EX-19 4 g16268qexv19.htm EX-(19) EX-(19)
Exhibit (19)
(WACHOVIA LOGO)

 


 

WACHOVIA CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL SUPPLEMENT
NINE MONTHS ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
 
         
    PAGE  
 
Financial Highlights
    1  
 
       
Management’s Discussion and Analysis
    2  
 
       
Explanation of Our Use of Non-GAAP Financial Measures
    46  
 
       
Selected Statistical Data
    47  
 
       
Summaries of Income, Per Common Share and Balance Sheet Data
    48  
 
       
Business Segments
    49  
 
       
Net Trading Revenue — Investment Banking
    65  
 
       
Selected Ratios
    66  
 
       
Loans — On-Balance Sheet, and Managed and Servicing Portfolios
    67  
 
       
Loans Held for Sale
    68  
 
       
Allowance for Credit Losses
    69  
 
       
Allowance and Charge-Off Ratios
    70  
 
       
Nonperforming Assets
    71  
 
       
Nonaccrual Loan Activity
    72  
 
       
Deposits
    73  
 
       
Time Deposits in Amounts of $100,000 or More
    73  
 
       
Changes in Stockholders’ Equity
    74  
 
       
Capital Ratios
    75  
 
       
Net Interest Income Summaries — Five Quarters Ended September 30, 2008
    76  
 
       
Net Interest Income Summaries — Nine Months Ended September 30, 2008 and 2007
    78  
 
       
Consolidated Balance Sheets — Five Quarters Ended September 30, 2008
    79  
 
       
Consolidated Statements of Income — Five Quarters Ended September 30, 2008
    80  
 
       
Wachovia Corporation and Subsidiaries — Consolidated Financial Statements
    81  

 


 

FINANCIAL HIGHLIGHTS
 
                                                 
    Three Months Ended     Percent     Nine Months Ended     Percent  
    September 30,     Increase     September 30,     Increase  
(Dollars in millions, except per share data)   2008     2007     (Decrease)     2008     2007     (Decrease)  
 
EARNINGS SUMMARY
                                               
Net interest income (GAAP)
  $ 4,991       4,551       10 %   $ 14,033       13,500       4 %
Tax-equivalent adjustment
    48       33       45       155       108       44  
                     
Net interest income (Tax-equivalent)
    5,039       4,584       10       14,188       13,608       4  
Fee and other income
    733       2,933       (75 )     6,675       10,907       (39 )
                     
Total revenue (Tax-equivalent)
    5,772       7,517       (23 )     20,863       24,515       (15 )
Provision for credit losses
    6,629       408             15,027       764        
Other noninterest expense
    5,966       4,397       36       17,439       13,645       28  
Merger-related and restructuring expenses
    697       36             1,189       78        
Goodwill impairment
    18,786                   24,846              
Other intangible amortization
    96       92       4       296       313       (5 )
                     
Total noninterest expense
    25,545       4,525             43,770       14,036        
Minority interest in income (loss) of consolidated subsidiaries
    (105 )     189             32       464       (93 )
                     
Income (loss) from continuing operations before income taxes (benefits) (Tax-equivalent)
    (26,297 )     2,395             (37,966 )     9,251        
Tax-equivalent adjustment
    48       33       45       155       108       44  
Income taxes (benefits)
    (2,647 )     656             (4,844 )     2,794        
                     
Income (loss) from continuing operations
    (23,698 )     1,706             (33,277 )     6,349        
Discontinued operations, net of income taxes
          (88 )                 (88 )      
                     
Net income (loss)
    (23,698 )     1,618             (33,277 )     6,261        
Dividends on preferred stock
    191                   427              
                     
Net income (loss) available to common stockholders
  $ (23,889 )     1,618       %   $ (33,704 )     6,261       %
 
Diluted earnings per common share (a)
                                               
Net income (loss) available to common stockholders
  $ (11.18 )     0.85       %   $ (16.28 )     3.26       %
Return on average common stockholders’ equity
    (157.43 )%     9.19             (65.08 )%     12.04        
Return on average assets (b)
    (11.91 )%     0.88             (5.62 )%   1.18        
 
ASSET QUALITY
                                               
Allowance for loan losses as % of loans, net
    3.18 %     0.78             3.18 %     0.78        
Allowance for loan losses as % of nonperforming assets
    102       115             102       115        
Allowance for credit losses as % of loans, net
    3.24       0.82             3.24       0.82        
Net charge-offs as % of average loans, net
    1.57       0.19             1.11       0.16        
Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale
    3.05 %     0.66             3.05 %     0.66        
 
CAPITAL ADEQUACY
                                               
Tier I capital ratio
    7.49 %     7.10             7.49 %     7.10        
Total capital ratio
    12.40       10.84             12.40       10.84        
Leverage ratio
    5.70 %     6.10             5.70 %     6.10        
 
OTHER FINANCIAL DATA
                                               
Net interest margin
    2.94 %     2.92             2.81 %     2.98        
Fee and other income as % of total revenue
    12.70       39.02             31.99       44.49        
Effective income tax rate
    10.04 %     27.33             12.71 %     30.49        
 
BALANCE SHEET DATA
                                               
Securities
  $ 107,693       111,827       (4) %   $ 107,693       111,827       (4) %
Loans, net
    482,373       449,206       7       482,373       449,206       7  
Total assets
    764,378       754,168       1       764,378       754,168       1  
Total deposits
    418,840       421,937       (1 )     418,840       421,937       (1 )
Long-term debt
    183,350       158,584       16       183,350       158,584       16  
Stockholders’ equity
  $ 50,003       70,140       (29) %   $ 50,003       70,140       (29) %
 
OTHER DATA
                                               
Average basic common shares (In millions)
    2,137       1,885       13 %     2,070       1,890       10 %
Average diluted common shares (In millions)
    2,143       1,910       12       2,080       1,918       8  
Actual common shares (In millions)
    2,161       1,901       14       2,161       1,901       14  
Dividends paid per common share
  $ 0.05       0.64       (92 )   $ 1.07       1.76       (39 )
Dividend payout ratio on common shares
    (0.45) %     75.29             (6.54 )%     53.99        
Book value per common share
  $ 18.59       36.90       (50 )   $ 18.59       36.90       (50 )
Common stock price
    3.50       50.15       (93 )     3.50       50.15       (93 )
Market capitalization
  $ 7,563       95,326       (92 )   $ 7,563       95,326       (92 )
Common stock price to book value
    19 %     136       (86 )     19 %     136       (86 )
FTE employees
    117,227       109,724       7       117,227       109,724       7  
Total financial centers/brokerage offices
    4,820       4,167       16       4,820       4,167       16  
ATMs
    5,303       5,123       4 %     5,303       5,123       4 %
 
 
(a)   Calculated using average basic common shares in 2008.
 
(b)   Net income (loss) as a percentage of average assets.

1


 

Management’s Discussion and Analysis
This discussion contains forward-looking statements. Please refer to our Third 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     Nine Months Ended  
    September 30,     September 30,  
 
(In millions, except per share data)   2008     2007     2008     2007  
 
Net interest income (GAAP)
  $ 4,991       4,551       14,033       13,500  
Tax-equivalent adjustment
    48       33       155       108  
 
Net interest income (a)
    5,039       4,584       14,188       13,608  
Fee and other income
    733       2,933       6,675       10,907  
 
Total revenue (a)
    5,772       7,517       20,863       24,515  
Provision for credit losses
    6,629       408       15,027       764  
Other noninterest expense
    5,966       4,397       17,439       13,645  
Goodwill impairment
    18,786       -       24,846       -  
Merger-related and restructuring expenses
    697       36       1,189       78  
Other intangible amortization
    96       92       296       313  
 
Total noninterest expense
    25,545       4,525       43,770       14,036  
Minority interest in income (loss) of consolidated subsidiaries
    (105 )     189       32       464  
Income taxes (benefits)
    (2,647 )     656       (4,844 )     2,794  
Tax-equivalent adjustment
    48       33       155       108  
 
Net income (loss)
    (23,698 )     1,706       (33,277 )     6,349  
 
Discontinued operations, net of income taxes
    -       (88 )     -       (88 )
Dividends on preferred stock
    191       -       427       -  
 
Net income (loss) available to common stockholders
    (23,889 )     1,618       (33,704 )     6,261  
 
Diluted earnings (loss) per common share from continuing operations
    (11.18 )     0.90       (16.28 )     3.31  
 
Diluted earnings (loss) available to common stockholders
  $ (11.18 )     0.85       (16.28 )     3.26  
 
(a) Tax-equivalent.
Following tumultuous events in the financial services industry in the third quarter of 2008, Wachovia entered into a merger agreement with Wells Fargo & Company on October 3, 2008. Details about the merger agreement are discussed in the Wachovia-Wells Fargo Merger section. The merger agreement with Wells Fargo was preceded by Wachovia’s deteriorating financial and liquidity position, which included its inability to access the debt capital markets, following the bankruptcy of Lehman Brothers, the Federal Reserve’s assistance to AIG, the Federal Deposit Insurance Corporation (FDIC) seizure of Washington Mutual Bank, and the announcement that a tentative agreement in the U.S. Congress regarding banking relief legislation had collapsed. On September 29, 2008, we announced we had entered into a nonbinding agreement-in-principle with Citigroup, Inc. and the FDIC, providing for Citigroup’s acquisition of Wachovia’s banking entities with federal assistance from the FDIC. The agreement-in-principle with Citigroup was subject to the execution of definitive agreements between Wachovia and Citigroup. Prior to executing such definitive agreements with Citigroup, we entered into the merger agreement with Wells Fargo.
Wachovia reported a net loss available to common stockholders of $33.7 billion, or a net loss of $16.28 per share, in the first nine months of 2008 compared with earnings of $6.3 billion, or $3.26 per share, in the first nine months of 2007. Key drivers in the pre-tax loss were:
    A $24.8 billion noncash goodwill impairment charge reflecting declining equity market valuations and the terms of the merger with Wells Fargo. The goodwill impairment charge did not affect Wachovia’s tangible capital levels, regulatory capital ratios or liquidity. More information is in the Critical Accounting Policies and Balance Sheet Analysis: Goodwill sections.

2


 

    A $15.0 billion loan loss provision, which increased reserves by $10.9 billion since December 31, 2007, including an increase in reserves of $7.8 billion for the payment option mortgage portfolio called Pick-a-Payment.
 
    $5.7 billion in market disruption-related losses, including $2.1 billion of securities impairment write-downs. More information is in the Market Disruption-Related Losses section. These losses included:
  o   $3.1 billion in Corporate and Investment Bank distribution-related losses. More information is in the Market Disruption-Related Losses section;
 
  o   $1.6 billion in the Parent, which included $1.3 billion of securities impairments;
 
  o   $1.0 billion in Capital Management, which included $766 million in securities losses primarily related to the support of three Evergreen money market funds.
    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.
 
    A $225 million gain from our ownership interest in Visa, Inc., which completed its initial public offering in March 2008.
 
    A $1.7 billion addition to legal reserves, including $997 million of costs related to a previously disclosed auction rate securities settlement ($783 million net of minority interest).
 
    $1.2 billion of merger-related and restructuring charges, including $515 million related to expense reductions announced in the second quarter of 2008.
On October 3, 2008, Wachovia and Wells Fargo & Company signed a definitive merger agreement that provides for Wachovia common stockholders to receive 0.1991 of a share of Wells Fargo common stock for each Wachovia common share they own. The merger is expected to be consummated in the fourth quarter of 2008, pending stockholder approval. More information is in the Wachovia-Wells Fargo Merger section.
Revenues and expenses also reflect the impact of the A.G. Edwards, Inc. acquisition from October 1, 2007.
In the first nine months 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.
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 increased the allowance for credit losses by $10.9 billion in the first nine months of 2008, to $15.6 billion or 3.24 percent of loans at September 30, 2008. The $7.8 billion increase in Pick-a-Payment reserves in the first nine months of 2008, $3.4 billion of which was in the third quarter, reflected a continued severe decline in home prices and the related effects on borrowers’ behavior in the face of the loss of equity in their homes.

3


 

The provision for credit losses was $15.0 billion compared with $764 million in the first nine months of 2007, and exceeded net charge-offs by $11.1 billion. In the first nine months of 2008 our net charge-offs were $3.9 billion, an increase of $3.4 billion from the first nine months of 2007. This represented a 95 basis point increase in the net charge-off ratio to 1.11 percent of average net loans. The provision in the third quarter of 2008 amounted to $6.6 billion compared with $5.6 billion in the second quarter of 2008 and $2.8 billion in the first quarter of 2008.
Nonperforming assets, including loans held for sale, were $15.0 billion, representing a ratio of nonperforming assets to loans, foreclosed properties and loans held for sale of 3.05 percent at September 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 commercial real estate. We continue to mitigate the risk and volatility of our balance sheet through risk management practices, including increased collection efforts.
Other Factors in Results
Credit headwinds and the capital markets disruption overwhelmed results in the first nine months of 2008. In the first nine months of 2008 compared with the first nine months of 2007, results also included:
    4 percent growth in net interest income, driven by 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 12 percent increase in average loans to $473.7 billion. Average consumer loans rose 5 percent, driven by higher traditional mortgage loans. Average commercial loan growth of 23 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 $2.9 billion in consumer loans from the held-for-sale portfolio in the first nine months of 2008.
 
    A 4 percent increase in average core deposits to $392.5 billion, although period-end core deposits of $370.0 billion were down 7 percent from year-end 2007. The Liquidity and Capital Adequacy: Core Deposits section has more information. We continue to expand product distribution in the recently 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. In the first nine months of 2008, we opened 59 de novo branches, consolidated 101 branches, and expanded our commercial banking presence, all of which added $129 million to noninterest expense.
 
    Higher fiduciary and asset management fees and brokerage commissions largely reflecting the A.G. Edwards acquisition.
In the first nine months of 2008 compared with the first nine months of 2007, the General Bank’s earnings declined to $3.2 billion, down $1.2 billion, driven by rapidly rising credit costs and related expenses primarily in the mortgage business, which overshadowed continued sales momentum as reflected by 7 percent growth in revenue to $14.1 billion. Wealth Management earned $276 million on 5 percent revenue growth in challenging markets. The capital markets disruption continued to negatively affect results in the Corporate and Investment Bank (CIB), which had a loss of $566 million driven by $3.1 billion in net market disruption-related valuation losses and reduced origination volume in most markets-related businesses. Capital Management results were a net loss of $134 million due to continued market disruption-related valuation losses and our settlement agreement on auction rate securities.

4


 

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 cross-border 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 where the opinion 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 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. More information is in Note 1 to Consolidated Financial Statements in our Third Quarter 2008 Report on Form 10-Q.
On August 5, 2008, as part of an Internal Revenue Service (IRS) initiative, a number of companies including Wachovia received from the IRS a resolution offer regarding SILO transactions. On October 3, 2008, we submitted a nonbinding acceptance to participate in the initiative. As discussions with the IRS evolve, we will continue to evaluate any potential effect to our financial condition and results of operations were we to enter into a final settlement agreement with the IRS. Such an agreement would have no effect on our LILO portfolio as we settled all issues 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 nine months 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.

5


 

Upon adoption of SFAS 159, we elected to record certain existing securities classified as 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 (a)
 
                                                 
    2008     2007        
    Nine Months Year-to-Date     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
  $ (434 )     (388 )     10       (812 )     (1,048 )     (1,860 )
Commercial mortgage (CMBS)
    (662 )     (25 )     (390 )     (1,077 )     (1,088 )     (2,165 )
Consumer mortgage
    (367 )     -       (98 )     (465 )     (205 )     (670 )
Leveraged finance
    189       -       (374 )     (185 )     (179 )     (364 )
Other
    (479 )     (49 )     (2 )     (530 )     (50 )     (580 )
 
Total
    (1,753 )     (462 )     (854 )     (3,069 )     (2,570 )     (5,639 )
Capital Management
                                               
Impairment and trading losses
    (176 )     (766 )     (22 )     (964 )     (57 )     (1,021 )
Auction Rate securities (ARS) losses
    (85 )     -       -       (85 )     -       (85 )
Parent
                                               
Impairment losses/other (b)
    -       (1,274 )     (321 )     (1,595 )     (94 )     (1,689 )
 
Total, net
    (2,014 )     (2,502 )     (1,197 )     (5,713 )     (2,721 )     (8,434 )
Discontinued operations (Bluepoint)
  $ -       -       -       -       (330 )     (330 )
 
ARS Settlement costs in sundry expense
                                               
Capital Management(c)
  $ -       -       -       (932 )     -       (932 )
Corporate and Investment Bank
    -       -       -       (65 )     -       (65 )
 
Total
  $ -       -       -       (997 )     -       (997 )
 
(a) Net of associated hedges.
(b) 2nd half of 2007 includes $50 million of provision expense related to loan impairments.
(c) Includes $99 million and $115 million pre-tax relating to Prudential Financial’s minority interest in 3Q08 and 2Q08, respectively.
Market Disruption-Related Losses Net market disruption-related valuation losses were $5.7 billion in the first nine months of 2008, with $2.3 billion in the first quarter of 2008, $936 million in the second quarter of 2008 and $2.5 billion in the third 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, $3.1 billion were in the Corporate and Investment Bank, $1.6 billion were in the Parent, and $1.0 billion 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 continuing declines in the value of CMBS and CDOs backed by commercial real estate loans.

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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 and $22 million in the third quarter of 2008. The first quarter results were driven by losses on several large unfunded commitments partially offset by gains on 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. Third quarter results were driven by gains on economic hedges.
With respect to our monoline-related structured products exposure, in the first nine months of 2008 we recorded $411 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 nine months of 2008 amounted to $1.0 billion of write-downs largely on trading and available for sale securities. This included $761 million related to the support of Evergreen money market funds, $172 million related to the liquidation of an Evergreen fund, $85 million related to auction rate securities in our portfolio, and $31 million related to other securities impairment write-downs. Market disruption-related losses in the Parent in the first nine months of 2008 amounted to $1.6 billion, including impairment write-downs on securities available for sale of $1.3 billion, and valuation losses of $314 million related to our bank-owned life insurance (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 was a consolidated subsidiary of Wachovia. There were no additional BluePoint losses in the first nine months of 2008. Further information on BluePoint is in the Parent section.
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, Capital Management and Parent sections that follow.
Subprime-related, CMBS and Leveraged Finance
Distribution Exposure, Net
(a)
 
                                         
            9/30/08                    
            Exposure                    
    9/30/08     Hedged With     9/30/08     6/30/08     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
  $ 2,287       (2,287 )     -       -       -  
Mezzanine
    1,075       (726 )     349       419       613  
 
Total super senior ABS CDO exposures
    3,362       (3,013 )     349       419       613  
Other retained ABS CDO-related exposures
    50       (16 )     34       12       208  
 
Total ABS CDO-related exposures (b)
    3,412       (3,029 )     383       431       821  
Subprime RMBS exposures:
                                       
AAA rated
    1,420       -       1,420       1,524       1,948  
Below AAA rated (net of hedges) (c)
    144       -       144       (46 )     (253 )
 
Total subprime RMBS exposures
    1,564       -       1,564       1,478       1,695  
Total subprime-related exposure
    4,976       (3,029 )     1,947       1,909       2,516  
Commercial mortgage-related (CMBS)
    649       -       649       756       7,564  
Leveraged finance (net of applicable fees)
  $ n.a.       n.a.       2,270       3,766       9,149  
 
(a) Certain amounts herein are subject to SFAS 157 valuations and other are notional amounts. At September 30, 2008, substantially all of the amounts subject to SFAS 157 measurement were Level 3 assets. The valuation techniques and inputs used are found in Note 18 to Consolidated Financial Statements.
(b) At 9/30/08, $2.0 billion was hedged with highly rated monoline financial guarantors; $1.0 billion was hedged with AIG.
(c) Net short position due to hedging activities.

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Market Disruption-Related Distribution Exposure The Subprime-related, CMBS and Leveraged Finance Distribution Exposure, Net table shows our remaining exposure to structured products and leveraged finance assets originally intended for distribution, specifically ABS CDOs, subprime RMBS, CMBS and leveraged finance commitments, at September 30, 2008, and the comparable net exposures at June 30, 2008, and December 31, 2007.
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 nine months of 2008, these transfers amounted to $4.4 billion of commercial and commercial real estate funded and unfunded exposure and $2.1 billion of consumer real estate loans.
As of September 30, 2008, our notional ABS CDO distribution exposure, net of hedges with financial guarantors, was $383 million. Of our subprime RMBS exposure of $1.6 billion at September 30, 2008, $1.4 billion is rated AAA or equivalent by rating agencies.
Our CMBS mark-to-market exposure of $649 million at September 30, 2008, was down from $7.6 billion at December 31, 2007. More than 50 percent of the remaining exposure at September 30, 2008, is AAA-rated or equivalent.
Our leveraged finance exposure of $2.3 billion at September 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 September 30, 2008 exposure, $1.6 billion related to unfunded commitments. There was no bridge equity exposure at September 30, 2008.
Wachovia-Wells Fargo Merger
On October 3, 2008, Wells Fargo & Company and Wachovia announced they had entered into a merger agreement providing for Wells Fargo to purchase Wachovia in its entirety and without government assistance, in a stock-for-stock merger transaction. In addition, as announced on October 3, 2008, Wachovia entered into a share exchange agreement with Wells Fargo under which Wells Fargo agreed to acquire 10 newly issued shares of Wachovia’s Series M, Class A preferred stock, representing 39.9 percent of the aggregate voting power exercisable by Wachovia common stockholders and Wells Fargo as holder of the preferred stock, in exchange for the issuance of 1,000 shares of Wells Fargo common stock to Wachovia. The share exchange was completed on October 20, 2008.
The proposed merger with Wells Fargo will create the nation’s premier coast-to-coast community banking presence with community banks in 39 states and the District of Columbia. The new company will also operate the nation’s second largest retail brokerage firm and many complementary financial services businesses. The merger is expected to close by year-end 2008, subject to regulatory approvals and Wachovia stockholder approval.
Auction Rate Securities Wachovia has entered into agreements in principle with the Securities and Exchange Commission (SEC), the attorney general for the State of New York and the Missouri secretary of state (as the lead state in the North American Securities Administrators Association task force investigating the marketing and sale of auction rate securities, or ARS). The agreements in principle require that Wachovia purchase certain ARS sold to customers in accounts at Wachovia, reimburse investors who sold ARS purchased at Wachovia for less than par, provide liquidity loans to customers at no net interest until the ARS are repurchased, offer to participate in special arbitration procedures with customers who claim consequential damages from the lack of liquidity in ARS and refund refinancing fees to certain municipal issuers who issued ARS and later refinanced those securities through Wachovia. In addition Wachovia,

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without admitting or denying the allegations, will pay a total fine of $50 million to the state regulatory agencies and agree to the entry of consent orders by the state regulators and an injunction by the SEC. Wachovia intends to begin buying back the auction rate securities in November 2008. We recorded a $997 million pre-tax increase to legal reserves in the second and third quarters of 2008 related to this matter. More information is in the Noninterest Expense and Business Segments: Capital Management sections and Note 1 to Consolidated Financial Statements.
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 charges to our results in the first nine months of 2008, we include 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 loans as part of our allowance modeling process. In addition, we rely on estimates and exercise judgment in assessing credit risk. At September 30, 2008, the allowance for loan losses was $15.4 billion and the reserve for unfunded lending commitments was $254 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 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

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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 and third quarters 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. More information is in the Provision and Allowance for Credit Losses section.
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 September 30, 2008, the formula-based components of the allowance were $2.5 billion for commercial loans and $11.6 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 and for loans that have been modified in a troubled debt restructuring. 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 recorded investment and the loan’s estimated value, primarily determined based on the fair value of the collateral securing the loan. No other reserve is provided on impaired loans that are individually reviewed. At September 30, 2008, the allowance for loan losses included $529 million and the reserve for unfunded lending commitments included $25 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 September 30, 2008, the unallocated component of the allowance for loan losses was $770 million, or 5 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. The reserve for unfunded lending commitments, including the reserve for impaired commitments, was $254 million at September 30, 2008, and $210 million at December 31, 2007.
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.

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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.
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.
Prior to 2008, we utilized two methods of estimating the fair values of the reporting units, the earnings multiple (EM) and discounted cash flow (DCF) methods. As our market capitalization declined and financial sector volatility increased, we focused on methods that were more representative of a market participant’s view. For the test as of March 31, 2008, a third method, transaction premium (TP), was added as an additional data point for management’s review in assessing the estimated fair values of the reporting units. The EM and TP methods are used in the analysis; however, there are significant differences in the products, services, and operating characteristics of the reporting units as compared to a set of selected comparable companies. As a result, in 2008, we relied primarily on the DCF method, using management projections for each reporting unit and risk-adjusted discount rates, as we considered it to be most reflective of a market participant’s view of fair value given the current market conditions. For segment reporting purposes, we allocate a provision for loan losses 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. However, for purposes of the goodwill impairment analysis, the provision for loan losses is fully allocated to reporting units.
The DCF method used at each period-end utilized discount rates that we believe adequately reflected the risk and uncertainty in the financial markets generally and specifically in our internally developed earnings projections. Our DCF method employs a capital asset pricing

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model in estimating the discount rate (i.e., cost of equity financing) for each reporting unit. The inputs to this model include: risk-free rate of return; beta, a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit; market equity risk premium; and an unsystematic (company-specific) risk factor. The unsystematic risk factor is the input that specifically addresses uncertainty related to our projections of earnings and growth, including the uncertainty related to loss expectations.
For the September 30, 2008, goodwill impairment test, we used a total company fair value of $15.1 billion based on the exchange ratio of the proposed Wachovia-Wells Fargo merger and the closing price of Wells Fargo common stock of $35.16 on October 2, 2008. Using this total company fair value, we estimated the relative fair values of the reporting units, using market observable data, where available. As such, we did not use additional methods to estimate fair value of the reporting units for the third quarter of 2008.
The Goodwill Modeling Assumptions table details estimated fair values at each period-end as well as market capitalization. The table also includes the range of discount rates used in the DCF method at each reporting date and the implied control premium. 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.
Goodwill Modeling Assumptions
 
                                 
    2008     2007  
    Third     Second     First     Fourth  
($ in billions)   Quarter     Quarter     Quarter     Quarter  
 
Earnings multiple method
  $ n/ a       74.0       90.8       94.4  
Transaction premium method
    n/ a       94.8       116.0       n/ a  
Discounted cash flow method
    n/ a       46.4       91.3       92.3  
Wells Fargo transaction
  $ 15.1       n/ a       n/ a       n/ a  
Discount rate range
    n/ a     14.2% to 20.9%   13.6% to 16.2%   11.4% to 17.2%
Market capitalization - 1 month’s average
  $ 29.2       40.3       56.0       80.2  
Implied control premium
    n/ a %     14.9       63.0       15.2  
As shown above, the estimated fair values at each period-end with the exception of September 30, 2008, exceeded the market capitalization, representing an implied control premium. We evaluated the control premium against those in previous market transactions for financial services companies and determined that the indicated control premium was reasonable at each period end.
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.
The Goodwill section has further information on the goodwill impairment charges in the second and third quarters of 2008. Applicable Notes to Consolidated Financial Statements provide additional information.

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Corporate Results of Operations
Average Balance Sheets and Interest Rates
 
                                 
    Nine Months Ended     Nine Months Ended  
    September 30, 2008     September 30, 2007  
 
    Average     Interest     Average     Interest  
(In millions)   Balances     Rates     Balances     Rates  
 
Interest-bearing bank balances
  $ 7,179       3.11 %   $ 3,807       6.06 %
Federal funds sold
    14,514       2.80       13,480       5.25  
Trading account assets
    41,630       5.00       34,561       5.93  
Securities
    115,812       5.47       109,322       5.43  
Commercial loans, net (a)
    204,579       4.49       165,888       7.12  
Consumer loans, net
    269,157       6.69       256,272       7.52  
 
Total loans, net
    473,736       5.74       422,160       7.36  
 
Loans held for sale
    9,712       7.08       18,213       6.62  
Other earning assets
    10,818       5.12       8,057       6.98  
 
Risk management derivatives
    -       0.05       -       0.03  
 
Total earning assets
    673,401       5.62       609,600       6.88  
 
Interest-bearing deposits
    384,698       2.53       347,439       3.67  
Federal funds purchased
    39,557       2.79       39,203       4.98  
Commercial paper
    5,036       1.98       5,290       4.60  
Securities sold short
    6,409       3.54       7,758       3.79  
Other short-term borrowings
    9,236       1.60       7,463       2.69  
Long-term debt
    175,495       4.19       145,604       5.39  
 
Risk management derivatives
    -       0.04       -       0.10  
 
Total interest-bearing liabilities
    620,431       3.05       552,757       4.31  
 
Net interest income and margin
  $ 14,188       2.81 %   $ 13,608       2.98 %
 
(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 4 percent in the first nine months of 2008 from the first nine months of 2007. The effect of higher earning assets, 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 17 basis points to 2.81 percent in the first nine months of 2008 from the first nine months of 2007. The net interest margin was 3.00 percent in the first nine months of 2008, excluding the 19 basis point impact of the SILO charge, an improvement of 2 basis points from the same period a year ago 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 nine months of 2008 was 279 basis points lower than the average rate in the first nine months of 2007, while the average longer-term two-year treasury note rate decreased 238 basis points and the average 10-year treasury note rate decreased 95 basis points.
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 nine months of 2008, interest rate risk management-related derivatives reduced net interest income by $64 million, which had a 1 basis point impact on the net interest margin, compared with a decrease in the first nine months of 2007 of $278 million, or 6 basis points.

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Fee and Other Income
 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(In millions)   2008     2007     2008     2007  
 
Service charges
  $ 717       689       2,102       1,970  
Other banking fees
    525       471       1,541       1,336  
Commissions
    799       600       2,623       1,908  
Fiduciary and asset management fees
    1,291       1,029       4,085       2,997  
Advisory, underwriting and other investment banking fees
    243       393       784       1,254  
Trading account profits (losses)
    (701 )     (301 )     (1,519 )     22  
Principal investing
    (310 )     372       272       718  
Securities gains (losses)
    (1,978 )     (34 )     (2,991 )     42  
Other income
    147       (286 )     (222 )     660  
 
Total fee and other income
  $ 733       2,933       6,675       10,907  
 
Fee and Other Income Fee and other income declined 39 percent in the first nine months of 2008 compared with the first nine months of 2007 due to net market disruption-related valuation losses of $5.7 billion and reduced volume in many of our investment banking businesses. Results included $481 million in net gains in the first quarter of 2008 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 nine months of 2008 compared with the first nine months 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 impact of the A.G. Edwards acquisition, partially offset by lower retail brokerage transactional revenue as well as lower insurance commissions.
 
    Increased fiduciary and asset management fees were driven by the impact of the A.G. Edwards acquisition, continued growth in retail brokerage managed account and other asset-based fees reflecting organic growth, somewhat offset by the effect of lower market valuations.
 
    Advisory and underwriting results declined 37 percent from the year ago period driven by lower origination activity in businesses affected by the market disruption.
 
    Trading account losses of $1.5 billion compared with profits of $22 million in the same period a year ago. Trading account losses in the first nine months of this year were driven by net market disruption-related losses of $2.0 billion, compared with losses of $447 million in the third quarter of 2007 (there were none in the first half of 2007), which included:
  o   $434 million of losses in subprime residential asset-backed CDOs and other subprime-related products largely relating to losses on warehouse positions compared with $230 million of losses in the third quarter of 2007.
 
  o   $662 million of losses in commercial mortgage structured products compared with $129 million of losses in the third quarter of 2007.
 
  o   $367 million of losses in consumer mortgage structured products compared with $41 million of losses in the third quarter of 2007.
 
  o   $189 million of hedging gains on economic hedges in leveraged finance compared with hedging gains of $62 million in the third quarter of 2007.
 
  o   $479 million of losses in non-subprime collateralized debt obligations and other structured products compared with losses of $109 million in the third quarter of 2007.

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  o   $176 million in trading securities write-downs, substantially all of which were recorded in connection with the liquidation of an Evergreen fund compared with no write-downs in the third quarter of 2007.
 
  o   $85 million of write-downs related to auction rate securities compared with no write-downs in the third quarter of 2007.
    Principal investing results declined from the first nine months of 2007 despite the $466 million of net gains related to the adoption of new fair value accounting standards on January 1, 2008, as a result of strong results in the year ago period compared with the current nine month period, which included $310 million of net losses in the third quarter of 2008.
 
    Net securities losses of $3.0 billion were driven by $2.5 billion of market disruption-related losses and $788 million of losses (of which $720 million were in the Parent) reflecting our change in intent from holding certain securities to selling them in the near term. The $2.5 billion of market disruption-related securities losses included $462 million of CIB distribution-related losses, $766 million of losses in Capital Management primarily related to the support of three Evergreen money market funds, and $1.3 billion of impairment losses in the Parent securities portfolio. These results also included the $225 million gain related to the Visa initial public offering. The losses in the first nine months of 2008 compared with net gains of $42 million in the year ago period, which included a $40 million valuation loss related to the purchase of certain asset-backed commercial paper investments from Evergreen money market funds in the third quarter of 2007.
 
    Other income was a net loss of $222 million in the first nine months of 2008 compared with income of $660 million in the same period a year ago. The decline was partially attributable to $1.2 billion of market disruption-related losses in other income in the first nine months of this year compared with $734 million of losses in the third quarter of 2007 (there were none in the first half of 2007). The year over year results included:
  o   A $394 million loss in the commercial sales and securitization business largely related to the market disruption with a loss of $140 million in the same period a year ago, which included $359 million of market disruption-related losses offsetting strong results earlier in 2007.
 
  o   A $420 million decline in results for certain corporate investments largely reflecting the $314 million loss on certain BOLI contracts in the first quarter of 2008 as well as lower returns in 2008.
 
  o   A $175 million decline in consumer loan sale and securitization results on lower volume largely in real estate secured.
 
  o   Leveraged finance net market disruption-related losses of $374 million compared with $334 million in the third quarter of 2007 largely related to net write-downs on unfunded commitments. The first quarter of 2008 included $792 million of net write-downs; 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 and a net $20 million of write-downs in the third quarter of 2008. Related economic hedge results are reflected in trading. Unfunded commitments are valued assuming the commitments are fully funded under the current contractual terms.

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The same trends described above in the nine month period also were the primary drivers of fee and other income results in the third quarter of 2008 compared with the third quarter of 2007, with the exception of other income, which was higher in the third quarter of 2008 compared with the same quarter a year ago, driven by higher losses in commercial mortgage-related sale and securitization activity in the third quarter of 2007.
Noninterest Expense
 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(In millions)   2008     2007     2008     2007  
 
Salaries and employee benefits
  $ 3,489       2,628       10,184       8,722  
Occupancy
    381       325       1,137       968  
Equipment
    325       283       965       899  
Marketing
    68       74       260       214  
Communications and supplies
    173       176       543       527  
Professional and consulting fees
    242       194       656       576  
Sundry expense
    1,288       717       3,694       1,739  
 
Other noninterest expense
    5,966       4,397       17,439       13,645  
Merger-related and restructuring expenses
    697       36       1,189       78  
Goodwill impairment
    18,786       -       24,846       -  
Other intangible amortization
    96       92       296       313  
 
Total noninterest expense
  $ 25,545       4,525       43,770       14,036  
 
Noninterest Expense Noninterest expense increased 212 percent in the first nine months of 2008 from the first nine months of 2007. The overwhelming driver of the increase was the $24.8 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 effect of the A.G. Edwards acquisition as well as increased incentives. Nonmerger-related severance expense increased $31 million in the first nine months of 2008 compared with the same period a year ago.
Additions to legal reserves in the first nine months of 2008 amounted to $1.7 billion, primarily related to previously disclosed matters, and $997 million for the effect of our settlement 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 nine months of 2008 also included $129 million associated with our strategic initiatives, including de novo expansion, branch consolidations and western expansion, compared with $120 million in the same period of 2007.
The same trends described above in the nine month period also drove noninterest expense results in the third quarter of 2008 compared with the third quarter of 2007.
Merger-Related and Restructuring Expenses Merger-related and restructuring expenses in the first nine months of 2008 of $1.2 billion included $577 million related to A.G. Edwards, $95 million related to Golden West, and $515 million related to our previously announced expense reduction strategies. In the first nine months of 2007, we recorded $78 million of merger-related and restructuring expenses.
Income Taxes Income tax benefit on a tax-equivalent basis was $4.7 billion in the first nine months of 2008 compared with income tax expense of $2.9 billion in the first nine months of 2007. The related effective income tax rates were 12.35 percent and 31.32 percent, respectively. The significant decline in the tax rate was the result of the $24.8 billion goodwill impairment charge, only a very small percentage of which is deductible for income tax purposes, as well as an $826 million increase in the valuation allowance for certain deferred tax assets, the primary source of which is the allowance for loan losses.

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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. The Parent includes the minority interest expense associated with our retail brokerage subsidiary; the Capital Management results include 100 percent of the subsidiary’s results. Business segment data excludes goodwill impairment charges, 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. This methodology holds individual business segments responsible for confirmed net losses associated with operating the business and is consistent with the way in which management reviews segment results. In the first nine months of 2008, provision for credit losses in the Parent segment amounted to $11.0 billion, the majority of which related to Pick-a-Payment loans in the General Bank. While the $24.8 billion of goodwill impairment charges is not included in segment results, the Goodwill section shows the components of the charges attributed to each sub-segment.
We continuously update segment information for changes that occur in the management of our businesses. In the first nine months 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 $207 million.
 
    In Wealth Management, an increase of $21 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 $405 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.
As a result of updated performance expectations, modeling and macroeconomic conditions, the economic capital and expected loss factors for the Pick-a-Payment mortgage portfolio within the

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General Bank’s Retail and Small Business line of business were revised for the third quarter of 2008. This revision results in economic capital and expected loss factors that are more closely aligned with the risk profile of the portfolio. All of the economic capital and expected loss factors will continue to be reviewed and updated quarterly as needed to reflect current conditions and updated modeling.
General Bank
Performance Summary

 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(Dollars in millions)   2008     2007     2008   2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 3,763       3,466       10,922       10,240  
Fee and other income
    1,003       935       2,983       2,716  
Intersegment revenue
    50       59       162       161  
 
Total revenue (Tax-equivalent)
    4,816       4,460       14,067       13,117  
Provision for credit losses
    1,340       207       2,834       508  
Noninterest expense
    2,127       1,898       6,236       5,685  
Income taxes (Tax-equivalent)
    492       860       1,824       2,527  
 
Segment earnings
  $ 857       1,495       3,173       4,397  
 
 
                               
 
Performance and other data
                               
Economic profit
  $ 699       1,190       2,624       3,442  
Risk adjusted return on capital (RAROC)
    25.40 %     54.30       32.54       53.61  
Economic capital, average
  $ 19,302       10,904       16,273       10,800  
Cash overhead efficiency ratio (Tax-equivalent)
    44.16 %     42.54       44.33       43.34  
Lending commitments
  $ 128,178       132,779       128,178       132,779  
Average loans, net
    318,573       295,188       316,217       292,003  
Average core deposits
  $ 292,653       290,099       293,361       288,209  
FTE employees
    53,073       56,427       53,073       56,427  
 
General Bank The General Bank includes our Retail and Small Business and our Commercial lines of business. The General Bank’s earnings declined to $3.2 billion, down $1.2 billion, driven by rapidly rising credit costs and related expenses, primarily in the mortgage business. These results overshadowed continued sales momentum elsewhere as reflected in total revenue of $14.1 billion, up 7 percent. Other key General Bank trends in the first nine months of 2008 compared with the first nine months of 2007 included:
    Average loan growth of 8 percent, led by consumer real estate secured and commercial lending.
 
    A 4 percent increase in mortgage lending, primarily reflecting a decline in prepayments. Significant efforts have been made in our mortgage business to mitigate risk in the face of declining housing markets by restructuring our operating model, including ceasing origination through 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.
 
    Reduced home equity originations, reflecting implementation of tightened credit standards resulting in additional limitations on utilization of undrawn equity lines. More than 95 percent of our home equity loans were originated through our branch network and other direct channels.
 
    A 3 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 4 percent, and an increase of 1 percent in retail deposits.
 
    Growth in net new retail checking accounts, reflecting retention and acquisition efforts resulting in a net increase of 645,000 in the first nine months of 2008 compared with a net increase of 845,000 in the first nine months of 2007.
 
    442,000 new checking accounts linked to the new Way2Save accounts, which launched in mid-January 2008.
 
    10 percent growth in fee and other income, with strength in service charges, interchange income and mortgage banking fee income. Growth in interchange income reflected a 16 percent increase in debit/credit card volume from the first nine months of 2007.
 
    Noninterest expense up 10 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 nine months of 2008, 59 de novo branches were opened and 101 branches were consolidated.
 
    An increase in the provision for credit losses to $2.8 billion largely reflecting rapid deterioration in consumer real estate particularly in certain housing markets and higher losses in auto.

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The same trends described above in the nine month period also drove General Bank results in the third quarter of 2008 compared with the third quarter of 2007.
Wealth Management
Performance Summary

 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 194       184       575       542  
Fee and other income
    192       184       610       582  
Intersegment revenue
    2       4       10       10  
 
Total revenue (Tax-equivalent)
    388       372       1,195       1,134  
Provision for credit losses
    8       6       15       9  
Noninterest expense
    246       240       744       730  
Income taxes (Tax-equivalent)
    50       46       160       144  
 
Segment earnings
  $ 84       80       276       251  
 
 
                               
 
Performance and other data
                               
Economic profit
  $ 64       61       207       192  
Risk adjusted return on capital (RAROC)
    46.00 %     50.69       49.76       53.68  
Economic capital, average
  $ 729       609       713       601  
Cash overhead efficiency ratio (Tax-equivalent)
    63.55 %     64.71       62.31       64.40  
Lending commitments
  $ 6,376       7,007       6,376       7,007  
Average loans, net
    22,765       20,996       22,374       20,517  
Average core deposits
  $ 14,690       17,180       16,732       17,300  
FTE employees
    4,516       4,547       4,516       4,547  
 
Wealth Management Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. Wealth Management earned $276 million on 5 percent revenue growth in challenging markets. Other key Wealth Management trends in the first nine months of 2008 compared with the first nine months of 2007 included:
    6 percent growth in net interest income on 9 percent loan growth and wider deposit spreads despite a 3 percent decline in average core deposits.
 
    16 percent growth in fiduciary and asset management fees as the benefits of a pricing initiative implemented in the third quarter of 2007 and sales growth overcame declines in equity valuations. Insurance commissions declined 14 percent in a soft market for insurance premiums.
 
    2 percent expense growth driven by the effect of private banking and western expansion investment, partially offset by expense efficiency initiatives.
 
    A 13 percent decline in assets under management since year-end 2007 to $73.2 billion largely due to market depreciation.
The same trends described above in the nine month period also drove Wealth Management results in the third quarter of 2008 compared with the third quarter of 2007.

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Corporate and Investment Bank
Performance Summary

 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 1,043       838       3,211       2,328  
Fee and other income
    (416 )     176       82       2,806  
Intersegment revenue
    (57 )     (52 )     (159 )     (145 )
 
Total revenue (Tax-equivalent)
    570       962       3,134       4,989  
Provision for credit losses
    525       1       1,160       5  
Noninterest expense
    1,154       626       2,867       2,556  
Income taxes (Tax-equivalent)
    (406 )     123       (327 )     887  
 
Segment earnings
  $ (703 )     212       (566 )     1,541  
 
 
                               
 
Performance and other data
                               
Economic profit (loss)
  $ (899 )     (113 )     (1,301 )     663  
Risk adjusted return on capital (RAROC)
    (13.26 )%     6.40       (1.47 )     20.85  
Economic capital, average
  $ 14,732       9,791       13,933       8,995  
Cash overhead efficiency ratio (Tax-equivalent)
    202.09 %     65.12       91.45       51.24  
Lending commitments
  $ 99,489       119,791       99,489       119,791  
Average loans, net
    109,323       82,979       105,708       77,736  
Average core deposits
  $ 27,497       37,208       30,932       36,077  
FTE employees
    5,718       6,695       5,718       6,695  
 
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 loss of $566 million in first nine months of 2008 compared with earnings of $1.5 billion in the first nine months of 2007. Results in the first nine months of 2008 were driven by $3.1 billion in net valuation losses reflecting continued disruption in the capital markets and reduced origination volume in most markets-related businesses. Principal investing results declined despite $446 million of gains in the first quarter of 2008 related to the adoption of new fair value accounting standards largely attributable to $310 million of losses in the third quarter of 2008. The market disruption-related valuation losses, net of applicable hedges, recognized in the first nine months of 2008 compared with the third quarter of 2007 (there were none in the first half of 2007) included:
    $812 million in subprime residential asset-backed CDOs and other subprime-related products largely relating to losses on warehouse positions compared with $230 billion of losses in the third quarter of 2007;
 
    $1.1 billion in commercial mortgage structured products compared with $488 million of losses in the third quarter of 2007;
 
    $465 million in consumer mortgage structured products compared with $82 million of losses in the third quarter of 2007;
 
    $185 million in leveraged finance net of fees and macro credit hedges compared with $272 million of losses in the third quarter of 2007; and
 
    $530 million related to monoline reserves and breakage of certain contracts compared with $109 million of losses in the third quarter of 2007.
Additional key Corporate and Investment Bank trends in the first nine months of 2008 compared with the first nine months of 2007 included:
    A 38 percent increase in net interest income, which reflected a 36 percent increase in average loans including $7.3 billion of net transfers into the loan portfolio of certain loans originally slated for disposition largely in the fourth quarter of 2007 and first quarter of 2008, 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 increase in noninterest expense primarily due to higher compensation expense including severance, and a $65 million reserve for auction rate securities losses in our portfolio.
 
    Provision for credit losses of $1.2 billion largely reflecting residential-related commercial real estate losses, compared with $5 million in the first nine months of 2007.
The same trends described above in the nine month period also drove the Corporate and Investment Bank’s results in the third quarter of 2008 compared with the third quarter of 2007.
Capital Management
Performance Summary

 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ 388       268       977       787  
Fee and other income
    968       1,444       5,155       4,457  
Intersegment revenue
    4       (8 )     (14 )     (27 )
 
Total revenue (Tax-equivalent)
    1,360       1,704       6,118       5,217  
Provision for credit losses
    1       -       1       -  
Noninterest expense
    2,145       1,241       6,328       3,772  
Income taxes (benefits) (Tax-equivalent)
    (287 )     169       (77 )     527  
 
Segment earnings (loss)
  $ (499 )     294       (134 )     918  
 
 
                               
 
Performance and other data
                               
Economic profit (loss)
  $ (555 )     258       (307 )     808  
Risk adjusted return on capital (RAROC)
    (97.63 )%     88.96       (8.56 )     92.17  
Economic capital, average
  $ 2,033       1,310       2,098       1,331  
Cash overhead efficiency ratio (Tax-equivalent)
    157.72 %     72.82       103.43       72.29  
Lending commitments
  $ 1,657       1,164       1,657       1,164  
Average loans, net
    3,223       2,142       2,889       1,789  
Average core deposits
  $ 54,734       31,489       48,844       31,463  
FTE employees
    29,301       17,908       29,301       17,908  
 
Capital Management Capital Management includes Retail Brokerage Services and Asset Management. Capital Management results were a net loss of $134 million in the first nine months of 2008 primarily due to market disruption-related valuation losses of $1.0 billion and $932 million of auction rate securities settlement charges compared with earnings of $918 million in the first nine months of 2007. Capital Management results in the first nine months of 2008 include the acquisition of A.G. Edwards, completed on October 1, 2007. Other key Capital Management trends in the first nine months of 2008 compared with the first nine months of 2007 included:
  Revenue growth of 17 percent despite declining equity markets year over year.
  o   $6.2 billion in revenue from our retail brokerage businesses reflecting transactional revenues of $2.3 billion and asset-based and other income of $3.9 billion. Retail brokerage fee income increased 45 percent driven by the impact of the A.G. Edwards acquisition, as well as growth in managed account and other asset-based fees, partially offset by lower brokerage transaction activity and equity syndicate distribution fees as well as losses related to auction rate securities in the portfolio.
 
  o   Net negative revenue of $71 million from our asset management businesses reflecting $942 million of market disruption-related losses incurred in connection with providing support to Evergreen funds.
  Fee and other income up 16 percent driven by the addition of A.G. Edwards and growth in managed account and other brokerage asset-based fees, partially offset by $1.0 billion in market disruption-related losses, including:

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  o   $761 million in valuation losses primarily relating to the support of three Evergreen money market funds;
 
  o   $172 million in valuation losses on the liquidation of an Evergreen fund;
 
  o   $85 million in valuation losses on auction rate securities held in the securities portfolio; and
 
  o   $31 million in other securities impairment losses.
  Net interest income up 24 percent, driven by retail brokerage core deposit growth of $17.4 billion, which was partially offset by spread compression.
 
  68 percent growth in noninterest expense largely due to the effect of the $932 million of settlement charges related to auction rate securities, along with merger activity.
Total Assets Under Management (AUM)
 
                                                 
    2008     2007  
    Third Quarter     Fourth Quarter     Third Quarter  
 
(In billions)   Amount     Mix     Amount     Mix     Amount     Mix  
 
Equity
  $ 61.7       30 %   $ 83.6       30 %   $ 84.6       30 %
Fixed income
    92.8       44       123.0       45       137.7       48  
Money market
    54.6       26       68.1       25       63.1       22  
 
Total assets under management (a)
  $ 209.1       100 %   $ 274.7       100 %   $ 285.4       100 %
 
(a) Includes $28.5 billion in assets managed for Wealth Management, which are also reported in that segment.
Total assets under management (AUM) of $209.1 billion at September 30, 2008, decreased 24 percent from December 31, 2007, with the decline largely in the third quarter of 2008, driven by net outflows of $40.6 billion as well as $25.0 billion in lower market valuations. Total brokerage client assets were $1.0 trillion at September 30, 2008, down 14 percent from year-end 2007 primarily due to lower market valuations. Retail Brokerage client accounts held auction rate securities subject to our settlement agreement amounting to an estimated $6.0 billion at September 30, 2008.
The same trends described above in the nine month period also drove Capital Management results in the third quarter of 2008 compared with the third quarter of 2007. However, fee and other income decreased in the third quarter of 2008 compared with the same period a year ago due to higher market disruption-related losses in the third quarter of 2008.

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Parent
Performance Summary

 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(Dollars in millions)   2008     2007     2008     2007  
 
Income statement data
                               
Net interest income (Tax-equivalent)
  $ (349 )     (172 )     (1,497 )     (289 )
Fee and other income
    (1,014 )     194       (2,155 )     346  
Intersegment revenue
    1       (3 )     1       1  
 
Total revenue (Tax-equivalent)
    (1,362 )     19       (3,651 )     58  
Provision for credit losses
    4,755       194       11,017       242  
Noninterest expense
    390       484       1,560       1,215  
Minority interest
    (71 )     139       153       275  
Income taxes (benefits) (Tax-equivalent)
    (2,128 )     (445 )     (5,792 )     (964 )
Dividends on preferred stock
    191       -       427       -  
 
Segment loss
  $ (4,499 )     (353 )     (11,016 )     (710 )
 
 
 
Performance and other data
                               
Economic loss
  $ (1,414 )     (319 )     (3,895 )     (629 )
Risk adjusted return on capital (RAROC)
    (1,259.81 )%     (41.54 )     (400.09 )     (22.61 )
Economic capital, average
  $ 443       2,403       1,265       2,499  
Cash overhead efficiency ratio (Tax-equivalent)
    (21.45 )%     1,976.53       (34.59 )     1,576.74  
Lending commitments
  $ 483       529       483       529  
Average loans, net
    24,601       28,496       26,548       30,115  
Average core deposits
  $ 2,735       3,033       2,627       2,578  
FTE employees
    24,619       24,147       24,619       24,147  
 
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 nine months of 2008 compared with the first nine months of 2007 included:
    A decline in net interest income, reflecting the leveraged 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 $10.8 billion increase in the provision for credit losses reflecting greater credit risk and loan growth. More information is in the Provision and Allowance for Credit Losses section.
 
    A $2.5 billion decrease in fee and other income, reflecting net securities losses of $1.7 billion compared with net gains of $72 million in the year ago period, as well as $314 million of valuation losses on our bank-owned life insurance portfolio (BOLI) in the first nine months of 2008. Of the $1.7 billion of net securities losses in the first nine months of 2008, $1.3 billion were market disruption-related and $788 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 in the first quarter of 2008.
 
    A $345 million increase in noninterest expense to $1.6 billion, primarily reflecting higher legal costs.
The same trends described above in the nine month period also drove the Parent results for the third quarter of 2008 compared with the third 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) 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 September 30, 2008, and at December 31, 2007. BOLI is an insurance investment product where we purchase life insurance policies on a group of

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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.
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 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 $32 million in the first nine months of 2008 compared with $464 million in the first nine months of 2007, of which a minority interest benefit of $117 million and expense of $307 million, respectively, related to Prudential.
Wachovia owns 100 percent of the outstanding stock of BluePoint Re Limited, a Bermuda-based monoline bond reinsurer. On August 7, 2008, BluePoint was placed in liquidation and its affairs are being wound up by a court-appointed liquidator. As a result, we de-consolidated BluePoint in the third quarter of 2008.
In the second half of 2007, BluePoint recorded significant losses on certain derivative instruments and these losses through December 31, 2007, approximated substantially all of Wachovia’s investment in BluePoint. Our consolidated results in the third and fourth quarters of 2007 were reclassified to reflect BluePoint’s results as a discontinued operation. Results from the inception of

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BluePoint in 2005 through June 30, 2007, were not material, and accordingly, have not been included in discontinued operations. Having no obligation to fund additional losses in excess of those recorded in 2007, we recorded no additional BluePoint-related losses in our consolidated financial statements in the first nine months of 2008.
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, a $4.5 billion increase in net unrealized losses due to continued spread widening predominantly on our fixed rate mortgage-backed securities, approximately $3.0 billion of impairment and other realized losses, and $4.8 billion of agency mortgage swaps. The write-downs include $391 million in the second quarter of 2008 and $397 million in the third quarter of 2008 related to our change in intent from holding $2.0 billion of securities at June 30, 2008, and $715 million at September 30, 2008, to selling them in the near term. The securities on which we changed our intent include primarily agency perpetual preferred securities and certain corporate notes. Our intent changed with respect to the perpetual preferred securities as a result of previously unexpected significant declines in value and an increasingly negative outlook. With respect to the corporate notes, our intent changed as a result of the unprecedented illiquidity in fixed income markets and our desire to reduce our exposure to this market. With the exception of the specific securities on which we explicitly changed our intent, at September 30, 2008, we had the ability and intent to hold all securities in our available-for-sale portfolio to recovery, even if that equates to the maturity of the individual securities. The Realized Losses table shows losses from sales of securities and losses on securities on which our intent changed.
Securities Available For Sale
 
                 
    September 30,     December 31,  
(In billions)   2008     2007  
 
Market value
  $ 107.7       115.0  
Net unrealized loss
  $ (5.8 )     (1.3 )
 
Memoranda (Market value)
               
Residual interests
  $ 0.3       0.5  
Retained bonds Investment grade (a)
  $ 14.3       11.6  
 
(a) $ 14.0 billion had credit ratings of AA and above at September 30, 2008.
Realized Losses

(In millions)
 
                         
    Nine Months Ended September 30, 2008  
Category   Sale     Change of Intent     Total  
 
Sundry
                       
Perpetual preferred securities
  $ 248       251       499  
Corporate notes
    12       275       287  
 
Total
  $ 260       526       786  
 
The average duration of our securities available for sale portfolio was 3.6 years in the first nine months of 2008, an increase from 3.5 years in the first nine months of 2007 driven largely by slowing prepayments. The average rate earned on securities available for sale was 5.47 percent in the first nine months of 2008 and 5.43 percent in the first nine months of 2007.
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 September 30, 2008, included residual interests with a market value of $317 million, which included a net unrealized gain of $58 million, and retained bonds from securitizations with a market value of $14.3 billion, which included a net unrealized gain of $115 million.

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Retained interests from securitizations recorded as either securities available for sale, trading account assets or loans amounted to $14.9 billion at September 30, 2008, and $12.4 billion at December 31, 2007.
Loans — On-Balance Sheet
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Commercial
                                       
Commercial, financial and agricultural
  $ 128,411       122,628       119,193       112,509       109,269  
Real estate — construction and other
    17,824       18,629       18,597       18,543       18,167  
Real estate — mortgage
    27,970       27,191       26,370       23,846       21,514  
Lease financing
    23,725       24,605       23,637       23,913       23,966  
Foreign
    32,344       35,168       33,616       29,540       26,471  
 
Total commercial
    230,274       228,221       221,413       208,351       199,387  
 
Consumer
                                       
Real estate secured
    224,842       230,520       230,197       227,719       225,355  
Student loans
    10,335       9,945       9,324       8,149       7,742  
Installment loans
    26,433       29,261       27,437       25,635       24,763  
 
Total consumer
    261,610       269,726       266,958       261,503       257,860  
 
Total loans
    491,884       497,947       488,371       469,854       457,247  
Unearned income
    (9,511 )     (9,749 )     (7,889 )     (7,900 )     (8,041 )
 
Loans, net (On-balance sheet)
  $ 482,373       488,198       480,482       461,954       449,206  
 
Loans — Managed Portfolio (Including on-balance sheet)
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Commercial
  $ 231,664       230,550       224,875       217,896       213,434  
Real estate secured
    246,055       255,190       254,685       250,520       242,526  
Student loans
    14,367       12,718       12,148       11,012       12,618  
Installment loans
    35,271       33,710       31,571       30,487       29,365  
 
Total managed portfolio
  $ 527,357       532,168       523,279       509,915       497,943  
 
Loans The 4 percent increase in net loans from year-end 2007 to $482.4 billion reflected 11 percent growth in commercial loans, which included the impact of $4.1 billion transferred to the loan portfolio from loans held for sale predominantly in 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 loans were flat, with growth in student and auto loans, offset by the impact of the securitization and sale of $9.3 billion of consumer loans, including securitization of $5.7 billion of real estate secured loans, $3.3 billion of auto loans, and $234 million in student loans. We transferred to held for sale $4.8 billion of real estate secured loans and $1.3 billion of student loans. In addition, we transferred from held for sale $801 million of auto loans and $2.1 billion of consumer real estate loans.
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 September 30, 2008 (percentages represent the balance of loans, not the number of loans):
  Commercial loans represented 47 percent and consumer loans 53 percent of the loan portfolio.
  o   71 percent of the commercial loan portfolio was secured by collateral.
 
  o   98 percent of the consumer loan portfolio was either secured by collateral or guaranteed.

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  Of our $224.8 billion consumer real estate loan portfolio:
  o   84 percent is secured by a first lien.
 
  o   83 percent has an original loan-to-value ratio of 80 percent or less.
 
  o   95 percent has an original loan-to-value ratio of 90 percent or less.
 
  o   13 percent of the home equity and prime equity portfolios have an original loan-to-value ratio greater than 90 percent; of which 41 percent are in the first lien position.
  $2.8 billion were reduced documentation Alt-A loans, which includes $2.0 billion of Corporate and Investment Bank non-branch originated mortgages.
Our managed loan portfolio grew 3 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.
Pick-a-Payment Loans Our Pick-a-Payment loan portfolio amounted to $118.7 billion at September 30, 2008, or 45 percent of the consumer loan portfolio. Pick-a-Payment loans are home mortgages on which the borrower had the option each month to select from among four payment options: (1) a minimum payment as described below, (2) an interest-only payment, (3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment. Approximately 80 percent of the Pick-a-Payment portfolio has payment options calculated using a monthly adjustable interest rate. The rest of the portfolio is fixed rate. No loans with an original fixed period of interest below market rates have been originated since 2003. Currently, all such loans are accruing interest at a fully indexed rate of interest.
Approximately 85 percent of the September 30, 2008, Pick-a-Payment loan portfolio was originated under a “Quick Qualifier” program where the level of documentation to be obtained from a prospective borrower relative to income and assets was determined based on data provided by the borrower in their loan application. As a result, loans in the “Quick Qualifier” program may have varying levels of income and asset verification. The remaining 15 percent was originated with full documentation (verified assets and verified income).
Substantially all of the Pick-a-Payment loans that we originated allowed the borrower to select an initial monthly payment for the first year of the loan. The initial monthly payment selected by the borrower was limited by a floor that we establish based on our evaluation of credit information related to the borrower. The minimum monthly payment for substantially all our Pick-a-Payment loans is reset annually. The new minimum monthly payment amount generally cannot exceed the prior year’s payment amount by more than 7.5 percent. In the current environment, the minimum payment generally is not sufficient to pay the monthly interest due, and accordingly, a loan on which the borrower has made a minimum payment is subject to “negative amortization” where unpaid interest is added to the principal balance of the loan. The amount of interest that has been added to a loan balance is referred to as “deferred interest.” For loans that are performing, we recognize the entire monthly interest amount as interest income, including the deferred interest. Our Pick-a-Payment borrowers have been fairly constant in their utilization of the minimum payment option. Of our Pick-a-Payment borrowers, approximately 65 percent at September 30, 2008, and at June 30, 2008, and 67 percent at December 31, 2007, had elected this option. At September 30, 2008, approximately 52 percent of Pick-a-Payment borrowers had elected the minimum payment option in each of the past six months. These percentages represent the number of loans, not the balance of loans.
The frequency with which a borrower elected the payment option that resulted in negative amortization is subject to a variety of factors including changes in the underlying index on which the monthly

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interest is based such that the lower the interest rate, the less interest that will be deferred under the minimum payment; borrower payment behavior; and the impact of general economic conditions. Deferred interest on the Pick-a-Payment portfolio amounted to $4.1 billion, or 3.49 percent of the portfolio, at September 30, 2008, $3.9 billion or 3.18 percent at June 30, 2008, and $3.1 billion or 2.58 percent at December 31, 2007. Deferred interest for all Pick-a-Payment borrowers with a deferred interest balance in excess of 10 percent of the current outstanding loan balance amounted to approximately $474 million or 3.6 percent of borrowers at September 30, 2008, $300 million or 2.2 percent at June 30, 2008, and $22 million or 0.2 percent at December 31, 2007. The Deferred Interest by Original LTV table provides information related to deferred interest balances by original loan-to-value (LTV):
Deferred Interest by Original LTV
 
                                 
    2008     2007  
    Third     Second     First     Fourth  
(In millions)   Quarter     Quarter     Quarter     Quarter  
 
At or below 80%
                               
60% or less
  $ 353       343       329       305  
60.01% to 70%
    469       456       434       402  
70.01% to 80%
    1,178       1,149       1,090       991  
 
Subtotal
    2,000       1,948       1,853       1,698  
80.01% to 85%
    1,071       1,057       1,033       935  
85.01% to 90%
    714       614       466       327  
Greater than 90%
    355       266       174       129  
 
Subtotal
    2,140       1,937       1,673       1,391  
 
Total deferred interest
  $ 4,140       3,885       3,526       3,089  
 
Deferral of interest on a loan may continue as long as the loan balance remains below a predefined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original LTV ratio equal to or below 85 percent have a cap of 125 percent and these loans represent substantially all our Pick-a-Payment portfolio. Loans with an original LTV ratio above 85 percent have a cap of 110 percent. Pick-a-Payment loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its cap, or the 10-year anniversary of origination. After the recast, the borrower’s new payment terms require that the loan be fully repaid by the end of the original loan term. Based on assumptions of a flat rate environment, election of the minimum payment option 100 percent of the time by all eligible borrowers and no prepayment of balances, we would expect the following balance of loans to recast based on reaching the cap: $549,000 in 2008, $6 million in 2009, $14 million in 2010, $26 million in 2011 and $80 million in 2012. In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $8 million in 2008, $36 million in 2009, $58 million in 2010, $91 million in 2011 and $173 million in 2012.
Home prices have been declining since mid 2007, and in the second quarter of 2008, the decline accelerated as indicated by actual and forecasted home price indices. Certain geographic areas are particularly hard hit by the general economic conditions and more specifically by deterioration in home prices. We carefully monitor trends in our portfolio including home prices, borrower delinquency patterns and percent of borrowers making the minimum payment. Our credit loss modeling for our Pick-a-Payment loan portfolio incorporates a variety of credit data related to underlying collateral (loan-to-value, loan product, property type), borrower data (FICO score, negative amortization history, delinquency) and economic information (unemployment, home price data, interest rates).

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In stressed housing markets with increasing delinquencies and declining home prices, the LTV ratio is a key metric in predicting future loan performance. The Pick-a-Payment Outstandings Data table provides information on the geographic distribution of our Pick-a-Payment portfolio, plus LTV and FICO data.
Pick-a-Payment Outstandings Data

(In millions)
 
                                         
    September 30, 2008  
                    Current LTV -     Original     Current  
Region   Outstandings     Original LTV     AVM     FICO     FICO  
 
Central Valley
  $ 9,833       72       132       667       646  
Inland Empire
    10,938       71       115       664       645  
Total California
    69,300       70       104       668       654  
Florida
    11,853       71       92       683       656  
New Jersey
    5,416       71       76       691       680  
Arizona
    2,993       72       100       681       668  
Texas
    2,839       75       62       679       663  
Other states
    26,303       72       79       687       674  
 
Total Pick-a-Payment
  $ 118,704       71       95       675       661  
 
At September 30, 2008, all of our Pick-a-Payment loans were included in our loss modeling and substantially all of our Pick-a-Payment loans had an amount of estimated loss assigned. We believe that our modeling tools and information create a reasonable estimate of probable losses that are incurred in our loan portfolio. We have obtained mortgage insurance agreements that cover $601 million of the Pick-a-Payment portfolio at September 30, 2008, $624 million at June 30, 2008, and $664 million at December 31, 2007. The Pick-a-Payment Asset Quality table provides asset quality information for the Pick-a-Payment loan portfolio:
Pick-a-Payment Asset Quality
 
                                 
    2008     2007  
    Third     Second     First     Fourth  
($ in millions)   Quarter     Quarter     Quarter     Quarter  
 
Period-end loans, net of unearned
  $ 119,842       123,198       122,349       120,816  
Allowance for loan losses
  8,648       5,214       1,963       824  
Nonperforming assets
  $ 8,989       7,049       4,623       3,052  
as % of loans, net and foreclosed properties
    7.47 %     5.71       3.77       2.52  
Nonperforming loans (NPLs)
  $ 8,531       6,743       4,386       2,882  
as % of loans
    7.12 %     5.47       3.58       2.39  
Net charge-offs
  $ 810       508       240       93  
as % of average loans, net
    2.67 %     1.65       0.78       0.31  
Allowance as a % of loans
    7.22     4.23       1.60       0.68  
Allowance as a % of NPLs
    101 %     77       45       29  
 
30+ days past due
    4.99 %     3.92       3.62       3.67  
60+ days past due
    1.66 %     1.28       1.12       1.02  
 
Average original FICO
    675     675       674       674  
Current average FICO
    661     662       664       666  
 
Average original LTV
    71 %     71       71       71  
Current average LTV
    95 %     85       78       72  
 
To maximize return and allow flexibility for borrowers to avoid foreclosure, we have initiated several loss mitigation strategies in our Pick-a-Payment loan portfolio. We contact borrowers who are experiencing difficulty and may in certain circumstances modify the terms of a loan to meet their needs while at the same time maximizing the likelihood of full repayment of the loan. In circumstances where we make an economic concession to a borrower who is experiencing financial difficulty, which would include reducing the interest rate to a below market rate for the loan, we classify the restructured loans as a troubled debt restructuring (TDR). In the nine months ended September 30, 2008, Wachovia modified approximately $332 million (886 Pick-a-Payment loans) using this loss mitigation strategy.
Also, we have made modifications that allow a borrower to capitalize payments for principal, interest and/or taxes into the principal balance. Under a payment plan, borrowers with delinquent payments may be required to make additional monthly payments over a specified period of time, typically three to six months. We believe these borrowers are experiencing financial difficulty, but because we are not making an economic concession, these modifications are not classified as TDRs. In the nine

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months ended September 30, 2008, Wachovia modified $7.5 billion of Pick-a-Payment loans or approximately 23,000 loans using this loss mitigation strategy.
In June 2008, we announced we would no longer originate negative amortization Pick-a-Payment loans and that we will waive prepayment fees. In July 2008, we discontinued portfolio loan retention strategies and the origination of Pick-a-Payment loans through the General Bank’s wholesale mortgage channel. Our discontinued loan retention strategies resulted in the modification of $6.7 billion of Pick-a-Payment loans or approximately 22,000 loans in the nine months ended September 30, 2008. These modifications were made at market interest rates for those borrowers and as a result, we have not classified these modifications as TDRs.
We have also announced proactive steps to work with borrowers to refinance or restructure their Pick-a-Payment loans into other loan products. Based on a borrower’s individual situation, we will customize an approach to refinance or restructure. The offers may include rate buy-downs and/or conversions into FHA-insured loans, conversion into other conventional loans with no negative amortization features, or origination of zero percent interest second lien loans. The amount of loans restructured during the third quarter of 2008 was minimal given the recent start to this strategy. If we believe these borrowers are experiencing financial difficulty and we make an economic concession through the modification, we report these restructurings as TDRs.
We continually reassess our loss mitigation strategies and may adopt additional strategies in the future. To the extent that these strategies involve making an economic concession to a borrower experiencing financial difficulty, they will be accounted for and reported as TDRs.
Pick-a-Payment loans in a delinquent status that have been modified are considered nonperforming until six consecutive months of payments have been made, at which time the loan moves to accruing status.
Asset Quality
Asset Quality
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Nonperforming assets
                                       
Nonaccrual loans
  $ 13,476       11,049       7,788       4,995       2,715  
Troubled debt restructurings (a)
    646       248       48       -       -  
Foreclosed properties
    860       631       530       389       334  
 
Total nonperforming assets
  $ 14,982       11,928       8,366       5,384       3,049  
 
as % of loans, net and foreclosed properties
    3.10 %     2.44       1.74       1.16       0.68  
 
Nonperforming assets in loans held for sale
  $ 26       63       5       62       59  
 
Total nonperforming assets in loans and in loans held for sale
  $ 15,008       11,991       8,371       5,446       3,108  
 
as % of loans, net, foreclosed properties and loans held for sale
    3.05 %     2.41       1.70       1.14       0.66  
 
Provision for credit losses
  $ 6,629       5,567       2,831       1,497       408  
Allowance for credit losses
  $ 15,605       10,956       6,767       4,717       3,691  
 
Allowance for loan losses
                                       
as % of loans, net
    3.18 %     2.20       1.37       0.98       0.78  
as % of nonaccrual and restructured loans (b)
    109       95       84       90       129  
as % of nonperforming assets (b)
    102       90       78       84       115  
Allowance for credit losses
                                       
as % of loans, net
    3.24 %     2.24       1.41       1.02       0.82  
 
Net charge-offs
  $ 1,872       1,309       765       461       206  
Commercial, as % of average commercial loans
    1.05 %     0.88       0.48       0.34       0.08  
Consumer, as % of average consumer loans
    1.97       1.26       0.79       0.46       0.27  
Total, as % of average loans, net
    1.57 %     1.10       0.66       0.41       0.19  
 
Past due accruing loans, 90 days and over
  $ 1,119       1,101       866       708       590  
Commercial, as a % of loans, net
    0.07 %     0.11       0.05       0.05       0.04  
Consumer, as a % of loans, net
    0.37 %     0.32       0.28       0.23       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.
Nonperforming Assets Increases in nonaccrual loans, troubled debt restructurings and foreclosed properties resulting from significant weakness in the housing market particularly in stressed regions of Florida and California contributed to the $9.6 billion increase in nonperforming assets from year-end 2007 to $15.0 billion, or 3.05 percent of loans, foreclosed properties and loans held for sale at September 30, 2008. Consumer nonaccrual loans were $9.3

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billion at September 30, 2008, up $6.0 billion from year-end 2007, driven primarily by new nonaccruals of $5.3 billion related to our Pick-a-Payment portfolio and $267 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 September 30, 2008, were $4.1 billion, up $2.5 billion from year-end 2007, reflecting new nonaccrual loans of $4.8 billion, including $2.6 billion of residential-related commercial real estate in our Real Estate Financial Services portfolio, partially offset by gross charge-offs of $499 million. Our Real Estate Financial Services portfolio includes loans backed by residential and income producing properties. We conducted an intensive review of income producing in August 2008 with minimal negative grade migration; however, we expect weakness in this portfolio in 2009-2010 as the broader economy declines.
Nonperforming Assets
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Nonaccrual Loans
                                       
Commercial:
                                       
Commercial, financial and agricultural
  $ 1,298       1,229       908       602       354  
Commercial real estate — construction and mortgage
    2,836       2,203       1,750       1,059       289  
 
Total commercial
    4,134       3,432       2,658       1,661       643  
 
Consumer:
                                       
Real estate secured:
                                       
First lien
    9,197       7,430       5,015       3,234       1,986  
Second lien
    110       147       75       58       41  
Installment and other loans (a)
    35       40       40       42       45  
 
Total consumer
    9,342       7,617       5,130       3,334       2,072  
 
Total nonaccrual loans
    13,476       11,049       7,788       4,995       2,715  
Troubled debt restructurings (b)
    646       248       48       -       -  
Foreclosed properties
    860       631       530       389       334  
 
Total nonperforming assets
  $ 14,982       11,928       8,366       5,384       3,049  
As % of loans, net, and foreclosed properties (c)
    3.10 %     2.44       1.74       1.16       0.68  
 
Nonperforming assets included in loans held for sale
                                       
Commercial
  $ 21       56       -       -       -  
Consumer
    5       7       5       62       50  
 
Total nonaccrual loans
    26       63       5       62       50  
Foreclosed properties
    -       -       -       -       9  
 
Total nonperforming assets included in loans held for sale
    26       63       5       62       59  
 
Nonperforming assets included in loans and in loans held for sale
  $ 15,008       11,991       8,371       5,446       3,108  
As % of loans, net, foreclosed properties and loans held for sale (d)
    3.05 %     2.41       1.70       1.14       0.66  
 
Past due loans, 90 days and over, and nonaccrual loans
                                       
Accruing loans past due 90 days and over
  $ 1,119       1,101       866       708       590  
Nonaccrual loans
    13,476       11,049       7,788       4,995       2,715  
 
Total past due loans 90 days and over, and nonaccrual loans
  $ 14,595       12,150       8,654       5,703       3,305  
Commercial, as a % of loans, net
    1.96 %     1.69       1.31       0.89       0.38  
Consumer, as a % of loans, net
    3.91 %     3.12       2.19       1.49       1.00  
 
(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.
Nonperforming assets at September 30, 2008, included $646 million of troubled debt restructurings which were predominantly consumer real estate-secured loans and included $332 million of Pick-a-Payment loans, $156 million of predominantly first lien home equity loans, $127 million of first lien construction loans to consumer borrowers and $30 million of auto loans. 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. A loan modification that extends the payment terms where the loan is re-underwritten to current market standards at the time of modification is generally not classified as a troubled debt restructuring.

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Past Due Loans Accruing loans 90 days or more past due, excluding loans that are classified as loans held for sale, were $1.1 billion, which represented 0.23 percent of total loans at September 30, 2008, compared with $708 million and 0.15 percent at December 31, 2007. Of these past due loans, $152 million were commercial loans or commercial real estate loans and $967 million were consumer loans. Loans 30 to 89 days past due, excluding loans that are classified as loans held for sale, were $9.1 billion at September 30, 2008, compared with $6.7 billion at December 31, 2007.
Charge-offs
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Loan losses:
                                       
Commercial, financial and agricultural
  $ (286 )     (254 )     (171 )     (67 )     (41 )
Commercial real estate — construction and mortgage
    (279 )     (216 )     (81 )     (117 )     (5 )
 
Total commercial
    (565 )     (470 )     (252 )     (184 )     (46 )
Real estate secured
    (1,087 )     (700 )     (351 )     (156 )     (59 )
Student loans
    (29 )     (3 )     (3 )     (4 )     (5 )
Installment and other loans (a)
    (299 )     (230 )     (242 )     (225 )     (168 )
 
Total consumer
    (1,415 )     (933 )     (596 )     (385 )     (232 )
 
Total loan losses
    (1,980 )     (1,403 )     (848 )     (569 )     (278 )
Loan recoveries:
                                       
Commercial, financial and agricultural
    16       15       14       22       9  
Commercial real estate — construction and mortgage
    2       -       1       -       3  
 
Total commercial
    18       15       15       22       12  
Real estate secured
    27       18       10       9       12  
Student loans
    1       1       1       2       3  
Installment and other loans (a)
    62       60       57       75       45  
 
Total consumer
    90       79       68       86       60  
 
Total loan recoveries
    108       94       83       108       72  
 
Net charge-offs:
                                       
Commercial, financial and agricultural
    (270 )     (239 )     (157 )     (45 )     (32 )
Commercial real estate — construction and mortgage
    (277 )     (216 )     (80 )     (117 )     (2 )
 
Total commercial
    (547 )     (455 )     (237 )     (162 )     (34 )
Real estate secured
    (1,060 )     (682 )     (341 )     (147 )     (47 )
Student loans
    (28 )     (2 )     (2 )     (2 )     (2 )
Installment and other loans (a)
    (237 )     (170 )     (185 )     (150 )     (123 )
 
Total consumer
    (1,325 )     (854 )     (528 )     (299 )     (172 )
 
Net charge-offs
  $ (1,872 )     (1,309 )     (765 )     (461 )     (206 )
Net charge-offs as a % of average loans, net (b)
                                       
Commercial, financial and agricultural
    0.66 %     0.60       0.41       0.12       0.10  
Commercial real estate — construction and mortgage
    2.41       1.89       0.73       1.12       0.02  
 
Total commercial
    1.05       0.88       0.48       0.34       0.08  
Real estate secured
    1.85       1.18       0.59       0.26       0.08  
Student loans
    1.03       0.07       0.08       0.10       0.14  
Installment and other loans (a)
    3.18       2.36       2.76       2.35       1.99  
 
Total consumer
    1.97       1.26       0.79       0.46       0.27  
 
Total, as % of average loans, net
    1.57 %     1.10       0.66       0.41       0.19  
 
Consumer real estate secured net charge-offs:
                                       
First lien
  $ (952 )     (592 )     (291 )     (122 )     (32 )
Second lien
    (108 )     (90 )     (50 )     (25 )     (15 )
 
Total consumer real estate secured net charge-offs
  $ (1,060 )     (682 )     (341 )     (147 )     (47 )
 
(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 $3.9 billion, or 111 basis points of average net loans in the first nine months of 2008, an increase of $3.4 billion from the first nine months 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 $1.2 billion in the first nine months of 2008, compared with $90 million in the first nine months of 2007, and included $573 million in residential-related commercial real estate loans. Consumer net charge-offs were $2.7 billion, up $2.3 billion from the first nine months of 2007. The increase in consumer net charge-offs was driven by consumer real estate losses of $2.1 billion, including Pick-a-Payment losses of $1.6 billion, student lending losses of $32 million, and installment losses of $592 million, of which $463 million were in the auto portfolio.

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Allowance for Credit Losses
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Allowance for credit losses (a)
                                       
Allowance for loan losses, beginning of period
  $ 10,744       6,567       4,507       3,505       3,390  
Net charge-offs
    (1,872 )     (1,309 )     (765 )     (461 )     (206 )
Allowance relating to loans acquired, transferred to loans held for sale or sold
    (108 )     (69 )     (16 )     (10 )     (63 )
Provision for credit losses related to loans transferred to loans held for sale or sold (b)
    17       51       7       6       3  
Provision for credit losses
    6,570       5,504       2,834       1,467       381  
 
Allowance for loan losses, end of period
    15,351       10,744       6,567       4,507       3,505  
 
Reserve for unfunded lending commitments, beginning of period
    212       200       210       186       162  
Provision for credit losses
    42       12       (10 )     24       24  
 
Reserve for unfunded lending commitments, end of period
    254       212       200       210       186  
 
Allowance for credit losses
  $ 15,605       10,956       6,767       4,717       3,691  
 
Allowance for loan losses
                                       
as % of loans, net
    3.18 %     2.20       1.37       0.98       0.78  
as % of nonaccrual and restructured loans (c)
    109       95       84       90       129  
as % of nonperforming assets (c)
    102       90       78       84       115  
Allowance for credit losses
                                       
as % of loans, net
    3.24 %     2.24       1.41       1.02       0.82  
 
(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 $15.0 billion in the first nine months of 2008 compared with $764 million in the first nine months of 2007, and the allowance for loan losses increased to $15.4 billion from $4.5 billion at year-end 2007, with the increase in both periods driven mostly by the effect of dramatic deterioration in certain housing markets. Provision in the first nine months of 2008 exceeded net charge-offs by $11.1 billion, which included:
    A $9.8 billion higher reserve for the consumer portfolio, including Pick-a-Payment, home equity, traditional mortgage, and auto portfolios on significant market weakness and changing consumer behaviors. Of this amount, $7.8 billion related to the Pick-a-Payment portfolio.
 
    $448 million higher reserve on the commercial and industrial portfolio on higher loss frequency and severity expectations.
 
    $164 million higher reserve on the commercial real estate portfolio, including $94 million on impaired loans.
 
    $605 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. Our credit loss modeling correlates forward expected losses to changes in home prices and the resulting change in borrower behavior, while also relying on historical delinquency trends over the shorter term. In addition, the updated model incorporates a variety of loan and/or borrower characteristics to refine 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 both the second and third quarters of 2008, loss expectations for the Pick-a-Payment portfolio were well above the previous quarters’ expectations as trends and outlooks for both housing and the

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economy continued to worsen. Home prices continued to decline, but at a more rapid pace than previously anticipated. This decline was evidenced by actual and forecasted home price indices (HPI) published by independent third party sources. We employ market-specific HPI data as key model inputs in estimating default probability and loss severity after default as part of establishing the allowance for loan losses for the Pick-a-Payment portfolio.
The Composite Home Price Indices Data table summarizes the HPI data used and the expected cumulative loss over the remaining life of the portfolio.
Composite Home Price Indices Data
 
                         
    2008  
    Third     Second     First  
    Quarter     Quarter     Quarter  
 
Portfolio-weighted peak to trough HPI
                       
Nationwide
    (27.6 )%     (20.9 )     (12.4 )
California
    (30.2 )     (23.1 )     (13.9 )
Florida
    (36.3 )%     (28.6 )     (16.4 )
Housing price trough occurs in
  Mid-2010     Mid-2010     Mid-2009  
Expected cumulative loss over remaining life
    22 %     12       8  
 
HPI data for the second and third quarters reflected material home value declines particularly in certain metropolitan markets including several in California and Florida, where we have significant Pick-a-Payment exposure. This loss of equity has been a vital factor in our estimation of losses.
Principally as a result of a continuing steep decline in actual and projected HPI data, the Pick-a-Payment allowance for loan losses increased $3.4 billion in the third quarter, $3.3 billion in the second quarter and $1.1 billion in the first quarter of 2008. Approximately 70 percent of the third quarter 2008 increase can be attributed to deterioration in observed and expected home values with the remaining 30 percent driven by updated actual experience in the portfolio. We currently expect cumulative losses over the remaining life of the Pick-a-Payment portfolio to approximate 22 percent. At September 30, 2008, the Pick-a-Payment allowance for loan losses amounted to $8.6 billion.
More information on the provision for credit losses is in Table 11: Allowance for Credit Losses. The Corporate Results of Operations section has further information.
Our allowance for loan losses as a percent of nonperforming assets increased to 102 percent at September 30, 2008, from 84 percent at December 31, 2007, and our allowance as a percent of loans, net increased to 3.18 percent at September 30, 2008, from 0.98 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.
Our coverage ratio of allowance for loan losses compared to annualized net charge-offs (using the most recent quarter) declined to 205 percent at September 30, 2008, from 244 percent at December 31, 2007. We believe these ratios are affected by the risk associated primarily with our Pick-a-Payment portfolio, including the HPI changes discussed above. These ratios are considered in our overall review of the adequacy of our allowance; however, no individual ratio is an explicit factor in establishing our allowance. Rather, as described above, our allowance methodologies for each portfolio focus on estimation of probable incurred losses in the portfolios.
The reserve for unfunded lending commitments increased $44 million from year-end 2007 to $254 million at September 30, 2008, which reflected slightly increased volume. The reserve for unfunded lending commitments relates to commercial lending activity. The loan equivalent exposure of unfunded commitments was $137.3 billion at September 30, 2008.
Loans Held for Sale Loans held for sale of $9.2 billion at September 30, 2008, declined $7.6 billion from $16.8 billion at year-end 2007. The activity in the first nine months of 2008 included $23.3 billion of originations and purchases, $28.5 billion of sales/securitizations, $6.2 billion of transfers from the loan portfolio and $7.0 billion of transfers to the loan portfolio. Net write-downs on the held for sale portfolio amounted to $530 million in the first nine months of 2008 compared with $359 million in the same period a year ago.

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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. Core business activity includes loans that we originate with the intent to sell to third parties. At both September 30, 2008 and December 31, 2007, core business activity represented the majority of loans held for sale.
The $23.3 billion of originations and purchases in the first nine months of 2008 included primarily $17.0 billion of residential mortgages, $3.1 billion of commercial and commercial real estate loans and $2.3 billion of leveraged finance fundings. Of the $28.5 billion of sales/securitizations in the first nine months of 2008, $8.4 billion were commercial loans and $20.1 billion were consumer loans. In the first nine months of 2007, we sold or securitized $47.3 billion of loans out of the loans held for sale portfolio, including $30.3 billion of commercial loans and $17.0 billion of consumer loans, primarily residential mortgages. Substantially all of the loans sold in both periods were performing.
We transferred $6.2 billion of loans from the portfolio into loans held for sale in the first nine months of 2008 based on a change in our intent with respect to these specific loans from holding them to marketing them for sale. These transfers included $1.9 billion, $2.9 billion and $1.3 billion of residential mortgages, home equity loans and student loans, respectively.
We transferred $7.0 billion of loans from held for sale to the loan portfolio in the first nine months of 2008 based on a change in our intent with respect to these specific loans from selling them to holding them in portfolio for the foreseeable future where the term “foreseeable future” refers generally to the time horizon of our budgeting and forecasting process, but not less than twelve to 24 months. The following describes the loans transferred from held for sale to the loan portfolio, along with the reasons for the transfers:
    Consumer real estate loans represented $2.1 billion of the amounts transferred. Due to the market declines and the large liquidity discount applied to consumer real estate assets, particularly in the subprime, Alt-A and jumbo lending markets, we determined that the economic benefit of the loans would be maximized by holding the loans in the portfolio.
 
    Commercial real estate loans represented $3.5 billion of the amounts transferred. These loans were originated with the intent to sell into commercial mortgage-backed securitizations. During the second half of 2007, liquidity in the CMBS market deteriorated precipitously. After considering other potential exit strategies, the forecasted length of the CMBS market disruption, and the deteriorating prices for this asset class, we decided that the economic benefit of the loans would be maximized by holding the loans in the portfolio indefinitely.
 
    Auto loans represented $801 million of the amounts transferred. Liquidity in the auto loan securitization market diminished in late 2007 and accordingly, we decided that the economic benefit of the loans would be maximized by holding the loans in the portfolio.
 
    Commercial loans from our leveraged finance business represented $644 million of the amounts transferred. These are amounts in excess of the amount we intended to retain at underwriting.

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Goodwill
Goodwill amounted to $18.4 billion at September 30, 2008, compared with $43.1 billion at December 31, 2007, with the decrease related to goodwill impairment charges of $18.8 billion in the third quarter of 2008 and $6.1 billion in the second quarter of 2008 as described below.
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 nine months of 2008, we recorded fair value and exit cost purchase accounting adjustments amounting to a net $172 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), $4.3 billion of goodwill was recorded on this acquisition through September 30, 2008.
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. 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, June 30, 2008, and September 30, 2008. There was no indication of impairment in the first step of the test in any of our 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 a $6.1 billion goodwill impairment charge in the second quarter of 2008 across three of the four reporting units resulting in write-off of all of the goodwill in two reporting units.
The primary cause of impairment of our goodwill in the three reporting units as of June 30, 2008, 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.
At September 30, 2008, there was an indication of impairment in four reporting units (two of which had no indication of impairment at June 30, 2008), and accordingly, the second step was performed on these four reporting units. Based on the results of the second step, we recorded an $18.8 billion goodwill impairment charge in the third quarter of 2008 across all four reporting units resulting in write-off of all of the goodwill in two reporting units. Of the total third quarter goodwill impairment charge, 63 percent was in the General Bank Retail and Small Business reporting unit where the Pick-a-Payment portfolio resides, and amounted to a write-off of 51 percent of that reporting unit’s goodwill. The value of the retail franchise and branch network was sufficient to support the remaining goodwill in that reporting unit.

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The primary drivers of the third quarter goodwill impairment were declining market valuations and the terms of the Wells Fargo merger. The Goodwill Impairment table provides a summary of the goodwill impairment charges by reporting unit and the remaining goodwill in each.
Goodwill Impairment
 
                                                                 
    General     General Bank             CIB     CIB             All Other        
    Bank     Retail and Small     Wealth     Corporate     Investment     CMG Asset     Reporting        
(Dollars in millions)   Commercial     Business     Management     Lending     Banking     Management     Units (a)     Total  
 
Second quarter impairment
  $ 2,526       -       -       2,937       597       -       -       6,060  
Third quarter impairment
    4,557       12,332       998       -       -       899       -       18,786  
 
Total impairment
    7,083       12,332       998       2,937       597       899       -       24,846  
 
Remaining goodwill at
9/ 30/ 08
  $ -       11,633       -       -       -       231       6,489       18,353  
 
(a) Includes Brokerage of $6.0 billion and CIB Treasury and Trade Finance of $465 million.
Liquidity and Capital Adequacy
In July 2008, we announced a series of initiatives intended to protect, preserve and generate capital and enhance liquidity, including a common stock dividend reduction, reducing loans and securities by $20 billion by year-end, expense reductions and possible asset sales. We estimated these initiatives would generate or preserve approximately $6 billion in capital and enhance liquidity. Following the market events described previously in the Executive Summary section, we experienced significant and abrupt end-of-quarter outflows in commercial core deposits, evidenced by a 24 percent period-end decrease in commercial core deposits and an 8 percent decrease in total core deposits compared with the second quarter of 2008. This deposit outflow, coupled with growth in funded assets and inability to access the debt capital markets, placed significant pressure on our liquidity. We understand this pressure on liquidity was a contributing factor in the FDIC’s determination to exercise its powers under the Federal Deposit Insurance Act to effect the proposed open bank assisted transaction between Wachovia and Citigroup, announced September 29, 2008.
Following our entry into the merger agreement with Wells Fargo, we have taken specific steps to enhance our liquidity position and we are experiencing stabilizing deposit activities, including improved commercial deposit trends. On October 6, 2008, we entered into overnight, collateralized financing arrangements with Wells Fargo to provide access to funding for operations in addition to the other financing sources available to us including the Federal Reserve. Our Federal Reserve borrowings have maturities through January 2009.
In addition, Wachovia is participating in the FDIC’s Temporary Liquidity Guarantee Program (TLGP), which became effective on October 14, 2008. The TLGP has two components: the Debt Guarantee Program, which provides a temporary guarantee of newly issued senior unsecured debt issued by eligible entities; and the Transaction Account Guarantee Program, which provides a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC-insured institutions. All eligible entities, which include Wachovia and its depository institution subsidiaries, are automatically covered under the TLGP for the first 30 days, during which time eligible entities may choose to opt out of either or both components of the TLGP. Wachovia and its depository institution subsidiaries will continue to participate in the Debt Guarantee Program and the Transaction Account Guarantee Program through their respective termination dates of June 30 and December 31, 2009. Eligible entities participating in the TLGP will be assessed fees payable to the FDIC for coverage under the program. Under the Debt Guarantee Program, there will be an annualized fee equal to 75 basis points multiplied by the amount of covered debt issued. For the Transaction Account Guarantee Program, there will be an annualized fee in the form of a 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000. This assessment will be in addition to risk-based deposit insurance assessments currently imposed under FDIC rules and regulations.
Core Deposits Core deposits, which are total deposits excluding foreign deposits and time deposits of $100,000 or more, decreased 7 percent from year-end 2007 to $370.1 billion at September 30, 2008, with substantially all of the decrease occurring in the third quarter of 2008. The majority of this decrease was due to a 47 percent decline in higher cost commercial money market accounts, which are more sensitive to the market turmoil. Compared with the first nine months of 2007, average core deposits in the first nine months of 2008 increased 4 percent to $392.5 billion; average low-cost core deposits, which exclude consumer certificates of deposit, increased 6 percent, to $270.5 billion; and average consumer certificates of deposit rose $2.1 billion from the first nine months of 2007.
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 $116.7 billion at September 30, 2008, compared with $102.9 billion at June 30, 2008, and $102.1 billion at December 31, 2007.
Average purchased funds were $103.3 billion in the first nine months of 2008 and $84.3 billion in the first nine months 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

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to the market disruption. Average purchased funds were $106.8 billion in the third quarter of 2008 compared with $102.6 billion in the second quarter of 2008.
Long-term Debt Long-term debt was $183.4 billion at September 30, 2008, and $161.0 billion at December 31, 2007, reflecting borrowings of $61.2 billion, including $37.5 billion in Federal Home Loan Bank advances in the first nine months of 2008, partially offset by maturities. Scheduled maturities of long-term debt amount to $10.9 billion in the fourth quarter of 2008, including $2.1 billion in Federal Home Loan Bank advances and $867 million in structured debt.
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 $2.3 billion of USD-equivalent of Euro-denominated debt securities in the first nine months of 2008 and had up to $22.4 billion available for issuance at September 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 nine months of 2008. We had up to A$8.5 billion available for issuance at September 30, 2008.
At September 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 nine months of 2008, we issued $11.55 billion of common stock and preferred stock under 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 nine months 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 nine months of 2008. We had $49.0 billion available for issuance under this program at September 30, 2008.
We also have a shelf registration with the SEC under which we may offer and sell hybrid trust preferred securities. At September 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. This funding, due to its terms, is considered one-year financing for liquidity management purposes, but it has a contractual maturity of June 2038, and accordingly, is included in long-term debt on the balance sheet.
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 notch. All short-term ratings were affirmed. Following the announcement of the definitive merger agreement with Wells Fargo, all three of these rating agencies placed Wachovia’s debt ratings under review for a possible upgrade.

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Credit Lines At September 30, 2008, Wachovia Bank had a $1.9 billion committed back-up line of credit that was scheduled to expire in 2010. We have not used this line of credit and it was terminated in October 2008.
Stockholders’ Equity Stockholders’ equity declined 35 percent from $76.9 billion at year-end 2007 to $50.0 billion at September 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 $33.3 billion of net losses in the first nine months of 2008, $2.2 billion of common stock dividends and $427 million of preferred stock dividends paid in the first nine months of 2008, a $20 million reduction related to share repurchases, a $24 million reduction related to adoption of new accounting standards, and a $4.5 billion increase in after-tax depreciation in securities available for sale to $5.8 billion at September 30, 2008.
Dividend and Share Activity
 
                 
    Nine Months Ended  
    September 30,  
(In millions, except per share data)   2008     2007  
 
Dividends on common shares
  $ 2,190       3,352  
Dividends per common share
  $ 1.07       1.76  
Common shares repurchased
    1       22  
Average diluted common shares outstanding
    2,080       1,918  
 
In the nine months ended September 30, 2008, we repurchased 540,000 common shares at a cost of $20 million. At September 30, 2008, we had authorization to buy back approximately 19 million shares of common stock. Our Third Quarter 2008 Report on Form 10-Q has additional information related to share repurchases.
In the first nine months 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 from 37.5 cents to 5 cents per common share effective with the September 2008 dividend.
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 Historically, 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 September 30, 2008, our subsidiaries had $7.1 billion available for dividends that could be paid without prior regulatory approval. Our banking subsidiaries did not pay dividends to the parent company in the first nine months of 2008. Our nonbank subsidiaries paid $68 million to the parent company in the first nine months of 2008.

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Regulatory Capital Our capital ratios were above regulatory minimums at September 30, 2008, and we continued to be classified as well capitalized. The tier 1 capital ratio was 7.49 percent at September 30, 2008, compared with 7.35 percent at December 31, 2007. Our total capital ratio was 12.40 percent and our leverage ratio was 5.70 percent at September 30, 2008, and 11.82 percent and 6.09 percent, respectively, at December 31, 2007. The goodwill impairment charges had no impact on our regulatory capital ratios or tangible capital levels because goodwill is deducted when computing those ratios.
Off-Balance Sheet Transactions
Summary of Off-Balance Sheet Exposures
 
                                 
    September 30, 2008     December 31, 2007  
    Carrying             Carrying        
(In millions)   Amount     Exposure     Amount     Exposure  
 
GUARANTEES
                               
Securities and other lending indemnifications
  $ -       37,652       -       59,238  
Standby letters of credit
    126       32,604       124       29,295  
Liquidity agreements
    643       25,821       14       36,926  
Loans sold with recourse
    44       6,244       44       6,710  
Residual value guarantees
    -       1,372       -       1,220  
Written put options
    2,124       12,900       2,001       15,273  
 
Total guarantees
  $ 2,937       116,593       2,183       148,662  
 
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 recorded 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.
The decrease in securities and other lending indemnifications exposure reflected unfavorable market conditions. 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 decrease in written put option exposure relates primarily to liquidation of certain 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.

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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.
Our risk measures include the Value at Risk (VaR) methodology, which 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 $54 million at September 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 nine months of 2008 were $78 million, $48 million and $63 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 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,

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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. 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. However, due to the currently low absolute level of the federal funds rate, we modified the “low rate” scenario to measure a decline of only 50 basis points. Based on our October 2008 forward rate expectation, our various scenarios together measure net interest income volatility to a September 2009 federal funds rate ranging from 0.90 percent to 3.40 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 further 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 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.
Policy Period
Sensitivity Measurement
 
                         
            Implied     Percent  
    Fed Funds     Fed Funds     Net Interest  
    Rate at     Rate for     Income  
    September 30, 2008     September 2009     Sensitivity  
 
Market Forward Rate Scenarios (a)
    2.00 %     1.40       -  
 
High Rate Composite
            3.40       (1.40 )
 
Low Rate
            0.90       0.10  
 
(a) Assumes base federal funds rate mirrors market expectations.
On October 8, 2008, the target federal funds rate was lowered from 2.00 percent to 1.50 percent. The October 2008 forward rate expectations imply a high probability that the federal funds rate will decrease by an additional 25 basis points to 1.25 percent in late 2008, and will increase to 1.40 percent by the end of our policy period in September 2009. If forward rates

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prevail, the spread between the 10-year treasury note rate and the target federal funds rate would migrate from a positive 183 basis points of slope at September 30, 2008, to a positive slope of 265 basis points by September 2009. The long-term average spread is a positive 114 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. On October 29, 2008, the Federal Reserve reduced the target federal funds rate by 50 basis points.
In October 2008, our earnings simulation model indicated net interest income would be negatively affected by 1.4 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 50 basis points over a 12-month period while the longer-term rates also decline by 50 basis points relative to the “market forward rate” scenario. The model indicates net interest income would be positively affected by 0.1 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 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 interests that results in deconsolidation may trigger

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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, for calendar year-end companies.
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.
The exposure draft provides for an effective date of January 1, 2010, for calendar year-end companies. 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 In September 2008, the FASB issued two exposure drafts of proposed statements: Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140, and Amendments to FASB Interpretation No. 46(R).
The exposure draft on SFAS 140 removes the concept of a qualifying special purpose entity (QSPE) from SFAS 140, thereby eliminating the exception from consolidation that is accorded to QSPEs. This would have the effect of dramatically increasing the number of variable interest entities that companies must evaluate for consolidation under FASB Interpretation (FIN) 46R. These exposure drafts also include 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.
These exposure drafts provide for an effective date of January 1, 2010, for calendar year-end companies. We cannot predict with any certainty what the provisions of final standards will be or what changes may be required to the structure of or the accounting for transactions subject to SFAS 140 or FIN 46R.
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

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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. bank 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 begin a series of three one-year transitional periods for capital calculation no later than April 1, 2011. The final rule also requires that prior to beginning the three-year transitional period, we must complete a satisfactory parallel run period of no less than four consecutive calendar quarters during which we will be required to report regulatory capital confidentially under the new risk-based capital rule as well as the existing capital rule. As further required, on August 19, 2008, our board of directors approved an implementation plan, and we have established the necessary project management infrastructure, funding and management support to ensure we will comply with the final rule.

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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     Nine Months Ended  
    September 30,     September 30,  
(In millions)   2008     2007     2008     2007  
 
Net interest income (GAAP)
  $ 4,991       4,551       14,033       13,500  
Tax-equivalent adjustment
    48       33       155       108  
 
Net interest income (Tax-equivalent)
  $ 5,039       4,584       14,188       13,608  
 

46


 

Table 2
SELECTED STATISTICAL DATA
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(Dollars in millions, except per share data)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
PROFITABILITY
                                       
Return on average common stockholders’ equity
    (157.43 )%     (50.47 )     (3.81 )     0.28       9.19  
Return on average total stockholders’ equity
    (134.31 )     (43.86 )     (3.39 )     0.28       9.19  
Net interest margin (a)
    2.94       2.58       2.92       2.88       2.92  
Fee and other income as % of total revenue
    12.70       42.15       36.62       36.99       39.02  
Effective income tax rate
    10.04 %     18.06       26.02       122.05       27.33  
 
ASSET QUALITY
                                       
Allowance for loan losses as % of loans, net
    3.18 %     2.20       1.37       0.98       0.78  
Allowance for loan losses as % of nonperforming assets (b)
    102       90       78       84       115  
Allowance for credit losses as % of loans, net
    3.24       2.24       1.41       1.02       0.82  
Net charge-offs as % of average loans, net
    1.57       1.10       0.66       0.41       0.19  
Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale
    3.05 %     2.41       1.70       1.14       0.66  
 
CAPITAL ADEQUACY
                                       
Tier 1 capital ratio
    7.49 %     8.00       7.42       7.35       7.10  
Total capital ratio
    12.40       12.74       12.05       11.82       10.84  
Leverage
    5.70       6.57       6.18       6.09       6.10  
Tangible capital ratio
    4.00       4.68       4.31       4.29       4.19  
Tangible capital ratio (c)
    4.56 %     5.07       4.59       4.50       4.56  
 
OTHER DATA
                                       
FTE employees
    117,227       119,952       120,378       121,890       109,724  
Total financial centers/brokerage offices
    4,820       4,820       4,850       4,894       4,167  
ATMs
    5,303       5,277       5,308       5,139       5,123  
Actual common shares (In millions) (d)
    2,161       2,159       1,992       1,980       1,901  
Common stock price
  $ 3.50       15.53       27.00       38.03       50.15  
Market capitalization (d)
  $ 7,563       33,527       53,782       75,302       95,326  
 
(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.

47


 

Table 3
SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(In millions, except per share data)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
SUMMARIES OF INCOME
                                       
Interest income
  $ 9,400       8,646       10,179       10,910       10,831  
Tax-equivalent adjustment
    48       54       53       44       33  
 
Interest income (a)
    9,448       8,700       10,232       10,954       10,864  
Interest expense
    4,409       4,356       5,427       6,280       6,280  
 
Net interest income (a)
    5,039       4,344       4,805       4,674       4,584  
Provision for credit losses
    6,629       5,567       2,831       1,497       408  
 
Net interest income after provision for credit losses (a)
    (1,590 )     (1,223 )     1,974       3,177       4,176  
Securities gains (losses)
    (1,978 )     (808 )     (205 )     (320 )     (34 )
Fee and other income
    2,711       3,973       2,982       3,064       2,967  
Merger-related and restructuring expenses
    697       251       241       187       36  
Goodwill impairment
    18,786       6,060       -       -       -  
Other noninterest expense
    6,062       6,473       5,200       5,599       4,489  
Minority interest in income of consolidated subsidiaries
    (105 )     (18 )     155       107       189  
 
Income (loss) from continuing operations before income taxes (benefits) (a)
    (26,297 )     (10,824 )     (845 )     28       2,395  
Income taxes (benefits)
    (2,647 )     (1,963 )     (234 )     (209 )     656  
Tax-equivalent adjustment
    48       54       53       44       33  
 
Income (loss) from continuing operations
    (23,698 )     (8,915 )     (664 )     193       1,706  
Discontinued operations, net of income taxes
    -       -       -       (142 )     (88 )
 
Net income (loss)
    (23,698 )     (8,915 )     (664 )     51       1,618  
Dividends on preferred stock
    191       193       43       -       -  
 
Net income (loss) available to common stockholders
  $ (23,889 )     (9,108 )     (707 )     51       1,618  
 
PER COMMON SHARE DATA
                                       
Basic earnings
                                       
Income (loss) from continuing operations
  $ (11.18 )     (4.31 )     (0.36 )     0.10       0.91  
Net income (loss) available to common stockholders
    (11.18 )     (4.31 )     (0.36 )     0.03       0.86  
Diluted earnings (b)
                                       
Income (loss) from continuing operations
    (11.18 )     (4.31 )     (0.36 )     0.10       0.90  
Net income (loss) available to common stockholders
    (11.18 )     (4.31 )     (0.36 )     0.03       0.85  
Cash dividends
  $ 0.05       0.38       0.64       0.64       0.64  
Average common shares - Basic
    2,137       2,111       1,963       1,959       1,885  
Average common shares - Diluted
    2,143       2,119       1,977       1,983       1,910  
Average common stockholders’ equity
                                       
Quarter-to-date
  $ 60,370       72,579       74,697       73,599       69,857  
Year-to-date
    69,183       73,638       74,697       70,533       69,500  
Book value per common share (c)
    18.59       30.25       36.24       37.66       36.90  
Common stock price
                                       
High
    19.06       30.08       38.76       51.80       52.64  
Low
    1.84       15.53       25.60       38.03       44.94  
Period-end
  $ 3.50       15.53       27.00       38.03       50.15  
To earnings ratio (d)
    (0.22 ) X     (4.10 )     15.52       11.52       11.22  
To book value
    19 %     51       75       101       136  
BALANCE SHEET DATA
                                       
Assets
  $ 764,378       812,433       808,575       782,896       754,168  
Long-term debt
  $ 183,350       184,401       175,653       161,007       158,584  
 
(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.

48


 

Table 4
BUSINESS SEGMENTS (a)
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
GENERAL BANK COMBINED (b)
                                       
Net interest income (c)
  $ 3,763       3,697       3,462       3,404       3,466  
Fee and other income
    1,003       1,000       980       929       935  
Intersegment revenue
    50       57       55       58       59  
 
Total revenue (c)
    4,816       4,754       4,497       4,391       4,460  
Provision for credit losses
    1,340       922       572       320       207  
Noninterest expense
    2,127       2,061       2,048       2,037       1,898  
Income taxes
    482       637       674       732       849  
Tax-equivalent adjustment
    10       10       11       11       11  
 
Segment earnings
  $ 857       1,124       1,192       1,291       1,495  
 
Economic profit
  $ 699       928       997       1,043       1,190  
Risk adjusted return on capital
    25.40 %     33.26       42.55       48.00       54.30  
Economic capital, average
  $ 19,302       16,777       12,705       11,188       10,904  
Cash overhead efficiency ratio (c)
    44.16 %     43.35       45.55       46.40       42.54  
Lending commitments
  $ 128,178       133,201       132,805       133,733       132,779  
Average loans, net
    318,573       317,969       312,084       303,903       295,188  
Average core deposits
  $ 292,653       290,313       297,124       296,159       290,099  
FTE employees
    53,073       54,315       54,739       55,469       56,427  
 
COMMERCIAL
                                       
Net interest income (c)
  $ 1,025       1,030       954       932       903  
Fee and other income
    138       134       130       116       113  
Intersegment revenue
    52       46       43       43       44  
 
Total revenue (c)
    1,215       1,210       1,127       1,091       1,060  
Provision for credit losses
    235       180       174       178       121  
Noninterest expense
    408       396       402       392       347  
Income taxes
    199       222       189       179       205  
Tax-equivalent adjustment
    10       10       11       11       11  
 
Segment earnings
  $ 363       402       351       331       376  
 
Economic profit
  $ 226       234       218       239       255  
Risk adjusted return on capital
    27.61 %     28.91       28.51       32.92       35.11  
Economic capital, average
  $ 5,406       5,253       5,018       4,333       4,197  
Cash overhead efficiency ratio (c)
    33.61 %     32.71       35.65       35.87       32.76  
Average loans, net
  $ 89,034       88,225       84,829       82,084       80,146  
Average core deposits
  $ 40,882       45,483       47,904       46,499       42,832  
 
RETAIL AND SMALL BUSINESS
                                       
Net interest income (c)
  $ 2,738       2,667       2,508       2,472       2,563  
Fee and other income
    865       866       850       813       822  
Intersegment revenue
    (2 )     11       12       15       15  
 
Total revenue (c)
    3,601       3,544       3,370       3,300       3,400  
Provision for credit losses
    1,105       742       398       142       86  
Noninterest expense
    1,719       1,665       1,646       1,645       1,551  
Income taxes
    283       415       485       553       644  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings
  $ 494       722       841       960       1,119  
 
Economic profit
  $ 473       694       779       804       935  
Risk adjusted return on capital
    24.54 %     35.24       51.71       57.53       66.31  
Economic capital, average
  $ 13,896       11,524       7,687       6,855       6,707  
Cash overhead efficiency ratio (c)
    47.71 %     46.99       48.86       49.88       45.59  
Average loans, net
  $ 229,539       229,744       227,255       221,819       215,042  
Average core deposits
  $ 251,771       244,830       249,220       249,660       247,267  
 
(a) Certain amounts presented in this Table 5 in periods prior to the third quarter of 2008 have been reclassified to conform to the presentation in the third 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)

49


 

Table 4
BUSINESS SEGMENTS
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
WEALTH MANAGEMENT
                                       
Net interest income (a)
  $ 194       201       180       181       184  
Fee and other income
    192       208       210       215       184  
Intersegment revenue
    2       3       5       3       4  
 
Total revenue (a)
    388       412       395       399       372  
Provision for credit losses
    8       5       2       7       6  
Noninterest expense
    246       252       246       249       240  
Income taxes
    50       57       53       53       46  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings
  $ 84       98       94       90       80  
 
Economic profit
  $ 64       74       69       72       61  
Risk adjusted return on capital
    46.00 %     52.48       50.93       58.24       50.69  
Economic capital, average
  $ 729       720       690       609       609  
Cash overhead efficiency ratio (a)
    63.55 %     61.24       62.21       62.55       64.71  
Lending commitments
  $ 6,376       6,915       7,007       7,011       7,007  
Average loans, net
    22,765       22,557       21,794       21,181       20,996  
Average core deposits
  $ 14,690       17,609       17,920       17,145       17,180  
FTE employees
    4,516       4,665       4,650       4,712       4,547  
 
(a) Tax-equivalent.
(Continued)

50


 

Table 4
BUSINESS SEGMENTS
 
                                         
    2008   2007
    Third   Second   First   Fourth   Third
(Dollars in millions)   Quarter   Quarter   Quarter   Quarter   Quarter
 
CORPORATE AND INVESTMENT BANK COMBINED (a)
                                       
Net interest income (b)
  $ 1,043       1,132       1,036       988       838  
Fee and other income
    (416 )     656       (158 )     (554 )     176  
Intersegment revenue
    (57 )     (52 )     (50 )     (50 )     (52 )
 
Total revenue (b)
    570       1,736       828       384       962  
Provision for credit losses
    525       438       197       112       1  
Noninterest expense
    1,154       963       750       952       626  
Income taxes (benefits)
    (423 )     104       (65 )     (268)       114  
Tax-equivalent adjustment
    17       19       21       19       9  
 
Segment earnings (loss)
  $ (703 )     212       (75 )     (431 )     212  
 
Economic profit (loss)
  $ (899 )   8       (410 )     (744 )     (113 )  
Risk adjusted return on capital
    (13.26 )%     11.22       (1.45 )     (15.21 )     6.40  
Economic capital, average
  $ 14,732       13,821       13,237       11,262       9,791  
Cash overhead efficiency ratio (b)
    202.09 %     55.50       90.58       247.26       65.12  
Lending commitments
  $ 99,489       113,559       114,114       118,734       119,791  
Average loans, net
    109,323       106,680       101,081       91,695       82,979  
Average core deposits
  $ 27,497       31,686       33,651       36,235       37,208  
FTE employees
    5,718       6,361       6,302       6,555       6,695  
 
CORPORATE LENDING
                                       
Net interest income (b)
  $ 415       414       434       417       413  
Fee and other income
    312       70       155       149       136  
Intersegment revenue
    10       10       13       18       16  
 
Total revenue (b)
    737       494       602       584       565  
Provision for credit losses
    387       350       132       103       2  
Noninterest expense
    141       128       141       137       139  
Income taxes
    75       7       120       126       153  
Tax-equivalent adjustment
    -       -       -       -       1  
 
Segment earnings
  $ 134       9       209       218       270  
 
Economic profit (loss)
  $ 109       (18 )     47       65       82  
Risk adjusted return on capital
    17.02 %     9.95       13.83       15.34       17.10  
Economic capital, average
  $ 7,175       6,763       6,653       5,943       5,289  
Cash overhead efficiency ratio (b)
    19.07 %     25.99       23.47       23.45       24.56  
Average loans, net
  $ 65,659       65,459       64,038       62,339       58,528  
Average core deposits
  $ 3,891       4,455       4,576       4,632       5,120  
 
(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)

51


 

Table 4
BUSINESS SEGMENTS
 
                                         
    2008     2007  
    Third     Second     First     Fourth     Third  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
TREASURY AND INTERNATIONAL TRADE FINANCE
                                       
Net interest income (b)
  $ 123       127       117       110       104  
Fee and other income
    235       224       217       217       218  
Intersegment revenue
    (60 )     (52 )     (47 )     (47 )     (46 )
 
Total revenue (b)
    298       299       287       280       276  
Provision for credit losses
    1       -       (2 )     -       (1 )
Noninterest expense
    172       172       178       173       170  
Income taxes
    46       46       41       39       39  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings
  $ 79       81       70       68       68  
 
Economic profit
  $ 69       69       57       56       58  
Risk adjusted return on capital
    90.88 %     87.60       74.59       78.25       82.99  
Economic capital, average
  $ 340       363       361       334       318  
Cash overhead efficiency ratio (b)
    57.83 %     57.44       62.20       62.02       61.24  
Average loans, net
  $ 14,701       13,606       13,461       12,309       10,811  
Average core deposits
  $ 14,045       18,111       19,619       20,844       21,240  
 
INVESTMENT BANKING
                                       
Net interest income (b)
  $ 505       591       485       461       321  
Fee and other income
    (963 )     362       (530 )     (920 )     (178 )
Intersegment revenue
    (7 )     (10 )     (16 )     (21 )     (22 )
 
Total revenue (b)
    (465 )     943       (61 )     (480 )     121  
Provision for credit losses
    137       88       67       9       -  
Noninterest expense
    841       663       431       642       317  
Income taxes (benefits)
    (544 )     51       (226 )     (433 )     (78 )
Tax-equivalent adjustment
    17       19       21       19       8  
 
Segment earnings (loss)
  $ (916 )     122       (354 )     (717 )     (126 )
 
Economic profit (loss)
  $ (1,077 )     (43 )     (514 )     (865 )     (253 )
Risk adjusted return on capital
    (48.27 )%     8.36       (22.20 )     (57.87 )     (12.95 )
Economic capital, average
  $ 7,217       6,695       6,223       4,985       4,184  
Cash overhead efficiency ratio (b)
    (180.56 )%     70.33       (706.35 )     (133.99 )     265.05  
Average loans, net
  $ 28,963       27,615       23,582       17,047       13,640  
Average core deposits
  $ 9,561       9,120       9,456       10,759       10,848  
 
(Continued)

52


 

Table 4
BUSINESS SEGMENTS
 
                                         
    2008   2007
    Third   Second   First   Fourth   Third
(Dollars in millions)   Quarter   Quarter   Quarter   Quarter   Quarter
 
CAPITAL MANAGEMENT COMBINED (a)
                                       
Net interest income (b)
  $ 388       308       281       320       268  
Fee and other income
    968       1,995       2,192       2,210       1,444  
Intersegment revenue
    4       (8 )     (10 )     (11 )     (8 )
 
Total revenue (b)
    1,360       2,295       2,463       2,519       1,704  
Provision for credit losses
    1       -       -       -       -  
Noninterest expense
    2,145       2,328       1,855       1,937       1,241  
Income taxes (benefits)
    (287 )     (13 )     221       212       169  
Tax-equivalent adjustment
    -       1       1       1       -  
 
Segment earnings (loss)
  $ (499 )     (21 )     386       369       294  
 
Economic profit (loss)
  $ (555 )     (79 )     327       310       258  
Risk adjusted return on capital
    (97.63) %     (3.95 )     72.25       69.09       88.96  
Economic capital, average
  $ 2,033       2,118       2,145       2,120       1,310  
Cash overhead efficiency ratio (b)
    157.72 %     101.39       75.34       76.91       72.82  
Lending commitments
  $ 1,657       1,544       1,348       1,281       1,164  
Average loans, net
    3,223       2,878       2,562       2,295       2,142  
Average core deposits
  $ 54,734       48,647       43,084       38,019       31,489  
FTE employees
    29,301       29,658       29,824       29,880       17,908  
Assets under management
  $ 209,097       245,940       258,691       274,697       285,422  
 
ASSET MANAGEMENT
                                       
Net interest income (b)
  $ 17       12       14       7       6  
Fee and other income
    (572 )     165       295       279       244  
Intersegment revenue
    -       (1 )     (1 )     -       (1 )
 
Total revenue (b)
    (555 )     176       308       286       249  
Provision for credit losses
    -       -       -       -       -  
Noninterest expense
    224       209       224       217       206  
Income taxes
    (284 )     (13 )     31       26       15  
Tax-equivalent adjustment
    -       -       -       -       -  
 
Segment earnings (loss)
  $ (495 )     (20 )     53       43       28  
 
Economic profit (loss)
  $ (501 )     (26 )     47       37       22  
Risk adjusted return on capital
    (898.80) %     (37.28 )     99.16       82.68       56.73  
Economic capital, average
  $ 219       217       216       205       194  
Cash overhead efficiency ratio (b)
    (40.26) %     117.86       72.81       76.33       82.50  
Average loans, net
  $ 29       17       41       22       36  
Average core deposits
  $ 309       304       453       405       418  
 
(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)

53


 

Table 4
BUSINESS SEGMENTS
 
                                         
    2008   2007
    Third   Second   First   Fourth   Third
(Dollars in millions)   Quarter   Quarter   Quarter   Quarter   Quarter
 
RETAIL BROKERAGE SERVICES
                                       
Net interest income (b)
  $ 370       296       267       313       262  
Fee and other income
    1,542       1,832       1,899       1,933       1,202  
Intersegment revenue
    4       (7 )     (9 )     (11 )     (7 )
 
Total revenue (b)
    1,916       2,121       2,157       2,235       1,457  
Provision for credit losses
    1       -       -       -       -  
Noninterest expense
    1,924       2,122       1,634       1,724       1,038  
Income taxes
    (4 )     -       190       185       154  
Tax-equivalent adjustment
    -       1       1       1       -  
 
Segment earnings (loss)
  $ (5 )     (2 )     332       325       265  
 
Economic profit (loss)
  $ (55 )     (54 )     279       272       235  
Risk adjusted return on capital
    (0.91 )%     (0.33 )     69.04       67.36       94.13  
Economic capital, average
  $ 1,814       1,901       1,929       1,915       1,116  
Cash overhead efficiency ratio (b)
    100.31 %     100.08       75.79       77.09       71.33  
Average loans, net
  $ 3,194       2,861       2,521       2,273       2,106  
Average core deposits
  $ 54,425       48,343       42,631       37,614       31,071  
 
OTHER
                                       
Net interest income (b)
  $ 1       -       -       -       -  
Fee and other income
    (2 )     (2 )     (2 )     (2 )     (2 )
Intersegment revenue
    -       -       -       -       -  
 
Total revenue (b)
    (1 )     (2 )     (2 )     (2 )     (2 )
Provision for credit losses
    -       -       -       -       -  
Noninterest expense
    (3 )     (3 )     (3 )     (4 )     (3 )
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)

54


 

Table 4
BUSINESS SEGMENTS
 
                                         
    2008   2007
    Third     Second     First     Fourth     Third  
(Dollars in millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
PARENT
                                       
Net interest income (a)
  $ (349 )     (994 )     (154 )     (219 )     (172 )
Fee and other income
    (1,014 )     (694 )     (447 )     (56 )     194  
Intersegment revenue
    1       -       -       -       (3 )
 
Total revenue (a)
    (1,362 )     (1,688 )     (601 )     (275 )     19  
Provision for credit losses
    4,755       4,202       2,060       1,058       194  
Noninterest expense
    390       869       301       424       484  
Minority interest
    (71 )     26       198       118       189  
Income tax benefits
    (2,149 )     (2,666 )     (1,042 )     (870 )     (508 )
Tax-equivalent adjustment
    21       24       20       13       13  
Dividends on preferred stock
    191       193       43       -       -  
 
Segment loss
  $ (4,499 )     (4,336 )     (2,181 )     (1,018 )     (353 )
 
Economic loss
  $ (1,414 )     (1,635 )     (846 )     (480 )     (319 )
Risk adjusted return on capital
    (1,259.81 )%     (432.84 )     (169.71 )     (83.56 )     (41.54 )
Economic capital, average
  $ 443       1,482       1,881       2,020       2,403  
Cash overhead efficiency ratio (a)
    (21.45 )%     (45.78 )     (32.99 )     (114.15 )     1,976.53  
Lending commitments
  $ 483       543       538       599       529  
Average loans, net
    24,601       26,650       28,415       30,731       28,496  
Average core deposits
  $ 2,735       2,415       2,734       2,485       3,033  
FTE employees
    24,619       24,953       24,863       25,274       24,147  
 
(a) Tax-equivalent.
(Continued)

55


 

Table 5
BUSINESS SEGMENTS
 
                                                         
    Three Months Ended September 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)
  $ 3,763       194       1,043       388       (349 )     (48 )     4,991  
Fee and other income
    1,003       192       (416 )     968       (1,014 )     -       733  
Intersegment revenue
    50       2       (57 )     4       1       -       -  
 
Total revenue (a)
    4,816       388       570       1,360       (1,362 )     (48 )     5,724  
Provision for credit losses
    1,340       8       525       1       4,755       -       6,629  
Noninterest expense
    2,127       246       1,154       2,145       390       19,483       25,545  
Minority interest
    -       -       -       -       (71 )     (34 )     (105 )
Income taxes (benefits)
    482       50       (423 )     (287 )     (2,149 )     (320 )     (2,647 )
Tax-equivalent adjustment
    10       -       17       -       21       (48 )     -  
 
Net income (loss)
    857       84       (703 )     (499 )     (4,308 )     (19,129 )     (23,698 )
Dividends on preferred stock
    -       -       -       -       191       -       191  
 
Net income (loss) available to common stockholders
  $ 857       84       (703 )     (499 )     (4,499 )     (19,129 )     (23,889 )
 
Economic profit (loss)
  $ 699       64       (899 )     (555 )     (1,414 )     -       (2,105 )
Risk adjusted return on capital
    25.40 %     46.00       (13.26 )     (97.63 )     (1,259.81 )     -       (11.49 )
Economic capital, average
  $ 19,302       729       14,732       2,033       443       -       37,239  
Cash overhead efficiency ratio (a)
    44.16 %     63.55       202.09       157.72       (21.45 )     -       103.34  
Lending commitments
  $ 128,178       6,376       99,489       1,657       483       -       236,183  
Average loans, net
    318,573       22,765       109,323       3,223       24,601       -       478,485  
Average core deposits
  $ 292,653       14,690       27,497       54,734       2,735       -       392,309  
FTE employees
    53,073       4,516       5,718       29,301       24,619       -       117,227  
 
                                                         
    Three Months Ended September 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)
  $ 3,466       184       838       268       (172 )     (33 )     4,551  
Fee and other income
    935       184       176       1,444       194       -       2,933  
Intersegment revenue
    59       4       (52 )     (8 )     (3 )     -       -  
 
Total revenue (a)
    4,460       372       962       1,704       19       (33 )     7,484  
Provision for credit losses
    207       6       1       -       194       -       408  
Noninterest expense
    1,898       240       626       1,241       484       36       4,525  
Minority interest
    -       -       -       -       189       -       189  
Income taxes (benefits)
    849       46       114       169       (508 )     (14 )     656  
Tax-equivalent adjustment
    11       -       9       -       13       (33 )     -  
 
Net income (loss) from continuing operations
    1,495       80       212       294       (353 )     (22 )     1,706  
Discontinued operations, net of income taxes
    -       -       -       -       (88 )     -       (88 )
 
Net income (loss)
  $ 1,495       80       212       294       (441 )     (22 )     1,618  
 
Economic profit (loss)
  $ 1,190       61       (113 )     258       (319 )     -       1,077  
Risk adjusted return on capital
    54.30 %     50.69       6.40       88.96       (41.54 )     -       28.07  
Economic capital, average
  $ 10,904       609       9,791       1,310       2,403       -       25,017  
Cash overhead efficiency ratio (a)
    42.54 %     64.71       65.12       72.82       1,976.53       -       58.51  
Lending commitments
  $ 132,779       7,007       119,791       1,164       529       -       261,270  
Average loans, net
    295,188       20,996       82,979       2,142       28,496       -       429,801  
Average core deposits
  $ 290,099       17,180       37,208       31,489       3,033       -       379,009  
FTE employees
    56,427       4,547       6,695       17,908       24,147       -       109,724  
 
(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)

56


 

Table 4
BUSINESS SEGMENTS
 
                 
    Nine Months Ended
September 30,
 
 
(Dollars in millions)   2008     2007  
 
GENERAL BANK COMBINED (a)
               
Net interest income (b)
  $ 10,922       10,240  
Fee and other income
    2,983       2,716  
Intersegment revenue
    162       161  
 
Total revenue (b)
    14,067       13,117  
Provision for credit losses
    2,834       508  
Noninterest expense
    6,236       5,685  
Income taxes
    1,793       2,495  
Tax-equivalent adjustment
    31       32  
 
Segment earnings
  $ 3,173       4,397  
 
Economic profit
  $ 2,624       3,442  
Risk adjusted return on capital
    32.54 %     53.61  
Economic capital, average
  $ 16,273       10,800  
Cash overhead efficiency ratio (b)
    44.33 %     43.34  
Lending commitments
  $ 128,178       132,779  
Average loans, net
    316,217       292,003  
Average core deposits
  $ 293,361       288,209  
FTE employees
    53,073       56,427  
 
COMMERCIAL
               
Net interest income (b)
  $ 3,009       2,605  
Fee and other income
    402       332  
Intersegment revenue
    141       122  
 
Total revenue (b)
    3,552       3,059  
Provision for credit losses
    589       314  
Noninterest expense
    1,206       1,061  
Income taxes
    610       583  
Tax-equivalent adjustment
    31       32  
 
Segment earnings
  $ 1,116       1,069  
 
Economic profit
  $ 678       697  
Risk adjusted return on capital
    28.33 %     33.81  
Economic capital, average
  $ 5,226       4,084  
Cash overhead efficiency ratio (b)
    33.95 %     34.70  
Average loans, net
  $ 87,369       78,086  
Average core deposits
  $ 44,742       43,187  
 
RETAIL AND SMALL BUSINESS
               
Net interest income (b)
  $ 7,913       7,635  
Fee and other income
    2,581       2,384  
Intersegment revenue
    21       39  
 
Total revenue (b)
    10,515       10,058  
Provision for credit losses
    2,245       194  
Noninterest expense
    5,030       4,624  
Income taxes
    1,183       1,912  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 2,057       3,328  
 
Economic profit
  $ 1,946       2,745  
Risk adjusted return on capital
    34.53 %     65.65  
Economic capital, average
  $ 11,047       6,716  
Cash overhead efficiency ratio (b)
    47.84 %     45.96  
Average loans, net
  $ 228,848       213,917  
Average core deposits
  $ 248,619       245,022  
 
(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)

57


 

Table 4
BUSINESS SEGMENTS
 
                 
    Nine Months Ended
September 30,
 
 
(Dollars in millions)   2008     2007  
 
WEALTH MANAGEMENT
               
Net interest income (a)
  $ 575       542  
Fee and other income
    610       582  
Intersegment revenue
    10       10  
 
Total revenue (a)
    1,195       1,134  
Provision for credit losses
    15       9  
Noninterest expense
    744       730  
Income taxes
    160       144  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 276       251  
 
Economic profit
  $ 207       192  
Risk adjusted return on capital
    49.76 %     53.68  
Economic capital, average
  $ 713       601  
Cash overhead efficiency ratio (a)
    62.31 %     64.40  
Lending commitments
  $ 6,376       7,007  
Average loans, net
    22,374       20,517  
Average core deposits
  $ 16,732       17,300  
FTE employees
    4,516       4,547  
 
(a) Tax-equivalent.
(Continued)

58


 

Table 4
BUSINESS SEGMENTS
 
                 
    Nine Months Ended
September 30,
 
 
(Dollars in millions)   2008     2007  
 
CORPORATE AND INVESTMENT BANK COMBINED (a)
               
Net interest income (b)
  $ 3,211       2,328  
Fee and other income
    82       2,806  
Intersegment revenue
    (159 )     (145 )
 
Total revenue (b)
    3,134       4,989  
Provision for credit losses
    1,160       5  
Noninterest expense
    2,867       2,556  
Income taxes
    (384 )     857  
Tax-equivalent adjustment
    57       30  
 
Segment earnings
  $ (566 )     1,541  
 
Economic profit (loss)
  $ (1,301 )     663  
Risk adjusted return on capital
    (1.47 )%     20.85  
Economic capital, average
  $ 13,933       8,995  
Cash overhead efficiency ratio (b)
    91.45 %     51.24  
Lending commitments
  $ 99,489       119,791  
Average loans, net
    105,708       77,736  
Average core deposits
  $ 30,932       36,077  
FTE employees
    5,718       6,695  
 
CORPORATE LENDING
               
Net interest income (b)
  $ 1,263       1,218  
Fee and other income
    537       403  
Intersegment revenue
    33       53  
 
Total revenue (b)
    1,833       1,674  
Provision for credit losses
    869       6  
Noninterest expense
    410       439  
Income taxes
    202       447  
Tax-equivalent adjustment
    -       1  
 
Segment earnings
  $ 352       781  
 
Economic profit
  $ 138       268  
Risk adjusted return on capital
    13.68 %     18.29  
Economic capital, average
  $ 6,865       4,911  
Cash overhead efficiency ratio (b)
    22.37 %     26.23  
Average loans, net
  $ 65,054       56,575  
Average core deposits
  $ 4,306       5,104  
 
(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)

59


 

Table 4
BUSINESS SEGMENTS
 
                 
    Nine Months Ended
September 30,
 
 
(Dollars in millions)   2008     2007  
 
TREASURY AND INTERNATIONAL TRADE FINANCE
               
Net interest income (b)
  $ 367       295  
Fee and other income
    676       637  
Intersegment revenue
    (159 )     (140 )
 
Total revenue (b)
    884       792  
Provision for credit losses
    (1 )     (1 )
Noninterest expense
    522       514  
Income taxes
    133       102  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 230       177  
 
Economic profit
  $ 195       147  
Risk adjusted return on capital
    84.26 %     73.81  
Economic capital, average
  $ 355       313  
Cash overhead efficiency ratio (b)
    59.11 %     64.83  
Average loans, net
  $ 13,925       9,549  
Average core deposits
  $ 17,246       20,763  
 
INVESTMENT BANKING
               
Net interest income (b)
  $ 1,581       815  
Fee and other income
    (1,131 )     1,766  
Intersegment revenue
    (33 )     (58 )
 
Total revenue (b)
    417       2,523  
Provision for credit losses
    292       -  
Noninterest expense
    1,935       1,603  
Income taxes
    (719 )     308  
Tax-equivalent adjustment
    57       29  
 
Segment earnings (loss)
  $ (1,148 )     583  
 
Economic profit (loss)
  $ (1,634 )     248  
Risk adjusted return on capital
    (21.49 )%     19.79  
Economic capital, average
  $ 6,713       3,771  
Cash overhead efficiency ratio (b)
    463.65 %     63.58  
Average loans, net
  $ 26,729       11,612  
Average core deposits
  $ 9,380       10,210  
 
(Continued)

60


 

Table 4
BUSINESS SEGMENTS
 
                 
    Nine Months Ended
September 30,
 
 
(Dollars in millions)   2008     2007  
 
CAPITAL MANAGEMENT COMBINED (a)
               
Net interest income (b)
  $ 977       787  
Fee and other income
    5,155       4,457  
Intersegment revenue
    (14 )     (27 )
 
Total revenue (b)
    6,118       5,217  
Provision for credit losses
    1       -  
Noninterest expense
    6,328       3,772  
Income taxes
    (79 )     527  
Tax-equivalent adjustment
    2       -  
 
Segment earnings
  $ (134 )     918  
 
Economic profit
  $ (307 )     808  
Risk adjusted return on capital
    (8.56 )%     92.17  
Economic capital, average
  $ 2,098       1,331  
Cash overhead efficiency ratio (b)
    103.43 %     72.29  
Lending commitments
  $ 1,657       1,164  
Average loans, net
    2,889       1,789  
Average core deposits
  $ 48,844       31,463  
FTE employees
    29,301       17,908  
Assets under management
  $ 209,097       285,422  
 
ASSET MANAGEMENT
               
Net interest income (b)
  $ 43       14  
Fee and other income
    (112 )     828  
Intersegment revenue
    (2 )     (1 )
 
Total revenue (b)
    (71 )     841  
Provision for credit losses
    -       -  
Noninterest expense
    657       648  
Income taxes
    (266 )     70  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ (462 )      123  
 
Economic profit
  $ (480 )      106  
Risk adjusted return on capital
    (284.28 )%     80.13  
Economic capital, average
  $ 217       205  
Cash overhead efficiency ratio (b)
    (923.80 )%     76.99  
Average loans, net
  $ 29       29  
Average core deposits
  $ 355       354  
 
(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)

61


 

Table 4
BUSINESS SEGMENTS
 
                 
    Nine Months Ended
September 30,
 
 
(Dollars in millions)   2008     2007  
 
RETAIL BROKERAGE SERVICES
               
Net interest income (b)
  $ 933       772  
Fee and other income
    5,273       3,636  
Intersegment revenue
    (12 )     (26 )
 
Total revenue (b)
    6,194       4,382  
Provision for credit losses
    1       -  
Noninterest expense
    5,680       3,136  
Income taxes
    186       455  
Tax-equivalent adjustment
    2       -  
 
Segment earnings
  $ 325       791  
 
Economic profit
  $ 170       698  
Risk adjusted return on capital
    23.11 %     93.88  
Economic capital, average
  $ 1,881       1,126  
Cash overhead efficiency ratio (b)
    91.70 %     71.58  
Average loans, net
  $ 2,860       1,760  
Average core deposits
  $ 48,489       31,109  
 
OTHER
               
Net interest income (b)
  $ 1       1  
Fee and other income
    (6 )     (7 )
Intersegment revenue
    -       -  
 
Total revenue (b)
    (5 )     (6 )
Provision for credit losses
    -       -  
Noninterest expense
    (9 )     (12 )
Income taxes
    1       2  
Tax-equivalent adjustment
    -       -  
 
Segment earnings
  $ 3       4  
 
Economic profit
  $ 3       4  
Risk adjusted return on capital
    - %     -  
Economic capital, average
  $ -       -  
Cash overhead efficiency ratio (b)
    - %     -  
Average loans, net
  $ -       -  
Average core deposits
  $ -       -  
 
(Continued)

62


 

Table 4
BUSINESS SEGMENTS
 
                 
    Nine Months Ended
September 30,
 
(Dollars in millions)   2008     2007  
 
PARENT
               
Net interest income (a)
  $ (1,497 )     (289 )
Fee and other income
    (2,155 )     346  
Intersegment revenue
    1       1  
 
Total revenue (a)
    (3,651 )     58  
Provision for credit losses
    11,017       242  
Noninterest expense
    1,560       1,215  
Minority interest
    153       464  
Income tax benefits
    (5,857 )     (1,199 )
Tax-equivalent adjustment
    65       46  
Dividends on preferred stock
    427       -  
 
Segment loss
  $ (11,016 )     (710 )
 
Economic loss
  $ (3,895 )     (629 )
Risk adjusted return on capital
    (400.09 )%     (22.61 )
Economic capital, average
  $ 1,265       2,499  
Cash overhead efficiency ratio (a)
    (34.59 )%     1,576.74  
Lending commitments
  $ 483       529  
Average loans, net
    26,548       30,115  
Average core deposits
  $ 2,627       2,578  
FTE employees
    24,619       24,147  
 
(a) Tax-equivalent.    
(Continued)

63


 

Table 4
BUSINESS SEGMENTS

 
                                                         
    Nine Months Ended September 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)
  $ 10,922       575       3,211       977       (1,497 )     (155 )     14,033  
Fee and other income
    2,983       610       82       5,155       (2,155 )     -       6,675  
Intersegment revenue
    162       10       (159 )     (14 )     1       -       -  
 
Total revenue (a)
    14,067       1,195       3,134       6,118       (3,651 )     (155 )     20,708  
Provision for credit losses
    2,834       15       1,160       1       11,017       -       15,027  
Noninterest expense
    6,236       744       2,867       6,328       1,560       26,035       43,770  
Minority interest
    -       -       -       -       153       (121 )     32  
Income taxes (benefits)
    1,793       160       (384 )     (79 )     (5,857 )     (477 )     (4,844 )
Tax-equivalent adjustment
    31       -       57       2       65       (155 )     -  
 
Net income (loss)
    3,173       276       (566 )     (134 )     (10,589 )     (25,437 )     (33,277 )
Dividends on preferred stock
    -       -       -       -       427       -       427  
 
Net income (loss) available to common stockholders
  $ 3,173       276       (566 )     (134 )     (11,016 )     (25,437 )     (33,704 )
 
Economic profit (loss)
  $ 2,624       207       (1,301 )     (307 )     (3,895 )     -       (2,672 )
Risk adjusted return on capital
    32.54 %     49.76       (1.47 )     (8.56 )     (400.09 )     -       0.59  
Economic capital, average
  $ 16,273       713       13,933       2,098       1,265       -       34,282  
Cash overhead efficiency ratio (a)
    44.33 %     62.31       91.45       103.43       (34.59 )     -       83.58  
Lending commitments
  $ 128,178       6,376       99,489       1,657       483       -       236,183  
Average loans, net
    316,217       22,374       105,708       2,889       26,548       -       473,736  
Average core deposits
  $ 293,361       16,732       30,932       48,844       2,627       -       392,496  
FTE employees
    53,073       4,516       5,718       29,301       24,619       -       117,227  
 
                                                         
    Nine Months Ended September 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)
  $ 10,240       542       2,328       787       (289 )     (108 )     13,500  
Fee and other income
    2,716       582       2,806       4,457       346       -       10,907  
Intersegment revenue
    161       10       (145 )     (27 )     1       -       -  
 
Total revenue (a)
    13,117       1,134       4,989       5,217       58       (108 )     24,407  
Provision for credit losses
    508       9       5       -       242       -       764  
Noninterest expense
    5,685       730       2,556       3,772       1,215       78       14,036  
Minority interest
    -       -       -       -       464       -       464  
Income taxes (benefits)
    2,495       144       857       527       (1,199 )     (30 )     2,794  
Tax-equivalent adjustment
    32       -       30       -       46       (108 )     -  
 
Net income (loss) from continuing operations
    4,397       251       1,541       918       (710 )     (48 )     6,349  
Discontinued operations, net of income taxes
    -       -       -       -       (88 )     -       (88 )
 
Net income (loss)
  $ 4,397       251       1,541       918       (798 )     (48 )     6,261  
 
Economic profit (loss)
  $ 3,442       192       663       808       (629 )     -       4,476  
Risk adjusted return on capital
    53.61 %     53.68       20.85       92.17       (22.61 )     -       35.70  
Economic capital, average
  $ 10,800       601       8,995       1,331       2,499       -       24,226  
Cash overhead efficiency ratio (a)
    43.34 %     64.40       51.24       72.29       1,576.74       -       55.66  
Lending commitments
  $ 132,779       7,007       119,791       1,164       529       -       261,270  
Average loans, net
    292,003       20,517       77,736       1,789       30,115       -       422,160  
Average core deposits
  $ 288,209       17,300       36,077       31,463       2,578       -       375,627  
FTE employees
    56,427       4,547       6,695       17,908       24,147       -       109,724  
 
(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.

64


 

Table 5
NET TRADING REVENUE — INVESTMENT BANKING (a)

 
                                         
    2008     2007  
 
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
Net interest income (Tax-equivalent)
  $ 64       122       78       51       34  
Trading account profits (losses)
    (633 )     (365 )     (245 )     (562 )     (381 )
Other fee income
    123       187       187       181       140  
 
Total net trading revenue (Tax-equivalent)
  $ (446 )     (56 )     20       (330 )     (207 )
 
(a) Certain amounts presented in periods prior to the third quarter of 2008 have been reclassified to conform to the presentation in the third quarter of 2008.

65


 

Table 6
SELECTED RATIOS

 
                                                         
    Nine Months Ended
September 30,
    2008     2007  
 
                    Third     Second     First     Fourth     Third  
    2008     2007     Quarter     Quarter     Quarter     Quarter     Quarter  
 
PERFORMANCE RATIOS (a)
                                                       
Assets to stockholders’ equity
    10.29 X     10.19       11.28       9.74       9.95       10.32       10.44  
Return on assets
    (5.62 )%     1.18       (11.91 )     (4.50 )     (0.34 )     0.03       0.88  
Return on common stockholders’ equity
    (65.08 )     12.04       (157.43 )     (50.47 )     (3.81 )     0.28       9.19  
Return on total stockholders’ equity
    (57.83 )%     12.04       (134.31 )     (43.86 )     (3.39 )     0.28       9.19  
 
DIVIDEND PAYOUT RATIOS
                                                       
Common shares
    (6.54 )%     53.99       (0.45 )     (8.70 )     (177.78 )     2,133.33       75.29  
Preferred and common shares
    (7.87 )%     53.99       (1.26 )     (11.24 )     (198.30 )     2,133.33       75.29  
 
(a) Based on average balances and net income.

66


 

Table 7
LOANS — ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS

 
                                         
    2008     2007  
                               
    Third     Second     First     Fourth     Third  
(In millions)   Quarter     Quarter     Quarter     Quarter     Quarter  
 
ON-BALANCE SHEET LOAN PORTFOLIO COMMERCIAL
                                       
Commercial, financial and agricultural
  $ 128,411       122,628       119,193       112,509       109,269  
Real estate — construction and other
    17,824       18,629       18,597       18,543       18,167  
Real estate — mortgage
    27,970       27,191       26,370       23,846       21,514  
Lease financing
    23,725       24,605       23,637       23,913       23,966  
Foreign
    32,344       35,168       33,616       29,540       26,471  
 
Total commercial
    230,274       228,221       221,413       208,351       199,387  
 
CONSUMER
                                       
Real estate secured (a)
    224,842       230,520       230,197       227,719       225,355  
Student loans
    10,335       9,945       9,324       8,149       7,742  
Installment loans
    26,433       29,261       27,437       25,635       24,763  
 
Total consumer
    261,610       269,726       266,958       261,503       257,860  
 
Total loans
    491,884       497,947       488,371       469,854       457,247  
Unearned income
    (9,511 )     (9,749 )     (7,889 )     (7,900 )     (8,041 )
 
Loans, net (On-balance sheet)
  $ 482,373       488,198       480,482       461,954       449,206  
 
 
                                       
MANAGED PORTFOLIO (b) (c)
                                       
 
COMMERCIAL  
On-balance sheet loan portfolio
  $ 230,274       228,221       221,413       208,351       199,387  
Securitized loans — off-balance sheet
    100       105       120       131       142  
Loans held for sale
    1,290       2,224       3,342       9,414       13,905  
 
Total commercial
    231,664       230,550       224,875       217,896       213,434  
 
CONSUMER
                                       
Real estate secured
                                       
On-balance sheet loan portfolio
    224,842       230,520       230,197       227,719       225,355  
Securitized loans — off-balance sheet
    5,641       6,337