million and $7,852 million at December 31, 2008, and $5,909 million and $5,941 million at March 31, 2008.
(2)   Foreign residential mortgage-backed securities with a fair value of $6.0 billion are included in residential mortgage-backed securities at March 31, 2009. These instruments were included in other debt securities at December 31, 2008, and had a fair value of $6.3 billion.

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Gross Unrealized Losses and Fair Value
The following table shows the gross unrealized losses and fair value of securities in the securities available-for-sale portfolio by length of time that individual securities in each category had been in a continuous loss position. Debt securities on which we have taken only credit-related OTTI write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the OTTI write-down.
                                                 
   
    Less than 12 months     12 months or more     Total  
    Gross             Gross             Gross        
  unrealized     Fair   unrealized     Fair     unrealized     Fair  
(in millions)   losses     value     losses     value     losses     value  
   

December 31, 2008

                                               

Securities of U.S. Treasury and federal agencies

  $ --     $ --     $ --     $ --     $ --     $ --  
Securities of U.S. states and political subdivisions
    (745 )     3,483       (775 )     1,702       (1,520 )     5,185  
Mortgage-backed securities:
                                               
Federal agencies
    (3 )     83       --       --       (3 )     83  
Residential
    (4,471 )     9,960       (246 )     238       (4,717 )     10,198  
Commercial
    (1,726 )     4,152       (2,152 )     2,302       (3,878 )     6,454  
 
                                   
Total mortgage-backed securities
    (6,200 )     14,195       (2,398 )     2,540       (8,598 )     16,735  
Corporate debt securities
    (285 )     1,056       (254 )     469       (539 )     1,525  
Collateralized debt obligations
    (113 )     215       (457 )     180       (570 )     395  
Other
    (554 )     8,638       (48 )     38       (602 )     8,676  
 
                                   
Total debt securities
    (7,897 )     27,587       (3,932 )     4,929       (11,829 )     32,516  
Marketable equity securities:
                                               
Perpetual preferred securities
    (75 )     265       (252 )     360       (327 )     625  
Other marketable equity securities
    (23 )     72       (4 )     9       (27 )     81  
 
                                   
Total marketable equity securities
    (98 )     337       (256 )     369       (354 )     706  
 
                                   

Total

  $ (7,995 )   $ 27,924     $ (4,188 )   $ 5,298     $ (12,183 )   $ 33,222  
 
                                   

March 31, 2009

                                               

Securities of U.S. Treasury and federal agencies

  $ (2 )   $ 1,300     $ --     $ --     $ (2 )   $ 1,300  
Securities of U.S. states and political subdivisions
    (504 )     3,821       (669 )     2,222       (1,173 )     6,043  
Mortgage-backed securities:
                                               
Federal agencies
    (4 )     279       --       20       (4 )     299  
Residential
    (1,723 )     12,707       (1,935 )     4,823       (3,658 )     17,530  
Commercial
    (1,077 )     4,228       (2,190 )     3,037       (3,267 )     7,265  
 
                                   
Total mortgage-backed securities
    (2,804 )     17,214       (4,125 )     7,880       (6,929 )     25,094  
Corporate debt securities
    (442 )     2,863       (260 )     531       (702 )     3,394  
Collateralized debt obligations
    (195 )     853       (401 )     285       (596 )     1,138  
Other
    (384 )     6,982       (172 )     1,430       (556 )     8,412  
 
                                   
Total debt securities
    (4,331 )     33,033       (5,627 )     12,348       (9,958 )     45,381  
Marketable equity securities:
                                               
Perpetual preferred securities
    (405 )     807       (349 )     366       (754 )     1,173  
Other marketable equity securities
    (123 )     387       --       --       (123 )     387  
 
                                   
Total marketable equity securities
    (528 )     1,194       (349 )     366       (877 )     1,560  
 
                                   

Total

  $ (4,859 )   $ 34,227     $ (5,976 )   $ 12,714     $ (10,835 )   $ 46,941  
 
                                   
   
The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and not due to the credit quality of the securities. These investments are almost exclusively investment grade and were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of our ongoing impairment analysis, but are expected to perform, even if

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the rating agencies reduce the credit rating of the bond insurers. As a result, we concluded that these securities were not other-than-temporarily impaired at March 31, 2009.
The unrealized losses associated with private collateralized mortgage obligations are primarily related to securities backed by commercial mortgages and residential mortgages. Approximately 75% of the securities were AAA-rated by at least one major rating agency. We estimate loss projections for each security by assessing loans collateralizing the security and determining expected default rates and loss severities. Based upon our assessment of expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we concluded that these securities were not other-than-temporarily impaired at March 31, 2009.
The unrealized losses associated with other securities are primarily related to securities backed by commercial loans and individual issuer companies. For securities with commercial loans as the underlying collateral, we have evaluated the expected credit losses in the security and concluded that we have sufficient credit enhancement when compared with our estimate of credit losses for the individual security. For individual issuers, we evaluate the financial performance of the issuer on a quarterly basis to determine if it is probable that the issuer can make all contractual principal and interest payments.
Our marketable equity securities included $3.8 billion of investments in perpetual preferred securities at March 31, 2009. These securities provide very attractive tax-equivalent yields and were current as to periodic distributions in accordance with their respective terms as of March 31, 2009. We evaluated these hybrid financial instruments with investment-grade ratings for impairment using an evaluation methodology similar to that used for debt securities. Perpetual preferred securities were not other-than-temporarily impaired at March 31, 2009, if there was no evidence of credit deterioration or investment rating downgrades of any issuers to below investment grade, and it was probable we would continue to receive full contractual payments. We will continue to evaluate the prospects for these securities for recovery in their market value in accordance with our policy for estimating OTTI. We have recorded impairment write-downs on perpetual preferred securities where there was evidence of credit deterioration.
The fair values of our investment securities could decline in the future if the underlying performance of the collateral for the private collateralized mortgage obligations or other securities deteriorate and our credit enhancement levels do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that significant OTTI may occur in the future given the current economic environment.
Other-Than-Temporarily Impaired Debt Securities
We recognize OTTI for debt securities classified as available for sale in accordance with FSP FAS 115-2 and FAS 124-2. As required by this FSP, we assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference

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between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.
The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that we have written down for OTTI and the credit component of the loss is recognized in earnings (referred to as “credit-impaired” debt securities). The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2009. OTTI recognized in earnings in first quarter 2009 for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were:
         
   
  Quarter ended  
(in millions) March 31, 2009  
   

Balance, beginning of period

  $ 471  

Additions (1):

       
Initial credit impairments
    197  
Subsequent credit impairments
    66  

Reductions:

       
For securities sold
    (7 )
 
     

Balance, end of period

  $ 727  
 
     
   
(1)   Excludes $6 million of OTTI on debt securities we intend to sell.

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For asset-backed securities (e.g., residential mortgage-backed securities), we estimated expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordination interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which considers current delinquencies and nonperforming assets, future expected default rates and collateral value by vintage and geographic region) and prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. The following table presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings for asset-backed securities as of March 31, 2009.
         
   
    Residential MBS  
   

Expected remaining life of loan losses (1):

       
Range (2)
    0.28 to 34.32%  
Weighted average (3)
    11.69%  

Current subordination levels (4):

       
Range (2)
    0 to 19.68%  
Weighted average (3)
    6.93%  

Prepayment speed (annual CPR (5)):

       
Range (2)
    7.27 to 24.64%  
Weighted average (3)
    15.76%  
   
(1)   Represents future expected credit losses on underlying pool of loans expressed as a percentage of total current outstanding loan balance.
(2)   Represents the range of inputs/assumptions based upon the individual securities within each category.
(3)   Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
(4)   Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance.
(5)   Constant prepayment rate.
Realized Gains and Losses
The following table shows the gross realized gains and losses on the sales of securities from the securities available-for-sale portfolio, including marketable equity securities. Of the first quarter 2009 OTTI write-downs of $516 million, $269 million related to debt securities and $247 million to equity securities. Under FSP FAS 115-2 and FAS 124-2, which we adopted this quarter, total OTTI on debt securities amounted to $603 million, which included $263 million of credit-related OTTI and $6 million related to securities we intend to sell, both of which were recorded as part of gross realized losses, and $334 million recorded directly to other comprehensive income for non-credit related impairment on securities. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income.
                 
   
    Quarter ended March 31 ,
(in millions)   2009     2008  
   

Gross realized gains

  $ 294     $ 378  
Gross realized losses
    (370 )     (88 )
 
           
Net realized gains (losses)
  $ (76 )   $ 290  
 
           
   

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Contractual Maturities
The following table shows the remaining contractual principal maturities and contractual yields of debt securities available for sale. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature.
                                                                                 
   
                    Remaining contractual principal maturity  
            Weighted-                     After one year     After five years        
    Total     average     Within one year     through five years     through ten years     After ten years  
(in millions)   Amount     yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
   

December 31, 2008

                                                                               

Securities of U.S. Treasury and federal agencies

  $ 3,249       1.54 %   $ 1,719       0.02 %   $ 1,127       3.15 %   $ 388       3.40 %   $ 15       4.79 %
Securities of U.S. states and political subdivisions
    12,658       7.54       210       5.54       784       7.36       1,163       7.39       10,501       7.61  
Mortgage-backed securities:
                                                                               
Federal agencies
    66,434       5.73       42       4.23       122       4.98       353       6.02       65,917       5.73  
Residential
    24,830       6.73       --       --       --       --       34       8.15       24,796       6.73  
Commercial
    8,478       7.95       --       --       5       1.57       135       8.64       8,338       7.94  
 
                                                                     
Total mortgage-backed securities
    99,742       6.17       42       4.23       127       4.87       522       6.83       99,051       6.17  
Corporate debt securities
    6,924       5.81       432       5.49       3,697       4.76       2,212       7.48       583       6.31  
Collateralized debt obligations
    2,085       4.52       --       --       120       7.83       809       3.65       1,156       4.77  
Other
    20,775       5.17       43       3.82       8,057       7.41       1,346       4.86       11,329       3.61  
 
                                                                     

Total debt securities at fair value (1)

  $ 145,433       6.00 %   $ 2,446       1.60 %   $ 13,912       6.34 %   $ 6,440       6.14 %   $ 122,635       6.04 %
 
                                                                     

March 31, 2009

                                                                               

Securities of U.S. Treasury and federal agencies

  $ 2,903       1.72 %   $ 1,380       0.11 %   $ 918       3.01 %   $ 586       3.41 %   $ 19       5.36 %
Securities of U.S. states and political subdivisions
    11,846       6.48       117       6.19       621       7.43       976       6.90       10,132       6.38  
Mortgage-backed securities:
                                                                               
Federal agencies
    90,648       5.62       6       4.80       97       5.50       329       5.57       90,216       5.62  
Residential
    32,482       5.41       8       4.42       131       0.80       91       6.31       32,252       5.43  
Commercial
    9,775       5.20       79       1.46       72       5.31       158       7.67       9,466       5.19  
 
                                                                     
Total mortgage-backed securities
    132,905       5.54       93       1.94       300       3.40       578       6.26       131,934       5.54  
Corporate debt securities
    6,986       5.85       715       5.48       3,092       4.95       2,643       7.03       536       5.42  
Collateralized debt obligations
    2,386       2.53       --       --       168       5.87       1,025       2.94       1,193       1.69  
Other
    16,263       4.59       35       3.47       9,414       6.65       766       1.62       6,048       1.76  
 
                                                                     

Total debt securities at fair value (1)

  $ 173,289       5.42 %   $ 2,340       2.18 %   $ 14,513       6.01 %   $ 6,574       5.35 %   $ 149,862       5.41 %
 
                                                                     
   
(1)   The weighted-average yield is computed using the contractual life amortization method.

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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The major categories of loans outstanding showing those subject to SOP 03-3 are presented in the following table. Certain loans acquired in the Wachovia acquisition are subject to SOP 03-3. These include loans where it is probable that we will not collect all contractual principal and interest. Loans within the scope of SOP 03-3 are initially recorded at fair value, and no allowance is carried over or initially recorded. Outstanding balances of all other loans are presented net of unearned income, net deferred loan fees, and unamortized discount and premium totaling $21,173 million, $16,891 million and $4,172 million, at March 31, 2009, December 31, 2008, and March 31, 2008, respectively.
                                                         
   
    March 31, 2009     December 31, 2008        
            All                     All                
    SOP 03-3     other             SOP 03-3     other             Mar. 31 ,
(in millions)   loans     loans     Total     loans     loans     Total     2008  
   

Commercial and commercial real estate:

                                                       
Commercial
  $ 3,088     $ 188,623     $ 191,711     $ 4,580     $ 197,889     $ 202,469     $ 92,589  
Other real estate mortgage
    6,597       98,337       104,934       7,762       95,346       103,108       38,415  
Real estate construction
    4,507       29,405       33,912       4,503       30,173       34,676       18,885  
Lease financing
    --       14,792       14,792       --       15,829       15,829       6,885  
 
                                         
Total commercial and commercial real estate
    14,192       331,157       345,349       16,845       339,237       356,082       156,774  
Consumer:
                                                       
Real estate 1-4 family first mortgage
    41,520       201,427       242,947       39,214       208,680       247,894       73,321  
Real estate 1-4 family junior lien mortgage
    615       109,133       109,748       728       109,436       110,164       74,840  
Credit card
    --       22,815       22,815       --       23,555       23,555       18,677  
Other revolving credit and installment
    32       91,220       91,252       151       93,102       93,253       55,505  
 
                                         
Total consumer
    42,167       424,595       466,762       40,093       434,773       474,866       222,343  
Foreign
    1,849       29,619       31,468       1,859       32,023       33,882       7,216  
 
                                         
Total loans
  $ 58,208     $ 785,371     $ 843,579     $ 58,797     $ 806,033     $ 864,830     $ 386,333  
 
                                         
   
We consider a loan to be impaired under FAS 114, Accounting by Creditors for Impairment of a Loan – an amendment of FASB Statement No. 5 and 15, when, based on current information and events, we determine that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. We assess and account for as impaired certain nonaccrual commercial and commercial real estate loans that are over $5 million and certain consumer, commercial and commercial real estate loans whose terms have been modified in a troubled debt restructuring. The recorded investment in impaired loans and the methodology used to measure impairment was:
                         
   
  Mar. 31 ,   Dec. 31 , Mar. 31 ,
(in millions)   2009     2008     2008  
   
Impairment measurement based on:
                       
Collateral value method
  $ 345       $     88       $     14  
Discounted cash flow method (1)
    6,445       3,552       909  
 
                     
Total (2)
  $ 6,790       $3,640       $   923  
 
                     
   
(1)   The March 31, 2009, balance includes $474 million of Government National Mortgage Association (GNMA) loans that are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs. Although both principal and interest are insured, the insured interest rate may be different than the original contractual interest rate prior to modification, resulting in interest impairment under a discounted cash flow methodology.
(2)   Includes $6,206 million, $3,468 million and $828 million of impaired loans with a related allowance of $1,571 million, $816 million and $111 million at March 31, 2009, December 31, 2008, and March 31, 2008, respectively.
The average recorded investment in impaired loans was $5,795 million in first quarter 2009 and $678 million in first quarter 2008.

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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded credit commitments. Changes in the allowance for credit losses were:
                 
   
    Quarter ended March 31 ,
(in millions)   2009     2008  
   

Balance, beginning of period

  $ 21,711     $ 5,518  

Provision for credit losses

    4,558       2,028  

Loan charge-offs:

               
Commercial and commercial real estate:
               
Commercial
    (596 )     (259 )
Other real estate mortgage
    (31 )     (4 )
Real estate construction
    (105 )     (29 )
Lease financing
    (20 )     (12 )
 
           
Total commercial and commercial real estate
    (752 )     (304 )
Consumer:
               
Real estate 1-4 family first mortgage
    (424 )     (81 )
Real estate 1-4 family junior lien mortgage
    (873 )     (455 )
Credit card
    (622 )     (313 )
Other revolving credit and installment
    (900 )     (543 )
 
           
Total consumer
    (2,819 )     (1,392 )
Foreign
    (54 )     (68 )
 
           
Total loan charge-offs
    (3,625 )     (1,764 )
 
           

Loan recoveries:

               
Commercial and commercial real estate:
               
Commercial
    40       31  
Other real estate mortgage
    10       1  
Real estate construction
    2       1  
Lease financing
    3       3  
 
           
Total commercial and commercial real estate
    55       36  
Consumer:
               
Real estate 1-4 family first mortgage
    33       6  
Real estate 1-4 family junior lien mortgage
    26       17  
Credit card
    40       38  
Other revolving credit and installment
    204       125  
 
           
Total consumer
    303       186  
Foreign
    9       14  
 
           
Total loan recoveries
    367       236  
 
           
Net loan charge-offs (1)
    (3,258 )     (1,528 )
 
           

Allowances related to business combinations/other

    (165 )     (5 )
 
           

Balance, end of period

  $ 22,846     $ 6,013  
 
           

Components:

               
Allowance for loan losses
  $ 22,281     $ 5,803  
Reserve for unfunded credit commitments
    565       210  
 
           
Allowance for credit losses
  $ 22,846     $ 6,013  
 
           

Net loan charge-offs (annualized) as a percentage of average total loans

    1.54 %     1.60 %

Allowance for loan losses as a percentage of total loans (2)

    2.64 %     1.50 %
Allowance for credit losses as a percentage of total loans (2)
    2.71       1.56  
   
(1)   Loans accounted for under SOP 03-3 were recorded in purchase accounting at fair value and, accordingly, charge-offs do not include losses on such loans.
(2)   The allowance for loan losses and the allowance for credit losses do not include any amounts related to loans acquired from Wachovia that are accounted for under SOP 03-3. Loans acquired from Wachovia are included in total loans net of related purchase accounting net write-downs.

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SOP 03-3
At December 31, 2008, and March 31, 2009, loans within the scope of SOP 03-3 had an unpaid principal balance of $95.8 billion and $93.0 billion, respectively, and a carrying value of $59.7 billion and $58.2 billion, respectively. The following table provides details on the SOP 03-3 loans acquired from Wachovia.
         
   
    December 31, 2008  
(in millions)   (refined)  
   

Contractually required payments including interest

    $114,565  
Nonaccretable difference (1)
    (44,274 )
 
       
Cash flows expected to be collected (2)
    70,291  
Accretable yield
    (10,547 )
 
       
Fair value of loans acquired
    $  59,744  
 
       
   
(1)   Includes $40.0 billion in principal cash flows (purchase accounting adjustments) not expected to be collected, $2.0 billion of pre-acquisition charge-offs and $2.3 billion of future interest not expected to be collected.
(2)   Represents undiscounted expected principal and interest cash flows.
The change in the accretable yield related to SOP 03-3 loans is presented in the following table.
         
   
(in millions)   Quarter ended March 31, 2009  
   

Balance, beginning of quarter (refined)

    $ (10,547 )
Disposals
    4  
Accretion
    561  
 
       
Balance, end of quarter
    $   (9,982 )
 
       
   

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6. OTHER ASSETS
The components of other assets were:
                         
   
    Mar. 31 ,   Dec. 31 ,   Mar. 31 ,
(in millions)   2009     2008     2008  
   

Nonmarketable equity investments:

                       
Cost method:
                       
Private equity investments
  $ 2,588     $ 2,706     $ 2,078  
Federal bank stock
    6,080       6,106       2,110  
Other
    2,306       2,292       1,939  
 
                 
Total cost method
    10,974       11,104       6,127  
Equity method
    4,151       4,400       1,107  
Principal investments (1)
    1,270       1,278       --  
 
                 
Total nonmarketable equity investments
    16,395       16,782       7,234  

Operating lease assets

    2,866       2,251       1,955  
Accounts receivable
    16,471       22,493       14,547  
Interest receivable
    5,009       5,746       2,835  
Core deposit intangibles
    12,026       11,999       403  
Customer relationship and other intangibles
    2,700       3,516       306  
Foreclosed assets:
                       
GNMA loans (2)
    768       667       578  
Other
    1,294       1,526       637  
Due from customers on acceptances
    188       615       66  
Other
    47,299       44,206       13,997  
 
                 
Total other assets
  $ 105,016     $ 109,801     $ 42,558  
 
                 
   
(1)   Principal investments are recorded at fair value with realized and unrealized gains (losses) included in net gains (losses) from equity investments in the income statement.
(2)   Consistent with regulatory reporting requirements, foreclosed assets include foreclosed real estate securing GNMA loans. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
Income related to nonmarketable equity investments was:
                 
   
    Quarter ended March 31 ,
(in millions)   2009     2008  
   

Net gains (losses) from private equity investments (1)

  $ (220 )   $ 346  
Net losses from principal investments
    (8 )     --  
Net losses from all other nonmarketable equity investments
    (49 )     (39 )
 
           
Net gains (losses) from nonmarketable equity investments
  $ (277 )   $ 307  
 
           
   
(1)   Net gains from first quarter 2008 include $334 million gain from our ownership in Visa, which completed its initial public offering in March 2008.

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

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The classifications of assets and liabilities in our balance sheet associated with our transactions with QSPEs and VIEs are as follows:
                                         
   
                          Transfers that        
          VIEs that we           we account        
            do not   VIEs that we   for as secured        
(in millions)   QSPEs   consolidate   consolidate   borrowings     Total  
   

December 31, 2008

                                       

Cash

  $ --     $ --     $ 117     $ 287     $ 404  
Trading account assets
    1,261       5,241       71       141       6,714  
Securities (1)
    18,078       15,168       922       6,094       40,262  
Mortgages held for sale
    56       --       --       --       56  
Loans (2)
    --       16,882       217       4,126       21,225  
MSRs
    14,106       --       --       --       14,106  
Other assets
    345       5,022       2,416       55       7,838  
 
                             
Total assets
    33,846       42,313       3,743       10,703       90,605  
 
                             

Short-term borrowings

    --       --       307       1,440       1,747  
Accrued expenses and other liabilities
    528       1,976       330       26       2,860  
Long term debt
    --       --       1,773       7,125       8,898  
Noncontrolling interests
    --       --       121       --       121  
 
                             
Total liabilities and noncontrolling interests
    528       1,976       2,531       8,591       13,626  
 
                             

Net assets

  $ 33,318     $ 40,337     $ 1,212     $ 2,112     $ 76,979  
 
                             

March 31, 2009

                                       

Cash

  $ --     $ --     $ 166     $ 288     $ 454  
Trading account assets
    2,097       5,183       55       135       7,470  
Securities (1)
    21,766       14,633       1,627       5,849       43,875  
Loans (2)
    --       16,852       312       3,284       20,448  
MSRs
    11,969       18       --       --       11,987  
Other assets
    258       5,648       2,616       167       8,689  
 
                             
Total assets
    36,090       42,334       4,776       9,723       92,923  
 
                             

Short-term borrowings

    --       --       306       2,307       2,613  
Accrued expenses and other liabilities
    622       2,351       517       90       3,580  
Long term debt
    --       --       1,807       6,529       8,336  
Noncontrolling interests
    --       --       138       --       138  
 
                             
Total liabilities and noncontrolling interests
    622       2,351       2,768       8,926       14,667  
 
                             

Net assets

  $ 35,468     $ 39,983     $ 2,008     $ 797     $ 78,256  
 
                             
   
(1)   Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA).
(2)   Excludes related allowance for loan losses.
The following disclosures regarding our significant continuing involvement with QSPEs and unconsolidated VIEs exclude entities where our only involvement is in the form of: (1) investments in trading securities, (2) investments in securities or loans underwritten by third parties, (3) certain derivatives such as interest rate swaps or cross currency swaps that have customary terms, and (4) administrative or trustee services. We have also excluded investments accounted for in accordance with the AICPA Investment Company Audit Guide, investments accounted for under the cost method, and investments accounted for under the equity method.
Transactions with QSPEs
We use QSPEs to securitize consumer and commercial real estate loans and other types of financial assets, including student loans, auto loans and municipal bonds. We typically retain the servicing rights from these sales and may continue to hold other beneficial interests in QSPEs. We may also provide liquidity to investors in the beneficial interests and credit enhancements in

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the form of standby letters of credit. Through these securitizations we may be exposed to liability under limited amounts of recourse as well as standard representations and warranties we make to purchasers and issuers. The amount recorded for this liability is included in other commitments and guarantees in the following table.
A summary of our involvements with QSPEs is as follows:
                                                 
   
                                    Other        
    Total     Debt and                   commitments        
    QSPE     equity   Servicing             and     Net  
(in millions)   assets (1)   interests (2)     assets   Derivatives   guarantees     assets  
               
December 31, 2008           Carrying value – asset (liability)  

Residential mortgage loan securitizations

  $ 1,144,775     $ 17,469     $ 12,951     $ 30     $ (511 )   $ 29,939  
Commercial mortgage securitizations
    355,267       1,452       1,098       524       (14 )     3,060  
Auto loan securitizations
    4,133       72       --       43       --       115  
Student loan securitizations
    2,765       76       57       --       --       133  
Other
    11,877       74       --       (3 )     --       71  
 
                                   
Total
  $ 1,518,817     $ 19,143     $ 14,106     $ 594     $ (525 )   $ 33,318  
 
                                   
                                                 
            Maximum exposure to loss  

Residential mortgage loan securitizations

          $ 17,469     $ 12,951     $ 300     $ 718     $ 31,438  
Commercial mortgage securitizations
            1,452       1,098       524       3,302       6,376  
Auto loan securitizations
            72       --       43       --       115  
Student loan securitizations
            76       57       --       --       133  
Other
            74       --       1,465       37       1,576  
 
                                     
Total
          $ 19,143     $ 14,106     $ 2,332     $ 4,057     $ 39,638  
 
                                     
                                                 
March 31, 2009           Carrying value – asset (liability)  

Residential mortgage loan securitizations

  $ 1,229,211     $ 21,763     $ 10,961     $ 24     $ (605 )   $ 32,143  
Commercial mortgage securitizations
    391,114       1,561       953       482       (17 )     2,979  
Auto loan securitizations
    3,580       76       --       39       --       115  
Student loan securitizations
    2,776       165       55       --       --       220  
Other
    9,955       11       --       --       --       11  
 
                                   
Total
  $ 1,636,636     $ 23,576     $ 11,969     $ 545     $ (622 )   $ 35,468  
 
                                   
                                                 
            Maximum exposure to loss  

Residential mortgage loan securitizations

          $ 21,763     $ 10,961     $ 276     $ 1,525     $ 34,525  
Commercial mortgage securitizations
            1,561       953       482       3,017       6,013  
Auto loan securitizations
            76       --       39       --       115  
Student loan securitizations
            165       55       --       --       220  
Other
            11       --       133       37       181  
 
                                     
Total
          $ 23,576     $ 11,969     $ 930     $ 4,579     $ 41,054  
 
                                     
   
(1)   Represents the remaining principal balance of assets held by QSPEs using the most current information available.
(2)   Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA.
“Maximum exposure to loss” represents the carrying value of our involvement with off-balance sheet QSPEs plus remaining undrawn liquidity and lending commitments, notional amount of net written derivative contracts, and notional amount of other commitments and guarantees. Maximum exposure to loss is a required disclosure under generally accepted accounting principles and represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite its extremely remote possibility, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.

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We recognized net losses of $4 million from sales of financial assets in securitizations in first quarter 2009. Additionally, we had the following cash flows with our securitization trusts.
                 
   
    Quarter ended March 31, 2009 ,
            Other  
    Mortgage     financial  
(in millions)   loans     assets  
   

Sales proceeds from securitizations (1)

    $81,178       $  --  
Servicing fees
    1,000       18  
Other interests held
    495       79  
Purchases of delinquent assets
    13       --  
Net servicing advances
    62       --  
   
(1)   Represents cash flow data for all loans securitized in first quarter 2009.
For securitizations completed in first quarter 2009, we used the following assumptions to determine the fair value of mortgage servicing rights at the date of securitization.
         
   
    March 31, 2009  
    Mortgage  
    servicing rights  
   

Prepayment speed (annual CPR (1))

    12.6 %
Life (in years)
    5.9  
Discount rate
    9.1 %
   
(1)   Constant prepayment rate.

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Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at March 31, 2009, for residential and commercial mortgage servicing rights, and other interests held related to residential mortgage loan securitizations are presented in the following table.
                         
 
    Mortgage     Other     Other interests held –  
($ in millions)   servicing rights     interests held     subordinate bonds  
 
Fair value of interests held
  $ 12,932     $ 265     $ 176  
Expected weighted-average life (in years)
    3.6       4.2       5.4  
 
                       
Prepayment speed assumption (annual CPR)
    19.6 %     17.6 %     14.0 %
Decrease in fair value from:
                       
10% increase
  $ 650     $ 17     $ --  
25% increase
    1,482       38       --  
 
                       
Discount rate assumption
    10.0 %     12.6 %     13.6 %
MSRs and other interests held
                       
Decrease in fair value from:
                       
100 basis point increase
  $ 448     $ 8          
200 basis point increase
    861       15          
 
                       
Other interests held – subordinate bonds
                       
Decrease in fair value from:
                       
50 basis point increase
                  $ 4  
100 basis point increase
                    9  
 
                       
Credit loss assumption
                    3.4 %
Decrease in fair value from:
                       
10% higher losses
                  $ 16  
25% higher losses
                    36  
   
Adverse changes in key economic assumptions used to measure the fair value of retained interests in securitizations that we acquired in the Wachovia acquisition were analyzed. The price sensitivity to these adverse changes was not significant and, accordingly, is not included in the table above.
The sensitivities in the table above are hypothetical and caution should be exercised when relying on this data. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the other interests held is calculated independently without changing any other assumptions. In reality, changes in one factor may result in changes in others (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.

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We also retained some AAA-rated fixed-rate and adjustable rate mortgage-backed securities. The fair value of the securities was $5,623 million at March 31, 2009, and $5,147 million at December 31, 2008, and was determined using an independent third party pricing service.
The table below presents information about the principal balances of owned and securitized loans.
                                         
 
                    Delinquent     Net charge-offs  
    Total loans (1)     loans (2)(3)     (recoveries) (3)  
    Mar. 31 ,   Dec. 31 ,   Mar. 31 ,   Dec. 31 ,   Quarter ended  
(in millions)   2009     2008     2009     2008     March 31, 2009  
 
 
                                       
Commercial and commercial real estate:
                                       
Commercial
  $ 193,236     $ 204,113     $ 2,113     $ 1,471     $ 556  
Other real estate mortgage
    312,211       310,480       2,912       1,058       25  
Real estate construction
    33,912       34,676       1,995       1,221       103  
Lease financing
    14,792       15,829       114       92       17  
 
                             
Total commercial and commercial real estate
    554,151       565,098       7,134       3,842       701  
Consumer:
                                       
Real estate 1-4 family first mortgage
    1,211,050       1,165,456       10,213       6,849       593  
Real estate 1-4 family junior lien mortgage
    114,845       115,308       2,096       1,421       880  
Credit card
    22,815       23,555       738       687       582  
Other revolving credit and installment
    104,469       104,886       1,504       1,427       737  
 
                             
Total consumer
    1,453,179       1,409,205       14,551       10,384       2,792  
Foreign
    31,468       33,882       104       91       45  
 
                             
Total loans owned and securitized
    2,038,798       2,008,185     $ 21,789     $ 14,317     $ 3,538  
 
                             
Less:
                                       
Securitized loans
    1,150,106       1,117,039                          
Mortgages held for sale
    36,807       20,088                          
Loans held for sale
    8,306       6,228                          
 
                                   
Total loans held
  $ 843,579     $ 864,830                          
 
                                   
   
(1)   Represents loans in the balance sheet or that have been securitized and includes residential mortgages sold to FNMA and FHLMC and securitizations where servicing is our only form of continuing involvement.
 
(2)   Delinquent loans are 90 days or more past due and still accruing interest as well as nonaccrual loans.
 
(3)   Delinquent loans and net charge-offs exclude loans sold to FNMA and FHLMC. We continue to service the loans and would only experience a loss if required to repurchase a delinquent loan due to a breach in original representations and warranties associated with our underwriting standards.
Transactions with VIEs
Our transactions with VIEs include securitization, investment and financing activities involving collateralized debt obligations (CDOs) backed by asset-backed and commercial real estate securities, collateralized loan obligations (CLOs) backed by corporate loans or bonds, and other types of structured financing. We have various forms of involvement with VIEs, including holding senior or subordinated interests, entering into liquidity arrangements, credit default swaps and other derivative contracts.

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     A summary of our involvements with off-balance sheet (unconsolidated) VIEs is as follows:
                                         
 
                            Other        
    Total     Debt and             commitments        
    VIE     equity             and     Net  
(in millions)   assets (1)     interests     Derivatives     guarantees     assets  
 
 
                                       
December 31, 2008           Carrying value – asset (liability)
             
 
                                       
CDOs
  $ 48,802     $ 14,080     $ 1,053     $ --     $ 15,133  
Wachovia administered ABCP conduit
    10,767       --       --       --       --  
Asset-based lending structures
    11,614       9,232       (136 )     --       9,096  
Tax credit structures
    22,882       4,366       --       (516 )     3,850  
CLOs
    23,339       3,217       109       --       3,326  
Investment funds
    105,808       3,543       --       --       3,543  
Credit-linked note structures
    12,993       50       1,472       --       1,522  
Money market funds
    31,843       50       10       --       60  
Other (2)
    1,832       3,983       (36 )     (141 )     3,806  
 
                             
 
                                       
Total
  $ 269,880     $ 38,521     $ 2,472     $ (657 )   $ 40,336  
 
                             
 
                                       
            Maximum exposure to loss
             
 
                                       
CDOs
          $ 14,080     $ 4,849     $ 1,514     $ 20,443  
Wachovia administered ABCP conduit
            --       15,824       --       15,824  
Asset-based lending structures
            9,346       136       --       9,482  
Tax credit structures
            4,366       --       560       4,926  
CLOs
            3,217       109       555       3,881  
Investment funds
            3,550       --       140       3,690  
Credit-linked note structures
            50       2,253       --       2,303  
Money market funds
            50       51       --       101  
Other (2)
            3,991       130       578       4,699  
 
                               
 
                                       
Total
          $ 38,650     $ 23,352     $ 3,347     $ 65,349  
 
                               
 
                                       
March 31, 2009           Carrying value – asset (liability)
             
 
                                       
CDOs
  $ 53,439     $ 14,595     $ 1,008     $ --     $ 15,603  
Wachovia administered ABCP conduit
    9,894       --       --       --       --  
Asset-based lending structures
    15,158       9,061       (122 )     --       8,939  
Tax credit structures
    27,197       5,025       --       (863 )     4,162  
CLOs
    24,691       3,547       119       --       3,666  
Investment funds
    96,497       1,918       --       --       1,918  
Credit-linked note structures
    1,578       52       1,410       --       1,462  
Money market funds
    33,552       --       (9 )     --       (9 )
Other (2)
    3,989       4,336       (8 )     (86 )     4,242  
 
                             
 
                                       
Total
  $ 265,995     $ 38,534     $ 2,398     $ (949 )   $ 39,983  
 
                             
 
                                       
            Maximum exposure to loss
             
 
                                       
CDOs
          $ 14,595     $ 4,414     $ 1,092     $ 20,101  
Wachovia administered ABCP conduit
            --       10,092       --       10,092  
Asset-based lending structures
            9,061       122       1,073       10,256  
Tax credit structures
            5,025       --       15       5,040  
CLOs
            3,547       119       529       4,195  
Investment funds
            1,918       500       123       2,541  
Credit-linked note structures
            52       2,189       --       2,241  
Money market funds
    &nbs