EX-19 6 g14577qexv19.htm EXHIBIT 19 Exhibit 19
Exhibit (19)
(WACHOVIA LOGO)

 


 

WACHOVIA CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL SUPPLEMENT
SIX MONTHS ENDED JUNE 30, 2008
TABLE OF CONTENTS

 
         
    PAGE  
 
Financial Highlights
    1  
 
       
Management’s Discussion and Analysis
    2  
 
       
Explanation of Our Use of Non-GAAP Financial Measures
    42  
 
       
Selected Statistical Data
    43  
 
       
Summaries of Income, Per Common Share and Balance Sheet Data
    44  
 
       
Merger-Related and Restructuring Expenses
    45  
 
       
Business Segments
    46  
 
       
Net Trading Revenue — Investment Banking
    62  
 
       
Selected Ratios
    63  
 
       
Trading Account Assets and Liabilities
    64  
 
       
Loans — On-Balance Sheet, and Managed and Servicing Portfolios
    65  
 
       
Loans Held for Sale
    66  
 
       
Allowance for Credit Losses
    67  
 
       
Allowance and Charge-Off Ratios
    68  
 
       
Nonperforming Assets
    69  
 
       
Nonaccrual Loan Activity
    70  
 
       
Goodwill and Other Intangible Assets
    71  
 
       
Deposits
    72  
 
       
Time Deposits in Amounts of $100,000 or More
    72  
 
       
Long-Term Debt
    73  
 
       
Changes in Stockholders’ Equity
    74  
 
       
Capital Ratios
    75  
 
       
Net Interest Income Summaries — Five Quarters Ended June 30, 2008
    76  
 
       
Net Interest Income Summaries — Six Months Ended June 30, 2008 and 2007
    78  
 
       
Consolidated Balance Sheets — Five Quarters Ended June 30, 2008
    79  
 
       
Consolidated Statements of Income — Five Quarters Ended June 30, 2008
    80  
 
       
Wachovia Corporation and Subsidiaries — Consolidated Financial Statements
    81  


 

FINANCIAL HIGHLIGHTS
 
                                                 
    Three Months Ended     Percent     Six Months Ended     Percent  
    June 30,     Increase     June 30,     Increase  
(Dollars in millions, except per share data)   2008     2007     (Decrease)     2008     2007     (Decrease)  
 
EARNINGS SUMMARY
                                               
Net interest income (GAAP)
  $ 4,290       4,449       (4) %   $ 9,042       8,949       1 %
Tax-equivalent adjustment
    54       38       42       107       75       43  
                     
Net interest income (Tax-equivalent)
    4,344       4,487       (3 )     9,149       9,024       1  
Fee and other income
    3,165       4,240       (25 )     5,942       7,974       (25 )
                     
Total revenue (Tax-equivalent)
    7,509       8,727       (14 )     15,091       16,998       (11 )
Provision for credit losses
    5,567       179             8,398       356        
Other noninterest expense
    6,376       4,755       34       11,473       9,248       24  
Merger-related and restructuring expenses
    251       32             492       42        
Goodwill impairment
    6,060                   6,060              
Other intangible amortization
    97       103       (6 )     200       221       (10 )
                     
Total noninterest expense
    12,784       4,890             18,225       9,511       92  
Minority interest in income of consolidated subsidiaries
    (18     139             137       275       (50 )
                     
Income (loss) before income taxes (benefits) (Tax-equivalent)
    (10,824 )     3,519             (11,669 )     6,856        
Tax-equivalent adjustment
    54       38       42       107       75       43  
Income taxes (benefits)
    (1,963 )     1,140             (2,197 )     2,138        
                     
Net income (loss)
    (8,915 )     2,341             (9,579 )     4,643        
Dividends on preferred stock
    193                   236              
                     
Net income (loss) available to common stockholders
  $ (9,108 )     2,341       %   $ (9,815 )     4,643       %
 
Diluted earnings per common share (a)
                                               
Net income (loss) available to common stockholders
  $ (4.31 )     1.22       %   $ (4.82 )     2.42       %
Return on average common stockholders’ equity
    (50.47 )%   13.54             (26.80 )%     13.51        
Return on average assets (b)
    (4.50 )%     1.33             (2.44 )%     1.34        
 
ASSET QUALITY
                                               
Allowance for loan losses as % of loans, net
    2.20 %     0.79             2.20 %     0.79        
Allowance for loan losses as % of nonperforming assets
    90       157             90       157        
Allowance for credit losses as % of loans, net
    2.24       0.83             2.24       0.83        
Net charge-offs as % of average loans, net
    1.10       0.14             0.88       0.15        
Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale
    2.41 %     0.49             2.41 %     0.49        
 
CAPITAL ADEQUACY
                                               
Tier I capital ratio
    8.00 %     7.47             8.00 %     7.47        
Total capital ratio
    12.74       11.46             12.74       11.46        
Leverage ratio
    6.57 %     6.23             6.57 %     6.23        
 
OTHER FINANCIAL DATA
                                               
Net interest margin
    2.58 %     2.96             2.74 %     3.01        
Fee and other income as % of total revenue
    42.15       48.58             39.37       46.91        
Effective income tax rate
    18.06 %     32.78             18.67 %     31.53        
 
BALANCE SHEET DATA
                                               
Securities
  $ 113,461       106,184       7 %   $ 113,461       106,184       7 %
Loans, net
    488,198       429,120       14       488,198       429,120       14  
Total assets
    812,433       715,428       14       812,433       715,428       14  
Total deposits
    447,790       410,030       9       447,790       410,030       9  
Long-term debt
    184,401       142,047       30       184,401       142,047       30  
Stockholders’ equity
  $ 75,127       69,266       8 %   $ 75,127       69,266       8 %
 
OTHER DATA
                                               
Average basic common shares (In millions)
    2,111       1,891       12 %     2,037       1,892       8 %
Average diluted common shares (In millions)
    2,119       1,919       10       2,048       1,922       7  
Actual common shares (In millions)
    2,159       1,903       13       2,159       1,903       13  
Dividends paid per common share
  $ 0.38       0.56       (33 )   $ 1.02       1.12       (9 )
Dividend payout ratio on common shares
    (8.70 )%     45.90             (21.06 )%     46.28        
Book value per common share
  $ 30.25       36.40       (17 )   $ 30.25       36.40       (17 )
Common stock price
    15.53       51.25       (70 )     15.53       51.25       (70 )
Market capitalization
  $ 33,527       97,530       (66 )   $ 33,527       97,530       (66 )
Common stock price to book value
    51 %     141       (64 )     51 %     141       (64 )
FTE employees
    119,952       110,493       9       119,952       110,493       9  
Total financial centers/brokerage offices
    4,820       4,135       17       4,820       4,135       17  
ATMs
    5,277       5,099       3 %     5,277       5,099       3 %
 
(a) Calculated using average basic common shares in 2008.
(b) Net income (loss) as a percentage of average assets.

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Management’s Discussion and Analysis
This discussion contains forward-looking statements. Please refer to our Second Quarter 2008 Report on Form 10-Q for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements.
Executive Summary
Summary of Results of Operations
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(In millions, except per share data)   2008     2007     2008     2007  
 
Net interest income (GAAP)
  $ 4,290       4,449       9,042       8,949  
Tax-equivalent adjustment
    54       38       107       75  
 
Net interest income (a)
    4,344       4,487       9,149       9,024  
Fee and other income
    3,165       4,240       5,942       7,974  
 
Total revenue (a)
    7,509       8,727       15,091       16,998  
Provision for credit losses
    5,567       179       8,398       356  
Other noninterest expense
    6,376       4,755       11,473       9,248  
Goodwill impairment
    6,060       -       6,060       -  
Merger-related and restructuring expenses
    251       32       492       42  
Other intangible amortization
    97       103       200       221  
 
Total noninterest expense
    12,784       4,890       18,225       9,511  
Minority interest in income (loss) of consolidated subsidiaries
    (18 )     139       137       275  
Income taxes (benefits)
    (1,963 )     1,140       (2,197 )     2,138  
Tax-equivalent adjustment
    54       38       107       75  
 
Net income (loss)
    (8,915 )     2,341       (9,579 )     4,643  
 
Dividends on preferred stock
    193       -       236       -  
 
Net income (loss) available to common stockholders
    (9,108 )     2,341       (9,815 )     4,643  
 
Diluted earnings (loss) per common share
  $ (4.31 )     1.22       (4.82 )     2.42  
 
(a) Tax-equivalent.
Against a backdrop of the weakest domestic economy in more than 16 years and continued instability in the housing and financial markets, we reported a net loss applicable to common shareholders of $9.8 billion, or a net loss of $4.82 per share, in the first half of 2008 compared with earnings of $4.6 billion, or $2.42 per share, in the first half of 2007. Subsequent to our announcement of second quarter financial results on July 22, 2008, we further increased our legal reserves as of June 30, 2008, by $500 million pre-tax to reflect the effect of recent and active settlement discussions with securities regulators of investigations relating to auction rate securities. More information about the increased legal reserve is in the Outlook and Noninterest Expense sections. Key drivers in the pre-tax loss were:
    An $8.4 billion loan loss provision, which increased reserves by $6.2 billion, including $4.4 billion for the payment option mortgage portfolio called Pick-a-Payment.
 
    A $6.1 billion noncash goodwill impairment charge in commercial-related subsegments reflecting declining equity market valuations and underlying asset values. The goodwill impairment charge had no impact on Wachovia’s tangible capital levels, regulatory capital ratios or liquidity. More information is in the Critical Accounting Policies and Balance Sheet Analysis: Goodwill sections.
 
    $3.2 billion in market disruption-related losses.
 
    A $1.2 billion increase in legal reserves, $590 million of which was recorded in the second quarter of 2008, primarily related to previously disclosed matters, and $500 million of which was recorded after our July 22, 2008 release of second quarter 2008 results, for the effect of recent and active settlement discussions related to auction rate securities, partially offset by the first quarter 2008 reversal of $102 million of litigation reserves related to our ownership interest in Visa, Inc.

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    A $975 million noncash charge related to certain leasing transactions widely referred to as “sale in, lease out” or SILO transactions.
 
    $481 million in net gains related to the adoption of new fair value accounting standards on January 1, 2008.
 
    $391 million in losses related to planned discretionary securities sales.
 
    A $225 million gain from our ownership in Visa, which completed its initial public offering in March 2008.
Results also included after-tax net merger-related and restructuring expenses of $251 million, or 12 cents per share, in the first half of 2008 and $26 million, or 1 cent per share, in the first half of 2007. Revenues and expenses also reflect the impact of the A.G. Edwards, Inc. acquisition from October 1, 2007; and a majority interest investment in European Credit Management Ltd. (ECM), a London-based fixed income investment management firm, from January 31, 2007.
Actions on Capital, Liquidity and Risk
We are committed to protecting and creating shareholder value through the disciplined use of capital and maintaining a strong balance sheet in view of current and anticipated challenges in the credit environment.
During the second quarter of 2008, the board of directors and senior management conducted a strategic review of our major business lines given the changing financial services landscape. As a result, we outlined several initiatives aimed at three near-term strategic priorities: Protecting, preserving and generating capital; further enhancing Wachovia’s liquidity position; and reducing risk. On July 22, 2008, actions announced included:
    Reducing the quarterly dividend on our common stock by 32.5 cents to 5 cents per share, which is estimated to preserve approximately $700 million in capital per quarter. The dividend is payable on September 15, 2008, to shareholders of record on August 29, 2008. In the first half of 2008, we paid common stockholders dividends of $2.1 billion, or $1.015 per share.
 
    More aggressively managing our balance sheet, which we estimate will result in a $20 billion reduction in loans and securities by year-end 2008 and preserve an estimated $1.5 billion in capital. Proceeds from selected maturing securities will not be reinvested in order to reduce the securities portfolio balance. To reduce capital usage in the loan portfolio, we are implementing enhanced discipline to ensure more focus on strategic commercial customer relationships, and instituting programs to further enhance the mix of our consumer loan portfolio. This includes reducing mortgage concentration in our consumer loan portfolio by tightening mortgage underwriting standards, discontinuing origination of negative amortization loans, eliminating the General Bank wholesale mortgage origination channel, eliminating focus on Pick-a-Payment loan retention and offering opportunities for Pick-a-Payment borrowers to refinance mortgages into marketable products. Also, as we focus on disciplined deployment of capital in this environment, we currently expect new loan growth to be more modest due to increased pricing discipline and tighter underwriting guidelines. In addition, we will also consider the possible sale of certain noncore assets, which could preserve additional capital.

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    Instituting a more rigorous expense discipline, which we estimate will preserve up to $1 billion in capital. This includes an initiative to reduce planned expense growth in the second half of this year by approximately $490 million, more than offset by restructuring costs, and a reduction in full year 2009 planned expense growth by $1.5 billion. As part of this initiative, we reviewed 500 existing or planned capital expenditure projects and decided to delay or cancel $350 million of expenses related to these projects. Forty percent of the expense savings is expected to come from lower personnel costs and will involve reductions affecting approximately 6,950 active employees, revised upward by 600 subsequent to our original announcement, and 4,400 open positions. These expense actions are expected to have only a modest impact on revenue. Initiatives such as western expansion in retail, commercial and wealth will continue but at a more deliberate pace. The Merger-Related and Restructuring Expenses section has more information.
We estimate these strategies will generate or preserve more than $5 billion in tier 1 capital by year-end 2009 and further enhance our liquidity position. Wachovia ended the second quarter of 2008 with approximately $50 billion in tier 1 regulatory capital and a tier 1 capital ratio of 8.00 percent, a leverage ratio of 6.57 percent and a tangible capital ratio of 4.68 percent at June 30, 2008. Based on our tier 1, leverage and tangible capital ratios, we are considered “well capitalized.” More information is in the Stockholders’ Equity section.
On August 6, 2008, we announced a decision to end our acceptance of private undergraduate student loan applications effective immediately. This decision was made in light of the current economic environment.
In the first half of 2008, we added $11.55 billion in capital through common and preferred stock offerings. In April 2008, we issued in concurrent offerings $4.025 billion of convertible preferred stock and $4.025 billion of common stock and in February 2008 we issued $3.5 billion of preferred stock.
Over the past four quarters, prompted by continuing significant home price devaluation in stressed real estate markets, particularly in Florida and California, and our current expectation for continued devaluation through mid 2010, we have increased the allowance for credit losses by $7.4 billion, to $11.0 billion or 2.24 percent of loans. The $3.3 billion increase in Pick-a-Payment reserves in the second quarter reflected a continued severe decline in home market values and what we believe will be the related effect on borrower behavior in the face of the loss of equity in their home.
The provision for credit losses of $8.4 billion compared with $356 million in the first half of 2007, and exceeded net charge-offs by $6.3 billion. In the first half of 2008 our net charge-offs were $2.1 billion, an increase of $1.8 billion from the first half of 2007, and represented a 73 basis point increase in the net charge-off ratio to 0.88 percent of average net loans. This included commercial net charge-offs of $692 million, up $636 million from the first half of 2007, with the increase driven by $398 million of net losses in our Real Estate Financial Services portfolio and $182 million of net losses on large corporate loans. Consumer net charge-offs were $1.4 billion, up $1.1 billion, driven by net losses of $1.0 billion in consumer real estate, including $748 million in Pick-a-Payment loans as well as $274 million in auto loans.
Nonperforming assets, including loans held for sale, were $12.0 billion, representing a ratio of nonperforming assets to loans, foreclosed properties and loans held for sale of 2.41 percent at June 30, 2008, an increase from $5.4 billion, or 1.14 percent, at December 31, 2007, largely reflecting increases relating to our Pick-a-Payment mortgage product and residential-related

4


 

commercial real estate. We continue to mitigate the risk and volatility of our balance sheet through risk management practices, including increased collection efforts.
Strengthening Core Businesses
Another significant strategic priority is a continued focus on generating growth in our core businesses. While credit headwinds and the capital markets disruption overwhelmed our first half 2008 results, continued momentum in most of our businesses generated solid underlying performance. In the first half of 2008 compared with the first half of 2007, growth came from:
    Modestly higher net interest income, driven by our higher loans and deposits and improved margins, somewhat offset by the effect of the $975 million SILO-related lease charge and increasing nonaccrual loans.
 
    A 13 percent increase in average loans to $471.3 billion. Average consumer loans rose 5 percent, driven by higher traditional mortgage loans. Average commercial loan growth of 25 percent reflected strength in large corporate and middle-market commercial loans and in commercial real estate. Increased consumer and commercial loans included the transfer of $4.1 billion in commercial loans and $2.8 billion in consumer loans from the held-for-sale portfolio in the first half of 2008.
 
    A 5 percent increase in average core deposits to $392.6 billion. We expect deposits to grow further in 2008 as we continue to expand product distribution in the newly integrated former World Savings branches, offer retail brokerage deposits in the former A.G. Edwards franchise, increase productivity in our de novo (or new) branches and benefit from product introductions, such as Way2Save and competitive certificate of deposit campaigns, to attract and enhance customer relationships. We also continue to enhance the efficiency of our financial center network and expand our presence in higher growth markets. In the first half of 2008, we opened 46 de novo branches, consolidated 94 branches, and expanded our commercial banking presence, all of which added $84 million to noninterest expense. As a result of our strategic review, we currently plan to continue to open additional branches, but at a more deliberate pace.
 
    Higher fiduciary and asset management fees and brokerage commissions largely reflecting the A.G. Edwards acquisition.
Our core banking businesses, while absorbing increased credit costs, continued to perform well, as did our brokerage operations, in the first half of 2008 compared with the first half of 2007. The General Bank’s earnings declined to $2.3 billion, down 20 percent, driven by rapidly rising credit costs and related expenses, which overshadowed continued sales momentum and a 6 percent increase in revenue. Wealth Management earned $190 million, up 10 percent, on 6 percent revenue growth in challenging markets. The capital markets disruption continued to dampen results in the Corporate and Investment Bank (CIB), which earned $131 million, down 90 percent, driven by $2.1 billion in net market-related valuation losses and reduced origination volume in most markets-related businesses. The losses were somewhat offset by $466 million of principal investing net gains related to the adoption of new fair value accounting standards. In addition, CIB has a number of businesses that were not adversely affected by the market disruption, as described further in the Corporate and Investment Bank section. Capital Management earnings declined to $365 million, reflecting 35 percent revenue growth, primarily related to the A.G. Edwards acquisition, more than offset by legal reserves related to the auction rate securities.

5


 

Other Matters
Leveraged Lease Charge The noncash charge of $975 million, or $855 million after tax, recorded in the second quarter of 2008 relates to certain leasing transactions we entered into between 1999 and 2003 involving lease-to-service contracts and leases of qualified technological equipment, which are widely known as sale in, lease-out or SILO transactions. We discontinued originating these transactions in 2003. The decision to record the noncash charge came after our analysis of a federal appeals court opinion in a case involving another financial institution that disallowed tax benefits associated with certain lease-in, lease-out or LILO transactions. We believe some aspects of the court decision could be extended to SILO transactions. Subsequently, a federal court issued an adverse decision on a SILO transaction entered into by two other large financial institutions. While the tax law involving SILO transactions remains unsettled, as we disclosed in Note 1 to Consolidated Financial Statements in our 2007 Annual Report, applicable accounting standards require us to update the tax cash flow assessment on our SILO transactions in light of the federal court ruling. A majority of the charge will be recognized as income over the remaining terms of the affected leases, generally 35 to 40 years. However, because this charge occurs relatively early in the term of the SILOs, the effect on net interest income of recording this charge is expected to be a decrease through 2018, then positive thereafter. We estimate the related decrease in net interest income in the second half of 2008 will be $45 million. More information is in Note 1 to Consolidated Financial Statements in our Second Quarter 2008 Report on Form 10-Q.
On August 6, 2008, the Internal Revenue Service announced a settlement initiative related to SILO transactions. Management is evaluating the offer notification and potential impact to our financial condition and results of operations, in the event that we were to accept the terms of the offer. This settlement offer would have no impact on our LILO portfolio as we settled all issued related to this portfolio with the IRS in 2004.
Fair Value Implementation On January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 157 establishes a framework for measuring fair value under U.S. GAAP, expands disclosures about fair value measurements and provides new income recognition criteria for certain derivative contracts. SFAS 157 does not establish any new fair value measurements; rather it defines “fair value” for other accounting standards that require the use of fair value for recognition or disclosure. SFAS 159 permits companies to elect to carry certain financial instruments at fair value with corresponding changes in fair value recorded in the results of operations. The effect of adopting SFAS 157 was recorded either directly to first quarter 2008 results of operations or as a cumulative effect of a change in accounting principle through an adjustment to beginning retained earnings on January 1, 2008, depending on the nature of the fair value adjustment. The transition adjustment for SFAS 159 was recorded as a cumulative effect of a change in accounting principle through an adjustment to beginning retained earnings on January 1, 2008.
The adoption of SFAS 157 resulted in net gains in the first quarter 2008 results of operations of $481 million pre-tax related primarily to a change in the methodology used to calculate the fair value of certain investments in private equity funds held in a wholly owned investment company. This amount excludes the ongoing effect in the first half of 2008 related to the application of SFAS 157. Also, on January 1, 2008, we recorded a $38 million after-tax gain ($61 million pre-tax) as a cumulative effect adjustment to beginning retained earnings related to removal of blockage discounts previously applied in determining the fair value of certain actively traded public equity investments and to profits previously deferred on certain derivative transactions. SFAS 157 prohibits the use of blockage discounts in determining the fair value of certain financial instruments.

6


 

 
Upon adoption of SFAS 159, we elected to record certain existing securities available for sale and a small percentage of our loans held-for-sale portfolio at fair value, and as a result recorded a $38 million after-tax charge ($60 million pre-tax) to 2008 beginning retained earnings as a cumulative effect of the adoption of SFAS 159.
Market Disruption-Related Losses, Net
 
                                                 
    2008     2007        
    1st Half     2nd Half     Cumulative  
                                     
    Trading     Securities                          
    profits     gains     Other                    
(Pre-tax dollars in millions)   (losses)     (losses)     Income     Total     Total     Total  
 
Corporate and Investment Bank
                                               
ABS CDO and other subprime-related
  $ (387 )     (199 )     9       (577 )     (1,048 )     (1,625 )
Commercial mortgage (CMBS)
    (399 )     (2 )     (329 )     (730 )     (1,088 )     (1,818 )
Consumer mortgage
    (229 )     -       (90 )     (319 )     (205 )     (524 )
Leveraged finance
    147       -       (354 )     (207 )     (179 )     (386 )
Other
    (272 )     (15 )     (9 )     (296 )     (50 )     (346 )
 
Total
    (1,140 )     (216 )     (773 )     (2,129 )     (2,570 )     (4,699 )
Capital Management
                                               
Impairment losses
    (94 )     (24 )     -       (118 )     (57 )     (175 )
Parent
                                               
Impairment losses / other
    -       (655 )     (321 )     (976 )     (94 )     (1,070 )
 
Total, net
    (1,234 )     (895 )     (1,094 )     (3,223 )     (2,721 )     (5,944 )
Discontinued operations (Bluepoint)
  $ -       -       -       -       (330 )     (330 )
 
Market Disruption-Related Losses Net market disruption-related valuation losses were $3.2 billion in the first half of 2008, with $2.3 billion in the first quarter of 2008 and $936 million in the second quarter of 2008. We began to incur market disruption-related losses in the second half of 2007 and such losses amounted to $2.7 billion in 2007, excluding discontinued operations. Of the 2008 losses, $2.1 billion were in the Corporate and Investment Bank, $976 million were in the Parent, and $118 million were in Capital Management, as detailed in the Market Disruption-Related Losses, Net table.
For a number of years, we have been a major participant in structuring and underwriting fixed income investment products backed by pools of loans, such as commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS), as well as collateralized debt obligations (CDOs) that are typically backed by pools of bonds including CMBS and RMBS, loans and other assets. We have also been a participant in underwriting and syndicating leveraged commercial loans. Our CMBS and RMBS structuring activities involved consumer and commercial real estate loans underwritten primarily through our direct origination channels. Our CDO business involved transactions predominantly backed by commercial loans and commercial real estate loans. We purchased subprime residential assets such as RMBS as part of our CDO distribution strategy.
The markets for subprime RMBS and for CDOs collateralized by subprime RMBS, which we refer to as ABS CDOs, as well as for CMBS, have been particularly hard hit by the market disruption, while the market for leveraged loans has been affected by spread widening.
Rising defaults and delinquencies in subprime residential mortgages as well as rating agencies’ downgrades of a large number of subprime RMBS have led to continued declines in the valuations of these types of securities and certain indices that serve as a reference point for determining the value of such securities. The continued pressures of the weaker housing markets, particularly in income-producing categories, as well as continuing concerns over the U.S. economy and illiquidity in the commercial real estate sector have led to further declines in the value of CMBS and CDOs backed by commercial real estate loans.
Leveraged finance results included net market disruption-related losses of $309 million in the first quarter of 2008 and net gains of $102 million in the second quarter of 2008. The first quarter results were driven by losses on several large unfunded commitments partially offset by gains on

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economic hedges. Second quarter results were driven by recoveries of previous write-downs related to the resolution of certain commitments, partially offset by $372 million of losses related to ineffectiveness of economic hedges that were largely unwound during the second quarter.
With respect to our monoline-related structured product exposure, in the first half of 2008 we recorded $166 million of reserves based on monoline exposure profiles and our assessments of the credit quality of each monoline.
Market disruption-related losses in Capital Management in the first half of 2008 amounted to $118 million of write-downs on trading and available for sale securities. This included $89 million of securities write-downs related to the liquidation of an Evergreen fund and $24 million on securities purchased in the third quarter of 2007 from Evergreen money market funds. Market disruption-related losses in the Parent in the first half of 2008 amounted to $976 million, including impairment write-downs on securities available for sale of $655 million, and valuation losses of $314 million related to our BOLI portfolio.
In the second half of 2007, we recorded market disruption-related losses of $330 million related to BluePoint Re Limited, a Bermuda-based monoline bond reinsurer that is a consolidated subsidiary of Wachovia. There were no additional losses in the first half of 2008.
The fair values of all of our assets that are subject to market valuation adjustments, including but not limited to subprime RMBS and ABS CDOs, CMBS warehouse assets and leveraged finance commitments, depend on market conditions and assumptions that may change over time. Accordingly, the fair values of these assets in future periods and their effect on our financial results will depend on future market developments and assumptions and may be materially greater or less than the changes in values discussed above.
Further information on these market disruption-related losses is provided in the Corporate Results of Operations, Fee Income, Corporate and Investment Bank and Capital Management sections that follow. The Outlook section also has additional information.
Subprime-Related, CMBS and Leveraged Finance
Distribution Exposure, Net

 
                                         
            6/ 30/ 08                    
            Exposure                    
    6/ 30/ 08     Hedged With     6/ 30/ 08     3/ 31/ 08     12/ 31/ 07  
    Gross     Various     Net     Net     Net  
($ in millions)   Exposure     Instruments     Exposure     Exposure     Exposure  
 
ABS CDO-related exposures:
                                       
Super senior ABS CDO exposures
                                       
High grade
  $ 2,331       (2,331 )     -       -       -  
Mezzanine
    2,022       (1,603 )     419       439       613  
 
Total super senior ABS CDO exposures
    4,353       (3,934 )     419       439       613  
Other retained ABS CDO-related exposures
    29       (17 )     12       68       208  
 
Total ABS CDO-related exposures (a)
    4,382       (3,951 )     431       507       821  
Subprime RMBS exposures:
                                       
AAA rated
    1,524       -       1,524       1,684       1,948  
Below AAA rated (net of hedges) (b)
    (46 )     -       (46 )     40       (253 )
 
Total subprime RMBS exposures
    1,478       -       1,478       1,724       1,695  
Total subprime-related exposure
    5,860       (3,951 )     1,909       2,231       2,516  
Commercial mortgage-related (CMBS)
    756       -       756       2,954       7,564  
Leveraged finance (net of applicable fees)
  $ n.a.       n.a.       3,766       8,157       9,149  
 
(a) At 6/ 30/ 08, $2.0 billion is hedged with highly rated monoline financial guarantors; $900 million with a AA-rated large European bank, under margin agreements; and $1.0 billion with a large AA-rated global multi-line insurer, under margin agreements.
(b) Net short position due to hedging activities.
Market Disruption-Related Distribution Exposure We have taken steps to reduce the size of our exposure to structured products and leveraged finance assets originally intended for distribution, which have been most exposed to market disruptions, specifically ABS CDOs, subprime RMBS, CMBS and leveraged finance commitments. The table above shows our remaining exposure at June 30, 2008, and the comparable changes in those exposures since March 31, 2008, and December 31, 2007.

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Since the market disruption began in July 2007, we have elected to transfer certain assets that were originally intended for distribution to the loan portfolio based on our view that the market valuations provide attractive longer term investment returns. These assets were transferred at fair value and are no longer being marketed. In the first half of 2008, these transfers amounted to $4.4 billion of commercial and commercial real estate exposure and $2.0 billion of consumer real estate loans.
As of June 30, 2008, our notional subprime ABS CDO distribution exposure, net of hedges with financial guarantors, was $431 million and $1.5 billion of our subprime RMBS exposure was rated AAA or equivalent by rating agencies.
Our CMBS mark-to-market exposure of $756 million at June 30, 2008, was down from $7.6 billion at December 31, 2007. More than 50 percent of the remaining exposure at June 30, 2008, was AAA-rated or equivalent.
Our leveraged finance exposure of $3.8 billion at June 30, 2008, was down from $9.1 billion at December 31, 2007, with the decrease attributable in part to cancellation of a large unfunded commitment. Of the June 30, 2008 exposure $574 million related to unfunded commitments. There was no bridge equity exposure at June 30, 2008.
Outlook
In the face of significant deterioration in the housing market and pressure on our markets-oriented businesses beginning with the disruption in the capital markets in the second half of 2007, our core businesses are performing well and we are committed to strengthening them. We anticipate continued housing market deterioration and rising credit costs as well as a continuing challenge for revenue generation in many of our markets-related businesses over the next few quarters. But longer term, we are optimistic that our capital and liquidity position us well to take advantage of the opportunities arising in the wake of these market conditions.
Looking ahead, we are taking steps to ensure that as financial markets remain unsettled and loan losses increase, we focus intently on strengthening our balance sheet, controlling costs and actively managing our exposures in a challenging credit environment. We believe our company is in the right businesses for long-term growth, and that our strategies around capital and liquidity, focus on high growth businesses and markets, customer service, expense discipline, and our commitment to credit risk management will restore value for shareholders over the long term.
Wachovia is in active discussions of potential settlement with various state regulators and the SEC of ongoing investigations concerning the underwriting, sale and subsequent auctions of certain auction rate securities by Wachovia Securities, LLC, and Wachovia Capital Markets, LLC, including the likelihood of liquidity solutions. Based on the probability of such settlement, current market value estimates, affected auction rate securities and expected future redemptions, we recorded a $500 million pre-tax increase to legal reserves for the second quarter of 2008. This legal expense includes amounts reserved for estimated market valuation losses on auction rate securities associated with a potential settlement. We do not currently expect that the possible settlement would have a material effect on capital, liquidity or overall financial results through estimated maturities or redemptions for affected auction rate securities, or alter Wachovia’s previously announced focus on improving our tier 1 capital ratio. We currently expect that our tier 1 capital ratio will decrease by approximately 3 basis points following a potential settlement. More information is in the Noninterest Expense and Business Segments: Capital Management sections and Note 1 to Consolidated Financial Statements.

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Our outlook for 2008, which follows, generally assumes a slowing U.S. economy overall and the benefits of a steeper yield curve and low short-term interest rates. Based on these assumptions and before merger-related and restructuring expenses, we expect that in the second half of 2008:
    Net interest income will decline modestly from first half 2008 levels, excluding the impact of the SILO lease-related charge;
 
    Fee income will remain exposed to net market disruption-related losses/gains;
 
    A continued focus on expense control;
 
    A continued challenging credit environment;
 
    A full year 2008 effective income tax rate of approximately 20.5 percent to 21.5 percent on a tax-equivalent basis; and
 
    A focus on the actions described above to increase tier 1 capital from current levels.
In addition, we are focused on ensuring a successful integration of the A.G. Edwards acquisition, with integration activity scheduled to continue through the third quarter of 2009. Merger milestones have been met to date and systems integration activities remain on track.
As part of our near-term strategic priorities and when consistent with our overall business strategy, we may consider disposing of certain assets, branches, subsidiaries or lines of business. Although not currently a priority or focus of management, in the future we may also explore acquisition opportunities in areas that would complement our core businesses and future acquisitions involving cash, debt or equity securities could occur.
Critical Accounting Policies
Our accounting and reporting policies are in accordance with U.S. GAAP, and conform to general practices within the applicable industries. We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the estimations. There are five policies that we identify as being particularly sensitive to judgments and the extent to which significant estimates are used: allowance for loan losses and the reserve for unfunded lending commitments (which is recorded in other liabilities); fair value of certain financial instruments (which includes assessment of available for sale securities for other-than-temporary impairment); consolidation; goodwill impairment; and contingent liabilities. Because of the relative significance of the provision for credit losses and the goodwill impairment charge to our results in the first half of 2008, we included information regarding the related policies below. For more information on the other critical accounting policies, please refer to our 2007 Annual Report on Form 10-K.
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments The allowance for loan losses and reserve for unfunded lending commitments, which we refer to collectively as the allowance for credit losses, are maintained at levels we believe are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the consolidated financial statements. We monitor various qualitative and quantitative credit metrics and trends, including changes in the levels of past due, criticized and nonperforming

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loans as part of our allowance modeling process. In addition, we rely on estimates and exercise judgment in assessing credit risk. At June 30, 2008, the allowance for loan losses was $10.7 billion and the reserve for unfunded lending commitments was $212 million.
We employ a variety of modeling and estimation tools for measuring credit risk. These tools are periodically reevaluated and refined as appropriate. The following provides a description of each component of our allowance for credit losses, the techniques we use and the estimates and judgments inherent in each.
Our model for the allowance for loan losses has four components: formula-based components for both the commercial and consumer portfolios, each including a factor for historical loss variability; a reserve for impaired commercial loans; and an unallocated component.
For commercial loans, the formula-based component of the allowance for loan losses is based on statistical estimates of the average losses observed by credit grade. Average losses for each credit grade reflect the annualized historical default rate and the average losses realized for defaulted loans.
For consumer loans, the formula-based component of the allowance for loan losses is based on statistical estimates of the average losses observed by product classification. We compute average losses for each product class using historical loss data, including analysis of delinquency patterns, origination vintage and various credit risk forecast indicators. In addition, for certain residential real estate loans, primarily the Pick-a-Payment portfolio, we use borrowers’ standard credit scoring measure (FICO), loan-to-value ratios for underlying properties, home price appreciation or depreciation data and other general economic data in estimating losses. In certain cases, we may stratify the portfolio geographically in the estimation of future home value changes. Credit loss estimates derived from statistical models may be augmented by amounts reflecting management’s judgment regarding probable incurred losses not captured by the applicable models. In the second quarter of 2008, we updated our model inputs to reflect expected continued deterioration in housing and a general worsening of the overall economy. Model inputs for our Pick-a-Payment portfolio were adjusted to include a more severe home price decline scenario and greater sensitivity to changes in borrower equity, which resulted in an increased cumulative loss output.
For both commercial and consumer loans, the formula-based components include additional amounts to establish reasonable ranges that consider observed historical variability in losses. This historical loss variability component represents a measure of the potential for significant volatility above average losses over short periods. Factors we may consider in setting these amounts include, but are not limited to, industry-specific data, geographic data, portfolio-specific risks or concentrations, and macroeconomic conditions.
At June 30, 2008, the formula-based components of the allowance were $2.3 billion for commercial loans and $7.6 billion for consumer loans, compared with $2.2 billion and $2.0 billion, respectively, at December 31, 2007.
We have established specific reserves within the allowance for loan losses for impaired commercial loans. We individually review any nonaccrual commercial loan with a minimum total exposure of $10 million in the Corporate and Investment Bank and $5 million in other segments to determine the amount of impairment, if any. In addition, certain nonaccrual commercial real estate loans in the Corporate and Investment Bank having a minimum exposure of $5 million are also reviewed individually. The reserve for each individually reviewed loan is based on the difference between the loan’s carrying amount and the loan’s estimated fair value. No other reserve is provided on impaired loans that are individually reviewed. At June 30, 2008,

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the allowance for loan losses included $457 million and the reserve for unfunded lending commitments included $3 million for individually reviewed impaired loans compared with $226 million and $4 million, respectively, at December 31, 2007.
The allowance for loan losses is supplemented with an unallocated component to reflect the inherent uncertainty of our estimates. The amount of this component and its relationship to the total allowance for loan losses may change from one period to another as warranted by facts and circumstances. We anticipate the unallocated component of the allowance will generally not exceed 5 percent of the total allowance for loan losses. At June 30, 2008, the unallocated component of the allowance for loan losses was $330 million, or 3 percent of the allowance for loan losses, compared with $165 million, or 4 percent, at December 31, 2007.
The reserve for unfunded lending commitments, which relates only to commercial business where our intent is to hold the funded loan in the loan portfolio, is based on a modeling process that is consistent with the methodology described above for the commercial portion of the allowance. In addition, this model includes as a key factor the historical average rate at which unfunded commercial exposures have been funded at the time of default. At June 30, 2008, and December 31, 2007, the reserve for unfunded lending commitments was $212 million and $210 million, respectively, including the reserve for impaired commitments.
The factors supporting the allowance for loan losses and the reserve for unfunded lending commitments as described above do not diminish the fact that the entire allowance for loan losses and reserve for unfunded lending commitments are available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments.
Additionally, our primary bank regulators regularly conduct examinations of the allowance for credit losses and make assessments regarding its adequacy and the methodology employed in its determination.
Goodwill Impairment We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. As discussed in the Business Segments section, we operate in four core business segments. Goodwill impairment testing is performed at the sub-segment level (referred to as a reporting unit). The eight reporting units are General Bank: Commercial, and Retail and Small Business; Wealth Management; Corporate and Investment Bank: Corporate Lending, Investment Banking, and Treasury and International Trade Finance; and Capital Management: Retail Brokerage Services and Asset Management.
Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Under applicable accounting standards, goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.

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At June 30, 2008, the fair values of our reporting units were based on a discounted cash flow methodology using discount rates that reflect our current market capitalization plus a control premium. In the past, we used a composite of several methods in estimating the fair value of reporting units. However, in view of the current market environment, we believe the discounted cash flow methodology is more reflective of a market participant’s view, and accordingly, we used this methodology exclusively in our second quarter 2008 impairment analysis.
Estimating the fair value of reporting units is a very subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. Our cash flow estimates were consistent with our most recent financial projections for each reporting unit. The discount rates used ranged from 14.2 percent to 20.9 percent and were based on the relationship between the total fair value of the reporting units and the market capitalization of the company plus an estimated control premium.
The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill in the “pro forma” business combination accounting as described above, exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under applicable accounting standards.
The more significant fair value adjustments in the pro forma business combination in the second step were to loans in each of the reporting units. Also, our step two analysis included adjustments to previously recorded identifiable intangible assets to reflect them at fair value and also included the fair value of additional intangibles not previously recognized (generally related to businesses not acquired in a purchase business combination). The adjustments to measure the assets, liabilities and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the consolidated balance sheet.
We performed goodwill impairment testing for all eight reporting units at December 31, 2007, March 31, 2008, and June 30, 2008. Goodwill amounted to $37.0 billion at June 30, 2008, compared with $43.1 billion at December 31, 2007, with the decrease related to the second quarter 2008 goodwill impairment charge of $6.1 billion. The Goodwill section has further information. Applicable Notes to Consolidated Financial Statements provide additional information.

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Corporate Results of Operations
Average Balance Sheets and Interest Rates
 
                                 
    Six Months Ended     Six Months Ended  
    June 30, 2008     June 30, 2007  
                         
    Average     Interest     Average     Interest  
(In millions)   Balances     Rates     Balances     Rates  
 
Interest-bearing bank balances
  $ 4,616       3.91 %   $ 2,459       6.55 %
Federal funds sold
    12,470       2.98       13,111       5.16  
Trading account assets
    44,115       5.13       32,438       5.93  
Securities
    113,452       5.55       108,253       5.42  
Commercial loans, net (a)
    202,391       4.34       161,423       7.12  
Consumer loans, net
    268,944       6.86       256,852       7.53  
 
Total loans, net
    471,335       5.78       418,275       7.37  
 
Loans held for sale
    10,367       7.03       17,199       6.32  
Other earning assets
    10,706       5.30       8,119       7.02  
 
Risk management derivatives
    -       0.05       -       0.03  
 
Total earning assets
    667,061       5.69       599,854       6.88  
 
Interest-bearing deposits
    382,293       2.67       342,159       3.66  
Federal funds purchased
    39,622       2.95       36,595       4.97  
Commercial paper
    5,348       2.19       5,032       4.70  
Securities sold short
    6,581       3.53       7,929       3.81  
Other short-term borrowings
    9,722       1.57       7,295       2.66  
Long-term debt
    171,506       4.33       142,746       5.36  
 
Risk management derivatives
    -       0.06       -       0.10  
 
Total interest-bearing liabilities
    615,072       3.20       541,756       4.29  
 
Net interest income and margin
  $ 9,149       2.74 %   $ 9,024       3.01 %
 
(a) Includes the effect of the $975 million leverage lease recalculation charge in the second quarter of 2008.
Net Interest Income and Margin Tax-equivalent net interest income increased modestly in the first half of 2008 from the first half of 2007. The effect of earning asset growth of $67.2 billion, improving loan spreads and deposit growth, the effect of our preferred stock issuances in the first half of 2008 and in December 2007, and the benefit of a liability sensitive rate position were partially offset by the noncash $975 million SILO lease-related charge, the shift to lower spread deposits, increased liquidity levels and higher funding costs in response to the market disruption, as well as increased nonperforming loans.
The net interest margin declined 27 basis points to 2.74 percent. The net interest margin was 3.15 percent excluding the 41 basis point impact of the SILO charge, an improvement of 14 basis points reflecting improving loan spreads, deposit growth as well as the benefit of a liability sensitive rate position. Offsets to margin improvement, excluding the impact of the SILO charge, were a shift in deposits toward lower-spread categories, the impact of increased liquidity levels and higher wholesale funding costs in response to the market disruption, as well as increased nonperforming loans.
The average federal funds rate in the first half of 2008 was 262 basis points lower than the average rate in the first half of 2007, while the average longer-term two-year treasury note rate decreased 257 basis points and the average 10-year treasury note rate decreased 98 basis points.
Market rates suggest that in 2008 the yield curve will be steeper than in 2007 as a result of short-term rates falling more than long-term rates. If this expectation materializes, we expect the effect on net interest income and the margin to be positive. The Interest Rate Risk Management section has more information.
In order to maintain our targeted interest rate risk profile, derivatives are often used to manage the interest rate risk inherent in our assets and liabilities. We routinely deploy hedging strategies designed to protect future net interest income. These strategies may reduce income in the short-term, although we expect them to benefit future periods. In the first half of 2008, interest rate risk management-related derivatives reduced net interest income by $15 million, which had an insignificant effect on the net interest margin, compared with a decrease in the first half of 2007 of $176 million, or 6 basis points.

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Fee and Other Income
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(In millions)   2008     2007     2008     2007  
 
Service charges
  $ 709       667       1,385       1,281  
Other banking fees
    518       449       1,016       865  
Commissions
    910       649       1,824       1,308  
Fiduciary and asset management fees
    1,355       1,015       2,794       1,968  
Advisory, underwriting and other investment banking fees
    280       454       541       861  
Trading account profits (losses)
    (510 )     195       (818 )     323  
Principal investing
    136       298       582       346  
Securities gains (losses)
    (808 )     23       (1,013 )     76  
Other income
    575       490       (369 )     946  
 
Total fee and other income
  $ 3,165       4,240       5,942       7,974  
 
Fee and Other Income Fee and other income declined 25 percent in the first half of 2008 compared with the first half of 2007 due to net market disruption-related valuation losses of $3.2 billion and reduced volume in several of our investment banking businesses. Otherwise, momentum continued in underlying businesses. Results included $481 million in net gains related to adoption of new fair value accounting standards and a $225 million gain related to the Visa initial public offering. In addition, in the first half of 2008 compared with the first half of 2007:
    Service charge growth was driven by consumer service charges on higher volume and improved pricing, while commercial service charges rose on increased volume.
 
    Other banking fees rose largely due to mortgage banking income and interchange fees.
 
    Higher commissions reflected the addition of A.G. Edwards, partially offset by lower transactional revenue as well as lower insurance commissions.
 
    Increased fiduciary and asset management fees were driven by continued growth in retail brokerage managed account and other asset-based fees, reflecting the addition of A.G. Edwards and organic growth, somewhat offset by the effect of lower market valuations.
 
    Advisory and underwriting results declined from a strong first half a year ago driven by lower origination activity in businesses affected by the market disruption.
 
    Trading account losses of $818 million compared with profits of $323 million in the same period a year ago, with the decline driven by net market disruption-related losses of $1.2 billion in the first half of 2008 including:
  o   $387 million in subprime residential asset-backed CDOs and other subprime-related products largely relating to losses on warehouse positions.
 
  o   $399 million in commercial mortgage structured products.
 
  o   $229 million in consumer mortgage structured products.
 
  o   $147 million of hedging gains on economic hedges in leveraged finance.
 
  o   $272 million in non-subprime collateralized debt obligations and other structured products.
 
  o   $94 million of primarily securities write-downs recorded in connection with the liquidation of an Evergreen fund.

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    Principal investing results were up from the first half of 2007 largely due to the $466 million of net gains related to the adoption of new fair value accounting standards on January 1, 2008.
 
    Net securities losses of $1.0 billion were driven by $895 million of market disruption-related losses and $391 million of losses (of which $343 million was in the Parent) reflecting our change in intent from holding certain securities to selling them in the near term, partially offset by the $225 million gain related to the Visa initial public offering. This compared with gains of $76 million in the first half a year ago.
 
    Other income was a net loss of $369 million in the first half of 2008 compared with income of $946 million a year ago. The decline was largely attributable to $1.1 billion of market disruption-related losses in other income in the first half of this year. The year over year results included:
  o   A $336 million loss in the commercial sales and securitization business in the first half of 2008 largely related to the market disruption compared with $241 million of income in the same period a year ago.
 
  o   A decline in results for certain corporate investments largely reflecting the $314 million loss on certain BOLI contracts in the first quarter of 2008.
 
  o   An $80 million decline in consumer loan sale and securitization results on lower volume.
 
  o   Net market disruption-related losses of $354 million in the leveraged finance business largely related to net write-downs on unfunded commitments. The first quarter of 2008 included $792 million of write-downs, while the second quarter results were a net gain of $438 million reflecting recoveries of previous write-downs related to the resolution of certain leveraged finance commitments. Related economic hedge results are reflected in trading. Unfunded commitments are valued assuming the commitments are fully funded under the current contractual terms.
The same trends described above in the six month period also were the primary drivers in fee and other income results in the second quarter of 2008. These included market disruption-related valuation losses, net securities losses, and lower advisory, underwriting and other investment banking fees. These were partially offset by higher service charges, other banking fees, commissions, and fiduciary and asset management fees. However, principal investing gains were lower in the second quarter of 2008 compared with the second quarter of 2007 due to lower gains on public and private direct investments. While other income was higher in the second quarter of 2008 compared with the same quarter one year ago.

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Noninterest Expense
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(In millions)   2008     2007     2008     2007  
 
Salaries and employee benefits
  $ 3,435       3,122       6,695       6,094  
Occupancy
    377       331       756       643  
Equipment
    317       309       640       616  
Marketing
    95       78       192       140  
Communications and supplies
    184       178       370       351  
Professional and consulting fees
    218       205       414       382  
Sundry expense
    1,750       532       2,406       1,022  
 
Other noninterest expense
    6,376       4,755       11,473       9,248  
Merger-related and restructuring expenses
    251       32       492       42  
Goodwill impairment
    6,060       -       6,060       -  
Other intangible amortization
    97       103       200       221  
 
Total noninterest expense
  $ 12,784       4,890       18,225       9,511  
 
Noninterest Expense Noninterest expense increased 92 percent in the first half of 2008 from the first half of 2007. The majority of the increase was driven by the $6.1 billion noncash goodwill impairment charge as well as increased credit-related sundry expense primarily related to maintaining foreclosed properties, and previously mentioned legal expense. In addition, salaries and employee benefits expense contributed to the increase, largely attributable to the addition of A.G. Edwards. Nonmerger-related severance expense increased $40 million in the first half of 2008 compared with the same period a year ago.
Legal reserves in the first half of 2008 increased $1.2 billion, driven by second quarter of 2008 reserves of $590 million, primarily related to previously disclosed matters, and $500 million for the effect of recent and active settlement discussions related to auction rate securities, partially offset by the first quarter 2008 reversal of $102 million of litigation reserves related to our ownership interest in Visa. The first half of 2008 also included $208 million associated with our strategic initiatives, including de novo expansion, branch consolidations and western expansion, compared with $93 million in 2007.
In the first half of 2008 and 2007, we made annual stock award grants to employees. Under the applicable accounting standards, we are required to fully expense the fair value as of the grant date of awards to employees who are retirement-eligible at the date of the grant. This incremental salaries and employee benefits expense for retirement-eligible employees amounted to $109 million in the first half of 2008 and $93 million in the same period a year ago.
The same trends described above in the six month period also drove noninterest expense results in the second quarter of 2008 compared with the second quarter of 2007.
Merger-Related and Restructuring Expenses Merger-related and restructuring expenses in the first half of 2008 of $492 million included $411 million related to A.G. Edwards and $79 million related to Golden West. In the first half of 2007, we recorded $42 million of these expenses.
As described in the Executive Summary, on July 22, 2008, we announced a plan to reduce the number of active employees by 6,350. Subsequently, we revised this number to 6,950, which includes all of the personnel reductions contemplated in the strategies outlined in Executive Summary: Actions on Capital, Liquidity and Risk. In connection with the personnel reductions, we expect to record $525 million to $650 million in restructuring costs, including approximately $50 million in exit costs, primarily lease terminations, with the rest being severance. We expect to record substantially all the severance costs in the third quarter of 2008; however, the cash expenditures will occur through the end of 2009.

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Income Taxes Income tax benefit on a tax-equivalent basis was $2.1 billion in the first half of 2008 compared with income tax expense of $2.2 billion in the first half of 2007. The related effective income tax rates were 17.92 percent and 32.28 percent, respectively. The significant decline in the tax rate was the result of the $6.1 billion goodwill impairment charge, only a very small percentage of which is deductible for income tax purposes.
Business Segments
We provide diversified banking and nonbanking financial services and products primarily through four core business segments, the General Bank, Wealth Management, the Corporate and Investment Bank, and Capital Management. We also have a Parent segment that includes all asset and liability management functions, including managing our securities portfolio for liquidity and interest rate risk. Business segment data excludes the goodwill impairment charge, merger-related and restructuring expenses, other intangible amortization, discontinued operations, and the effect of changes in accounting principles. A provision for credit losses is allocated to each core business segment based on net charge-offs, and the difference between the total provision for the segments and the consolidated provision is recorded in the Parent segment. In the first half of 2008, provision for credit losses in the Parent segment amounted to $6.3 billion, the majority of which related to certain loans in the General Bank. While the $6.1 billion goodwill impairment charge is not included in segment results, the Goodwill section shows the components of the charge attributed to each sub-segment.
We continuously update segment information for changes that occur in the management of our businesses. In the first half of 2008, we updated our segment reporting to reflect BluePoint as a discontinued operation, which is included in the Parent. Previously, BluePoint was included in the Corporate and Investment Bank. Also, we realigned corporate overhead allocations, resulting in a shift of such allocations from the four core business segments to the Parent. Our current and historical financial reporting reflects these changes. The impact to full year 2007 segment earnings as a result of these changes was:
    In the General Bank, an increase of $203 million.
 
    In Wealth Management, an increase of $26 million.
 
    In the Corporate and Investment Bank, an increase of $330 million.
 
    In Capital Management, an increase of $77 million.
 
    In the Parent, a decrease of $406 million, not including $230 million in 2007 losses from discontinued operations excluded from core segment earnings; previously, this amount was included in Corporate and Investment Bank segment earnings.
The economic capital and expected loss factors for the Pick-a-Payment mortgage portfolio within the General Bank’s Retail and Small Business line of business were revised in the second quarter of 2008 based on updated performance expectations, modeling and macroeconomic conditions. This will more closely align economic capital and expected loss with management’s view of the perceived risk profile of the business going forward.

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General Bank
Performance Summary

 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 3,671       3,372       7,116       6,770  
Fee and other income
    1,000       935       1,980       1,781  
Intersegment revenue
    57       56       112       102  
 
Total revenue (Tax-equivalent)
    4,728       4,363       9,208       8,653  
Provision for credit losses
    919       154       1,488       301  
Noninterest expense
    2,050       1,922       4,088       3,787  
Income taxes (Tax-equivalent)
    642       834       1,326       1,665  
 
Segment earnings
  $ 1,117       1,453       2,306       2,900  
 
 
 
Performance and other data
                               
Economic profit
  $ 919       1,124       1,911       2,250  
Risk adjusted return on capital (RAROC)
    33.02 %     52.66       37.07       53.24  
Economic capital, average
  $ 16,786       10,821       14,739       10,744  
Cash overhead efficiency ratio (Tax-equivalent)
    43.35 %     44.05       44.39       43.76  
Lending commitments
  $ 133,201       129,851       133,201       129,851  
Average loans, net
    319,574       291,607       315,565       289,985  
Average core deposits
  $ 290,381       290,455       293,776       287,263  
FTE employees
    54,415       57,574       54,415       57,574  
 
General Bank The General Bank includes our Retail and Small Business and our Commercial lines of business. The General Bank’s earnings declined to $2.3 billion, down $594 million, driven by rapidly rising credit costs and related expenses, primarily in the mortgage business, which overshadowed continued sales momentum elsewhere as reflected in total revenue of $9.2 billion, up 6 percent. Other key General Bank trends in the first half of 2008 compared with the first half of 2007 included:
    Average loan growth of 9 percent, with 12 percent growth in wholesale and 8 percent growth in retail. Retail growth included a 5 percent increase in consumer real estate lending that primarily reflected a decline in prepayments.
 
    Significant efforts in our mortgage business to mitigate risk in the face of declining housing markets by restructuring its operating model, including exiting the General Bank’s wholesale mortgage origination channel; implementing extensive loss mitigation efforts; tightening underwriting guidelines and undertaking initiatives such as waiving prepayment fees on Pick-a-Payment loans and assisting Pick-a-Payment customers in refinancing their loans, to increase the volume of marketable mortgages.
 
    Reduced home equity originations, reflecting implementation of tightened credit standards. More than 95 percent of our home equity loans are originated through our branch network and other direct channels.
 
    An 18 percent increase in auto originations with continued focus on higher credit scores.
 
    Average core deposit growth of 2 percent, largely reflecting strength in wholesale deposits, which were up 8 percent, and an increase of 1 percent in retail deposits.
    Growth in net new retail checking accounts, reflecting continued benefits from retention and acquisition efforts resulting in an increase of 437,000 in the first half of 2008 compared with an increase of 582,000 in the first half of 2007.
 
    305,000 new checking accounts linked to the new Way2Save accounts, which launched in mid-January 2008.

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    11 percent growth in fee and other income, with strength in service charges, interchange income and mortgage banking fee income. Growth of 21 percent in interchange income reflected a 17 percent increase in debit/credit card volume from the first half of 2007.
 
    Noninterest expense up 8 percent due to growth in credit-related sundry expense, as well as continued strategic investment in de novo branch activity and western expansion. During the first half of 2008, 46 de novo branches were opened and 94 branches were consolidated. As a result of performance initiatives, operating leverage continued to improve, which enabled continued strategic investment.
 
    An increase in the provision for credit losses to $1.5 billion largely reflecting rapid deterioration in consumer real estate in certain housing markets and higher losses in auto.
The same trends described above in the six month period also drove General Bank results in the second quarter of 2008 compared with the second quarter of 2007.
Wealth Management
Performance Summary

 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 202       182       384       362  
Fee and other income
    207       202       418       398  
Intersegment revenue
    3       3       8       6  
 
Total revenue (Tax-equivalent)
    412       387       810       766  
Provision for credit losses
    8       2       13       3  
Noninterest expense
    253       244       499       491  
Income taxes (Tax-equivalent)
    53       51       108       99  
 
Segment earnings
  $ 98       90       190       173  
 
 
 
Performance and other data
                               
Economic profit
  $ 76       70       146       133  
Risk adjusted return on capital (RAROC)
    52.61 %     56.73       52.04       55.46  
Economic capital, average
  $ 731       612       715       602  
Cash overhead efficiency ratio (Tax-equivalent)
    61.05 %     62.80       61.50       64.00  
Lending commitments
  $ 6,915       6,892       6,915       6,892  
Average loans, net
    23,151       21,056       22,758       20,689  
Average core deposits
  $ 17,559       17,466       17,732       17,368  
FTE employees
    4,665       4,580       4,665       4,580  
 
Wealth Management Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. Wealth Management earned $190 million on 6 percent revenue growth in challenging markets. Other key Wealth Management trends in the first half of 2008 compared with the first half of 2007 included:
    6 percent growth in net interest income led by loan growth.
 
    22 percent growth in fiduciary and asset management fees as a pricing initiative implemented in the third quarter of 2007 and other growth offset declines in equity valuations. Insurance commissions declined largely due to a soft market for insurance premiums and nonstrategic insurance account dispositions.
    Modest expense growth as efficiency initiatives offset the effect of private banking and western expansion investment.
 
    An 8 percent decline in assets under management since year-end 2007 to $77.3 billion largely due to market depreciation.

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The same trends described above in the six month period also drove Wealth Management results in the second quarter of 2008 compared with the second quarter of 2007, along with improved deposit spreads.
Corporate and Investment Bank
Performance Summary

 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 1,124       773       2,152       1,489  
Fee and other income
    657       1,522       499       2,631  
Intersegment revenue
    (52 )     (50 )     (102 )     (93 )
 
Total revenue (Tax-equivalent)
    1,729       2,245       2,549       4,027  
Provision for credit losses
    438       (2 )     635       4  
Noninterest expense
    960       1,020       1,707       1,931  
Income taxes (Tax-equivalent)
    122       448       76       763  
 
Segment earnings
  $ 209       779       131       1,329  
 
 
 
Performance and other data
                               
Economic profit (loss)
  $ 4       490       (408 )     776  
Risk adjusted return on capital (RAROC)
    11.12 %     33.22       4.93       29.22  
Economic capital, average
  $ 13,816       8,850       13,525       8,590  
Cash overhead efficiency ratio (Tax-equivalent)
    55.60 %     45.43       67.00       47.94  
Lending commitments
  $ 113,559       115,430       113,559       115,430  
Average loans, net
    106,642       76,744       103,844       75,065  
Average core deposits
  $ 31,682       36,713       32,652       35,481  
FTE employees
    6,394       6,872       6,394       6,872  
 
Corporate and Investment Bank Our Corporate and Investment Bank includes corporate lending, investment banking and treasury and international trade finance. The capital markets disruption has hit our Corporate and Investment Bank particularly hard since the third quarter of 2007, with a 90 percent decline in first half 2008 segment earnings to $131 million driven by $2.1 billion in net valuation losses reflecting continued disruption in the capital markets and reduced origination volume in most markets-related businesses. The losses were somewhat offset by $584 million of principal investing net gains largely due to $466 million of gains in the first quarter of 2008 related to the adoption of new fair value accounting standards. The market disruption-related valuation losses, net of applicable hedges, included:
    $577 million in subprime residential asset-backed collateralized debt obligations and other related exposures;
 
    $730 million in commercial mortgage structured products;
 
    $319 million in consumer mortgage structured products;
 
    $207 million in leveraged finance net of fees and macro credit hedges; and
 
    $296 million in non-subprime collateralized debt obligations and other structured products.
Additional key Corporate and Investment Bank trends in the first half of 2008 compared with the first half of 2007 included:
    A 45 percent increase in net interest income, which reflected 38 percent growth in average loans including $7.2 billion of net transfers into the loan portfolio of certain loans originally slated for disposition, as well as loan growth in the corporate lending and the global financial institutions businesses.

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    Growth in equities, global rate products and high grade, offset by lower results in loan syndications, structured products and merger and advisory products and services.
 
    A 12 percent decline in noninterest expense primarily due to lower revenue-based incentive compensation and reduced headcount in markets-related businesses.
 
    Provision for credit losses of $635 million largely reflecting residential-related commercial real estate losses, compared with $4 million in the first half of 2007.
The same trends described above in the six month period also were the primary drivers of the Corporate and Investment Bank’s results in the second quarter of 2008 compared with the second quarter of 2007, with the exception of principal investing. Principal investing results were higher in the first half of 2008 compared with the same period a year ago while the second quarter of 2008 was lower than the second quarter of 2007 due to lower gains on public and private direct investments.
Capital Management
Performance Summary
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 308       260       589       519  
Fee and other income
    1,995       1,536       4,186       3,013  
Intersegment revenue
    (8 )     (11 )     (18 )     (19 )
 
Total revenue (Tax-equivalent)
    2,295       1,785       4,757       3,513  
Provision for credit losses
    -       -       -       -  
Noninterest expense
    2,327       1,294       4,182       2,531  
Income taxes (benefits) (Tax-equivalent)
    (11 )     179       210       358  
 
Segment earnings (loss)
  $ (21 )     312       365       624  
 
 
 
Performance and other data
                               
Economic profit (loss)
  $ (79 )     275       248       550  
Risk adjusted return on capital (RAROC)
    (3.97 )%     92.77       34.49       93.76  
Economic capital, average
  $ 2,105       1,348       2,124       1,341  
Cash overhead efficiency ratio (Tax-equivalent)
    101.39 %     72.47       87.91       72.04  
Lending commitments
  $ 1,544       1,169       1,544       1,169  
Average loans, net
    2,881       1,663       2,722       1,609  
Average core deposits
  $ 48,647       31,221       45,866       31,450  
FTE employees
    29,680       17,905       29,680       17,905  
 
Capital Management Capital Management includes Retail Brokerage Services and Asset Management. Capital Management generated earnings of $365 million in the first half of 2008, reflecting 35 percent revenue growth, primarily related to the A.G. Edwards acquisition. Results in the first half of 2008 included net market disruption-related losses of $118 million, including $89 million of write-downs on securities recorded in connection with the liquidation of the Evergreen Ultra Short Opportunities Fund. In June 2008, we provided financing to this fund in connection with its planned liquidation. As a result we consolidated the fund and recorded its assets on our consolidated balance sheet. The market disruption-related losses also included $24 million of write-downs on securities purchased in the third quarter of 2007 from Evergreen money market funds. Other key Capital Management trends in the first half of 2008 compared with the first half of 2007 included:
    Growth in revenue despite declining equity markets year over year.
  o   $4.3 billion in revenue from our retail brokerage businesses reflecting transactional revenues of $1.6 billion and asset-based and other income of $2.7 billion. Retail brokerage fee income increased 53 percent driven by the addition of A.G. Edwards and growth in managed account and other asset-based fees, partially offset by lower brokerage transaction activity and equity syndicate distribution fees.

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  o   $484 million in revenue from our asset management businesses, down $108 million, driven by the $118 million of market disruption-related losses.
    Retail brokerage core deposit growth of $14.4 billion, which was partially offset by spread compression.
 
    65 percent growth in noninterest expense largely due to the effect of A.G. Edwards as well as higher legal expense including $500 million for the effect of recent and active settlement discussions related to auction rate securities.
Total Assets Under Management (AUM)
 
                                                 
    2008     2007  
    Second Quarter     Fourth Quarter     Second Quarter  
                                     
(In billions)   Amount     Mix     Amount     Mix     Amount     Mix  
 
Equity
  $ 73       30 %   $ 84       30 %   $ 85       30 %
Fixed income
    108       44       123       45       135       48  
Money market
    65       26       68       25       61       22  
 
Total assets under management (a)
  $ 246       100 %   $ 275       100 %   $ 281       100 %
Securities lending
    42       -       52       -       64       -  
 
Total assets under management and securities lending
  $ 288       -     $ 327       -     $ 345       -  
 
(a) Includes $37 billion in assets managed for Wealth Management, which are also reported in that segment.
Mutual Funds (AUM also included in the above)
 
                                                 
    2008     2007  
    Second Quarter     Fourth Quarter     Second Quarter  
                                           
            Fund             Fund             Fund  
(In billions)   Amount     Mix     Amount     Mix     Amount     Mix  
 
Equity
  $ 30       29 %   $ 36       32 %   $ 38       35 %
Fixed income
    16       16       19       17       22       20  
Money market
    57       55       58       51       49       45  
 
Total mutual fund assets
  $ 103       100 %   $ 113       100 %   $ 109       100 %
 
Total assets under management (AUM) of $245.9 billion at June 30, 2008, decreased 10 percent from December 31, 2007, driven by net outflows of $17.6 billion as well as $11.2 billion in lower market valuations. Total brokerage client assets were $1.1 trillion at June 30, 2008, down 5 percent from year-end 2007 as lower market valuations were partially offset by positive net inflows. Retail Brokerage client accounts held an estimated $8.7 billion, $9.6 billion and $13.2 billion of auction rate securities at August 1, 2008, June 30, 2008 and March 31, 2008, respectively.
The same trends described above in the six month period also drove Capital Management results in the second quarter of 2008 compared with the second quarter of 2007.

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Parent
Performance Summary
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
                         
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ (961 )     (100 )     (1,092 )     (116 )
Fee and other income
    (694 )     45       (1,141 )     151  
Intersegment revenue
    -       2       -       4  
 
Total revenue (Tax-equivalent)
    (1,655 )     (53 )     (2,233 )     39  
Provision for credit losses
    4,202       25       6,262       48  
Noninterest expense
    883       378       1,197       729  
Minority interest
    26       139       224       275  
Income taxes (benefits) (Tax-equivalent)
    (2,633 )     (322 )     (3,653 )     (656 )
Preferred dividends
    193       -       236       -  
 
Segment loss
  $ (4,326 )     (273 )     (6,499 )     (357 )
 
 
 
Performance and other data
                               
Economic loss
  $ (1,623 )     (246 )     (2,463 )     (310 )
Risk adjusted return on capital (RAROC)
    (430.13 )%     (29.52 )     (284.89 )     (13.56 )
Economic capital, average
  $ 1,480       2,436       1,674       2,546  
Cash overhead efficiency ratio (Tax-equivalent)
    (47.55 )%     (496.52 )     (44.70 )     1,390.16  
Lending commitments
  $ 543       569       543       569  
Average loans, net
    24,486       30,187       26,446       30,927  
Average core deposits
  $ 2,401       2,641       2,565       2,346  
FTE employees
    24,798       23,562       24,798       23,562  
 
Parent Parent includes all asset and liability management functions, including managing our securities portfolio for liquidity and interest rate risk. Parent also includes goodwill and other intangible assets, and related funding costs; certain revenue and expenses that are not allocated to the business segments; and the results of wind-down or divested businesses, including the cross-border leasing activity. In addition, the Parent includes the provision for loan losses that exceeds net charge-offs in the business segments. Key trends in the Parent segment in the first half of 2008 compared with the first half of 2007 included:
    A decline in net interest income, reflecting the SILO lease-related charge, growth in wholesale funding as well as securitization of higher yielding real estate-secured loans that were largely replaced by lower yielding foreign commercial loans.
 
    A $6.2 billion increase in the provision for credit losses reflecting greater credit risk and loan growth. More information is in the Provision for Credit Losses section.
 
    A $1.3 billion decrease in fee and other income, reflecting net securities losses of $713 million compared with net gains of $70 million in the year ago period, as well as $314 million of valuation losses on our BOLI portfolio in the first half of 2008. Of the $713 million of net securities losses, $655 million of losses were market disruption-related and $343 million reflected our change in intent from holding certain securities to selling them in the near term, partially offset by the $225 million Visa gain.
 
    A 64 percent increase in noninterest expense, primarily reflecting higher legal costs.
The same trends described above in the six month period also drove the Parent results for the second quarter of 2008 compared with the second quarter of 2007.
In the first quarter of 2008 we recorded valuation losses of $314 million in the Parent segment following a review of three stable value agreements (SVAs) totaling $386 million provided by a third party guarantor in connection with our BOLI portfolio. SVAs are designed to protect cash surrender value on certain BOLI policies from market fluctuations on underlying investments.
BOLI assets on our balance sheet amounted to $15.0 billion at June 30, 2008, and at December 31, 2007. BOLI is an insurance investment product where we purchase life insurance policies on a

24


 

group of officer-level employees, and where we are the owner and beneficiary of the policies. The insurance premiums we pay are recorded as cash surrender value on the balance sheet. The earnings from the policies, represented by increases in the cash surrender value, offset the costs of providing employee benefits. BOLI portfolio results are reported as a component of other noninterest income in our results of operations. The cash surrender value of BOLI may increase or decrease further depending on market conditions related to the underlying investments.
Of our total BOLI portfolio, 25 percent is in general account life insurance placed with several highly rated insurance carriers. This general account life insurance typically includes a feature guaranteeing minimum returns. Seventy-five percent is in separate account life insurance, which is managed by third party investment advisors under pre-determined investment guidelines. Stable value protection is a feature available with respect to separate account life insurance policies that is designed to protect a policy’s cash surrender value from market fluctuations on underlying investments. Approximately 95 percent of our separate account portfolio has some form of stable value protection, with 74 percent of such protected portfolio being fully protected and 26 percent having partial protection. Nearly all of the stable value protection is provided by large, highly rated financial institutions. Approximately 5 percent of the separate account portfolio has no protection.
The Parent segment includes the impact of Prudential Financial Inc.’s (Prudential’s) minority interest in Wachovia Securities Financial Holdings, LLC (WSFH). As a result of Wachovia’s contribution to WSFH of the retail securities business of A.G. Edwards on January 1, 2008, Prudential’s percentage interest in WSFH was diluted as of that date based on the value of the contributed business relative to the value of WSFH. Although the adjustment in Prudential’s interest will be effective on a retroactive basis as of the January 1, 2008 contribution date, the valuations necessary to calculate the precise reduction in that percentage interest are not yet complete. Based on currently available information, Wachovia estimates that Prudential’s percentage interest has been diluted from its pre-contribution percentage interest of 38 percent to approximately 23 percent as a result of the A.G. Edwards contribution. This percentage interest may be adjusted higher or lower in a subsequent quarter retroactive to January 1, 2008, if the final valuations differ from Wachovia’s current estimate.
In connection with Wachovia’s acquisition of A.G. Edwards and under the terms of Wachovia Securities’ joint venture with Prudential, Prudential elected to exercise its lookback option, which permits Prudential to delay for two years following the combination of the A.G. Edwards retail brokerage business with Wachovia Securities its decision to make or not make an additional capital contribution to the joint venture or other payments to avoid or limit dilution of its ownership interest in the joint venture. During this period, Prudential’s share in the joint venture’s earnings and one-time costs associated with the combination will be based on Prudential’s diluted ownership level following the A.G. Edwards combination. At the end of the lookback period, Prudential may elect to make an additional capital contribution or other payment, based on the appraised value (as defined in the joint venture agreement) of the existing joint venture and the A.G. Edwards business as of the date of the combination with Wachovia Securities, to avoid or limit dilution. In this case, Prudential also would make a true-up payment of one-time costs to reflect the incremental increase in its ownership interest in the joint venture. In addition, in this case, Prudential may not then exercise its existing discretionary put option, described below, until the first anniversary of the end of the lookback period. Alternatively, at the end of the lookback period, Prudential may put its joint venture interests to Wachovia based on the appraised value of the joint venture, excluding the A.G. Edwards business, as of the date of the combination of the A.G. Edwards business with Wachovia Securities. Prudential also has a discretionary right to put its joint venture interests to Wachovia, including the A.G. Edwards business, at any time after July 1, 2008. If this put option is exercised, the closing would occur

25


 

approximately one year from the date of exercise and the appraised value would be determined at that time. Wachovia may pay the purchase price for the put option in cash, shares of Wachovia common stock, or a combination thereof. Total minority interest expense was $137 million in the first half of 2008 compared with $275 million in the first half of 2007, of which $81 million and $208 million, respectively, related to Prudential.
Wachovia controls 100 percent of the outstanding stock of BluePoint Re Limited (BluePoint), a Bermuda-based monoline bond reinsurer, and accordingly consolidates this subsidiary. The results for the third and fourth quarters of 2007 have been reclassified to reflect the results of BluePoint as a discontinued operation. Results from inception of BluePoint in 2005 through the second quarter of 2007 were not material and, accordingly, have not been included in discontinued operations. BluePoint’s board of directors has authorized its management to wind-up the company’s affairs, and a petition to wind up BluePoint was filed with the Supreme Court of Bermuda on August 7, 2008.
In the second half of 2007, BluePoint recorded significant losses on certain derivative instruments (principally credit default swaps on ABS CDOs) and these losses through December 31, 2007, approximated substantially all of Wachovia’s investment in BluePoint and were included in Wachovia’s 2007 consolidated financial results. Wachovia has no further obligation to inject capital in BluePoint. BluePoint continued to record these instruments at fair value in 2008. In estimating the fair value of these instruments under SFAS 157, a company must consider, among other things, its own credit rating, which in this case is BluePoint’s. As Wachovia has no obligation to fund losses in excess of BluePoint’s equity, BluePoint assessed the discount required in valuing these instruments to reflect a market participant’s view of BluePoint’s non-performance risk. BluePoint’s valuation at June 30, 2008, reflected a very significant discount for its non-performance risk, such that BluePoint recorded no further loss on the derivative instruments in the first half of 2008. Accordingly, consolidated results for the first half of 2008 reflected no additional losses in discontinued operations.
Balance Sheet Analysis
Securities The decrease in securities from December 31, 2007, is primarily attributable to the transfer to trading of $6.8 billion of securities in connection with the January 1, 2008, election under SFAS 159 to carry these securities at fair value as well as a $2.7 billion increase in net unrealized losses due to continued spread widening predominantly on our fixed rate mortgage-backed securities, largely offset by purchases and net securities retained from agency securitizations of consumer real estate loans. The average duration of this portfolio was 4.1 years in the first half of 2008, an increase from 3.4 years at year-end 2007 driven largely by slowing prepayments. The average rate earned on securities available for sale was 5.55 percent in the first half of 2008 and 5.42 percent in the first half of 2007.
Securities Available For Sale
 
                 
    June 30,     December 31,  
(In billions)   2008     2007  
 
Market value
  $ 113.5       115.0  
Net unrealized loss
  $ (4.0 )     (1.3 )
 
Memoranda (Market value)
               
Residual interests
  $ 0.4       0.5  
Retained bonds Investment grade (a)
  $ 16.0       11.6  
 
(a) $ 15.7 billion had credit ratings of AA and above at June 30, 2008.
The Interest Rate Risk Management section further explains our interest rate risk management practices.

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We retain interests in the form of either bonds or residual interests in connection with certain securitizations primarily of residential mortgage loans, home equity loans and lines, auto loans and student loans. Securities available for sale at June 30, 2008, included residual interests with a market value of $374 million, which included a net unrealized gain of $69 million, and retained bonds from securitizations with a market value of $16.0 billion, which included a net unrealized gain of $97 million.
Retained interests from securitizations recorded as either securities available for sale, trading account assets or loans amounted to $16.7 billion at June 30, 2008, and $12.4 billion at December 31, 2007.
Loans — On-Balance Sheet
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
COMMERCIAL
                                       
Commercial, financial and agricultural
  $ 122,628       119,193       112,509       109,269       102,397  
Real estate — construction and other
    18,629       18,597       18,543       18,167       17,449  
Real estate — mortgage
    27,191       26,370       23,846       21,514       20,448  
Lease financing
    24,605       23,637       23,913       23,966       24,083  
Foreign
    35,168       33,616       29,540       26,471       20,959  
 
Total commercial
    228,221       221,413       208,351       199,387       185,336  
 
Consumer
                                       
Real estate secured
    230,520       230,197       227,719       225,355       220,293  
Student loans
    9,945       9,324       8,149       7,742       6,757  
Installment loans
    29,261       27,437       25,635       24,763       25,017  
 
Total consumer
    269,726       266,958       261,503       257,860       252,067  
 
Total loans
    497,947       488,371       469,854       457,247       437,403  
Unearned income
    (9,749 )     (7,889 )     (7,900 )     (8,041 )     (8,283 )
 
Loans, Net (On-balance sheet)
  $ 488,198       480,482       461,954       449,206       429,120  
 
Loans — Managed Portfolio (including on-balance sheet)
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Commercial
  $ 230,550       224,875       217,896       213,434       197,079  
Real estate secured
    255,190       254,685       250,520       242,526       238,575  
Student loans
    12,718       12,148       11,012       12,618       11,760  
Installment loans
    33,710       31,571       30,487       29,365       28,273  
 
Total managed portfolio
  $ 532,168       523,279       509,915       497,943       475,687  
 
Loans The 6 percent increase in net loans from year-end 2007 to $488.2 billion reflected 10 percent growth in commercial loans and 3 percent growth in consumer loans. Commercial loan growth was driven by large corporate and middle-market loans as well as commercial real estate, including the impact of $4.1 billion transferred to the loan portfolio from loans held for sale in late 2007 and early 2008 as a result of a change in management’s strategy based on our view that the market valuations provide attractive long-term investment returns.
Consumer loan growth was driven by consumer real estate and auto loans, partially offset by the impact of the securitization and sale of $3.9 billion of consumer loans, including securitization of $3.7 billion of real estate secured loans and $128 million in student loans. We transferred to held for sale $2.6 billion of real estate secured loans and transferred from held for sale $801 million of auto loans and $1.9 billion of consumer real estate loans in the Corporate and Investment Bank.
Our loan portfolio is broadly diversified by industry, concentration and geography. Additionally, the majority of the portfolio is collateralized and we periodically estimate the impact that changes in market conditions would have on our loan-to-value (LTV) positions for loans in certain portfolios. At June 30, 2008:

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    Commercial loans represented 46 percent and consumer loans 54 percent of the loan portfolio.
 
    73 percent of the commercial loan portfolio was secured by collateral.
    99 percent of the consumer loan portfolio was either secured by collateral or guaranteed.
     Of our $230.5 billion consumer real estate loan portfolio:
    85 percent is secured by a first lien.
 
    84 percent has an original loan-to-value ratio of 80 percent or less.
 
    95 percent has an original loan-to-value ratio of 90 percent or less.
 
    13 percent of the home equity and prime equity portfolios have an original loan-to-value ratio greater than 90 percent; of which 43 percent are in the first lien position.
For Pick-a-Payment loans, certain of the payment options result in deferral of interest, which is added to the loan balance. The balance of deferred interest on this portfolio at June 30, 2008, was $3.9 billion, of which $307 million related to loans classified as nonperforming, compared with $3.1 billion, of which $81 million was related to loans classified as nonperforming, at December 31, 2007.
Our managed loan portfolio grew 4 percent from year-end 2007, reflecting the growth discussed above. The managed loan portfolio includes the on-balance sheet loan portfolio; loans held for sale; loans securitized for which the retained interests are classified in securities; and the off-balance sheet portfolio of securitized loans sold where we service the loans.
Asset Quality
Asset Quality
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Nonperforming assets
                                       
Nonaccrual loans
  $ 11,049       7,788       4,995       2,715       1,945  
Troubled debt restructurings (a)
    248       48       -       -       -  
Foreclosed properties
    631       530       389       334       207  
 
Total nonperforming assets
  $ 11,928       8,366       5,384       3,049       2,152  
 
as % of loans, net and foreclosed properties
    2.44 %     1.74       1.16       0.68       0.50  
 
Nonperforming assets in loans held for sale
  $ 63       5       62       59       42  
 
Total nonperforming assets in loans and in loans held for sale
  $ 11,991       8,371       5,446       3,108       2,194  
 
as % of loans, net, foreclosed properties and loans held for sale
    2.41 %     1.70       1.14       0.66       0.49  
 
Provision for credit losses
  $ 5,567       2,831       1,497       408       179  
Allowance for credit losses
  $ 10,956       6,767       4,717       3,691       3,552  
 
Allowance for loan losses
                                       
as % of loans, net
    2.20 %     1.37       0.98       0.78       0.79  
as % of nonaccrual and restructured loans (b)
    95       84       90       129       174  
as % of nonperforming assets (b)
    90       78       84       115       157  
Allowance for credit losses
                                       
as % of loans, net
    2.24 %     1.41       1.02       0.82       0.83  
 
Net charge-offs
  $ 1,309       765       461       206       150  
Commercial, as % of average commercial loans
    0.88 %     0.48       0.34       0.08       0.07  
Consumer, as % of average consumer loans
    1.26       0.79       0.46       0.27       0.19  
Total, as % of average loans, net
    1.10 %     0.66       0.41       0.19       0.14  
 
Past due accruing loans, 90 days and over
  $ 1,181       866       708       590       562  
Commercial, as a % of loans, net
    0.14 %     0.05       0.05       0.04       0.03  
Consumer, as a % of loans, net
    0.32 %     0.28       0.23       0.20       0.20  
 
(a) Troubled debt restructurings were not significant prior to the first quarter of 2008.
(b) These ratios do not include nonperforming assets included in loans held for sale.

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Nonperforming Assets Increases in both nonaccrual loans and foreclosed properties resulting from significant weakness in the housing market particularly in stressed regions of Florida and California contributed to the $6.5 billion increase in nonperforming assets from year-end 2007 to $12.0 billion, or 2.41 percent of loans, foreclosed properties and loans held for sale at June 30, 2008. Consumer nonaccrual loans were $7.6 billion at June 30, 2008, up $4.3 billion from year-end 2007, driven primarily by new nonaccruals of $3.7 billion related to our Pick-a-Payment portfolio and $228 million related to nonbranch-originated Alt-A loans in the Corporate and Investment Bank transferred from loans held for sale to the portfolio. Commercial nonaccrual loans at June 30, 2008, were $3.4 billion, up $1.8 billion from year-end 2007, reflecting new nonaccrual loans of $3.1 billion, including $1.5 billion of residential-related commercial real estate in our Real Estate Financial Services portfolio, and three large commercial credits, partially offset by gross charge-offs of $722 million. We continue to mitigate the risk and volatility of our balance sheet through prudent risk management practices, including increased collection efforts.
Nonperforming Assets
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Nonaccrual Loans
                                       
Commercial:
                                       
Commercial, financial and agricultural
  $ 1,229       908       602       354       318  
Commercial real estate — construction and mortgage
    2,203       1,750       1,059       289       161  
 
Total commercial
    3,432       2,658       1,661       643       479  
 
Consumer:
                                       
Real estate secured:
                                       
First lien
    7,430       5,015       3,234       1,986       1,380  
Second lien
    147       75       58       41       44  
Installment and other loans (a)
    40       40       42       45       42  
 
Total consumer
    7,617       5,130       3,334       2,072       1,466  
 
Total nonaccrual loans
    11,049       7,788       4,995       2,715       1,945  
Troubled debt restructurings (b)
    248       48       -       -       -  
Foreclosed properties
    631       530       389       334       207  
 
Total nonperforming assets
  $ 11,928       8,366       5,384       3,049       2,152  
As % of loans, net, and foreclosed properties (c)
    2.44 %     1.74       1.16       0.68       0.50  
 
Nonperforming assets included in loans held for sale
                                       
Commercial
  $ 56       -       -       -       -  
Consumer
    7       5       62       50       37  
 
Total nonaccrual loans
    63       5       62       50       37  
Foreclosed properties
    -       -       -       9       5  
 
Total nonperforming assets included in loans held for sale
    63       5       62       59       42  
 
Nonperforming assets included in loans and in loans held for sale
  $ 11,991       8,371       5,446       3,108       2,194  
As % of loans, net, foreclosed properties and loans held for sale (d)
    2.41 %     1.70       1.14       0.66       0.49  
 
Past due loans, 90 days and over, and nonaccrual loans
                                       
Accruing loans past due 90 days and over
  $ 1,181       866       708       590       562  
Nonaccrual loans
    11,049       7,788       4,995       2,715       1,945  
 
Total past due loans 90 days and over, and nonaccrual loans
  $ 12,230       8,654       5,703       3,305       2,507  
Commercial, as a % of loans, net
    1.73 %     1.31       0.89       0.38       0.31  
Consumer, as a % of loans, net
    3.12 %     2.19       1.49       1.00       0.78  
 
(a) Principally auto loans; nonaccrual status does not apply to student loans.
(b) Troubled debt restructurings were not significant prior to the first quarter of 2008.
(c) These ratios do not include nonperforming assets included in loans held for sale.
(d) These ratios reflect nonperforming assets included in loans held for sale.

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Nonperforming assets at June 30, 2008, included $248 million of troubled debt restructurings, all of which were consumer real estate-secured loans and included $129 million of Pick-a-Payment loans, $73 million of predominantly first lien home equity loans and $46 million of first lien construction loans to consumer borrowers. A loan is classified as a troubled debt restructuring in situations where we modify a loan to a borrower who is unable to make payments under the terms of the loan agreement and the modification represents a concession to the borrower as measured using a discounted cash flows analysis. The majority of our troubled debt restructurings involve interest rate reductions.
Past Due Loans Accruing loans 90 days or more past due, excluding loans that are classified as loans held for sale, were $1.2 billion at June 30, 2008, compared with $708 million at year-end 2007. Of the total past due loans, $312 million were commercial loans or commercial real estate loans and $869 million were consumer loans.
Charge-offs
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Loan losses:
                                       
Commercial, financial and agricultural
  $ 254       171       67       41       39  
Commercial real estate — construction and mortgage
    216       81       117       5       4  
 
Total commercial
    470       252       184       46       43  
Real estate secured
    700       351       156       59       40  
Student loans
    3       3       4       5       2  
Installment and other loans (a)
    230       242       225       168       138  
 
Total consumer
    933       596       385       232       180  
 
Total loan losses
    1,403       848       569       278       223  
Loan recoveries:
                                       
Commercial, financial and agricultural
    15       14       22       9       15  
Commercial real estate — construction and mortgage
    -       1       -       3       -  
 
Total commercial
    15       15       22       12       15  
Real estate secured
    18       10       9       12       11  
Student loans
    1       1       2       3       -  
Installment and other loans (a)
    60       57       75       45       47  
 
Total consumer
    79       68       86       60       58  
 
Total loan recoveries
    94       83       108       72       73  
 
Net charge-offs:
                                       
Commercial, financial and agricultural
    239       157       45       32       24  
Commercial real estate — construction and mortgage
    216       80       117       2       4  
 
Total commercial
    455       237       162       34       28  
Real estate secured
    682       341       147       47       29  
Student loans
    2       2       2       2       2  
Installment and other loans (a)
    170       185       150       123       91  
 
Total consumer
    854       528       299       172       122  
 
Net charge-offs
  $ 1,309       765       461       206       150  
Net charge-offs as a % of average loans, net(b)
                                       
Commercial, financial and agricultural
    0.60 %     0.41       0.12       0.10       0.07  
Commercial real estate — construction and mortgage
    1.89       0.73       1.12       0.02       0.04  
 
Total commercial
    0.88       0.48       0.34       0.08       0.07  
Real estate secured
    1.18       0.59       0.26       0.08       0.05  
Student loans
    0.07       0.08       0.10       0.14       0.07  
Installment and other loans (a)
    2.36       2.76       2.35       1.99       1.47  
 
Total consumer
    1.26       0.79       0.46       0.27       0.19  
 
Total, as % of average loans, net
    1.10 %     0.66       0.41       0.19       0.14  
 
Consumer real estate secured net charge-offs:
                                       
First lien
  $ 592       291       122       32       17  
Second lien
    90       50       25       15       12  
 
Total consumer real estate secured net charge-offs
  $ 682       341       147       47       29  
 
(a) Principally auto loans.
(b) Annualized.
Net Charge-offs Net charge-offs, which represent loan amounts written off as uncollectible, net of recoveries of previously charged-off amounts, were $2.1 billion, or 88 basis points of average net loans in the first half of 2008, an increase of $1.8 billion from the first half of 2007. The increase was driven by the effect of declining home values particularly in stressed markets such as California and Florida. Commercial net charge-offs were $692 million in the first half of 2008,

30


 

compared with $56 million in the first half of 2007, and included $296 million in residential-related commercial real estate loans. Consumer net charge-offs were $1.4 billion, up $1.1 billion from the first half of 2007. The increase in consumer net charge-offs was driven by consumer real estate losses of $1.0 billion, including Pick-a-Payment losses of $748 million, and installment losses of $355 million, including $274 million in the auto portfolio.
Allowance for Credit Losses
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Allowance for credit losses (a)
                                       
Allowance for loan losses, beginning of period
  $ 6,567       4,507       3,505       3,390       3,378  
Net charge-offs
    (1,309 )     (765 )     (461 )     (206 )     (150 )
Allowance relating to loans acquired, transferred to loans held for sale or sold
    (69 )     (16 )     (10 )     (63 )     (10 )
Provision for credit losses related to loans transferred to loans held for sale or sold (b)
    51       7       6       3       4  
Provision for credit losses
    5,504       2,834       1,467       381       168  
 
Allowance for loan losses, end of period
    10,744       6,567       4,507       3,505       3,390  
 
Reserve for unfunded lending commitments, beginning of period
    200       210       186       162       155  
Provision for credit losses
    12       (10 )     24       24       7  
 
Reserve for unfunded lending commitments, end of period
    212       200       210       186       162  
 
Allowance for credit losses
  $ 10,956       6,767       4,717       3,691       3,552  
 
Allowance for loan losses
                                       
as % of loans, net
    2.20 %     1.37       0.98       0.78       0.79  
as % of nonaccrual and restructured loans (c)
    95       84       90       129       174  
as % of nonperforming assets (c)
    90       78       84       115       157  
Allowance for credit losses
                                       
as % of loans, net
    2.24 %     1.41       1.02       0.82       0.83  
 
(a) The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments.
(b) The provision related to loans transferred or sold includes recovery of lower of cost or market losses.
(c) These ratios do not include nonperforming assets included in loans held for sale.
Provision and Allowance for Credit Losses Provision expense was $8.4 billion in the first half of 2008 and $356 million in the first half of 2007, with the increase driven mostly by the effect of dramatic deterioration in certain housing markets. Provision exceeded net charge-offs by $6.3 billion, which included:
    $5.7 billion due principally to higher expected loss factors for Pick-a-Payment, home equity and traditional mortgage, and auto portfolios on significant market weakness and changing consumer behaviors. Of this amount, $4.4 billion related to the Pick-a-Payment portfolio.
 
    $247 million on the commercial portfolio on higher loss frequency and severity expectations.
 
    $157 million on the commercial real estate portfolio, including $127 million on impaired loans.
 
    $165 million higher unallocated reserves due to increased credit risk uncertainty stemming from economic and other market environmental factors.
In the first quarter of 2008, we updated our credit loss modeling for the Pick-a-Payment portfolio in the context of significant continuing deterioration in the housing market particularly in certain geographic areas, resulting in additional reserves of $4.4 billion. Our credit loss modeling strongly correlates forward expected losses to changes in home prices and the resulting change in borrower behavior, although it does rely on historical delinquency trends over the shorter term. In addition, the updated model incorporates a variety of loan and/or borrower

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characteristics to further enhance loss forecasting by correlating borrower propensity to default and resulting loss severity to a widely used home price index, and it connects borrower equity to projected changes in home prices by geographic region. In the second quarter of 2008, the Pick-a-Payment portfolio performed below our first quarter 2008 expectations as trends and outlooks for both housing and the economy continued to worsen. As a result of these negative trends and outlooks, we further updated our model inputs to reflect greater sensitivity to changes in borrower equity and more severe home price decline scenarios, which resulted in increased 12-month forward expected losses for the portfolio. We use 12-month forward expected losses as a measure of probable incurred losses in the portfolio as of the balance sheet date.
More information on the provision for credit losses, including the impact of transfers to loans held for sale, is in Table 11: Allowance for Credit Losses. The Corporate Results of Operations section has further information.
The allowance for credit losses increased $6.2 billion from year-end 2007 to $11.0 billion at June 30, 2008, reflecting increased overall credit risk and loan growth. Our allowance for loan losses as a percent of nonperforming assets increased to 90 percent at June 30, 2008, from 84 percent at December 31, 2007. In the context of evaluating this allowance coverage ratio, it is important to note the high percentage of our portfolio that is collateralized and our low level of unsecured loans, such as credit card loans, which on an industry-wide basis typically generate higher losses.
The reserve for unfunded lending commitments increased $2 million from year-end 2007 to $212 million at June 30, 2008, which reflected slightly increased volume. The reserve for unfunded lending commitments relates to commercial lending activity.
Loans Held for Sale Loans held for sale declined $8.3 billion from year-end 2007 to $8.4 billion at June 30, 2008, as $6.9 billion of transfers to the loan portfolio of commercial and consumer real estate and auto loans, largely in the first quarter, and sales activity were somewhat offset by leveraged finance fundings. Net write-downs on the held for sale portfolio amounted to $461 million in the first half of 2008 compared with $104 million in the same period a year ago.
The loans held for sale portfolio includes loans originated for sale or securitization as part of our core business strategy and the activities related to our ongoing portfolio risk management strategies to reduce exposure to areas of perceived higher risk. At June 30, 2008 and 2007, core business activity represented the majority of loans held for sale. Core business activity includes residential and commercial mortgages, auto loans and credit card receivables that we originate with the intent to sell to third parties.
In the first half of 2008, we sold or securitized $19.5 billion in loans out of the loans held for sale portfolio, including $5.6 billion of commercial loans and $13.9 billion of consumer loans. In the first half of 2007, we sold or securitized $35.7 billion of loans out of the loans held for sale portfolio, including $23.7 billion of commercial loans and $12.0 billion of consumer loans, primarily residential mortgages. Substantially all of the loans sold in both periods were performing.
Goodwill
Goodwill amounted to $37.0 billion at June 30, 2008, compared with $43.1 billion at December 31, 2007, with the decrease related to the second quarter 2008 goodwill impairment charge of $6.1 billion described below.

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In connection with acquisitions, we record purchase accounting adjustments to reflect the respective fair values of the assets and liabilities of acquired entities, as well as certain exit costs related to these acquisitions. Purchase accounting adjustments are subject to refinement for up to one year following acquisition consummation.
Related to the October 1, 2007, A.G. Edwards acquisition, in the first half of 2008, we recorded fair value and exit cost purchase accounting adjustments amounting to a net $25 million increase in goodwill. Based on a purchase price of $6.8 billion, A.G. Edwards tangible stockholders’ equity of $2.2 billion and a customer relationship intangible of $850 million ($513 million after-tax), goodwill amounted to $4.1 billion at June 30, 2008.
Goodwill impairment testing is performed at the sub-segment level (referred to as the reporting unit). The eight reporting units are General Bank: Commercial, and Retail and Small Business; Wealth Management; Corporate and Investment Bank: Corporate Lending, Investment Banking, and Treasury and International Trade Finance; and Capital Management: Retail Brokerage Services and Asset Management. The Critical Accounting Policies: Goodwill Impairment section discusses our methodology, including the two-step testing process, and the key estimates and judgments involved in testing goodwill for impairment.
We performed goodwill impairment testing for all eight reporting units at December 31, 2007, March 31, 2008, and June 30, 2008. There was no indication of impairment in the first step of the test in any of these reporting units at either December 31, 2007, or March 31, 2008, and accordingly, we did not perform the second step. At June 30, 2008, there was an indication of impairment in four of our eight reporting units, and accordingly, the second step was performed on these four reporting units. Based on the results of the second step, we recorded the $6.1 billion goodwill impairment charge in the second quarter of 2008 across three of the four reporting units, as shown in the table below.
Goodwill Impairment
 
                                                 
    General Bank     Corporate and Investment Bank     All Other     June 30,  
            Retail and     Corporate     Investment     Reporting     2008  
(Dollars in millions)   Commercial     Small Business     Lending     Banking     Units     Total  
 
Assigned goodwill
  $ 7,083       23,976       2,937       597       8,460       43,053  
Impairment
    (2,526 )     -       (2,937 )     (597 )     -       (6,060 )
 
Remaining goodwill
  $ 4,557       23,976       -       -       8,460       36,993  
 
The primary cause of impairment of our goodwill in the three reporting units was the 38 percent decline in our market capitalization from March 31, 2008, to $33.5 billion at June 30, 2008. The decline was a function of both financial services industry-wide and company-specific factors. Although there was an initial indication of possible impairment in the General Bank Retail and Small Business reporting unit, which holds the Pick-a-Payment portfolio, the step two measurement indicated no impairment largely due to the value that the retail banking network contributes to that reporting unit.
The goodwill impairment charge includes all of the goodwill assigned to the two reporting units in the Corporate and Investment Bank that were subject to the step two analysis and approximately one-third of the goodwill assigned to the Commercial reporting unit in the General Bank. As indicated in the Critical Accounting Policies section, the total fair value of the reporting units does not exceed our June 30, 2008, market capitalization plus a control premium (referred to as enterprise value). As an indication of the relative sensitivity of the goodwill impairment measurement to changes in the enterprise value, a 30 percent decrease in the enterprise value would increase the impairment charge by approximately $2 billion in the Commercial reporting unit and would not result in impairment in the Retail and Small Business reporting unit.

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Liquidity and Capital Adequacy
We have recently announced a series of initiatives to preserve, generate and protect capital and maintain strong liquidity as described in the Executive Summary. Our liquidity position benefits from our liquidity management processes, which we have had in place for many years. Throughout the current credit markets disruption, we have heightened our focus on balance sheet liquidity. Our liquidity management processes incorporate liquidity stress-testing in a range of possible scenarios. In addition, we focus on both assets and liabilities and the manner in which they combine to provide adequate liquidity to meet our objectives. As one of the largest deposit-funded financial institutions in the country, we have a stable funding base with 87 percent of our funding provided through deposits, long-term debt and capital.
Core Deposits Core deposits increased modestly from year-end 2007 to $400.4 billion at June 30, 2008. Compared with the first half of 2007, average core deposits in the first half of 2008 increased 5 percent to $392.6 billion. Average low-cost core deposits, which exclude consumer certificates of deposit, increased 7 percent, to $274.0 billion. Average consumer certificates of deposit rose $131 million from the first half of 2007. Core deposit growth benefited from higher retail brokerage deposits driven by the A.G. Edwards acquisition as well as organic growth, including our new retail checking account product Way2Save, which was launched in early 2008.
Purchased Funds Purchased funds, which include federal funds purchased, commercial paper, other short-term borrowings and foreign and other time deposits with maturities of 12 months or less, were $102.9 billion at June 30, 2008, compared with $102.1 billion at December 31, 2007.
Average purchased funds were $101.6 billion in the first half of 2008 and $78.8 billion in the first half of 2007. The level of average purchased funds has increased since the beginning of the third quarter of 2007, reflecting significantly higher liquidity levels in response to the market disruption.
Long-term Debt Long-term debt was $184.4 billion at June 30, 2008, and $161.0 billion at December 31, 2007, reflecting issuances of $45.2 billion, including $21.5 billion in Federal Home Loan Bank advances in the first half of 2008, partially offset by maturities. In the rest of 2008, scheduled maturities of long-term debt amount to $20.7 billion, which includes $8.8 billion in Federal Home Loan Bank advances and $1.0 billion in structured debt. We anticipate replacing the maturing obligations, subject to market conditions.
Wachovia and Wachovia Bank, National Association have a $25.0 billion Euro medium-term note programme (EMTN), under which we may issue senior and subordinated debt securities. These securities are not registered with the Securities and Exchange Commission (SEC) and may not be offered in the United States without applicable exemptions from registration. Under the EMTN, Wachovia and Wachovia Bank issued an aggregate $2.3 billion of debt securities in the first six months of 2008 and had up to $22.4 billion available for issuance at June 30, 2008.
In addition, Wachovia and Wachovia Bank, National Association have an A$10.0 billion Australian medium-term note programme (AMTN), under which we may issue senior and subordinated debt securities. These securities are not registered with the SEC and may not be offered in the United States without applicable exemptions from registration. No AMTN debt securities were issued in the first half of 2008. We had up to A$8.5 billion available for issuance at June 30, 2008.
At June 30, 2008, we had $17.5 billion of senior or subordinated debt securities, common stock or preferred stock available for issuance under our current shelf registration statement filed with the SEC. In the first half of 2008, we issued $11.55 billion of common stock and preferred stock under

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this program. The Stockholders’ Equity section has more information. In addition, we had available for issuance up to $8.4 billion under a medium-term note program covering senior or subordinated debt securities under a separate shelf registration filed with the SEC. We issued $6.3 billion of senior and subordinated debt securities in the first half of 2008 under this program. Wachovia Bank has a global note program under which we issued $7.4 billion of senior and subordinated bank notes in the first half of 2008. We had $49.0 billion available for issuance under this program at June 30, 2008.
We also have a shelf registration with the SEC under which we may offer and sell hybrid trust preferred securities. At June 30, 2008, $2.5 billion was available for issuance under this shelf registration.
In June 2008, Wachovia Bank, National Association obtained $6.0 billion of term funding in a transaction with a third party. For liquidity management purposes, this funding, due to its terms, is considered one-year financing, but it has a contractual maturity of June 2038.
The issuance of debt or equity securities may continue under any of our programs and depends on future market conditions, funding needs and other factors.
Following our second quarter 2008 earnings announcement on July 22, 2008, Fitch Ratings, Standard and Poor’s and Moody’s each downgraded the long-term debt ratings of Wachovia Corporation and its rated subsidiaries by one grade, which was above investment grade. All short-term ratings were affirmed.
Credit Lines Wachovia Bank has a $1.9 billion committed back-up line of credit that expires in 2010. This credit facility contains a covenant that requires us to maintain a minimum level of adjusted total equity capital. We have not used this line of credit.
Stockholders’ Equity Stockholders’ equity declined 2 percent from $76.9 billion at year-end 2007 to $75.1 billion at June 30, 2008. In February 2008, we issued $3.5 billion of perpetual preferred stock. In April 2008, we issued in concurrent public offerings an aggregate $8.05 billion of capital consisting of 168 million shares or $4.025 billion of common stock and 4 million shares or $4.025 billion of 7.5 percent perpetual convertible preferred stock. The effect on stockholders’ equity of the issuance of $11.55 billion of additional capital from these offerings was more than offset by $9.6 billion of net losses in the first half of 2008, $2.1 billion of common stock dividends and $236 million of preferred stock dividends paid in the first half of 2008, a $20 million reduction related to share repurchases, a $24 million reduction related to adoption of new accounting standards, and a $2.7 billion increase in after-tax depreciation in securities available for sale to $4.0 billion at June 30, 2008.
Dividend and Share Activity
 
                 
    Six Months Ended  
            June 30,  
(In millions, except per share data)   2008     2007  
 
Dividends on common shares
  $ 2,082       2,137  
Dividends per common share
  $ 1.02       1.12  
Common shares repurchased
    1       18  
Average diluted common shares outstanding
    2,048       1,922  
 
In the six months ended June 30, 2008, we repurchased 540,000 common shares at a cost of $20 million. At June 30, 2008, we had authorization to buy back approximately 19 million shares of common stock. Our Second Quarter 2008 Report on Form 10-Q has additional information related to share repurchases.
In the first half of 2008, we reduced the quarterly dividend on our common stock twice; first, from 64 cents to 37.5 cents per common share effective with the June 2008 dividend, and then

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from 37.5 cents to 5 cents per common share effective with the September 15, 2008, dividend. The Executive Summary has further information.
In connection with the January 1, 2008, adoption of new fair value accounting standards, certain of the effects of adoption were recorded as an adjustment to January 1, 2008, retained earnings and the amount was insignificant.
Also on January 1, 2008, we adopted two new accounting pronouncements relating to the accounting for split-dollar life insurance policies that we hold on certain current and former employees. The effect of adoption of these standards amounted to a $19 million after-tax reduction in January 1, 2008, retained earnings.
Subsidiary Dividends Wachovia Bank and Wachovia Mortgage, FSB (formerly World Savings Bank, FSB) are the largest sources of subsidiary dividends paid to the parent company. Capital requirements established by regulators limit dividends that these subsidiaries and certain other of our subsidiaries can pay. Under these and other limitations, which include an internal requirement to maintain all deposit-taking banks at the well capitalized level, at June 30, 2008, our subsidiaries had $9.2 billion available for dividends that could be paid without prior regulatory approval. Our subsidiaries paid $22 million to the parent company in the first half of 2008.
Regulatory Capital Our capital ratios were above regulatory minimums at June 30, 2008, and we continued to be classified as well capitalized. The tier 1 capital ratio was 8.00 percent at June 30, 2008, up from 7.35 percent at December 31, 2007. Our total capital ratio was 12.74 percent and our leverage ratio was 6.57 percent at June 30, 2008, and 11.82 percent and 6.09 percent, respectively, at December 31, 2007. The goodwill impairment charge had no impact on our regulatory capital ratios or tangible capital levels because goodwill is deducted when computing those ratios.
Off-Balance Sheet Transactions
In the normal course of business, we engage in a variety of financial transactions that under GAAP either are not recorded on the balance sheet or are in amounts that differ from the full contract or notional amounts. These transactions, included in the Summary of Off-Balance Sheet Exposures table, involve varying elements of market, credit and liquidity risk. Generally these transactions are forms of guarantees that contingently require us to make payments to a guaranteed party based on an event or change in an underlying asset, liability, rate or index.
Summary of Off-Balance Sheet Exposures
 
                                 
    June 30, 2008     December 31, 2007  
    Carrying             Carrying        
(In millions)   Amount     Exposure     Amount     Exposure  
 
GUARANTEES
                               
Securities and other lending indemnifications
  $ -       48,041       -       59,238  
Standby letters of credit
    118       32,423       124       29,295  
Liquidity agreements
    360       29,773       14       36,926  
Loans sold with recourse
    45       6,111       44       6,710  
Residual value guarantees
    -       1,315       -       1,220  
Written put options
    2,373       14,892       2,001       15,273  
 
Total guarantees
  $ 2,896       132,555       2,183       148,662  
 
The decrease in securities and other lending indemnifications exposure reflected seasonality. The decrease in liquidity agreement exposure was due to lower volume in our off-balance sheet commercial paper conduit as a result of our strategic focus on customer relationships and protecting our liquidity profile. The increase in the carrying amount of written put options was due to widening

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spreads on liquidity puts related to certain ABS CDOs. Of the written put option exposure, approximately $400 million is included in our market disruption-related distribution exposure.
In addition to the off-balance sheet exposures in the table above, the Business Segments: Parent section provides information on the option Prudential holds relative to their minority interest in our retail brokerage joint venture, and the Business Segments: Capital Management section provides information on the second quarter 2008 consolidation of a fund we manage.
Risk Governance and Administration
Market Risk Management We trade a variety of equities, debt securities, foreign exchange instruments and other derivatives to provide customized solutions for the risk management needs of our customers and for proprietary trading. Market risk is inherent in all these activities.
The Value at Risk methodology assesses market volatility over the most recent 252 trading days to estimate within a given level of confidence the maximum trading loss over a period of time that we would expect to incur from an adverse movement in market rates and prices over the period. We calculate 1-day VaR at the 97.5 percent and 99 percent confidence levels, and 10-day VaR at the 99 percent confidence level. The VaR model is supplemented by stress testing on a daily basis. The analysis captures all financial instruments that are considered trading positions. As of January 1, 2008, we chose to split our VaR analysis into two categories: discretionary VaR, which is subject to limits, and nondiscretionary VaR, which is reserved for positions in runoff and for positions under the discretion of the asset and liability committee. On May 20, 2008, the market risk committee increased our 1-day VaR limit on the discretionary portion from $50 million to $70 million due to volatility arising from the market disruptions and the effect of the adoption of fair value accounting, which resulted in the addition of the mortgage pipeline and associated hedges to the VaR analysis. The total 1-day VaR was $65 million at June 30, 2008, and $62 million at December 31, 2007, and was primarily related to interest rate risk and credit spread risk. The high, low and average VaRs in the first half of 2008 were $78 million, $54 million and $66 million, respectively.
Interest Rate Risk Management One of the fundamental roles in banking is the management of interest rate risk, or the risk that changes in interest rates may diminish the net interest income we earn on loans, securities and other earning assets. The following discussion explains how we oversee the interest rate risk management process and describes the actions we take to protect net interest income from interest rate risk.
A balance sheet is considered asset sensitive when its assets (loans and securities) reprice faster or to a greater extent than liabilities (deposits and borrowings). An asset-sensitive balance sheet will produce more net interest income when interest rates rise and less net interest income when interest rates decline. Historically, our large and relatively rate-insensitive deposit base has funded a portfolio of primarily floating rate commercial and consumer loans. This mix naturally creates an asset-sensitive balance sheet. To achieve more neutrality or to establish a liability-sensitive position, we maintain a large portfolio of fixed rate discretionary instruments such as loans, securities and derivatives.
We expect to rely on our large base of low-cost core deposits as well as diverse wholesale sources to fund incremental investments in loans and securities. The characteristics of the loans we add will prompt different strategies. Fixed rate loans, for example, diminish the need to buy discretionary investments, so if more fixed rate loans were added to our loan portfolio, we would likely allow existing discretionary investments to mature or we would liquidate

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them. If more variable rate loans were added to our loan portfolio, we would likely allow fixed rate securities to mature or we would liquidate them, and then add new derivatives that, in effect, would convert the incremental variable rate loans to fixed rate loans.
We often elect to use derivatives to protect assets, liabilities and future financial transactions from changes in interest rates. When deciding whether to use derivatives instead of investing in securities to reach the same goal, we consider a number of factors, such as cost, efficiency, the effect on our liquidity and capital, and our overall interest rate risk management strategy. We choose to use derivatives when they provide greater relative value or more efficient execution of our strategy than securities. The derivatives we use for interest rate risk management include interest rate swaps, futures, forwards and various option strategies, which in some cases are designated and accounted for as accounting hedges. We fully incorporate the market risk associated with interest rate risk management derivatives into our earnings simulation model in the same manner as other on-balance sheet financial instruments.
Our policy is to limit the risk we can take through balance sheet management actions such that consolidated net interest income will not be negatively affected by more than 3.5 percent in both rising and falling rate environments over the policy measurement period. In June 2008, we established our policy limit as a percent of net interest income rather than our previously defined limit of 5 percent of consolidated net income. This change was made to decrease the volatility of the measurement caused by items unrelated to the margin. The policy is sized to be in line with our historical interest rate risk limits.
We analyze and manage the amount of risk we are taking to changes in interest rates by forecasting a wide range of interest rate scenarios for time periods as long as 36 months. In analyzing interest rate sensitivity for policy measurement, we compare forecasted net interest income in both “high rate” and “low rate” scenarios to the “market forward rate.” Our policy measurement period is 12 months in length, beginning with the first month of the forecast. Our objective is to ensure we prudently manage interest-bearing assets and liabilities in ways that improve financial performance without unduly putting net interest income at risk.
The “market forward rate” is constructed using currently implied market forward rate estimates for all points on the yield curve over the next 36 months. Our standard approach evaluates expected net interest income in a 400 basis point range, or 200 basis points both above and below the “market forward rate” scenario. Based on our July 2008 forward rate expectation, our various scenarios together measure net interest income volatility to a June 2009 federal funds rate ranging from 1.15 percent to 5.15 percent. We always incorporate into our modeling all repricing and balance sheet dynamics that depend on interest rate levels. For example, in the current market outlook and low rate scenario referenced above, we particularly stress the repricing characteristics of our deposit portfolio. We expect deposit repricing downward to be slowed in very low rate environments and we have taken actions to mitigate this risk.
We simultaneously measure the impact of a parallel and nonparallel shift in rates on each of our interest rate scenarios. A parallel shift would, as the term implies, shift all points on the yield curve by the same increments. For example, by the twelfth month in our policy measurement period, short-term rates such as the federal funds rate would increase by 200 basis points over the “market forward rate,” while longer term rates such as the 10-year treasury note rate and 30-year treasury note rate would increase by 200 basis points as well. A nonparallel shift would consist of a 200 basis point increase in short-term rates, while long-term rates would increase by a different amount. A rate shift in which short-term rates rise to a greater degree than long-term rates is referred to as a “flattening” of the yield curve. Conversely, long-term rates rising to a

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greater degree than short-term rates is a “steepening” of the yield curve. The impact of a nonparallel shift in rates depends on the types of assets in which funds are invested and the shape of the yield curve implicit in the “market forward rate” scenario.
Net Interest Income Sensitivity The Policy Period Sensitivity Measurement table provides a summary of our interest rate sensitivity measurements, and as noted earlier, in June 2008 we changed our sensitivity measurement to measure sensitivity over a base of net interest income rather than consolidated net income.
The July 2008 forward rate expectations imply a high probability that the federal funds rate will increase by 115 basis points by the end of our policy period in June 2009. If this occurs, the spread between the 10-year treasury note rate and the target federal funds rate would migrate from a positive 197 basis points of slope at June 30, 2008, to a positive slope of 121 basis points by June 2009. The long-term average spread is a positive 113 basis points. Because it is unlikely short-term rates would rise an additional 200 basis points above the market forward rates while all other points on the yield curve would move in simultaneous parallel increments, our high rate sensitivity to the “market forward rate” scenario is measured using three different yield curve shapes. These yield curves are constructed to represent the more likely range of yield curve shapes that may prevail throughout the policy period in an environment where short-term rates rise 200 basis points above current market expectations. The reported high rate sensitivity is a composite of these three scenarios.
Policy Period
Sensitivity Measurement
 
                         
            Implied     Percent  
    Fed Funds     Fed Funds     Net Interest  
    Rate at     Rate for     Income  
    June 30, 2008     June 2009     Sensitivity  
 
Market Forward Rate Scenarios (a)
    2.00 %     3.15       -  
 
High Rate Composite
            5.15       (0.90 )
 
Low Rate
            1.15       0.50  
 
(a) Assumes base federal funds rate mirrors market expectations.
In July 2008, our earnings simulation model indicated net interest income would be negatively affected by 0.9 percent in a “high rate composite” scenario relative to the “market forward rate” over the policy period. Additionally, we measure a scenario where short-term rates gradually decline 200 basis points over a 12-month period while the longer-term rates decline by less than 200 basis points relative to the “market forward rate” scenario. The model indicates net interest income would be positively affected by 0.5 percent in this scenario. These percentages are for a full year, but may be higher or lower in individual reporting periods.
While our interest rate sensitivity modeling assumes management takes no action, we regularly assess the viability of strategies to reduce unacceptable risks to net interest income and we implement such strategies when we believe those actions are prudent. As new monthly outlooks become available, we formulate strategies aimed at protecting net interest income from the potentially negative effects of changes in interest rates.
Accounting and Regulatory Matters
The following information addresses significant new accounting and regulatory developments that will affect us, as well as new or proposed legislation that will continue to have a significant impact on our industry.
Business Combinations and Noncontrolling Interests In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised), Business Combinations (SFAS 141(R)), and SFAS 160, Noncontrolling

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Interests in Consolidated Financial Statementsan amendment of ARB 51. These new standards will significantly change the accounting and reporting for business combinations and noncontrolling interests (previously referred to as minority interests).
SFAS 141(R) retains the fair value model for assets and liabilities acquired in a business combination while making other significant changes to business combination accounting. The more significant changes include: recognizing 100 percent of the fair values of assets and liabilities acquired in acquisitions of less than a 100 percent controlling interest, measuring shares issued as consideration in a business combination based on their fair value at the acquisition date, recognizing contingent consideration arrangements and pre-acquisition gain and loss contingencies at their respective acquisition date fair values, expensing acquisition-related transaction costs as incurred, and capitalizing acquisition-related restructuring costs only if certain criteria are met.
SFAS 160 retains much of the existing guidance for consolidation while making significant changes to the reporting of noncontrolling interests, which we currently report as liabilities. Under SFAS 160, noncontrolling interests in consolidated subsidiaries will be reported as a component of stockholders’ equity. Also under SFAS 160, a change in ownership interests in a consolidated subsidiary that does not result in loss of control will be recorded directly to stockholders’ equity. A change in ownership interest that results in deconsolidation may trigger recognition of a gain or loss and establishment of a new fair value basis in the remaining interest held.
These standards are effective on January 1, 2009, for calendar year-end companies, with early adoption prohibited. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the adoption date. SFAS 160 must be adopted prospectively with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.
Derivative Disclosure In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, which enhances the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires quantitative disclosures of the fair value of all derivative instruments by primary underlying risk and accounting designation, as well as gains and losses recognized on derivative instruments. Further, SFAS 161 requires qualitative disclosures about how and why a company uses derivatives as well as any credit risk-related contingencies. This new standard is effective on January 1, 2009.
Hedge Accounting In June 2008, the FASB issued an exposure draft of a proposed Statement of Financial Accounting Standards, Accounting for Hedging Activities—an amendment of FASB Statement No. 133. The FASB’s primary objectives in undertaking this project are to simplify the accounting for hedging activities, improve financial reporting for hedging activities, and resolve practice issues that have arisen under SFAS No. 133. The proposed changes are substantial including an amendment that will no longer permit companies to hedge by individual risk (for example, benchmark interest rate). Further, significant changes are being proposed to the frequency and manner in which a company must assess whether a hedge is effective in offsetting the overall changes in fair value of the hedged item. Additional provisions of the exposure draft would affect a company’s ability to achieve hedge accounting and the income/expense recognition associated with hedging instruments.

40


 

The exposure draft provides for an effective date of January 1, 2010. We have not completed our assessment of the potential impact that a new standard, if finalized as currently drafted, would have on us.
Transfers of Financial Assets and Consolidation The FASB has an ongoing project that may result in significant changes to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FASB Interpretation (FIN) No. 46R, Consolidation of Variable Interest Entities.
The FASB has tentatively decided to remove the concept of a qualifying special purpose entity (QSPE) from SFAS 140, thereby eliminating the exception from consolidation that is accorded to QSPEs. This will have the effect of dramatically increasing the number of variable interest entities that companies must evaluate for consolidation under FIN 46R. The FASB has also decided to make other amendments to SFAS 140 and FIN 46R that may significantly reduce the number of transactions that qualify for off-balance sheet treatment, which may result in assets and liabilities remaining on a transferor’s or sponsor’s balance sheet.
The FASB currently plans to issue exposure drafts of amendments to SFAS 140 and FIN 46R in the third quarter of 2008, with final standards effective on January 1, 2010. We cannot predict with certainty whether any guidance will be issued, what changes may be required to the structure of or the accounting for transactions subject to SFAS 140 or FIN 46R, or what the transition provisions for implementation of any new guidance would be.
Legislative and Regulatory Matters Various legislative and regulatory proposals concerning the financial services industry are pending in Congress, the legislatures in states in which we conduct operations and before various regulatory agencies that supervise our operations. Given the uncertainty of the legislative and regulatory process, we cannot assess the effect of any such legislation or regulations on our consolidated financial position or results of operations. For a more detailed description of the laws and regulations governing our business operations, please see our 2007 Annual Report on Form 10-K.
In June 2004, the Basel Committee on Bank Supervision published new international guidelines for determining regulatory capital (Basel II) that are designed to be more risk sensitive than the current framework. In December 2007, the U.S. regulatory agencies jointly adopted a final rule for Basel II that represents the U.S. version of the international guidelines. Under the final rule, which was effective April 1, 2008, we must adopt a board of directors-approved implementation plan by October 1, 2008, and begin a three-year transitional period for capital calculation no later than April 1, 2011. The final rule also requires that prior to beginning the three-year transitional period, we complete a satisfactory parallel run period of no less than four consecutive calendar quarters during which we will be required to confidentially report regulatory capital under the new risk-based capital rule as well as under the existing capital rule. The final rule allows banks to enter a parallel run starting in April 2008, and the first possible years for the transitional periods are 2009 through 2011. We have established necessary project management infrastructure, funding and management support to ensure we will comply with the new regulations.

41


 

Table 1
EXPLANATION OF OUR USE OF NON-GAAP FINANCIAL MEASURES
 
     In addition to results of operations presented in accordance with U.S. generally accepted accounting principles (GAAP), our management uses certain non-GAAP financial measures such as expenses excluding merger-related and restructuring expenses, other intangible amortization and goodwill impairment charges; net interest income excluding charges related to certain leasing transactions widely referred to as SILO transactions; and net interest income on a tax-equivalent basis. In addition, Wachovia presents certain information regarding its loan portfolio on a “managed” basis, which is a non-GAAP financial measure that combines loans reported on-balance sheet with loans securitized for which the retained interests are classified in securities on-balance sheet, loans held for sale on-balance sheet and the off-balance sheet portfolio of securitized loans sold, where we service the loans.
     We believe these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends, and they facilitate comparisons with the performance of others in the financial services industry. Specifically, we believe the exclusion of merger-related and restructuring expenses, other intangible amortization and goodwill impairment charges, as well as the exclusion of the SILO lease-related charge from net interest income, permits evaluation and comparison of results for ongoing business operations, and it is on this basis that our management internally assesses our performance. Those non-operating items also are excluded from our segment measures used internally to evaluate segment performance in accordance with GAAP because management does not consider them particularly relevant or useful in evaluating the operating performance of our business segments. For additional information related to segment performance, see the Business Segments section and the Business Segments footnote to Notes to Consolidated Financial Statements.
     This report also includes net interest income on a tax-equivalent basis. We believe the presentation of net interest income on a tax-equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.
     Although we believe the above mentioned non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of these non-GAAP financial measures from GAAP to non-GAAP, to the extent any of these non-GAAP financial measures are included in this report, is presented below or elsewhere in this report, including in the Loans — On-Balance Sheet, and Managed and Servicing Portfolios table.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In millions)   2008     2007     2008     2007  
 
Net interest income (GAAP)
  $ 4,290       4,449       9,042       8,949  
Tax-equivalent adjustment
    54       38       107       75  
 
Net interest income (Tax-equivalent)
  $ 4,344       4,487       9,149       9,024  
 

42


 

Table 2
SELECTED STATISTICAL DATA
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions, except per share data)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
PROFITABILITY
                                       
Return on average common stockholders’ equity
    (50.47 )%     (3.81 )     0.28       9.19       13.54  
Return on average total stockholders’ equity
    (43.86 )     (3.39 )     0.28       9.19       13.54  
Net interest margin (a)
    2.58       2.92       2.88       2.92       2.96  
Fee and other income as % of total revenue
    42.15       36.62       36.99       39.02       48.58  
Effective income tax rate
    18.06 %     26.02       122.05       27.33       32.78  
 
ASSET QUALITY
                                       
Allowance for loan losses as % of loans, net
    2.20 %     1.37       0.98       0.78       0.79  
Allowance for loan losses as % of nonperforming assets (b)
    90       78       84       115       157  
Allowance for credit losses as % of loans, net
    2.24       1.41       1.02       0.82       0.83  
Net charge-offs as % of average loans, net
    1.10       0.66       0.41       0.19       0.14  
Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale
    2.41 %     1.70       1.14       0.66       0.49  
 
CAPITAL ADEQUACY
                                       
Tier 1 capital ratio
    8.00 %     7.42       7.35       7.10       7.47  
Total capital ratio
    12.74       12.05       11.82       10.84       11.46  
Leverage
    6.57       6.18       6.09       6.10       6.23  
Tangible capital ratio
    4.68       4.31       4.29       4.19       4.30  
Tangible capital ratio (c)
    5.07 %     4.59       4.50       4.56       4.76  
 
OTHER DATA
                                       
FTE employees
    119,952       120,378       121,890       109,724       110,493  
Total financial centers/brokerage offices
    4,820       4,850       4,894       4,167       4,135  
ATMs
    5,277       5,308       5,139       5,123       5,099  
Actual common shares (In millions) (d)
    2,159       1,992       1,980       1,901       1,903  
Common stock price
  $ 15.53       27.00       38.03       50.15       51.25  
Market capitalization (d)
  $ 33,527       53,782       75,302       95,326       97,530  
 
(a) Tax-equivalent.
(b) These ratios do not include nonperforming loans included in loans held for sale.
(c) These ratios exclude the effect on tangible capital of the unamortized gains and losses under employee benefit plans, the unrealized gains and losses on available for sale securities, certain risk management derivatives and the pension accounting adjustments to stockholders’ equity.
(d) Includes restricted stock for which the holder receives dividends and has full voting rights.

43


 

Table 3
SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions, except per share data)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
SUMMARIES OF INCOME
                                       
Interest income
  $ 8,646       10,179       10,910       10,831       10,350  
Tax-equivalent adjustment
    54       53       44       33       38  
 
Interest income (a)
    8,700       10,232       10,954       10,864       10,388  
Interest expense
    4,356       5,427       6,280       6,280       5,901  
 
Net interest income (a)
    4,344       4,805       4,674       4,584       4,487  
Provision for credit losses
    5,567       2,831       1,497       408       179  
 
Net interest income after provision for credit losses (a)
    (1,223 )     1,974       3,177       4,176       4,308  
Securities gains (losses)
    (808 )     (205 )     (320 )     (34 )     23  
Fee and other income
    3,973       2,982       3,064       2,967       4,217  
Merger-related and restructuring expenses
    251       241       187       36       32  
Goodwill impairment
    6,060       -       -       -       -  
Other noninterest expense
    6,473       5,200       5,599       4,489       4,858  
Minority interest in income of consolidated subsidiaries
    (18 )     155       107       189       139  
 
Income (loss) from continuing operations before income taxes (benefits) (a)
    (10,824 )     (845 )     28       2,395       3,519  
Income taxes (benefits)
    (1,963 )     (234 )     (209 )     656       1,140  
Tax-equivalent adjustment
    54       53       44       33       38  
 
Income (loss) from continuing operations
    (8,915 )     (664 )     193       1,706       2,341  
Discontinued operations, net of income taxes
    -       -       (142 )     (88 )     -  
 
Net income (loss)
    (8,915 )     (664 )     51       1,618       2,341  
Dividends on preferred stock
    193       43       -       -       -  
 
Net income (loss) available to common stockholders
  $ (9,108 )     (707 )     51       1,618       2,341  
 
PER COMMON SHARE DATA
                                       
Basic earnings
                                       
Income (loss) from continuing operations
  $ (4.31 )     (0.36 )     0.10       0.91       1.24  
Net income (loss) available to common stockholders
    (4.31 )     (0.36 )     0.03       0.86       1.24  
Diluted earnings (b)
Income (loss) from continuing operations
    (4.31 )     (0.36 )     0.10       0.90       1.22  
Net income (loss) available to common stockholders
    (4.31 )     (0.36 )     0.03       0.85       1.22  
Cash dividends
  $ 0.38       0.64       0.64       0.64       0.56  
Average common shares - Basic
    2,111       1,963       1,959       1,885       1,891  
Average common shares - Diluted
    2,119       1,977       1,983       1,910       1,919  
Average common stockholders’ equity
Quarter-to-date
  $ 72,579       74,697       73,599       69,857       69,317  
Year-to-date
    73,638       74,697       70,533       69,500       69,318  
Book value per common share (c)
    30.25       36.24       37.66       36.90       36.40  
Common stock price
High
    30.08       38.76       51.80       52.64       56.81  
Low
    15.53       25.60       38.03       44.94       51.25  
Period-end
  $ 15.53       27.00       38.03       50.15       51.25  
To earnings ratio (d)
    (4.10 )X   15.52       11.52       11.22       10.70  
To book value
    51 %     75       101       136       141  
BALANCE SHEET DATA
                                       
Assets
  $ 812,433       808,575       782,896       754,168       715,428  
Long-term debt
  $ 184,401       175,653       161,007       158,584       142,047  
 
(a) Tax-equivalent.
(b) Calculated using average basic common shares in 2008.
(c) Share count in the calculation includes restricted stock for which the holder receives dividends and has full voting rights.
(d) Based on diluted earnings per common share.

44


 

Table 4
MERGER-RELATED AND RESTRUCTURING EXPENSES
 
         
    Six  
    Months  
    Ended  
    June 30,  
(In millions)   2008  
 
Wachovia/A.G. Edwards
  $ 411  
Wachovia/Golden West
    79  
Other
    2  
 
Total merger-related and restructuring expenses
  $ 492  
 

45


 

Table 5
BUSINESS SEGMENTS (a)
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
GENERAL BANK COMBINED (b)
                                       
Net interest income (c)
  $ 3,671       3,445       3,401       3,464       3,372  
Fee and other income
    1,000       980       929       936       935  
Intersegment revenue
    57       55       58       59       56  
 
Total revenue (c)
    4,728       4,480       4,388       4,459       4,363  
Provision for credit losses
    919       569       320       207       154  
Noninterest expense
    2,050       2,038       2,037       1,897       1,922  
Income taxes
    632       673       730       850       824  
Tax-equivalent adjustment
    10       11       11       11       10  
 
Segment earnings
  $ 1,117       1,189       1,290       1,494       1,453  
 
Economic profit
  $ 919       992       1,043       1,189       1,124  
Risk adjusted return on capital
    33.02 %     42.43       47.99       54.28       52.66  
Economic capital, average
  $ 16,786       12,693       11,183       10,898       10,821  
Cash overhead efficiency ratio (c)
    43.35 %     45.50       46.42       42.56       44.05  
Lending commitments
  $ 133,201       132,805       133,733       132,779       129,851  
Average loans, net
    319,574       311,556       303,396       294,709       291,607  
Average core deposits
  $ 290,381       297,171       296,194       290,133       290,455  
FTE employees
    54,415       54,831       55,559       56,519       57,574  
 
COMMERCIAL
                                       
Net interest income (c)
  $ 1,013       943       932       903       865  
Fee and other income
    133       131       116       114       110  
Intersegment revenue
    46       43       43       44       42  
 
Total revenue (c)
    1,192       1,117       1,091       1,061       1,017  
Provision for credit losses
    180       174       178       121       96  
Noninterest expense
    394       400       389       347       353  
Income taxes
    215       187       181       205       198  
Tax-equivalent adjustment
    10       11       11       11       10  
 
Segment earnings
  $ 393       345       332       377       360  
 
Economic profit
  $ 224       213       240       256       230  
Risk adjusted return on capital
    28.20 %     28.09       33.01       35.20       33.43  
Economic capital, average
  $ 5,245       5,015       4,333       4,196       4,110  
Cash overhead efficiency ratio (c)
    33.04 %     35.78       35.73       32.64       34.79  
Average loans, net
  $ 88,272       84,875       82,127       80,172       78,178  
Average core deposits
  $ 45,396       47,844       46,460       42,828       43,145  
 
RETAIL AND SMALL BUSINESS
                                       
Net interest income (c)
  $ 2,658       2,502       2,469       2,561       2,507  
Fee and other income
    867       849       813       822       825  
Intersegment revenue
    11       12       15       15       14  
 
Total revenue (c)
    3,536       3,363       3,297       3,398       3,346  
Provision for credit losses
    739       395       142       86       58  
Noninterest expense
    1,656       1,638       1,648       1,550       1,569  
Income taxes
    417       486       549       645       626  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings
  $ 724       844       958       1,117       1,093  
 
Economic profit
  $ 695       779       803       933       894  
Risk adjusted return on capital
    35.21 %     51.79       57.46       66.23       64.44  
Economic capital, average
  $ 11,541       7,678       6,850       6,702       6,711  
Cash overhead efficiency ratio (c)
    46.83 %     48.72       49.95       45.65       46.86  
Average loans, net
  $ 231,302       226,681       221,269       214,537       213,429  
Average core deposits
  $ 244,985       249,327       249,734       247,305       247,310  
 
(a) Certain amounts presented in this Table 5 in periods prior to the second quarter of 2008 have been reclassified to conform to the presentation in the second quarter of 2008.
(b) General Bank Combined represents the consolidation of the General Bank’s Commercial, and Retail and Small Business lines of business.
(c) Tax-equivalent.
(Continued)

46


 

Table 5
BUSINESS SEGMENTS

 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
WEALTH MANAGEMENT
                                       
Net interest income (a)
  $ 202       182       183       186       182  
Fee and other income
    207       211       215       185       202  
Intersegment revenue
    3       5       3       4       3  
 
Total revenue (a)
    412       398       401       375       387  
Provision for credit losses
    8       5       7       6       2  
Noninterest expense
    253       246       250       240       244  
Income taxes
    53       55       52       48       51  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings
  $ 98       92       92       81       90  
 
Economic profit
  $ 76       70       73       62       70  
Risk adjusted return on capital
    52.61 %     51.44       58.46       50.96       56.73  
Economic capital, average
  $ 731       699       616       616       612  
Cash overhead efficiency ratio (a)
    61.05 %     61.98       62.23       64.36       62.80  
Lending commitments
  $ 6,915       7,007       7,011       7,007       6,892  
Average loans, net
    23,151       22,365       21,727       21,494       21,056  
Average core deposits
  $ 17,559       17,906       17,132       17,167       17,466  
FTE employees
    4,665       4,650       4,712       4,547       4,580  
 
(a) Tax-equivalent.
(Continued)

47


 

Table 5
BUSINESS SEGMENTS

 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
CORPORATE AND INVESTMENT BANK COMBINED (a)
                                       
Net interest income (b)
  $ 1,124       1,028       988       839       773  
Fee and other income
    657       (158 )     (552 )     175       1,522  
Intersegment revenue
    (52 )     (50 )     (50 )     (52 )     (50 )
 
Total revenue (b)
    1,729       820       386       962       2,245  
Provision for credit losses
    438       197       112       1       (2 )
Noninterest expense
    960       747       953       626       1,020  
Income taxes (benefits)
    103       (67 )     (267 )     114       437  
Tax-equivalent adjustment
    19       21       19       9       11  
 
Segment earnings (loss)
  $ 209       (78 )     (431 )     212       779  
 
Economic profit (loss)
  $ 4       (412 )     (744 )     (114 )     490  
Risk adjusted return on capital
    11.12 %     (1.53 )     (15.22 )     6.39       33.22  
Economic capital, average
  $ 13,816       13,233       11,263       9,791       8,850  
Cash overhead efficiency ratio (b)
    55.60 %     91.00       247.26       65.15       45.43  
Lending commitments
  $ 113,559       114,114       118,734       119,791       115,430  
Average loans, net
    106,642       101,046       91,665       82,969       76,744  
Average core deposits
  $ 31,682       33,623       36,214       37,188       36,713  
FTE employees
    6,394       6,342       6,600       6,730       6,872  
 
CORPORATE LENDING
                                       
Net interest income (b)
  $ 410       431       417       412       405  
Fee and other income
    69       154       148       135       140  
Intersegment revenue
    10       13       18       16       19  
 
Total revenue (b)
    489       598       583       563       564  
Provision for credit losses
    350       132       103       2       (1 )
Noninterest expense
    128       141       137       139       148  
Income taxes
    4       119       126       152       152  
Tax-equivalent adjustment
    -       -       -       1       -  
 
Segment earnings
  $ 7       206       217       269       265  
 
Economic profit (loss)
  $ (20 )      45       65       81       97  
Risk adjusted return on capital
    9.82 %     13.74       15.34       17.12       19.20  
Economic capital, average
  $ 6,739       6,627       5,922       5,266       4,778  
Cash overhead efficiency ratio (b)
    26.21 %     23.61       23.50       24.62       26.22  
Average loans, net
  $ 65,451       64,035       62,338       58,533       56,083  
Average core deposits
  $ 4,429       4,534       4,597       5,087       5,054  
 
(a) Corporate and Investment Bank Combined represents the consolidation of the Corporate and Investment Bank’s Corporate Lending, Treasury and International Trade Finance, and Investment Banking lines of business.
(b) Tax-equivalent.
(Continued)

48


 

Table 5
BUSINESS SEGMENTS

 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
TREASURY AND INTERNATIONAL TRADE FINANCE
                                       
Net interest income (b)
  $ 122       112       110       104       100  
Fee and other income
    226       218       218       220       213  
Intersegment revenue
    (52 )     (47 )     (47 )     (46 )     (49 )
 
Total revenue (b)
    296       283       281       278       264  
Provision for credit losses
    -       (2 )     -       (1 )     -  
Noninterest expense
    169       175       174       170       172  
Income taxes
    46       40       38       40       33  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings
  $ 81       70       69       69       59  
 
Economic profit
  $ 68       56       56       58       47  
Risk adjusted return on capital
    82.71 %     70.21       74.12       77.84       68.15  
Economic capital, average
  $ 382       383       355       342       335  
Cash overhead efficiency ratio (b)
    57.09 %     61.70       61.78       60.98       65.13  
Average loans, net
  $ 13,612       13,461       12,309       10,813       9,540  
Average core deposits
  $ 18,132       19,633       20,858       21,253       21,121  
 
INVESTMENT BANKING
                                       
Net interest income (b)
  $ 592       485       461       323       268  
Fee and other income
    362       (530 )     (918 )     (180 )     1,169  
Intersegment revenue
    (10 )     (16 )     (21 )     (22 )     (20 )
 
Total revenue (b)
    944       (61 )     (478 )     121       1,417  
Provision for credit losses
    88       67       9       -       (1 )
Noninterest expense
    663       431       642       317       700  
Income taxes (benefits)
    53       (226 )     (431 )     (78 )     252  
Tax-equivalent adjustment
    19       21       19       8       11  
 
Segment earnings (loss)
  $ 121       (354 )     (717 )     (126 )     455  
 
Economic profit (loss)
  $ (44 )      (513 )     (865 )     (253 )     346  
Risk adjusted return on capital
    8.34 %     (22.21 )     (57.88 )     (12.96 )     48.01  
Economic capital, average
  $ 6,695       6,223       4,986       4,183       3,737  
Cash overhead efficiency ratio (b)
    70.37 %     (708.47 )     (134.16 )     265.36       49.41  
Average loans, net
  $ 27,579       23,550       17,018       13,623       11,121  
Average core deposits
  $ 9,121       9,456       10,759       10,848       10,538  
 
(Continued)

49


 

Table 5
BUSINESS SEGMENTS

 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
CAPITAL MANAGEMENT COMBINED (a)
                                       
Net interest income (b)
  $ 308       281       320       268       260  
Fee and other income
    1,995       2,191       2,210       1,444       1,536  
Intersegment revenue
    (8 )     (10 )     (11 )     (8 )     (11 )
 
Total revenue (b)
    2,295       2,462       2,519       1,704       1,785  
Provision for credit losses
    -       -       -       -       -  
Noninterest expense
    2,327       1,855       1,936       1,241       1,294  
Income taxes (benefits)
    (11 )     220       213       169       179  
Tax-equivalent adjustment
    1       1       1       -       -  
 
Segment earnings (loss)
  $ (21 )     386       369       294       312  
 
Economic profit (loss)
  $ (79 )     327       310       258       275  
Risk adjusted return on capital
    (3.97 )%     72.26       69.14       88.96       92.77  
Economic capital, average
  $ 2,105       2,144       2,119       1,310       1,348  
Cash overhead efficiency ratio (b)
    101.39 %     75.34       76.90       72.82       72.47  
Lending commitments
  $ 1,544       1,348       1,281       1,164       1,169  
Average loans, net
    2,881       2,562       2,295       2,142       1,663  
Average core deposits
  $ 48,647       43,084       38,019       31,489       31,221  
FTE employees
    29,680       29,841       29,891       17,908       17,905  
Assets under management
  $ 245,940       258,691       274,736       285,422       281,462  
 
ASSET MANAGEMENT
                                       
Net interest income (b)
  $ 12       14       7       6       5  
Fee and other income
    165       295       279       244       312  
Intersegment revenue
    (1 )     (1 )     -       (1 )     -  
 
Total revenue (b)
    176       308       286       249       317  
Provision for credit losses
    -       -       -       -       -  
Noninterest expense
    209       224       217       206       222  
Income taxes
    (13 )     31       26       15       35  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings (loss)
  $ (20 )     53       43       28       60  
 
Economic profit (loss)
  $ (25 )     47       37       22       55  
Risk adjusted return on capital
    (39.89 )%     99.16       82.68       56.73       112.79  
Economic capital, average
  $ 203       216       205       194       215  
Cash overhead efficiency ratio (b)
    117.97 %     72.81       76.33       82.50       70.01  
Average loans, net
  $ 17       41       22       36       17  
Average core deposits
  $ 304       453       405       418       364  
 
(a) Capital Management Combined represents the consolidation of Capital Management’s Asset Management, Retail Brokerage Services, and Other, which primarily serves to eliminate intersegment revenue.
(b) Tax-equivalent.
(Continued)

50


 

Table 5
BUSINESS SEGMENTS

 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
RETAIL BROKERAGE SERVICES
                                       
Net interest income (b)
  $ 296       267       313       262       254  
Fee and other income
    1,832       1,898       1,933       1,202       1,227  
Intersegment revenue
    (7 )     (9 )     (11 )     (7 )     (11 )
 
Total revenue (b)
    2,121       2,156       2,235       1,457       1,470  
Provision for credit losses
    -       -       -       -       -  
Noninterest expense
    2,121       1,634       1,723       1,038       1,076  
Income taxes
    1       189       186       154       143  
Tax-equivalent adjustment
    1       1       1       -       -  
 
Segment earnings (loss)
  $ (2 )     332       325       265       251  
 
Economic profit (loss)
  $ (55 )     279       272       235       219  
Risk adjusted return on capital
    (.30 )%     69.06       67.42       94.13       88.54  
Economic capital, average
  $ 1,902       1,928       1,914       1,116       1,133  
Cash overhead efficiency ratio (b)
    100.07 %     75.79       77.08       71.33       73.18  
Average loans, net
  $ 2,864       2,521       2,273       2,106       1,646  
Average core deposits
  $ 48,343       42,631       37,614       31,071       30,857  
 
OTHER
                                       
Net interest income (b)
  $ -       -       -       -       1  
Fee and other income
    (2 )     (2 )     (2 )     (2 )     (3 )
Intersegment revenue
    -       -       -       -       -  
 
Total revenue (b)
    (2 )     (2 )     (2 )     (2 )     (2 )
Provision for credit losses
    -       -       -       -       -  
Noninterest expense
    (3 )     (3 )     (4 )     (3 )     (4 )
Income taxes
    -       -       1       -       1  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings
  $ 1       1       1       1       1  
 
Economic profit
  $ 1       1       1       1       1  
Risk adjusted return on capital
    - %     -       -       -       -  
Economic capital, average
  $ -       -       -       -       -  
Cash overhead efficiency ratio (b)
    - %     -       -       -       -  
Average loans, net
  $ -       -       -       -       -  
Average core deposits
  $ -       -       -       -       -  
 
(Continued)

51


 

Table 5
BUSINESS SEGMENTS

 
                                         
            2008     2007  
    Second     First     Fourth     Third     Second  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
PARENT
                                       
Net interest income (a)
  $ (961 )      (131 )     (218 )     (173 )     (100 )
Fee and other income
    (694 )     (447 )     (58 )     193       45  
Intersegment revenue
    -       -       -       (3 )     2  
 
Total revenue (a)
    (1,655 )     (578 )     (276 )     17       (53 )
Provision for credit losses
    4,202       2,060       1,058       194       25  
Noninterest expense
    883       314       423       485       378  
Minority interest
    26       198       118       189       139  
Income tax benefits
    (2,657 )     (1,040 )     (869 )     (511 )     (339 )
Tax-equivalent adjustment
    24       20       13       13       17  
Dividends on preferred stock
    193       43       -       -       -  
 
Segment loss
  $ (4,326 )     (2,173 )     (1,019 )     (353 )     (273 )
 
Economic loss
  $ (1,623 )     (840 )     (481 )     (318 )     (246 )
Risk adjusted return on capital
    (430.13 )%     (169.74 )     (83.78 )     (41.68 )     (29.52 )
Economic capital, average
  $ 1,480       1,867       2,014       2,395       2,436  
Cash overhead efficiency ratio (a)
    (47.55 )%     (36.54 )     (113.98 )     1,988.83       (496.52 )
Lending commitments
  $ 543       538       599       529       569  
Average loans, net
    24,486       28,407       30,722       28,487       30,187  
Average core deposits
  $ 2,401       2,729       2,484       3,032       2,641  
FTE employees
    24,798       24,714       25,128       24,020       23,562  
 
(a) Tax-equivalent.
(Continued)

52


 

Table 5
BUSINESS SEGMENTS
 
                                                         
    Three Months Ended June 30, 2008  
                                                     
                                            Goodwill        
                                            Impairment,        
                    Corporate                     Net Merger-        
                    and                     Related and        
    General     Wealth     Investment     Capital             Restructuring        
(Dollars in millions)   Bank     Management     Bank     Management     Parent     Expenses (b)     Total  
 
CONSOLIDATED
                                                       
Net interest income (a)
  $ 3,671       202       1,124       308       (961 )     (54 )     4,290  
Fee and other income
    1,000       207       657       1,995       (694 )     -       3,165  
Intersegment revenue
    57       3       (52 )     (8 )     -       -       -  
 
Total revenue (a)
    4,728       412       1,729       2,295       (1,655 )     (54 )     7,455  
Provision for credit losses
    919       8       438       -       4,202       -       5,567  
Noninterest expense
    2,050       253       960       2,327       883       6,311       12,784  
Minority interest
    -       -       -       -       26       (44 )     (18 )
Income taxes (benefits)
    632       53       103       (12 )     (2,657 )     (82 )     (1,963 )
Tax-equivalent adjustment
    10       -       19       1       24       (54 )     -  
 
Net income (loss)
    1,117       98       209       (21 )     (4,133 )     (6,185 )     (8,915 )
Dividends on preferred stock
    -       -       -       -       193       -       193  
 
Net income (loss) available to
common stockholders
  $ 1,117       98       209       (21 )     (4,326 )     (6,185 )     (9,108 )
 
Economic profit (loss)
  $ 919       76       4       (79 )     (1,623 )     -       (703 )
Risk adjusted return on capital
    33.02  %     52.61       11.12       (3.97 )     (430.14 )     -       2.90  
Economic capital, average
  $ 16,786       731       13,816       2,105       1,480       -       34,918  
Cash overhead efficiency ratio (a)
    43.35  %     61.05       55.60       101.39       (47.55 )     -       84.92  
Lending commitments
  $ 133,201       6,915       113,559       1,544       543       -       255,762  
Average loans, net
    319,574       23,151       106,642       2,881       24,486       -       476,734  
Average core deposits
  $ 290,381       17,559       31,682       48,647       2,401       -       390,670  
FTE employees
    54,415       4,665       6,394       29,680       24,798       -       119,952  
 
                                                         
    Three Months Ended June 30, 2007  
                                                     
                                            Net Merger-        
                    Corporate                     Related        
                    and                     and        
    General     Wealth     Investment     Capital             Restructuring        
(Dollars in millions)   Bank     Management     Bank     Management     Parent     Expenses (b)     Total  
 
CONSOLIDATED
                                                       
Net interest income (a)
  $ 3,372       182       773       260       (100 )     (38 )     4,449  
Fee and other income
    935       202       1,522       1,536       45       -       4,240  
Intersegment revenue
    56       3       (50 )     (11 )     2       -       -  
 
Total revenue (a)
    4,363       387       2,245       1,785       (53 )     (38 )     8,689  
Provision for credit losses
    154       2       (2 )     -       25       -       179  
Noninterest expense
    1,922       244       1,020       1,294       378       32       4,890  
Minority interest
    -       -       -       -       139       -       139  
Income taxes (benefits)
    824       51       437       179       (339 )     (12 )     1,140  
Tax-equivalent adjustment
    10       -       11       -       17       (38 )     -  
 
Net income (loss)
  $ 1,453       90       779       312       (273 )     (20 )     2,341  
 
Economic profit (loss)
  $ 1,124       70       490       275       (246 )     -       1,713  
Risk adjusted return on capital
    52.66  %     56.73       33.22       92.77       (29.52 )     -       39.55  
Economic capital, average
  $ 10,821       612       8,850       1,348       2,436       -       24,067  
Cash overhead efficiency ratio (a)
    44.05  %     62.80       45.43       72.47       (496.52 )     -       54.47  
Lending commitments
  $ 129,851       6,892       115,430       1,169       569       -       253,911  
Average loans, net
    291,607       21,056       76,744       1,663       30,187       -       421,257  
Average core deposits
  $ 290,455       17,466       36,713       31,221       2,641       -       378,496  
FTE employees
    57,574       4,580       6,872       17,905       23,562       -       110,493  
 
(a) Tax-equivalent.
(b) Tax-equivalent amounts are eliminated in order for “Total” amounts to agree with amounts appearing in the Consolidated Statements of Income.
(Continued)

53


 

Table 5
BUSINESS SEGMENTS
 
                 
    Six Months Ended  
    June 30,  
             
(Dollars in millions)   2008     2007  
 
GENERAL BANK COMBINED (a)
               
Net interest income (b)
  $ 7,116       6,770  
Fee and other income
    1,980       1,781  
Intersegment revenue
    112       102  
 
Total revenue (b)
    9,208       8,653  
Provision for credit losses
    1,488       301  
Noninterest expense
    4,088       3,787  
Income taxes
    1,305       1,644  
Tax-equivalent adjustment
    21       21  
 
Segment earnings
  $ 2,306       2,900  
 
Economic profit
  $ 1,911       2,250  
Risk adjusted return on capital
    37.07  %     53.24  
Economic capital, average
  $ 14,739       10,744  
Cash overhead efficiency ratio (b)
    44.39  %     43.76  
Lending commitments
  $ 133,201       129,851  
Average loans, net
    315,565       289,985  
Average core deposits
  $ 293,776       287,263  
FTE employees
    54,415       57,574  
 
COMMERCIAL
               
Net interest income (b)
  $ 1,956       1,702  
Fee and other income
    264       219  
Intersegment revenue
    89       78  
 
Total revenue (b)
    2,309       1,999  
Provision for credit losses
    354       193  
Noninterest expense
    794       711  
Income taxes
    402       379  
Tax-equivalent adjustment
    21       21  
 
Segment earnings
  $ 738       695  
 
Economic profit
  $ 437       444  
Risk adjusted return on capital
    28.14  %     33.22  
Economic capital, average
  $ 5,130       4,028  
Cash overhead efficiency ratio (b)
    34.37  %     35.59  
Average loans, net
  $ 86,574       77,060  
Average core deposits
  $ 46,620       43,367  
 
RETAIL AND SMALL BUSINESS
               
Net interest income (b)
  $ 5,160       5,068  
Fee and other income
    1,716       1,562  
Intersegment revenue
    23       24  
 
Total revenue (b)
    6,899       6,654  
Provision for credit losses
    1,134       108  
Noninterest expense
    3,294       3,076  
Income taxes
    903       1,265  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 1,568       2,205  
 
Economic profit
  $ 1,474       1,806  
Risk adjusted return on capital
    41.83  %     65.25  
Economic capital, average
  $ 9,609       6,716  
Cash overhead efficiency ratio (b)
    47.75  %     46.21  
Average loans, net
  $ 228,991       212,925  
Average core deposits
  $ 247,156       243,896  
 
(a) General Bank Combined represents the consolidation of the General Bank’s Commercial, and Retail and Small Business lines of business.
(b) Tax-equivalent.
(Continued)

54


 

Table 5
BUSINESS SEGMENTS
 
                 
    Six Months Ended  
    June 30,  
               
(Dollars in millions)   2008     2007  
 
WEALTH MANAGEMENT
               
Net interest income (a)
  $ 384       362  
Fee and other income
    418       398  
Intersegment revenue
    8       6  
 
Total revenue (a)
    810       766  
Provision for credit losses
    13       3  
Noninterest expense
    499       491  
Income taxes
    108       99  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 190       173  
 
Economic profit
  $ 146       133  
Risk adjusted return on capital
    52.04  %     55.46  
Economic capital, average
  $ 715       602  
Cash overhead efficiency ratio (a)
    61.50  %     64.00  
Lending commitments
  $ 6,915       6,892  
Average loans, net
    22,758       20,689  
Average core deposits
  $ 17,732       17,368  
FTE employees
    4,665       4,580  
 
(a) Tax-equivalent.
(Continued)

55


 

Table 5
BUSINESS SEGMENTS
 
                 
    Six Months Ended  
    June 30,  
             
(Dollars in millions)   2008     2007  
 
CORPORATE AND INVESTMENT BANK COMBINED (a)
               
Net interest income (b)
  $ 2,152       1,489  
Fee and other income
    499       2,631  
Intersegment revenue
    (102 )     (93 )
 
Total revenue (b)
    2,549       4,027  
Provision for credit losses
    635       4  
Noninterest expense
    1,707       1,931  
Income taxes
    36       742  
Tax-equivalent adjustment
    40       21  
 
Segment earnings
  $ 131       1,329  
 
Economic profit (loss)
  $ (408 )     776  
Risk adjusted return on capital
    4.93  %     29.22  
Economic capital, average
  $ 13,525       8,590  
Cash overhead efficiency ratio (b)
    67.00  %     47.94  
Lending commitments
  $ 113,559       115,430  
Average loans, net
    103,844       75,065  
Average core deposits
  $ 32,652       35,481  
FTE employees
    6,394       6,872  
 
CORPORATE LENDING
               
Net interest income (b)
  $ 841       804  
Fee and other income
    223       265  
Intersegment revenue
    23       37  
 
Total revenue (b)
    1,087       1,106  
Provision for credit losses
    482       4  
Noninterest expense
    269       300  
Income taxes
    123       293  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 213       509  
 
Economic profit
  $ 25       186  
Risk adjusted return on capital
    11.77  %     18.99  
Economic capital, average
  $ 6,683       4,696  
Cash overhead efficiency ratio (b)
    24.78  %     27.15  
Average loans, net
  $ 64,743       55,593  
Average core deposits
  $ 4,481       5,061  
 
(a) Corporate and Investment Bank Combined represents the consolidation of the Corporate and Investment Bank’s Corporate Lending, Treasury and International Trade Finance, and Investment Banking lines of business.
(b) Tax-equivalent.
(Continued)

56


 

Table 5
BUSINESS SEGMENTS
 
                 
    Six Months Ended  
    June 30,  
               
(Dollars in millions)   2008     2007  
 
TREASURY AND INTERNATIONAL TRADE FINANCE
               
Net interest income (b)
  $ 234       192  
Fee and other income
    444       422  
Intersegment revenue
    (99 )     (94 )
 
Total revenue (b)
    579       520  
Provision for credit losses
    (2 )     -  
Noninterest expense
    344       345  
Income taxes
    86       64  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 151       111  
 
Economic profit
  $ 124       89  
Risk adjusted return on capital
    76.45  %     64.86  
Economic capital, average
  $ 382       334  
Cash overhead efficiency ratio (b)
    59.34  %     66.41  
Average loans, net
  $ 13,536       8,908  
Average core deposits
  $ 18,883       20,533  
 
INVESTMENT BANKING
               
Net interest income (b)
  $ 1,077       493  
Fee and other income
    (168 )     1,944  
Intersegment revenue
    (26 )     (36 )
 
Total revenue (b)
    883       2,401  
Provision for credit losses
    155       -  
Noninterest expense
    1,094       1,286  
Income taxes
    (173 )     385  
Tax-equivalent adjustment
    40       21  
 
Segment earnings (loss)
  $ (233 )     709  
 
Economic profit (loss)
  $ (557 )     501  
Risk adjusted return on capital
    (6.38 ) %     39.35  
Economic capital, average
  $ 6,460       3,560  
Cash overhead efficiency ratio (b)
    124.00  %     53.52  
Average loans, net
  $ 25,565       10,564  
Average core deposits
  $ 9,288       9,887  
 
(Continued)

57


 

Table 5
BUSINESS SEGMENTS
 
                 
    Six Months Ended  
    June 30,  
             
(Dollars in millions)   2008     2007  
 
CAPITAL MANAGEMENT COMBINED (a)
               
Net interest income (b)
  $ 589       519  
Fee and other income
    4,186       3,013  
Intersegment revenue
    (18 )     (19 )
 
Total revenue (b)
    4,757       3,513  
Provision for credit losses
    -       -  
Noninterest expense
    4,182       2,531  
Income taxes
    208       358  
Tax-equivalent adjustment
    2       -  
 
Segment earnings
  $ 365       624  
 
Economic profit
  $ 248       550  
Risk adjusted return on capital
    34.49  %     93.76  
Economic capital, average
  $ 2,124       1,341  
Cash overhead efficiency ratio (b)
    87.91  %     72.04  
Lending commitments
  $ 1,544       1,169  
Average loans, net
    2,722       1,609  
Average core deposits
  $ 45,866       31,450  
FTE employees
    29,680       17,905  
Assets under management
  $ 245,940       281,462  
 
ASSET MANAGEMENT
               
Net interest income (b)
  $ 26       8  
Fee and other income
    460       584  
Intersegment revenue
    (2 )     -  
 
Total revenue (b)
    484       592  
Provision for credit losses
    -       -  
Noninterest expense
    433       442  
Income taxes
    18       55  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 33       95  
 
Economic profit
  $ 22       84  
Risk adjusted return on capital
    31.69  %     91.06  
Economic capital, average
  $ 210       211  
Cash overhead efficiency ratio (b)
    89.27  %     74.67  
Average loans, net
  $ 29       25  
Average core deposits
  $ 378       321  
 
(a) Capital Management Combined represents the consolidation of Capital Management’s Asset Management, Retail Brokerage Services, and Other, which primarily serves to eliminate intersegment revenue.
(b) Tax-equivalent.
(Continued)

58


 

Table 5
BUSINESS SEGMENTS
 
                 
    Six Months Ended  
    June 30,  
             
(Dollars in millions)   2008     2007  
 
RETAIL BROKERAGE SERVICES
               
Net interest income (b)
  $ 563       510  
Fee and other income
    3,730       2,434  
Intersegment revenue
    (16 )     (19 )
 
Total revenue (b)
    4,277       2,925  
Provision for credit losses
    -       -  
Noninterest expense
    3,755       2,098  
Income taxes
    190       301  
Tax-equivalent adjustment
    2       -  
 
Segment earnings
  $ 330       526  
 
Economic profit
  $ 224       463  
Risk adjusted return on capital
    34.62  %     93.75  
Economic capital, average
  $ 1,914       1,130  
Cash overhead efficiency ratio (b)
    87.83  %     71.70  
Average loans, net
  $ 2,693       1,584  
Average core deposits
  $ 45,488       31,129  
 
OTHER
               
Net interest income (b)
  $ -       1  
Fee and other income
    (4 )     (5 )
Intersegment revenue
    -       -  
 
Total revenue (b)
    (4 )     (4 )
Provision for credit losses
    -       -  
Noninterest expense
    (6 )     (9 )
Income taxes
    -       2  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 2       3  
 
Economic profit
  $ 2       3  
Risk adjusted return on capital
    -  %     -  
Economic capital, average
  $ -       -  
Cash overhead efficiency ratio (b)
    -  %     -  
Average loans, net
  $ -       -  
Average core deposits
  $ -       -  
 
(Continued)

59


 

Table 5
BUSINESS SEGMENTS
 
                 
    Six Months Ended  
    June 30,  
             
(Dollars in millions)   2008     2007  
 
PARENT
               
Net interest income (a)
  $ (1,092 )     (116 )
Fee and other income
    (1,141 )     151  
Intersegment revenue
    -       4  
 
Total revenue (a)
    (2,233 )     39  
Provision for credit losses
    6,262       48  
Noninterest expense
    1,197       729  
Minority interest
    224       275  
Income tax benefits
    (3,697 )     (689 )
Tax-equivalent adjustment
    44       33  
Dividends on preferred stock
    236       -  
 
Segment loss
  $ (6,499 )     (357 )
 
Economic loss
  $ (2,463 )     (310 )
Risk adjusted return on capital
    (284.89 )%     (13.56 )
Economic capital, average
  $ 1,674       2,546  
Cash overhead efficiency ratio (a)
    (44.70 )%     1,390.16  
Lending commitments
  $ 543       569  
Average loans, net
    26,446       30,927  
Average core deposits
  $ 2,565       2,346  
FTE employees
    24,798       23,562  
 
(a) Tax-equivalent.
(Continued)

60


 

Table 5
BUSINESS SEGMENTS
 
                                                         
    Six Months Ended June 30, 2008  
                                                     
                                            Goodwill        
                                            Impairment,        
                    Corporate                     Net Merger-        
                    and                     Related and        
    General     Wealth     Investment     Capital             Restructuring        
(Dollars in millions)   Bank     Management     Bank     Management     Parent     Expenses (b)     Total  
 
CONSOLIDATED
                                                       
Net interest income (a)
  $ 7,116       384       2,152       589       (1,092 )     (107 )     9,042  
Fee and other income
    1,980       418       499       4,186       (1,141 )     -       5,942  
Intersegment revenue
    112       8       (102 )     (18 )     -       -       -  
 
Total revenue (a)
    9,208       810       2,549       4,757       (2,233 )     (107 )     14,984  
Provision for credit losses
    1,488       13       635       -       6,262       -       8,398  
Noninterest expense
    4,088       499       1,707       4,182       1,197       6,552       18,225  
Minority interest
    -       -       -       -       224       (87 )     137  
Income taxes (benefits)
    1,305       108       36       208       (3,697 )     (157 )     (2,197 )
Tax-equivalent adjustment
    21       -       40       2       44       (107 )     -  
 
Net income (loss)
    2,306       190       131       365       (6,263 )     (6,308 )     (9,579 )
Dividends on preferred stock
    -       -       -       -       236       -       236  
 
Net income (loss) available to
common stockholders
  $ 2,306       190       131       365       (6,499 )     (6,308 )     (9,815 )
 
Economic profit (loss)
  $ 1,911       146       (408 )     248       (2,463 )     -       (566 )
Risk adjusted return on capital
    37.07  %     52.04       4.93       34.49       (284.89 )     -       7.53  
Economic capital, average
  $ 14,739       715       13,525       2,124       1,674       -       32,777  
Cash overhead efficiency ratio (a)
    44.39  %     61.50       67.00       87.91       (44.70 )     -       76.03  
Lending commitments
  $ 133,201       6,915       113,559       1,544       543       -       255,762  
Average loans, net
    315,565       22,758       103,844       2,722       26,446       -       471,335  
Average core deposits
  $ 293,776       17,732       32,652       45,866       2,565       -       392,591  
FTE employees
    54,415       4,665       6,394       29,680       24,798       -       119,952  
 
                                                         
    Six Months Ended June 30, 2007  
                                                     
                                            Net Merger-        
                    Corporate                     Related        
                    and                     and        
    General     Wealth     Investment     Capital             Restructuring        
(Dollars in millions)   Bank     Management     Bank     Management     Parent     Expenses (b)     Total  
 
CONSOLIDATED
                                                       
Net interest income (a)
  $ 6,770       362       1,489       519       (116 )     (75 )     8,949  
Fee and other income
    1,781       398       2,631       3,013       151       -       7,974  
Intersegment revenue
    102       6       (93 )     (19 )     4       -       -  
 
Total revenue (a)
    8,653       766       4,027       3,513       39       (75 )     16,923  
Provision for credit losses
    301       3       4       -       48       -       356  
Noninterest expense
    3,787       491       1,931       2,531       729       42       9,511  
Minority interest
    -       -       -       -       275       -       275  
Income taxes (benefits)
    1,644       99       742       358       (689 )     (16 )     2,138  
Tax-equivalent adjustment
    21       -       21       -       33       (75 )     -  
 
Net income (loss)
  $ 2,900       173       1,329       624       (357 )     (26 )     4,643  
 
Economic profit (loss)
  $ 2,250       133       776       550       (310 )     -       3,399  
Risk adjusted return on capital
    53.24  %     55.46       29.22       93.76       (13.56 )     -       39.77  
Economic capital, average
  $ 10,744       602       8,590       1,341       2,546       -       23,823  
Cash overhead efficiency ratio (a)
    43.76  %     64.00       47.94       72.04       1,390.16       -       54.40  
Lending commitments
  $ 129,851       6,892       115,430       1,169       569       -       253,911  
Average loans, net
    289,985       20,689       75,065       1,609       30,927       -       418,275  
Average core deposits
  $ 287,263       17,368       35,481       31,450       2,346       -       373,908  
FTE employees
    57,574       4,580       6,872       17,905       23,562       -       110,493  
 
(a) Tax-equivalent.
(b) Tax-equivalent amounts are eliminated in order for “Total” amounts to agree with amounts appearing in the Consolidated Statements of Income.

61


 

Table 6
NET TRADING REVENUE — INVESTMENT BANKING (a)
 
                                         
    2008     2007  
                               
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Net interest income (Tax-equivalent)
  $ 122       78       51       34       43  
Trading account profits (losses)
    (365 )     (245 )     (562 )     (381 )     191  
Other fee income
    185       188       181       140       160  
 
Total net trading revenue (Tax-equivalent)
  $ (58 )      21       (330 )     (207 )     394  
 
(a) Certain amounts presented in periods prior to the second quarter of 2008 have been reclassified to conform to the presentation in the second quarter of 2008.

62


 

Table 7
SELECTED RATIOS
 
                                                         
    Six Months Ended              
    June 30,     2008     2007  
                                               
                    Second     First     Fourth     Third     Second  
    2008     2007     Quarter     Quarter     Quarter     Quarter     Quarter  
 
PERFORMANCE RATIOS (a)
                                                       
Assets to stockholders’ equity
    9.85     10.07       9.74       9.95       10.32       10.44       10.17  
Return on assets
    (2.44 )%     1.34       (4.50 )     (0.34 )     0.03       0.88       1.33  
Return on common stockholders’ equity
    (26.80 )     13.51       (50.47 )     (3.81 )     0.28       9.19       13.54  
Return on total stockholders’ equity
    (24.00 )%     13.51       (43.86 )     (3.39 )     0.28       9.19       13.54  
 
DIVIDEND PAYOUT RATIOS
                                                       
Common shares
    (21.06 )%     46.28       (8.70 )     (177.78 )     2,133.33       75.29       45.90  
 
(a) Based on average balances and net income.

63


 

Table 8
TRADING ACCOUNT ASSETS AND LIABILITIES
 
                                         
    2008     2007  
                               
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
TRADING ACCOUNT ASSETS
                                       
U.S. Treasury
  $ 1,211       1,422       604       993       2,348  
U.S. Government agencies
    2,674       3,045       2,811       3,104       2,865  
State, county and municipal
    5,557       5,195       3,898       3,844       3,551  
Mortgage-backed securities
    7,031       8,488       2,208       2,332       1,807  
Other asset-backed securities
    6,154       8,376       11,427       11,704       12,474  
Corporate bonds and debentures
    5,406       5,143       5,340       5,379       5,386  
Equity securities
    2,831       4,051       4,411       3,918       2,973  
Derivative financial instruments (a)
    23,487       28,379       19,116       13,194       9,707  
Sundry
    8,238       8,493       6,067       10,367       10,429  
 
Total trading account assets
  $ 62,589       72,592       55,882       54,835       51,540  
 
TRADING ACCOUNT LIABILITIES
                                       
Securities sold short
    7,378       7,706       6,287       7,014       9,564  
Derivative financial instruments (a)
    18,927       21,181       15,298       10,757       9,755  
 
Total trading account liabilities
  $ 26,305       28,887       21,585       17,771       19,319  
 
(a) Derivative financial instruments are reported net of cash collateral received and paid.

64


 

Table 9
LOANS — ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS
 
                                         
    2008     2007  
                               
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
ON-BALANCE SHEET LOAN PORTFOLIO COMMERCIAL
                                       
Commercial, financial and agricultural
  $ 122,628       119,193       112,509       109,269       102,397  
Real estate — construction and other
    18,629       18,597       18,543       18,167       17,449  
Real estate — mortgage
    27,191       26,370       23,846       21,514       20,448  
Lease financing
    24,605       23,637       23,913       23,966       24,083  
Foreign
    35,168       33,616       29,540       26,471       20,959  
 
Total commercial
    228,221       221,413       208,351       199,387       185,336  
 
CONSUMER
                                       
Real estate secured (a)
    230,520       230,197       227,719       225,355       220,293  
Student loans
    9,945       9,324       8,149       7,742       6,757  
Installment loans
    29,261       27,437       25,635       24,763       25,017  
 
Total consumer
    269,726       266,958       261,503       257,860       252,067  
 
Total loans
    497,947       488,371       469,854       457,247       437,403  
Unearned income
    (9,749 )     (7,889 )     (7,900 )     (8,041 )     (8,283 )
 
Loans, net (On-balance sheet)
  $ 488,198       480,482       461,954       449,206       429,120  
 
 
                                       
MANAGED PORTFOLIO (b) (c)
                                       
 
COMMERCIAL
                                       
On-balance sheet loan portfolio
  $ 228,221       221,413       208,351       199,387       185,336  
Securitized loans — off-balance sheet
    105       120       131       142       170  
Loans held for sale
    2,224       3,342       9,414       13,905       11,573  
 
Total commercial
    230,550       224,875       217,896       213,434       197,079  
 
CONSUMER
                                       
Real estate secured
                                       
On-balance sheet loan portfolio
    230,520       230,197       227,719       225,355       220,293  
Securitized loans — off-balance sheet
    6,337       6,845       7,230       7,625       8,112  
Securitized loans included in securities
    14,918       11,683       10,755       5,963       6,091  
Loans held for sale
    3,415       5,960       4,816       3,583       4,079  
 
Total real estate secured
    255,190       254,685       250,520       242,526       238,575  
 
Student
                                       
On-balance sheet loan portfolio
    9,945       9,324       8,149       7,742       6,757  
Securitized loans — off-balance sheet
    2,721       2,772       2,811       2,856       2,905  
Securitized loans included in securities
    52       52       52       52       52  
Loans held for sale
    -       -       -       1,968       2,046  
 
Total student
    12,718       12,148       11,012       12,618       11,760  
 
Installment
                                       
On-balance sheet loan portfolio
    29,261       27,437       25,635       24,763       25,017  
Securitized loans — off-balance sheet
    1,630       1,968       2,263       2,572       3,105  
Securitized loans included in securities
    28       39       47       55       116  
Loans held for sale
    2,791       2,127       2,542       1,975       35  
 
Total installment
    33,710       31,571       30,487       29,365       28,273  
 
Total consumer
    301,618       298,404       292,019       284,509       278,608  
 
Total managed portfolio
  $ 532,168       523,279       509,915       497,943       475,687  
 
 
                                       
SERVICING PORTFOLIO (c) (d)
                                       
Commercial
  $ 351,277       354,624       353,464       337,721       298,374  
Consumer
  $ 29,100       27,415       27,523       28,015       26,341  
 
(a) Includes deferred interest of $3.9 billion, $3.5 billion, $3.1 billion, $2.7 billion and $2.3 billion, at June 30 and March 31, 2008, and at December 31, September 30 and June 30, 2007, respectively.
(b) The managed portfolio includes the on-balance sheet loan portfolio, loans securitized for which the retained interests are classified in securities on-balance sheet, loans held for sale on-balance sheet and the off-balance sheet portfolio of securitized loans sold, where we service the loans.
(c) Certain amounts presented in periods prior to the second quarter of 2008 have been reclassified to conform to the presentation in the second quarter of 2008.
(d) The servicing portfolio consists of third party commercial and consumer loans for which our sole function is that of servicing the loans for the third parties.

65


 

Table 10
LOANS HELD FOR SALE
 
                                         
    2008     2007  
                               
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
CORE BUSINESS ACTIVITY (a)
                                       
Core business activity, beginning of period
  $ 8,406       15,094       17,646       15,696       15,030  
Originations and/or purchases
    8,069       8,144       8,160       13,007       22,671  
Transfer to (from) loans held for sale, net
    373       (6,801 )     (1,278 )     2,162       (71 )
Allowance for loan losses related to loans
    -       -       -       (57 )     -  
Lower of cost or market value adjustments (b)
    (87 )     (364 )     (223 )     (249 )     (91 )
Market value adjustments for fair value option loans
    (47 )     42       -       -       -  
Performing loans sold or securitized
    (8,796 )     (7,355 )     (8,992 )     (11,606 )     (20,910 )
Other, principally payments
    (94 )     (354 )     (219 )     (1,307 )     (933 )
 
Core business activity, end of period
    7,824       8,406       15,094       17,646       15,696  
 
PORTFOLIO MANAGEMENT ACTIVITY (a)
                                       
Portfolio business activity, beginning of period
    3,023       1,678       3,785       2,037       2  
Originations and/or purchases
    -       83       -       -       -  
Transfer to (from) loans held for sale, net
Performing loans (c)
    (19 )     2,317       137       1,831       2,046  
Lower of cost or market value adjustments (b)
    26       (31 )     (30 )     (6 )     (10 )
Performing loans sold or securitized
    (2,373 )     (990 )     (2,078 )     -       -  
Other, principally payments
    (51 )     (34 )     (136 )     (77 )     (1 )
 
Portfolio management activity, end of period
    606       3,023       1,678       3,785       2,037  
 
Total loans held for sale (d)
  $ 8,430       11,429       16,772       21,431       17,733  
 
(a) Core business activity means we originate and/or purchase loans with the intent to sell them to third parties, and portfolio management activity means we look for market opportunities to reduce risk in the loan portfolio by transferring loans to loans held for sale.
(b) Lower of cost or market value adjustments exclude amounts related to unfunded commitments. Market disruption-related recoveries on unfunded commitments amounted to $438 million in the second quarter of 2008. Market disruption-related write-downs on unfunded commitments amounted to $729 million, $78 million and $311 million in the first quarter of 2008 and in the fourth and third quarters of 2007, respectively.
(c) Includes $1.8 billion in the third quarter of 2007 in connection with consolidation of a structured lending vehicle that we administered; first quarter of 2008 and fourth quarter of 2007 include funding of the structured lending vehicle’s commitments amounting to $54 million and $159 million, respectively.
(d) Nonperforming loans included in loans held for sale at June 30 and March 31, 2008, and at December 31, September 30 and June 30, 2007, were $63 million, $5 million, $62 million, $59 million and $42 million, respectively.

66


 

Table 11
ALLOWANCE FOR CREDIT LOSSES
 
                                         
    2008     2007  
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
ALLOWANCE FOR CREDIT LOSSES (a)
                                       
Balance, beginning of period
  $ 6,767       4,717       3,691       3,552       3,533  
Provision for credit losses
    5,504       2,834       1,467       381       168  
Provision for credit losses relating to loans transferred to loans
held for sale or sold
    51       7       6       3       4  
Provision for credit losses for unfunded lending commitments
    12       (10 )     24       24       7  
LOAN LOSSES
                                       
Commercial, financial and agricultural
    (254 )     (171 )     (67 )     (41 )     (39 )
Commercial real estate — construction and mortgage
    (216 )     (81 )     (117 )     (5 )     (4 )
 
Total commercial
    (470 )     (252 )     (184 )     (46 )     (43 )
 
Real estate secured
    (700 )     (351 )     (156 )     (59 )     (40 )
Student loans
    (3 )     (3 )     (4 )     (5 )     (2 )
Installment and other loans (b)
    (230 )     (242 )     (225 )     (168 )     (138 )
 
Total consumer
    (933 )     (596 )     (385 )     (232 )     (180 )
 
Total loan losses
    (1,403 )     (848 )     (569 )     (278 )     (223 )
 
LOAN RECOVERIES
                                       
Commercial, financial and agricultural
    15       14       22       9       15  
Commercial real estate — construction and mortgage
    -       1       -       3       -  
 
Total commercial
    15       15       22       12       15  
 
Real estate secured
    18       10       9       12       11  
Student loans
    1       1       2       3       -  
Installment and other loans (b)
    60       57       75       45       47  
 
Total consumer
    79       68       86       60       58  
 
Total loan recoveries
    94       83       108       72       73  
 
Net charge-offs
    (1,309 )     (765 )     (461 )     (206 )     (150 )
 
Allowance relating to loans acquired, transferred to loans held for
sale or sold
    (69 )     (16 )     (10 )     (63 )     (10 )
 
Balance, end of period
  $ 10,956       6,767       4,717       3,691       3,552  
 
CONSUMER REAL ESTATE SECURED NET CHARGE-OFFS
                                       
First lien
  $ (592 )     (291 )     (122 )     (32 )     (17 )
Second lien
    (90 )     (50 )     (25 )     (15 )     (12 )
 
Total consumer real estate secured net charge-offs
  $ (682 )     (341 )     (147 )     (47 )     (29 )
 
ALLOWANCE FOR CREDIT LOSSES
                                       
Allocation of the allowance for loan losses
                           
Commercial
  $ 2,793       2,645       2,392       2,054       1,889  
Consumer
    7,621       3,592       1,950       1,246       1,371  
Unallocated
    330       330       165       205       130  
 
Total allowance for loan losses
    10,744       6,567       4,507       3,505       3,390  
Reserve for unfunded lending commitments
    212       200       210       186       162  
 
Total allowance for credit losses
  $ 10,956       6,767       4,717       3,691       3,552  
 
(a) The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments.
(b) Principally auto loans.

67


 

Table 12
ALLOWANCE AND CHARGE-OFF RATIOS
 
                                         
            2008                     2007  
                                         
    Second     First     Fourth     Third     Second  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
ALLOWANCE FOR LOAN LOSSES
                                       
as % of loans, net
    2.20  %     1.37       0.98       0.78       0.79  
as % of nonaccrual and restructured loans (a)
    95       84       90       129       174  
as % of nonperforming assets (a)
    90       78       84       115       157  
ALLOWANCE FOR CREDIT LOSSES
                                       
as % of loans, net
    2.24  %     1.41       1.02       0.82       0.83  
 
NET CHARGE-OFFS AS % OF AVERAGE LOANS, NET (b)
                                       
Commercial, financial and agricultural
    0.60  %     0.41       0.12       0.10       0.07  
Commercial real estate — construction and mortgage
    1.89       0.73       1.12       0.02       0.04  
 
Total commercial
    0.88       0.48       0.34       0.08       0.07  
 
Real esta