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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware
(State of incorporation)
  No. 41-0449260
(I.R.S. Employer Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 1-866-249-3302
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ      No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ      No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
     
            Large accelerated filer    þ      Accelerated filer    o
     
            Non-accelerated filer    o (Do not check if a smaller reporting company)      Smaller reporting company    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
    Shares Outstanding  
    July 29, 2011  
Common stock, $1-2/3 par value
  5,279,840,998

 


 

FORM 10-Q
CROSS-REFERENCE INDEX
                     
PART I   Financial Information        
Item 1.   Financial Statements     Page  
    Consolidated Statement of Income     71  
    Consolidated Balance Sheet     72  
    Consolidated Statement of Changes in Equity and Comprehensive Income     73  
    Consolidated Statement of Cash Flows     75  
    Notes to Financial Statements        
      1 -  
Summary of Significant Accounting Policies
    76  
      2 -  
Business Combinations
    77  
      3 -  
Federal Funds Sold, Securities Purchased under Resale Agreements and Other
       
           
Short-Term Investments
    77  
      4 -  
Securities Available for Sale
    78  
      5 -  
Loans and Allowance for Credit Losses
    87  
      6 -  
Other Assets
    103  
      7 -  
Securitizations and Variable Interest Entities
    104  
      8 -  
Mortgage Banking Activities
    115  
      9 -  
Intangible Assets
    118  
      10 -  
Guarantees, Pledged Assets and Collateral
    119  
      11 -  
Legal Actions
    121  
      12 -  
Derivatives
    123  
      13 -  
Fair Values of Assets and Liabilities
    130  
      14 -  
Preferred Stock
    146  
      15 -  
Employee Benefits
    149  
      16 -  
Earnings Per Common Share
    150  
      17 -  
Operating Segments
    151  
      18 -  
Condensed Consolidating Financial Statements
    153  
      19 -  
Regulatory and Agency Capital Requirements
    157  
           
 
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)        
    Summary Financial Data     1  
    Overview     2  
    Earnings Performance     4  
    Balance Sheet Analysis     11  
    Off-Balance Sheet Arrangements     16  
    Risk Management     17  
    Capital Management     49  
    Critical Accounting Policies     52  
    Current Accounting Developments     53  
    Regulatory and Other Developments     54  
    Forward-Looking Statements     55  
    Risk Factors     57  
    Glossary of Acronyms     158  
           
 
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     45  
           
 
       
Item 4.   Controls and Procedures     70  
           
 
       
PART II   Other Information        
Item 1.   Legal Proceedings     159  
           
 
       
Item 1A.   Risk Factors     159  
           
 
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     159  
           
 
       
Item 6.   Exhibits     160  
           
 
       
Signature     160  
           
 
       
Exhibit Index     161  
 Exhibit 10(a)
 Exhibit 12(a)
 Exhibit 12(b)
 Exhibit 31(a)
 Exhibit 31(b)
 Exhibit 32(a)
 Exhibit 32(b)
 Exhibit 99(a)
 Exhibit 99(b)
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

PART I — FINANCIAL INFORMATION
FINANCIAL REVIEW
Summary Financial Data
 
                                                                 
                                    % Change              
    Quarter ended     June 30, 2011 from     Six months ended        
    June 30,     Mar. 31,     June 30,     Mar. 31,     June 30,     June 30,     June 30,       %  
($ in millions, except per share amounts)   2011     2011     2010     2011     2010     2011     2010     Change  
   
For the Period
                                                               
Wells Fargo net income
  $ 3,948       3,759       3,062       5   %     29       7,707       5,609       37   %
Wells Fargo net income applicable to common stock
    3,728       3,570       2,878       4       30       7,298       5,250       39  
Diluted earnings per common share
    0.70       0.67       0.55       4       27       1.37       1.00       37  
Profitability ratios (annualized):
                                                               
Wells Fargo net income to average assets (ROA)
    1.27   %     1.23       1.00       3       27       1.25       0.92       36  
Wells Fargo net income applicable to common stock to average
                                                               
Wells Fargo common stockholders’ equity (ROE)
    11.92       11.98       10.40       -       15       11.95       9.69       23  
Efficiency ratio (1)
    61.2       62.6       59.6       (2 )     3       61.9       58.0       7  
Total revenue
  $ 20,386       20,329       21,394       -       (5 )     40,715       42,842       (5 )
Pre-tax pre-provision profit (PTPP)(2)
    7,911       7,596       8,648       4       (9 )     15,507       17,979       (14 )
Dividends declared per common share
    0.12       0.12       0.05       -       140       0.24       0.10       140  
Average common shares outstanding
    5,286.5       5,278.8       5,219.7       -       1       5,282.7       5,205.1       1  
Diluted average common shares outstanding
    5,331.7       5,333.1       5,260.8       -       1       5,329.9       5,243.0       2  
Average loans
  $ 751,253       754,077       772,460       -       (3 )     752,657       784,856       (4 )
Average assets
    1,250,945       1,241,176       1,224,180       1       2       1,246,088       1,225,145       2  
Average core deposits (3)
    807,483       796,826       761,767       1       6       802,184       760,475       5  
Average retail core deposits (4)
    592,974       584,100       574,436       2       3       588,561       574,059       3  
Net interest margin
    4.01   %     4.05       4.38       (1 )     (8 )     4.03       4.33       (7 )
At Period End
                                                               
Securities available for sale
  $ 186,298       167,906       157,927       11       18       186,298       157,927       18  
Loans
    751,921       751,155       766,265       -       (2 )     751,921       766,265       (2 )
Allowance for loan losses
    20,893       21,983       24,584       (5 )     (15 )     20,893       24,584       (15 )
Goodwill
    24,776       24,777       24,820       -       -       24,776       24,820       -  
Assets
    1,259,734       1,244,666       1,225,862       1       3       1,259,734       1,225,862       3  
Core deposits (3)
    808,970       795,038       758,680       2       7       808,970       758,680       7  
Wells Fargo stockholders’ equity
    136,401       133,471       119,772       2       14       136,401       119,772       14  
Total equity
    137,916       134,943       121,398       2       14       137,916       121,398       14  
Tier 1 capital (5)
    113,466       110,761       101,992       2       11       113,466       101,992       11  
Total capital (5)
    149,538       147,311       141,088       2       6       149,538       141,088       6  
Capital ratios:
                                                               
Total equity to assets
    10.95   %     10.84       9.90       1       11       10.95       9.90       11  
Risk-based capital (5):
                                                               
Tier 1 capital
    11.69       11.50       10.51       2       11       11.69       10.51       11  
Total capital
    15.41       15.30       14.53       1       6       15.41       14.53       6  
Tier 1 leverage (5)
    9.43       9.27       8.66       2       9       9.43       8.66       9  
Tier 1 common equity (6)
    9.15       8.93       7.61       2       20       9.15       7.61       20  
Common shares outstanding
    5,278.2       5,300.9       5,231.4       -       1       5,278.2       5,231.4       1  
Book value per common share
  $ 23.84       23.18       21.35       3       12       23.84       21.35       12  
Common stock price:
                                                               
High
    32.63       34.25       34.25       (5 )     (5 )     34.25       34.25       -  
Low
    25.26       29.82       25.52       (15 )     (1 )     25.26       25.52       (1 )
Period end
    28.06       31.71       25.60       (12 )     10       28.06       25.60       10  
Team members (active, full-time equivalent)
    266,600       270,200       267,600       (1 )     -       266,600       267,600       -  
 
(1)   The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2)   Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.
(3)   Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
(4)   Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
(5)   See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(6)   See the “Capital Management” section in this Report for additional information.

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This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” and “Risk Factors” sections, as well as in the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms at the end of this Report for terms used throughout this Report.
Financial Review
Overview
 

Wells Fargo & Company is a diversified financial services company with $1.3 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage services and consumer and commercial finance through more than 9,000 banking stores, 12,000 ATMs, the internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia (D.C.) and in other countries. With approximately 275,000 team members, we serve one in three households in America and ranked No. 23 on Fortune’s 2011 rankings of America’s largest corporations. We ranked fourth in assets and second in the market value of our common stock among our large bank peers at June 30, 2011.
Our Vision and Strategy
Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to offer them all of the financial products that fulfill their needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses.
     Our combined company retail bank household cross-sell was 5.84 products per household in second quarter 2011, up from 5.64 a year ago. We believe there is more opportunity for cross-sell as we continue to earn more business from our Wachovia customers. Our goal is eight products per customer, which is approximately half of our estimate of potential demand for an average U.S. household. One of every four of our retail banking households has eight or more products. Business banking cross-sell offers another potential opportunity for growth, with cross-sell of 4.17 products in our Western footprint in second quarter
2011 (including legacy Wells Fargo and converted Wachovia customers), up from 3.88 a year ago.
     Our pursuit of growth and earnings performance is influenced by our belief that it is important to maintain a well controlled operating environment as we complete the integration of the Wachovia businesses and grow the combined company. We manage our credit risk by establishing what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within established ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to facilitate future growth.
     Expense management is important to us, but we approach this in a manner intended to help ensure our revenue is not adversely affected. Our current company-wide expense management initiative is focused on removing unnecessary complexity and eliminating duplication as a way to improve the customer experience and the work process of our team members. We are still in the early stages of this initiative and expect meaningful cost savings over time. With this initiative and the completion of merger-related activities, we are targeting to reduce quarterly noninterest expense to $11 billion by fourth quarter 2012 from $12.5 billion in second quarter 2011. The target reflects expense savings initiatives that will be executed over the next six quarters. Quarterly expense trends may vary due to cyclical or seasonal factors, particularly in the first quarter of each year when higher incentive compensation and employee benefit expenses typically occur.
Financial Performance
Wells Fargo net income was $3.9 billion in second quarter 2011, up 29% from a year ago, and diluted earnings per common share were $0.70, up 27%. Our net income growth from a year ago included contributions from each of our three business segments: Community Banking (up 22%); Wholesale Banking (up 32%); and Wealth, Brokerage and Retirement (up 23%).
     On a linked-quarter basis, total revenues, loans, deposits and capital and capital ratios increased; our credit quality improved;


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Overview (continued)
and our noninterest expense decreased. On a year-over-year basis, revenue was down 5% in second quarter 2011, reflecting a decline in mortgage banking income and lower service charges on deposits due to regulatory changes, as well as a decline in average loans as we continued to reduce our non-strategic and liquidating loan portfolios. Noninterest expense was down 2% from a year ago reflecting the benefit of reduced core deposit amortization and lower litigation accruals.
     Our average core deposits grew 6% from a year ago to $807.5 billion at June 30, 2011. Average core deposits were 107% of total average loans in second quarter 2011, up from 99% a year ago. We continued to attract high quality core deposits in the form of checking and savings deposits, which grew 9% to $735.4 billion in second quarter 2011, from $672.0 billion a year ago, as we added new customers and deepened our relationships with existing customers.
Credit Quality
We continued to experience significant improvement in our credit portfolio with lower net charge-offs, lower nonperforming assets (NPAs) and improved delinquency trends from first quarter 2011. The improvement in our credit portfolio was due in part to the continued decline in our non-strategic and liquidating loan portfolios (primarily from the Wachovia acquisition), which decreased $5.1 billion in second quarter 2011, and $69.0 billion in total since the Wachovia acquisition, to $121.8 billion at June 30, 2011.
     Reflecting the improved performance in our loan portfolios, the $1.8 billion provision for credit losses for second quarter 2011 was $2.2 billion less than a year ago. The provision for credit losses was $1 billion less than net charge-offs in second quarter 2011 and $500 million less than net charge-offs for the same period a year ago. Absent significant deterioration in the economy, we expect future allowance releases. Second quarter 2011 marked the sixth consecutive quarter of decline in net charge-offs and the third consecutive quarter of reduced NPAs. Net charge-offs decreased significantly to $2.8 billion in second quarter 2011 from $3.2 billion in first quarter 2011, and $4.5 billion a year ago. NPAs decreased to $27.9 billion at June 30, 2011, from $30.5 billion at March 31, 2011, and $32.8 billion a year ago. Loans 90 days or more past due and still accruing (excluding government insured/guaranteed loans) decreased to $1.8 billion at June 30, 2011, from $2.4 billion at March 31, 2011, and $3.9 billion a year ago. In addition, the portfolio of purchased credit-impaired (PCI) loans acquired in the Wachovia merger continued to perform better than expected at the time of the merger.
Capital
We continued to build capital in second quarter 2011, with total stockholders’ equity up $10.0 billion from year-end 2010. In second quarter 2011, our Tier 1 common equity ratio grew 22 basis points to 9.15% of risk-weighted assets under Basel I, reflecting strong internal capital generation. Under current Basel III capital proposals, we estimate that our Tier 1 common equity ratio was 7.35% at the end of second quarter 2011. Our
other regulatory capital ratios also continued to grow with the Tier 1 capital ratio reaching 11.69% and Tier 1 leverage ratio reaching 9.43% at June 30, 2011. Additional capital requirements applicable to certain global systemically important financial institutions are under consideration by the Basel Committee. See the “Capital Management” section in this Report for more information regarding our capital, including Tier 1 common equity.
     We redeemed $3.4 billion of trust preferred securities and re-started our open market common stock repurchase program. During second quarter 2011, we repurchased 35 million shares of our common stock. We also paid a quarterly dividend of $0.12 per common share.
Wachovia Merger Integration
On December 31, 2008, Wells Fargo acquired Wachovia, one of the nation’s largest diversified financial services companies. Our integration progress to date is on track and on schedule, and business and revenue synergies have exceeded our expectations since the merger was announced. To date we have converted 2,215 Wachovia stores and 23.7 million customer accounts, including mortgage, deposit, trust, brokerage and credit card accounts. With our conversion of retail banking stores in Pennsylvania and Florida (completed in early July), 83% of our banking customers company-wide are now on a single deposit system. The remaining Eastern banking markets are scheduled to convert by year-end 2011.
     The Wachovia merger has already proven to be a financial success, with substantially all of the originally expected savings already realized and growing revenue synergies reflecting market share gains in many businesses, including mortgage, auto dealer services and investment banking. Some examples of merger revenue synergies include the following:
  Consumer checking account sales in the Eastern retail banking stores were up over 30% from a year ago.
  Credit card new account growth in the East was up over 140% from a year ago.
  Wachovia had a well-run auto business that has enabled us to increase our auto loan market share. As a result, we continue to be the largest used car lender and are now the second largest auto lender in the industry.
  Our investment banking market share increased to 4.7% for the first half of 2011 from 3.7% for the first half of 2009, and our investment banking revenue from corporate and commercial customers increased 53% in the first half of 2011 compared with the same period last year.
  We have experienced a 27% increase in client assets in our Wealth, Brokerage and Retirement segment and our broker loan originations have grown 47% since the merger.
     As a result of PCI accounting for loans acquired in the Wachovia merger, ratios of the Company, including the growth rate in NPAs since December 31, 2008, may not be directly comparable with periods prior to the merger or with credit-related ratios of other financial institutions. In particular:
  Wachovia’s high risk loans were written down pursuant to PCI accounting at the time of merger. Therefore,


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    the allowance for credit losses is lower than otherwise would have been required without PCI loan accounting; and
  Because we virtually eliminated Wachovia’s nonaccrual loans at December 31, 2008, the quarterly growth rate in our
    nonaccrual loans following the merger was higher than it would have been without PCI loan accounting. Similarly, our net charge-offs rate was lower than it otherwise would have been.


Earnings Performance
 

Wells Fargo net income for second quarter 2011 was $3.9 billion ($0.70 diluted per common share) with $3.7 billion applicable to common stock, compared with net income of $3.1 billion ($0.55 diluted per common share) with $2.9 billion applicable to common stock for second quarter 2010. Net income for the first half of 2011 was $7.7 billion, up 37% from the same period a year ago. Our June 30, 2011, quarter-to-date and year-to-date earnings compared with the same periods a year ago reflected strong business fundamentals with diversified sources of fee income, increased deposits, lower operating costs, improved credit quality and higher capital levels.
     Revenue, the sum of net interest income and noninterest income, was $20.4 billion in second quarter 2011 compared with $21.4 billion in second quarter 2010. Revenue for the first half of 2011 was $40.7 billion, down 5% from the same period a year ago. The decline in revenue in the first half of 2011 was predominantly due to lower net interest income and lower mortgage banking revenue. However, many businesses generated year over year quarterly revenue growth, including commercial banking, corporate banking, commercial real estate, international, debit card, global remittance, retail brokerage, auto dealer services and wealth management. Net interest income of $10.7 billion in second quarter 2011 declined 7% from a year ago driven by a 37 basis point decline in the net interest margin and a 3% decline in average loans. The decline in average loans reflected continued reductions in the non-strategic/liquidating portfolios. Continued success in generating low-cost deposits enabled the Company to grow assets while reducing long-term debt since December 31, 2010, including the redemption of $3.4 billion of higher-yielding trust preferred securities.
     Noninterest expense was $12.5 billion (61% of revenue) in second quarter 2011, compared with $12.7 billion (60% of revenue) a year ago. Noninterest expense was $25.2 billion for the first half of 2011 compared with $24.9 billion for the same period a year ago. The second quarter and first half of 2011 included $484 million and $924 million, respectively, of merger integration costs (down from $498 million in second quarter 2010 and up from $878 million in the first half of 2010), and $428 million and $900 million, respectively, of operating losses (down from $627 million in second quarter 2010 and up from $835 million in the first half of 2010).
Net Interest Income
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits, short-term borrowings and long-term debt. The net interest margin is the
average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
     Net interest income on a taxable-equivalent basis was $10.9 billion and $21.7 billion in the second quarter and first half of 2011, compared with $11.6 billion and $22.9 billion for the same periods a year ago. The net interest margin was 4.01% and 4.03% in the second quarter and first half of 2011, respectively, down from 4.38% and 4.33% for the same periods a year ago. Net interest margin was compressed relative to second quarter and first half of 2010 as lower-yielding cash and short-term investments increased as loan balances declined. The impact of these factors was somewhat mitigated by reduced long-term debt expense and continued disciplined deposit pricing.
     The mix of earning assets and their yields are important drivers of net interest income. Soft consumer loan demand and the impact of liquidating certain loan portfolios reduced average loans in second quarter 2011 to 69% (69% in the first half of 2011) of average earning assets from 72% in second quarter 2010 (73% in the first half of 2010). Average short-term investments and trading account assets were 12% of earning assets in both the second quarter and first half of 2011, up from 9% and 8%, respectively, for the same periods a year ago.
     Core deposits are a low-cost source of funding and thus an important contributor to both net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $807.5 billion in second quarter 2011 ($802.2 billion in the first half of 2011) from $761.8 billion in second quarter 2010 ($760.5 billion in the first half of 2010) and funded 107% and 99% (107% and 97% for the first half of the year) of average loans, respectively. Average core deposits increased to 74% of average earning assets in the second quarter and first half of 2011 compared with 71% for each respective period a year ago, yet the cost of these deposits declined significantly as the mix shifted from higher cost certificates of deposit to checking and savings products, which were also at lower yields relative to the second quarter and first half of 2010. About 91% of our average core deposits are now in checking and savings deposits, one of the highest percentages in the industry.


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Table of Contents

Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)
 
                                                 
    Quarter ended June 30,  
    2011     2010  
                    Interest                     Interest  
    Average     Yields/     income/     Average     Yields/     income/  
(in millions)   balance     rates     expense     balance     rates     expense  
 
 
 
Earning assets
                                               
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 98,519       0.32   %   $ 80       67,712       0.33   %   $ 56  
Trading assets
    38,015       3.71       352       28,760       3.79       272  
Securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    2,091       2.33       12       2,094       3.50       18  
Securities of U.S. states and political subdivisions
    22,610       5.35       302       16,192       6.48       255  
Mortgage-backed securities:
                                               
Federal agencies
    74,402       4.76       844       72,876       5.39       930  
Residential and commercial
    32,536       8.86       664       33,197       9.59       769  
                                   
 
 
Total mortgage-backed securities
    106,938       5.98       1,508       106,073       6.72       1,699  
Other debt and equity securities
    37,037       5.81       502       33,270       7.21       562  
                                   
 
 
Total securities available for sale
    168,676       5.81       2,324       157,629       6.75       2,534  
Mortgages held for sale (4)
    30,674       4.73       362       32,196       5.04       405  
Loans held for sale (4)
    1,356       5.05       17       4,386       2.73       30  
Loans:
                                               
Commercial:
                                               
Commercial and industrial
    153,630       4.60       1,761       147,965       5.44       2,009  
Real estate mortgage
    101,437       4.16       1,051       97,731       3.89       949  
Real estate construction
    21,987       4.64       254       33,060       3.44       284  
Lease financing
    12,899       7.72       249       13,622       9.54       325  
Foreign
    36,445       2.65       241       29,048       3.62       262  
                                   
 
 
Total commercial
    326,398       4.37       3,556       321,426       4.78       3,829  
                                   
 
 
Consumer:
                                               
Real estate 1-4 family first mortgage
    224,873       4.97       2,792       237,500       5.24       3,108  
Real estate 1-4 family junior lien mortgage
    91,934       4.25       975       102,678       4.53       1,162  
Credit card
    20,954       12.97       679       22,239       13.24       736  
Other revolving credit and installment
    87,094       6.32       1,372       88,617       6.57       1,452  
                                   
 
 
Total consumer
    424,855       5.48       5,818       451,034       5.74       6,458  
                                   
 
 
Total loans (4)
    751,253       5.00       9,374       772,460       5.34       10,287  
Other
    4,997       4.10       52       6,082       3.44       53  
                                   
 
 
Total earning assets
  $ 1,093,490       4.64   %   $ 12,561       1,069,225       5.14   %   $ 13,637  
                                   
 
 
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 53,344       0.09   %   $ 12       61,212       0.13   %   $ 19  
Market rate and other savings
    455,126       0.20       226       412,062       0.26       267  
Savings certificates
    72,100       1.42       256       89,773       1.44       323  
Other time deposits
    12,988       2.03       67       14,936       1.90       72  
Deposits in foreign offices
    57,899       0.23       33       57,461       0.23       33  
                                   
 
 
Total interest-bearing deposits
    651,457       0.37       594       635,444       0.45       714  
Short-term borrowings
    53,340       0.18       24       45,082       0.22       25  
Long-term debt
    145,431       2.78       1,009       195,440       2.52       1,233  
Other liabilities
    10,978       3.03       83       6,737       3.33       55  
                                   
 
 
Total interest-bearing liabilities
    861,206       0.80       1,710       882,703       0.92       2,027  
Portion of noninterest-bearing funding sources
    232,284       -       -       186,522       -       -  
                                   
 
 
Total funding sources
  $ 1,093,490       0.63       1,710       1,069,225       0.76       2,027  
                                   
 
 
Net interest margin and net interest income on a taxable-equivalent basis (5)
            4.01   %   $ 10,851               4.38   %   $ 11,610  
                         
 
 
Noninterest-earning assets
                                               
Cash and due from banks
  $ 17,373                       17,415                  
Goodwill
    24,773                       24,820                  
Other
    115,309                       112,720                  
                                       
 
 
Total noninterest-earning assets
  $ 157,455                       154,955                  
                                       
 
 
Noninterest-bearing funding sources
                                               
Deposits
  $ 199,339                       176,908                  
Other liabilities
    53,169                       43,713                  
Total equity
    137,231                       120,856                  
Noninterest-bearing funding sources used to fund earning assets
    (232,284 )                     (186,522 )                
                                       
 
 
Net noninterest-bearing funding sources
  $ 157,455                       154,955                  
                                       
 
 
Total assets
  $ 1,250,945                       1,224,180                  
                                       
 
                                               
 
 
(1)   Our average prime rate was 3.25% for the quarters ended June 30, 2011 and 2010. The average three-month London Interbank Offered Rate (LIBOR) was 0.26% and 0.44% for the same quarters, respectively.
 
(2)   Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
 
(3)   Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts include the effects of any unrealized gain or loss marks but those marks carried in other comprehensive income are not included in yield determination of affected earning assets. Thus yields are based on amortized cost balances computed on a settlement date basis.
 
(4)   Nonaccrual loans and related income are included in their respective loan categories.
 
(5)   Includes taxable-equivalent adjustments of $173 million and $161 million for June 30, 2011 and 2010, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.

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Table of Contents

 
                                                 
    Six months ended June 30,  
    2011     2010  
                    Interest                     Interest  
    Average     Yields/     income/     Average     Yields/     income/  
(in millions)   balance     rates     expense     balance     rates     expense  
 
 
 
Earning assets
                                               
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 90,994       0.34   %   $ 152       54,347       0.33   %   $ 89  
Trading assets
    37,711       3.76       708       28,338       3.85       544  
Securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    1,834       2.56       23       2,186       3.56       38  
Securities of U.S. states and political subdivisions
    21,098       5.39       572       14,951       6.53       476  
Mortgage-backed securities:
                                               
Federal agencies
    73,937       4.74       1,676       76,284       5.39       1,953  
Residential and commercial
    32,734       9.28       1,396       32,984       9.63       1,559  
                                   
 
 
Total mortgage-backed securities
    106,671       6.10       3,072       109,268       6.70       3,512  
Other debt and equity securities
    36,482       5.68       967       32,810       6.86       1,054  
                                   
 
 
Total securities available for sale
    166,085       5.87       4,634       159,215       6.67       5,080  
Mortgages held for sale (4)
    34,686       4.61       799       31,784       4.99       792  
Loans held for sale (4)
    1,167       4.98       29       5,390       2.39       64  
Loans:
                                               
Commercial:
                                               
Commercial and industrial
    151,849       4.62       3,484       152,192       4.97       3,752  
Real estate mortgage
    100,621       4.04       2,018       97,848       3.79       1,839  
Real estate construction
    23,128       4.44       509       34,448       3.25       555  
Lease financing
    12,959       7.78       504       13,814       9.38       648  
Foreign
    35,050       2.73       476       28,807       3.62       518  
                                   
 
 
Total commercial
    323,607       4.35       6,991       327,109       4.50       7,312  
                                   
 
 
Consumer:
                                               
Real estate 1-4 family first mortgage
    227,208       4.99       5,659       241,241       5.25       6,318  
Real estate 1-4 family junior lien mortgage
    93,313       4.30       1,993       104,151       4.50       2,330  
Credit card
    21,230       13.08       1,388       22,789       13.20       1,503  
Other revolving credit and installment
    87,299       6.34       2,743       89,566       6.49       2,879  
                                   
 
 
Total consumer
    429,050       5.51       11,783       457,747       5.72       13,030  
                                   
 
 
Total loans (4)
    752,657       5.01       18,774       784,856       5.21       20,342  
Other
    5,111       4.00       102       6,075       3.40       103  
                                   
 
 
Total earning assets
  $ 1,088,411       4.69   %   $ 25,198       1,070,005       5.10   %   $ 27,014  
                                   
 
 
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 55,909       0.09   %   $ 26       61,614       0.14   %   $ 42  
Market rate and other savings
    449,388       0.21       463       408,026       0.27       553  
Savings certificates
    73,229       1.41       511       92,254       1.40       640  
Other time deposits
    13,417       2.14       143       15,405       1.97       152  
Deposits in foreign offices
    57,687       0.23       66       56,453       0.22       62  
                                   
 
 
Total interest-bearing deposits
    649,630       0.38       1,209       633,752       0.46       1,449  
Short-term borrowings
    54,041       0.20       54       45,082       0.20       44  
Long-term debt
    147,774       2.86       2,113       202,186       2.48       2,509  
Other liabilities
    10,230       3.13       159       6,203       3.38       104  
  -                                  
 
 
Total interest-bearing liabilities
    861,675       0.82       3,535       887,223       0.93       4,106  
Portion of noninterest-bearing funding sources
    226,736       -       -       182,782       -       -  
                                   
 
 
Total funding sources
  $ 1,088,411       0.66       3,535       1,070,005       0.77       4,106  
 -                                  
 
 
Net interest margin and net interest income on a taxable-equivalent basis (5)
            4.03   %   $ 21,663               4.33   %   $ 22,908  
                           
 
 
Noninterest-earning assets
                                               
Cash and due from banks
  $ 17,367                       17,730                  
Goodwill
    24,774                       24,818                  
Other
    115,536                       112,592                  
                                       
 
 
Total noninterest-earning assets
  $ 157,677                       155,140                  
 -                                      
 
 
Noninterest-bearing funding sources
                                               
Deposits
  $ 196,237                       174,487                  
Other liabilities
    54,237                       44,224                  
Total equity
    133,939                       119,211                  
Noninterest-bearing funding sources used to fund earning assets
    (226,736 )                     (182,782 )                
                                       
 
 
Net noninterest-bearing funding sources
  $ 157,677                       155,140                  
                                       
 
 
Total assets
  $ 1,246,088                       1,225,145                  
                                       
 
                                               
 

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Table of Contents

Noninterest Income
Table 2: Noninterest Income
 
                                                 
                            Six months        
    Quarter ended June 30,     %     ended June 30,     %  
(in millions)   2011     2010     Change     2011     2010     Change  
   
 
Service charges on deposit accounts
  $ 1,074       1,417       (24)   %   $ 2,086       2,749       (24 )  %
Trust and investment fees:
                                               
Trust, investment and IRA fees
    1,020       1,035       (1 )     2,080       2,084       -  
Commissions and all other fees
    1,924       1,708       13       3,780       3,328       14  
   
 
Total trust and investment fees
    2,944       2,743       7       5,860       5,412       8  
   
 
Card fees
    1,003       911       10       1,960       1,776       10  
Other fees:
                                               
Cash network fees
    94       58       62       175       113       55  
Charges and fees on loans
    404       401       1       801       820       (2 )
Processing and all other fees
    525       523       -       1,036       990       5  
   
 
Total other fees
    1,023       982       4       2,012       1,923       5  
   
 
Mortgage banking:
                                               
Servicing income, net
    877       1,218       (28 )     1,743       2,584       (33 )
Net gains on mortgage loan origination/sales activities
    742       793       (6 )     1,892       1,897       -  
   
 
Total mortgage banking
    1,619       2,011       (19 )     3,635       4,481       (19 )
   
 
Insurance
    568       544       4       1,071       1,165       (8 )
Net gains from trading activities
    414       109       280       1,026       646       59  
Net gains (losses) on debt securities available for sale
    (128 )     30     NM       (294 )     58     NM  
Net gains (losses) from equity investments
    724       288       151       1,077       331       225  
Operating leases
    103       329       (69 )     180       514       (65 )
All other
    364       581       (37 )     773       1,191       (35 )
   
 
Total
  $ 9,708       9,945       (2 )   $ 19,386       20,246       (4 )
   
 
NM — Not meaningful

Noninterest income was $9.7 billion and $9.9 billion for second quarter 2011 and 2010, respectively, and $19.4 billion and $20.2 billion for the first half of 2011 and 2010, respectively. Noninterest income represented 48% of revenue for both periods in 2011. The decrease in total noninterest income in the second quarter and first half of 2011 from the same periods a year ago was due largely to lower mortgage banking net servicing income and lower service charges on deposit accounts.
     Our service charges on deposit accounts decreased 24% in the second quarter and first half of 2011 from the same periods a year ago, primarily due to changes mandated by Regulation E and related overdraft policy changes.
     We earn trust, investment and IRA (Individual Retirement Account) fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At June 30, 2011, these assets totaled $2.2 trillion, up 16% from $1.9 trillion at June 30, 2010. Trust, investment and IRA fees are largely based on a tiered scale relative to the market value of the assets under management or administration. These fees were $1.0 billion and $2.1 billion in the second quarter and first half of 2011, respectively, flat from a year ago for both periods.
     We receive commissions and other fees for providing services to full-service and discount brokerage customers as well as from investment banking activities including equity and bond underwriting. These fees increased to $1.9 billion in second
quarter 2011 from $1.7 billion a year ago and increased to $3.8 billion for the first half of 2011 from $3.3 billion a year ago. These fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, and asset-based fees, which are based on the market value of the customer’s assets. Brokerage client assets totaled $1.2 trillion at June 30, 2011, up from $1.1 trillion a year ago.
     Card fees increased to $1.0 billion in second quarter 2011, from $911 million in second quarter 2010. For the first six months of 2011, these fees increased to $2.0 billion from $1.8 billion a year ago. The increase is mainly due to growth in purchase volume and new accounts growth. With the final FRB rules regarding debit card interchange fees, we estimate a quarterly reduction in earnings of approximately $250 million (after tax), before the impact of any offsetting actions, starting in fourth quarter 2011. We expect to recapture at least half of this earnings reduction over time through volume and product changes.
     Mortgage banking noninterest income consists of net servicing income and net gains on loan origination/sales activities and totaled $1.6 billion in second quarter 2011, compared with $2.0 billion a year ago. The first half of 2011 showed a decrease to $3.6 billion from $4.5 billion for the same period a year ago. The reduction year over year in mortgage banking noninterest income was primarily driven by a decline in net servicing income.


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     Net servicing income includes both changes in the fair value of mortgage servicing rights (MSRs) during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income for second quarter 2011 included a $374 million net MSR valuation gain ($1.08 billion decrease in the fair value of the MSRs offset by a $1.45 billion hedge gain) and for second quarter 2010 included a $626 million net MSR valuation gain ($2.7 billion decrease in the fair value of MSRs offset by a $3.3 billion hedge gain). For the first half of 2011, it included a $753 million net MSR valuation gain ($576 million decrease in the fair value of MSRs offset by a $1.33 billion hedge gain) and for the same period of 2010, included a $1.6 billion net MSR valuation gain ($3.44 billion decrease in the fair value of MSRs offset by a $5.05 billion hedge gain). The valuation of our MSRs at the end of second quarter 2011 reflected our assessment of expected future levels in servicing and foreclosure costs, including the estimated impact from regulatory consent orders. See the “Risk Management — Credit Risk Management — Risks Relating to Servicing Activities” section in this Report for information on the regulatory consent orders. The $252 million and $862 million decline in net MSR valuation gain results for the second quarter and first half of 2011, respectively, compared with the same periods last year was primarily due to a decline in hedge carry income. See the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section of this Report for a detailed discussion of our MSRs risks and hedging approach. Our portfolio of loans serviced for others was $1.87 trillion at June 30, 2011, and $1.84 trillion at December 31, 2010. At June 30, 2011, the ratio of MSRs to related loans serviced for others was 0.87%, compared with 0.86% at December 31, 2010.
     Income from loan origination/sale activities was $742 million in second quarter 2011 compared with $793 million a year ago. The decrease in second quarter 2011 was driven by lower loan origination volume and margins on loan originations, offset by lower provision for mortgage loan repurchase losses. Income of $1.9 billion from loan origination/sales activities for the first half of 2011 remained flat from a year ago.
     Net gains on mortgage loan origination/sales activities include the cost of any additions to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties, and early payment default clauses in mortgage sale contracts. Additions to the mortgage repurchase liability that were charged against net gains on mortgage loan origination/sales activities during second quarter 2011 totaled $242 million (compared with $382 million for second quarter 2010), of which $222 million ($346 million for second quarter 2010) was for subsequent increases in estimated losses on prior period loan sales. For additional information about mortgage loan repurchases, see the “Risk Management — Credit Risk Management — Liability for Mortgage Loan Repurchase Losses” section in this Report.
     Residential real estate originations were $64 billion in second quarter 2011 compared with $81 billion a year ago and mortgage applications were $109 billion in second quarter 2011 compared with $143 billion a year ago. The 1-4 family first mortgage unclosed pipeline was $51 billion at June 30, 2011, and
$68 billion a year ago. For additional detail, see the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section and Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
     Net gains from trading activities, which reflect unrealized and realized net gains due to changes in fair value of our trading positions, were $414 million and $1.0 billion in the second quarter and first half of 2011, respectively, compared with $109 million and $646 million for the same periods a year ago. The year over year increase for the second quarter and first half of 2011 was driven by improved valuation of certain contracts utilized in some of our customer accommodation trading activity. Net gains from trading activities do not include interest income and other fees earned from related activities. Those amounts are reported within interest income from trading assets and other fees within noninterest income line items of the income statement. Net gains from trading activities are primarily from trading done on behalf of or driven by the needs of our customers (customer accommodation trading) and also include the results of certain economic hedging and proprietary trading. Net losses from proprietary trading totaled $23 million and $9 million in the second quarter and first half of 2011, respectively, compared with $199 million and $228 million for the same periods a year ago. These net proprietary trading losses were offset by interest and fees reported in their corresponding income statement line items. Proprietary trading activities are not significant to our client focused business model. Our trading activities and what we consider to be customer accommodation, economic hedging and proprietary trading are further discussed in the “Asset/Liability Management — Market Risk — Trading Activities” section in this Report.
     Net gains on debt and equity securities totaled $596 million for second quarter 2011 and $318 million for second quarter 2010, after other-than-temporary impairment (OTTI) write-downs of $205 million and $168 million for the same periods, respectively.
     Operating lease income was $103 million and $180 million in the second quarter and first half of 2011, respectively, down from $329 million and $514 million for the same periods a year ago, due to gains on early lease terminations in second quarter 2010.


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Noninterest Expense
Table 3: Noninterest Expense
 
                                                 
                            Six months                
    Quarter ended June 30,     %     ended June 30,             %  
(in millions)   2011     2010     Change     2011     2010     Change  
 
Salaries
  $ 3,584       3,564       1   %   $ 7,038       6,878       2   %
Commission and incentive compensation
    2,171       2,225       (2 )     4,518       4,217       7  
Employee benefits
    1,164       1,063       10       2,556       2,385       7  
Equipment
    528       588       (10 )     1,160       1,266       (8 )
Net occupancy
    749       742       1       1,501       1,538       (2 )
Core deposit and other intangibles
    464       553       (16 )     947       1,102       (14 )
FDIC and other deposit assessments
    315       295       7       620       596       4  
Outside professional services
    659       572       15       1,239       1,056       17  
Contract services
    341       384       (11 )     710       731       (3 )
Foreclosed assets
    305       333       (8 )     713       719       (1 )
Operating losses
    428       627       (32 )     900       835       8  
Outside data processing
    232       276       (16 )     452       548       (18 )
Postage, stationery and supplies
    236       230       3       471       472       -  
Travel and entertainment
    205       196       5       411       367       12  
Advertising and promotion
    166       156       6       282       268       5  
Telecommunications
    132       156       (15 )     266       299       (11 )
Insurance
    201       164       23       334       312       7  
Operating leases
    31       27       15       55       64       (14 )
All other
    564       595       (5 )     1,035       1,210       (14 )
                     
 
                                               
Total
  $ 12,475       12,746       (2 )   $ 25,208       24,863       1  
 

Noninterest expense was $12.5 billion in second quarter 2011, down 2% from $12.7 billion a year ago, reflecting the benefit of reduced core deposit amortization and lower operating losses in second quarter 2011 as well as $137 million of expense in second quarter 2010 for Wells Fargo Financial severance costs. For the first half of 2011, noninterest expense was nearly flat compared with the same period a year ago.
     Personnel expenses were flat for second quarter 2011 compared with the same quarter last year. They were up, however, for the first half of 2011, compared with the same period of 2010, primarily due to higher variable compensation paid in first quarter 2011 by businesses with revenue-based compensation, including brokerage. Mortgage personnel expenses declined in second quarter 2011 reflecting a decrease in mortgage loan originations.
     Outside professional services included increased investments by our businesses this year in their service delivery systems.
     Operating losses of $428 million in second quarter 2011 were substantially all for litigation accruals for mortgage foreclosure-related matters and were down from second quarter 2010, which was elevated predominantly due to additional accrual for litigation matters.
     Merger integration costs totaled $484 million and $498 million in second quarter 2011 and 2010, respectively, and $924 million and $878 million for the first six months of 2011 and 2010, respectively. Second quarter 2011 marked further milestones in our integration of legacy Wells Fargo and Wachovia, including the conversion of retail banking stores in Pennsylvania and Florida (completed in early July), one of our largest East Coast states. After these conversions, 83% of
banking customers company-wide are on a single deposit system.
     With our current expense management initiative and the completion of merger-related activities, we are targeting to reduce quarterly noninterest expense to $11 billion by fourth quarter 2012 from $12.5 billion in second quarter 2011. The target reflects expense savings initiatives that will be executed over the next six quarters. Quarterly expense trends may vary due to cyclical or seasonal factors, particularly in the first quarter of each year when higher incentive compensation and employee benefit expenses typically occur.
Income Tax Expense
Our effective tax rate was 33.6% in second quarter 2011, up from 33.1% in second quarter 2010 and 29.5% in first quarter 2011. The higher effective rate in second quarter 2011 reflected the tax cost associated with accruals for mortgage foreclosure related matters. Our effective tax rate was 31.7% in the first half of 2011, down from 34.2% in the first half of 2010. The decrease for the first half of 2011 from the first half of 2010 was primarily related to a tax benefit recognized in first quarter 2011 associated with the realization for tax purposes of a previously written down investment. Our current estimate for the full year 2011 effective tax rate is approximately 32.5%.


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Operating Segment Results
We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative guidance equivalent to generally accepted accounting principles (GAAP) for financial accounting. In fourth quarter 2010, we aligned certain lending businesses into Wholesale Banking from Community Banking to
reflect our previously announced restructuring of Wells Fargo Financial. In first quarter 2011, we realigned a private equity business into Wholesale Banking from Community Banking. Prior periods have been revised to reflect these changes. Table 4 and the following discussion present our results by operating segment. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 17 (Operating Segments) to Financial Statements in this Report.


Table 4: Operating Segment Results — Highlights
 
                                                 
                                    Wealth, Brokerage  
    Community Banking     Wholesale Banking     and Retirement  
(in billions)   2011     2010     2011     2010     2011     2010  
 
 
Quarter ended June 30,
                                               
Revenue
  $ 12.6       13.6       5.6       5.8       3.1       2.9  
Net income
    2.1       1.7       1.9       1.5       0.3       0.3  
 
 
Average loans
    498.2       534.3       243.1       228.2       43.5       42.6  
Average core deposits
    552.0       532.6       190.6       162.3       126.0       121.5  
 
 
Six months ended June 30,
                                               
Revenue
  $ 25.2       27.6       11.1       11.2       6.2       5.8  
Net income
    4.3       3.1       3.6       2.7       0.7       0.6  
 
 
Average loans
    504.0       542.3       238.9       232.6       43.1       43.2  
Average core deposits
    550.1       532.0       187.7       162.0       125.7       121.3  
 

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. through its Regional Banking and Wells Fargo Home Mortgage business units.
     Community Banking reported net income of $2.1 billion and revenue of $12.6 billion in second quarter 2011. Revenue declined $1.0 billion from second quarter 2010, driven primarily by a decrease in mortgage banking income from lower originations/sales activities and hedge valuations, and by lower interest income primarily attributed to reductions in the home equity loan portfolio. These declines were partially mitigated by gains on equity sales as well as lower deposit costs. Net interest income decreased $1.4 billion, or 9%, for the first half of 2011 compared with the same period a year ago, mostly due to lower average loans (down $38.3 billion) as a result of intentional run-off within the portfolios (including Home Equity and Pick-A-Pay) combined with softer loan demand, and a shift in earning assets mix towards lower-yielding investment securities portfolios. This decline in interest income was mitigated by continued low funding cost. Average core deposits increased $19.4 billion, or 4%, as growth in liquid deposits more than offset planned certificates of deposit run-off. We generated strong growth in the number of consumer checking accounts (up a net 7% from second quarter 2010). Non-interest expense decreased $260 million from second quarter 2010 due to reduced personnel costs (lower mortgage sales-related incentives and second quarter 2010 Wells Fargo Financial exit expense accruals), a decrease in software license expense, lower
litigation-related operating losses, and reduced intangible amortization. The provision for credit losses decreased $1.4 billion from second quarter 2010 and credit quality indicators in most of our consumer and business loan portfolios continued to improve. Net credit losses declined in almost all portfolios, which resulted in the release of $700 million in allowance for loan losses in second quarter 2011, compared with $389 million released a year ago. The provision for credit losses declined $3.9 billion for the first half of 2011 compared with the first half of 2010. Charge-offs decreased $2.7 billion, showing improvement primarily in the Home Equity, Credit Card, and Dealer Services portfolios. Additionally, we released $1.6 billion of the allowance in the first half of 2011, compared with $389 million released a year ago.
Wholesale Banking provides financial solutions across the U.S. and globally to middle market and large corporate customers with annual revenue generally in excess of $20 million. Products and businesses include commercial banking, investment banking and capital markets, securities investment, government and institutional banking, corporate banking, commercial real estate, treasury management, capital finance, international, insurance, real estate capital markets, commercial mortgage servicing, corporate trust, equipment finance, asset backed finance, and asset management.
     Wholesale Banking reported net income of $1.9 billion in second quarter 2011, up $469 million, or 32%, from second quarter 2010. Net income increased to $3.6 billion for the first half of 2011 from $2.7 billion a year ago. The year over year increases in net income for the second quarter and first six


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months were the result of decreases in the provision for credit losses and noninterest expenses more than offsetting decreases in revenues. Revenue in second quarter 2011 decreased $143 million, or 2%, from second quarter 2010 as strong growth across most businesses, including loan and deposit growth, was more than offset by lower PCI-related resolutions and other gains. Average loans of $243.1 billion in second quarter 2011 increased 7% from second quarter 2010 driven by increases across most lending areas. Average core deposits of $190.6 billion in second quarter 2011 increased 17% from second quarter 2010, reflecting continued strong customer liquidity. Noninterest expense in second quarter 2011 decreased $107 million, or 4%, from second quarter 2010 related to lower litigation and foreclosed asset expenses. The provision for credit losses in second quarter 2011 declined $732 million from second quarter 2010, and included a $300 million allowance release compared with a $111 million release a year ago along with a $543 million improvement in net credit losses.
Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients using a planning approach to meet each client’s needs. Wealth Management provides affluent and high net worth clients with a complete range of wealth management solutions including financial planning, private banking, credit, investment management and trust.
Family Wealth meets the unique needs of the ultra high net worth customers. Brokerage serves customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement is a national leader in providing institutional retirement and trust services (including 401(k) and pension plan record keeping) for businesses, retail retirement solutions for individuals, and reinsurance services for the life insurance industry.
     Wealth, Brokerage and Retirement earned net income of $333 million in second quarter 2011, up $63 million, or 23%, from second quarter 2010. Revenue of $3.1 billion predominantly consisted of brokerage commissions, asset-based fees and net interest income. Net interest income was up $7 million, or 1%, compared with second quarter 2010 as higher investment income was driven by higher deposits and loan growth offset by lower yields. Noninterest income increased $212 million, or 10%, and $420 million, or 9%, from the second quarter 2010 and first half of 2010, respectively, as higher asset-based fees and securities gains in the brokerage business were partially offset by lower brokerage transaction revenue. Noninterest expense was up $137 million, or 6%, and $306 million, or 6%, from second quarter 2010 and the first half of 2010, respectively, primarily due to growth in personnel cost driven by higher broker commissions.


Balance Sheet Analysis
 

At June 30, 2011, our total loans were down slightly from December 31, 2010 while our core deposits were up over the same period. At June 30, 2011, core deposits funded 108% of the loan portfolio, and we have significant capacity to add loans and higher yielding long-term MBS to generate future revenue and earnings growth. The strength of our business model produced record earnings and high rates of internal capital generation as reflected in our improved capital ratios. Tier 1 capital increased to 11.69% as a percentage of total risk-weighted assets, total
capital to 15.41%, Tier 1 leverage to 9.43% and Tier 1 common equity to 9.15% at June 30, 2011, up from 11.16%, 15.01%, 9.19% and 8.30%, respectively, at December 31, 2010.
     The following discussion provides additional information about the major components of our balance sheet. Information about changes in our asset mix and about our capital is included in the “Earnings Performance — Net Interest Income” and “Capital Management” sections of this Report.


Securities Available for Sale
Table 5: Securities Available for Sale — Summary
 
                                                 
    June 30, 2011     December 31, 2010  
            Net                     Net        
            unrealized     Fair             unrealized     Fair  
(in millions)   Cost     gain     value     Cost     gain     value  
 
 
Debt securities available for sale
  $ 173,526       8,417       181,943       160,071       7,394       167,465  
Marketable equity securities
    3,499       856       4,355       4,258       931       5,189  
 
 
Total securities available for sale
  $ 177,025       9,273       186,298       164,329       8,325       172,654  
 

     Table 5 presents a summary of our securities available-for-sale portfolio. Securities available for sale consist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily of very liquid, high quality federal agency debt and privately issued MBS. The total net
unrealized gains on securities available for sale were $9.3 billion at June 30, 2011, up from net unrealized gains of $8.3 billion at December 31, 2010, primarily due to lower interest rates and narrowing of credit spreads.
     We analyze securities for OTTI quarterly or more often if a potential loss-triggering event occurs. Of the $326 million OTTI write-downs recognized in the first half of 2011, $269 million


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related to debt securities. There were no OTTI write-downs for marketable equity securities and there were $57 million in OTTI write-downs related to nonmarketable equity securities. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies — Securities) in our 2010 Form 10-K and Note 4 (Securities Available for Sale) to Financial Statements in this Report.
     We apply the cost recovery method for debt securities available for sale where future cash flows cannot be reliably estimated. Under this method, cash flows received are applied against the amortized cost basis, and interest income is not recognized until such basis has been fully recovered. The respective cost basis and fair value of these securities was $71 million and $255 million at June 30, 2011, and $96 million and $296 million at December 31, 2010.
     At June 30, 2011, debt securities available for sale included $24 billion of municipal bonds, of which 82% were rated “A-” or better based on external, and in some cases internal, ratings. Additionally, some of these bonds are guaranteed against loss by bond insurers. These bonds are predominantly investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in making the investment decision. These municipal bonds will continue to be monitored as part of our ongoing impairment analysis of our securities available for sale.
     The weighted-average expected maturity of debt securities available for sale was 6.4 years at June 30, 2011. Because 61% of this portfolio is MBS, the expected remaining maturity may differ from contractual maturity because borrowers generally have the right to prepay obligations before the underlying mortgages mature. The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the MBS available for sale are shown in Table 6.
Table 6: Mortgage-Backed Securities
                         
                    Expected  
            Net     remaining  
    Fair     unrealized     maturity  
(in billions)   value     gain (loss)     (in years)  
 
 
At June 30, 2011
  $ 111.4       6.2       4.8  
 
At June 30, 2011, assuming a 200 basis point:
                       
 
Increase in interest rates
    101.2       (4.0 )     6.1  
 
Decrease in interest rates
    119.7       14.5       3.4  
 
     See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.


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Balance Sheet Analysis (continued)
Loan Portfolio
Total loans were $751.9 billion at June 30, 2011, down $5.3 billion from December 31, 2010. Increased balances in many commercial loan portfolios offset most of the continued planned reduction in the non-strategic and liquidating portfolios, which have declined $11.6 billion since December 31,
2010. Additional information on the non-strategic and liquidating portfolios is included in Table 11 in the “Credit Risk Management” section of this Report.


Table 7: Loan Portfolios
                                                 
    June 30, 2011     December 31, 2010  
 
(in millions)   Core     Liquidating     Total     Core     Liquidating     Total  
 
 
Commercial
  $ 323,673       7,016       330,689       314,123       7,935       322,058  
 
Consumer
    306,495       114,737       421,232       309,840       125,369       435,209  
 
 
Total loans
  $ 630,168       121,753       751,921       623,963       133,304       757,267  
 

     A discussion of average loan balances and a comparative detail of average loan balances is included in Table 1 under “Earnings Performance — Net Interest Income” earlier in this Report. Additional information on total loans outstanding by portfolio segment and class of financing receivable is included in the “Credit Risk Management” section in this Report. Period-end balances and other loan related information are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.


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Deposits
Deposits totaled $853.6 billion at June 30, 2011, compared with $847.9 billion at December 31, 2010. Table 8 provides additional detail regarding deposits. Comparative detail of average deposit balances is provided in Table 1 under
“Earnings Performance — Net Interest Income” earlier in this Report. Total core deposits were $809.0 billion at June 30, 2011, up $10.8 billion from $798.2 billion at December 31, 2010.


Table 8: Deposits
 
                                         
            % of             % of        
    June 30,     total     December 31,     total       %  
(in millions)   2011     deposits     2010     deposits     Change  
 
 
                                     
Noninterest-bearing
  $ 202,116       24   %   $ 191,231       23   %     6  
Interest-bearing checking
    47,635       6       63,440       7       (25 )
Market rate and other savings
    453,635       53       431,883       51       5  
Savings certificates
    70,596       8       77,292       9       (9 )
Foreign deposits (1)
    34,988       4       34,346       4       2  
         
 
                                     
Core deposits
    808,970       95       798,192       94       1  
Other time and savings deposits
    18,872       2       19,412       2       (3 )
Other foreign deposits
    25,793       3       30,338       4       (15 )
         
 
                                     
Total deposits
  $ 853,635       100   %   $ 847,942       100   %     1  
 
 
(1)   Reflects Eurodollar sweep balances included in core deposits.

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Balance Sheet Analysis (continued)
Fair Valuation of Financial Instruments
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. See our 2010 Form 10-K for a description of our critical accounting policy related to fair valuation of financial instruments.
     We may use independent pricing services and brokers to obtain fair values based on quoted prices. We determine the most appropriate and relevant pricing service for each security class and generally obtain one quoted price for each security. For certain securities, we may use internal traders to obtain estimated fair values, which are subject to our internal price verification procedures. We validate prices received using a variety of methods, including, but not limited to, comparison to pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by Company personnel familiar with market liquidity and other market-related conditions.
     Table 9 presents the summary of the fair value of financial instruments recorded at fair value on a recurring basis, and the amounts measured using significant Level 3 inputs (before derivative netting adjustments). The fair value of the remaining assets and liabilities were measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.
Table 9: Fair Value Level 3 Summary
 
                                 
    June 30, 2011     December 31, 2010  
    Total             Total        
($ in billions)   balance     Level 3(1)     balance     Level 3 (1)  
 
 
Assets carried at fair value
  $ 287.3       48.2       293.1       47.9  
 
As a percentage of total assets
    23 %     4       23       4  
 
Liabilities carried at fair value
  $ 23.7       5.3       21.2       6.4  
 
As a percentage of total liabilities
    2 %     -       2       1  
 
 
(1)   Before derivative netting adjustments.
     See Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for a complete discussion on our use of fair valuation of financial instruments, our related measurement techniques and the impact to our financial statements.


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Off-Balance Sheet Arrangements
 
In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital.
Off-Balance Sheet Transactions with Unconsolidated Entities
We routinely enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. Historically, the majority of SPEs were formed in connection with securitization transactions. For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.


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Risk Management
 
All financial institutions must manage and control a variety of business risks that can significantly affect their financial performance. Key among those are credit, asset/liability and market risk.
     For more information about how we manage these risks, see the “Risk Management” section in our 2010 Form 10-K. The discussion that follows is intended to provide an update on these risks.
Credit Risk Management
Table 10: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable
 
                 
    June 30,     Dec. 31,  
(in millions)   2011     2010  
 
 
Commercial:
               
Commercial and industrial
  $ 157,095       151,284  
Real estate mortgage
    101,458       99,435  
Real estate construction
    21,374       25,333  
Lease financing
    12,907       13,094  
Foreign (1)
    37,855       32,912  
 
 
Total commercial
    330,689       322,058  
 
 
Consumer:
               
Real estate 1-4 family first mortgage
    222,874       230,235  
Real estate 1-4 family junior lien mortgage
    89,947       96,149  
Credit card
    21,191       22,260  
Other revolving credit and installment
    87,220       86,565  
 
 
Total consumer
    421,232       435,209  
 
 
Total loans
  $ 751,921       757,267  
 
 
(1)   Substantially all of our foreign loan portfolio is commercial loans. Loans are classified as foreign if the borrower’s primary address is outside of the United States.
     We employ various credit risk management and monitoring activities to mitigate risks associated with multiple risk factors affecting loans we hold or could acquire or originate including:
  Loan concentrations and related credit quality
  Counterparty credit risk
  Economic and market conditions
  Legislative or regulatory mandates
  Changes in interest rates
  Merger and acquisition activities
  Reputation risk
     Our credit risk management process is governed centrally, but provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, disciplined credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. The Credit Committee of our Board of Directors (Board) receives reports from management,
including our Chief Risk Officer and Chief Credit Officer, and its responsibilities include oversight of the administration and effectiveness of, and compliance with, our credit policies and the adequacy of the allowance for credit losses. In addition, banking regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes.
     A key to our credit risk management is adhering to a well controlled underwriting process, which we believe is appropriate for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans.


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Non-Strategic and Liquidating Portfolios We continually evaluate and modify our credit policies to address appropriate levels of risk. Accordingly, from time to time, we designate certain portfolios and loan products as non-strategic or high risk to limit or cease their continued origination as we actively work to limit losses and reduce our exposures.
     Table 11 identifies our non-strategic and liquidating loan portfolios. They consist primarily of the Pick-a-Pay mortgage portfolio and non Pick-a-Pay PCI loans acquired from Wachovia as well as some portfolios from legacy Wells Fargo Home Equity and Wells Fargo Financial. Effective first quarter
2011, we added our education finance government guaranteed loan portfolio to the non-strategic and liquidating portfolios as there is no longer a U.S. Government guaranteed student loan program available to private financial institutions pursuant to legislation in 2010. The non-strategic and liquidating loan portfolios have decreased 36% since the merger with Wachovia at December 31, 2008, and decreased 9% from the end of 2010. The loss rate was 2.24% on these portfolios for the first half of 2011.


Table 11: Non-Strategic and Liquidating Loan Portfolios
 
                                 
    Outstanding balance
 
    June 30,     Dec. 31,     Dec. 31,     Dec. 31,  
(in millions)   2011     2010     2009     2008  
 
 
Commercial:
                               
Commercial and industrial, CRE and foreign PCI loans (1)
  $ 7,016       7,935       12,988       18,704  
 
 
Total commercial
    7,016       7,935       12,988       18,704  
 
 
Consumer:
                               
Pick-a-Pay mortgage (1)
    69,587       74,815       85,238       95,315  
Liquidating home equity
    6,266       6,904       8,429       10,309  
Legacy Wells Fargo Financial indirect auto
    3,881       6,002       11,253       18,221  
Legacy Wells Fargo Financial debt consolidation
    17,730       19,020       22,364       25,299  
Education Finance — government guaranteed (2)
    16,295       17,510       21,150       20,465  
Other PCI loans (1)
    978       1,118       1,688       2,478  
 
 
Total consumer
    114,737       125,369       150,122       172,087  
 
 
Total non-strategic and liquidating loan portfolios
  $ 121,753       133,304       163,110       190,791  
 
(1)   Net of purchase accounting adjustments related to PCI loans.
(2)   Effective first quarter 2011, we included our education finance government guaranteed loan portfolio as there is no longer a U.S. Government guaranteed student loan program available to private financial institutions, pursuant to legislation in 2010. Prior periods have been adjusted to reflect this change.

The legacy Wells Fargo Financial debt consolidation portfolio included $1.2 billion of loans at both June 30, 2011, and December 31, 2010, which were considered prime based on secondary market standards. The remainder is non-prime but was originated with standards to reduce credit risk. Legacy Wells Fargo Financial ceased originating loans and leases through its indirect auto business channel by the end of 2008.
     The home equity liquidating portfolio was designated in fourth quarter 2007 from loans generated through third party channels. This portfolio is discussed in more detail below in the “Credit Risk Management — Home Equity Portfolios” section of this Report.
     Information about the liquidating PCI and Pick-a-Pay loan portfolios is provided in the discussion of loan portfolios that follows.


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Risk Management — Credit Risk Management (continued)
PURCHASED CREDIT-IMPAIRED (PCI) LOANS As of December 31, 2008, certain of the loans acquired from Wachovia had evidence of credit deterioration since their origination, and it was probable that we would not collect all contractually required principal and interest payments. Such loans identified at the time of the acquisition were accounted for in the acquisition using the measurement provisions for PCI loans and are liquidating portfolios. PCI loans were recorded at fair value at the date of acquisition, and the historical allowance for credit losses related to these loans was not carried over. Such loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.
     A nonaccretable difference was established in purchase accounting for PCI loans to absorb losses expected at that time on those loans. Amounts absorbed by the nonaccretable difference do not affect the income statement or the allowance for credit losses.
     Substantially all commercial and industrial, CRE and foreign PCI loans are accounted for as individual loans. Conversely, Pick-a-Pay and other consumer PCI loans have been aggregated into several pools based on common risk characteristics. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
     Resolutions of loans may include sales to third parties, receipt of payments in settlement with the borrower, or foreclosure of the collateral. Our policy is to remove an individual loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference. This removal method assumes that the amount received from resolution approximates pool performance expectations. The accretable yield percentage is unaffected by the resolution and any changes in the effective yield for the remaining loans in the pool are addressed by our quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan. Modified PCI loans are not removed from a pool even if those loans would otherwise be deemed TDRs. Modified PCI loans that are accounted for individually are considered TDRs, and removed from PCI accounting, if there has been a concession granted in excess of the original nonaccretable difference. We include these TDRs in our impaired loans.
     In the first six months of 2011, we recognized in income $114 million released from nonaccretable difference related to commercial PCI loans due to payoffs and dispositions of these loans. We also transferred $210 million from the nonaccretable difference to the accretable yield and $1.0 billion of losses from loan resolutions and write-downs were absorbed by the nonaccretable difference. Table 12 provides an analysis of changes in the nonaccretable difference.


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Table 12: Changes in Nonaccretable Difference for PCI Loans
 
                                 
                    Other        
(in millions)   Commercial     Pick-a-Pay     consumer     Total  
 
 
Balance at December 31, 2008
  $ 10,410       26,485       4,069       40,964  
Release of nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
    (330 )     -       -       (330 )
Loans resolved by sales to third parties (2)
    (86 )     -       (85 )     (171 )
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
    (138 )     (27 )     (276 )     (441 )
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (4)
    (4,853 )     (10,218 )     (2,086 )     (17,157 )
 
 
Balance at December 31, 2009
    5,003       16,240       1,622       22,865  
Release of nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
    (817 )     -       -       (817 )
Loans resolved by sales to third parties (2)
    (172 )     -       -       (172 )
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
    (726 )     (2,356 )     (317 )     (3,399 )
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (4)
    (1,698 )     (2,959 )     (391 )     (5,048 )
 
 
Balance at December 31, 2010
    1,590       10,925       914       13,429  
Release of nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
    (89 )     -       -       (89 )
Loans resolved by sales to third parties (2)
    (25 )     -       -       (25 )
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
    (189 )     -       (21 )     (210 )
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (4)
    (95 )     (789 )     (160 )     (1,044 )
 
 
Balance at June 30, 2011
  $ 1,192       10,136       733       12,061  
 
 
                               
 
 
Balance at March 31, 2011
  $ 1,395       10,626       829       12,850  
Release of nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
    (36 )     -       -       (36 )
Loans resolved by sales to third parties (2)
    (7 )     -       -       (7 )
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
    (95 )     -       -       (95 )
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (4)
    (65 )     (490 )     (96 )     (651 )
 
 
Balance at June 30, 2011
  $ 1,192       10,136       733       12,061  
 
(1)   Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.
 
(2)   Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
 
(3)   Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.
 
(4)   Write-downs to net realizable value of PCI loans are absorbed by the nonaccretable difference when severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

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Risk Management — Credit Risk Management (continued)

     Since the Wachovia acquisition, we have released $5.6 billion in nonaccretable difference for certain PCI loans and pools of PCI loans, including $4.0 billion transferred from the nonaccretable difference to the accretable yield and $1.6 billion released to income through loan resolutions. We have provided $1.7 billion in the allowance for credit losses for certain PCI loans or pools of PCI loans that have had credit-related decreases to cash flows expected to be collected. The net result is a $3.9 billion reduction from December 31, 2008, through June 30, 2011, in our initial expected losses on all PCI loans.
     At June 30, 2011, the allowance for credit losses in excess of nonaccretable difference on certain PCI loans was $273 million. The allowance is necessary to absorb credit-related decreases since acquisition in cash flows expected to be collected and primarily relates to individual PCI loans. Table 13 analyzes the actual and projected loss results on PCI loans since acquisition through June 30, 2011.


Table 13: Actual and Projected Loss Results on PCI Loans
 
                                 
                    Other        
(in millions)   Commercial     Pick-a-Pay     consumer     Total  
 
Release of unneeded nonaccretable difference due to:
                               
Loans resolved by settlement with borrower (1)
  $ (1,236 )     -       -       (1,236 )
Loans resolved by sales to third parties (2)
    (283 )     -       (85 )     (368 )
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
    (1,053 )     (2,383 )     (614 )     (4,050 )
 
Total releases of nonaccretable difference due to better than expected losses
    (2,572 )     (2,383 )     (699 )     (5,654 )
Provision for losses due to credit deterioration (4)
    1,617       -       100       1,717  
 
Actual and projected losses on PCI loans less than originally expected
  $ (955 )     (2,383 )     (599 )     (3,937 )
 
(1)   Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.
 
(2)   Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
 
(3)   Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.
 
(4)   Provision for additional losses is recorded as a charge to income when it is estimated that the cash flows expected to be collected for a PCI loan or pool of loans may not support full realization of the carrying value.

     For further detail on PCI loans, see Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.


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Significant Credit Concentrations and Portfolio Reviews Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, FICO scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an adequate allowance for credit losses. The following analysis reviews the relevant concentrations and certain credit metrics of our significant portfolios. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.
COMMERCIAL REAL ESTATE (CRE) The CRE portfolio consists of both CRE mortgage loans and CRE construction loans. The combined CRE loans outstanding at June 30, 2011, represented 16% of total loans. CRE construction loans totaled $21.4 billion at June 30, 2011, or 3% of total loans. CRE mortgage loans totaled $101.5 billion at June 30, 2011, or 13% of total loans, of which over 36% was to owner-occupants. Table 14 summarizes CRE loans by state and property type with the related nonaccrual totals. CRE nonaccrual loans totaled 6% of the non-PCI CRE outstanding balance at June 30, 2011, a decline of 10% from the prior quarter. The portfolio is diversified both geographically and by property type. The largest geographic concentrations of combined CRE loans are in California and Florida, which represented 25% and 10% of the total CRE portfolio, respectively. By property type, the largest concentrations are office buildings at 25% and industrial/warehouse at 11% of the portfolio. The quarter ended with $26.8 billion of criticized CRE mortgage and $10.6 billion of criticized construction loans. Criticized CRE mortgage loans decreased 6% and criticized CRE construction loans decreased 24% since December 31, 2010. Total criticized CRE loans remained relatively high as a result of the current conditions in the real estate market. CRE delinquencies totaled $1.9 billion or 2% of total non-PCI CRE loans at quarter end. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further detail on criticized loans.
     The underwriting of CRE loans primarily focuses on cash flows and creditworthiness of the customer, in addition to collateral valuations. To identify and manage newly emerging problem CRE loans, we employ a high level of surveillance and regular customer interaction to understand and manage the risks associated with these loans, including regular loan reviews and appraisal updates. As issues are identified, management is engaged and dedicated workout groups are in place to manage problem loans. At June 30, 2011, the recorded investment in PCI CRE loans totaled $5.0 billion, down from $12.3 billion at December 31, 2008, reflecting the reduction resulting from loan resolutions and write-downs.


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Risk Management – Credit Risk Management (continued)
Table 14: CRE Loans by State and Property Type
 
                                                         
    June 30, 2011  
 
    Real estate mortgage     Real estate construction     Total     % of  
    Nonaccrual     Outstanding     Nonaccrual     Outstanding     Nonaccrual     Outstanding     total  
(in millions)   loans     balance (1)     loans     balance (1)     loans     balance (1)     loans  
   
 
By state:
                                                       
PCI loans (1):
                                                       
California
  $ -       595       -       190       -       785       *   %
Florida
    -       451       -       316       -       767       *  
New York
    -       301       -       205       -       506       *  
Virginia
    -       204       -       209       -       413       *  
North Carolina
    -       85       -       327       -       412       *  
Other
    -       1,164       -       941       -       2,105 (2)     *  
   
 
Total PCI loans
  $ -       2,800       -       2,188       -       4,988       *   %
   
 
All other loans:
                                                       
California
  $ 1,167       26,258       353       3,332       1,520       29,590       4   %
Florida
    734       9,362       236       1,862       970       11,224       1  
Texas
    362       7,054       138       1,812       500       8,866       1  
North Carolina
    322       4,375       154       1,136       476       5,511       *  
New York
    34       4,183       9       970       43       5,153       *  
Virginia
    86       3,491       40       1,489       126       4,980       *  
Georgia
    289       3,694       205       753       494       4,447       *  
Arizona
    244       3,694       53       660       297       4,354       *  
Colorado
    100       3,006       48       477       148       3,483       *  
Washington
    61       2,932       27       493       88       3,425       *  
Other
    1,292       30,609       780       6,202       2,072       36,811 (3)     5  
   
 
Total all other loans
  $ 4,691       98,658       2,043       19,186       6,734       117,844       16   %
   
 
Total
  $ 4,691       101,458       2,043       21,374       6,734       122,832       16   %
   
 
By property:
                                                       
PCI loans (1):
                                                       
Office buildings
  $ -       967       -       200       -       1,167       *   %
Apartments
    -       707       -       443       -       1,150       *  
1-4 family land
    -       179       -       400       -       579       *  
Retail (excluding shopping center)
    -       270       -       90       -       360       *  
Land (excluding 1-4 family)
    -       15       -       288       -       303       *  
Other
    -       662       -       767       -       1,429       *  
   
 
Total PCI loans
  $ -       2,800       -       2,188       -       4,988       *   %
   
 
All other loans:
                                                       
Office buildings
  $ 1,139       27,322       87       2,041       1,226       29,363       4   %
Industrial/warehouse
    619       13,207       58       700       677       13,907       2  
Apartments
    333       9,705       177       2,696       510       12,401       2  
Retail (excluding shopping center)
    651       10,615       51       829       702       11,444       2  
Shopping center
    291       9,243       149       1,418       440       10,661       1  
Real estate — other
    327       8,491       14       192       341       8,683       1  
Hotel/motel
    357       6,357       27       872       384       7,229       *  
Land (excluding 1-4 family)
    61       434       556       6,275       617       6,709       *  
Institutional
    92       2,762       6       234       98       2,996       *  
Agriculture
    156       2,589       -       24       156       2,613       *  
Other
    665       7,933       918       3,905       1,583       11,838       2  
   
 
Total all other loans
  $ 4,691       98,658       2,043       19,186       6,734       117,844       16   %
   
 
Total
  $ 4,691       101,458   (4)     2,043       21,374       6,734       122,832       16   %
   
 
*   Less than 1%.
(1)   For PCI loans, amounts represent carrying value. PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.
(2)   Includes 35 states; no state had loans in excess of $356 million.
(3)   Includes 40 states; no state had loans in excess of $3.1 billion.
(4)   Includes $37.0 billion of loans to owner-occupants where 51% or more of the property is used in the conduct of their business.

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COMMERCIAL AND INDUSTRIAL LOANS AND LEASE FINANCING For purposes of portfolio risk management, we aggregate commercial and industrial loans and lease financing according to market segmentation and standard industry codes. Table 15 summarizes commercial and industrial loans and lease financing by industry with the related nonaccrual totals. Across our non-PCI commercial loans and leases, the commercial and industrial loans and lease financing portfolios experienced less credit deterioration than our CRE portfolios in the second quarter 2011. Of the total commercial and industrial loans and lease financing non-PCI portfolios, 0.06% was 90 days or more past due and still accruing, 1.46% was nonaccruing and 13.8% were criticized. In comparison, of the total non-PCI CRE portfolio, 0.19% was 90 days or more past due and still accruing, 5.71% was nonaccruing and 28.1% was criticized. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report. Also, the annualized net-charge off rate for both portfolios declined from second quarter 2010. We believe this portfolio is well underwritten and is diverse in its risk with relatively even concentrations across several industries. Our credit risk management process for this portfolio primarily focuses on a customer’s ability to repay the loan through their cash flow. Generally, the collateral securing this portfolio represents a secondary source of repayment.
     A majority of our commercial and industrial loans and lease financing portfolio is secured by short-term liquid assets, such as accounts receivable, inventory and securities, as well as long-lived assets, such as equipment and other business assets.
Table 15: Commercial and Industrial Loans and Lease Financing by Industry
 
                         
  June 30, 2011  
                    % of  
    Nonaccrual     Outstanding     total  
(in millions)   loans     balance (1)     loans  
   
   
PCI loans (1):
                       
Insurance
  $ -       91       *   %
Investors
    -       74       *  
Technology
    -       66       *  
Residential construction
    -       62       *  
Healthcare
    -       46       *  
Aerospace and defense
    -       37       *  
Other
    -       151 (2)     *  
   
   
Total PCI loans
  $ -       527       *   %
   
   
All other loans:
                       
Financial institutions
  $ 143       10,561       1   %
Cyclical retailers
    46       9,603       1  
Food and beverage
    63       9,048       1  
Oil and gas
    128       8,272       1  
Healthcare
    74       7,983       1  
Industrial equipment
    63       7,165       *  
Real estate
    68       6,414       *  
Transportation
    29       6,410       *  
Investors
    74       5,580       *  
Technology
    75       5,552       *  
Public administration
    46       5,322       *  
Business services
    51       5,163       *  
Other
    1,612       82,402 (3)     11  
   
   
Total all other loans
  $ 2,472       169,475       23   %
   
   
Total
  $ 2,472       170,002       23   %
   
   
*   Less than 1%.
(1)   For PCI loans, amounts represent carrying value. PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.
(2)   No other single category had loans in excess of $23.4 million.
(3)   No other single category had loans in excess of $4.9 billion. The next largest categories included utilities, hotel/restaurant, securities firms, non-residential construction and leisure.


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Risk Management – Credit Risk Management (continued)

     During the recent credit cycle, we have experienced an increase in loans requiring risk mitigation activities including the restructuring of loan terms and requests for extensions of commercial and industrial and CRE loans. All actions are based on a re-underwriting of the loan and our assessment of the borrower’s ability to perform under the agreed-upon terms. For loans that are granted an extension, borrowers are generally performing in accordance with the contractual loan terms. Extension terms generally range from six to thirty-six months and may require that the borrower provide additional economic support in the form of partial repayment, or additional collateral or guarantees. In cases where the value of collateral or financial condition of the borrower is insufficient to repay our loan, we may rely upon the support of an outside repayment guarantee in providing the extension. In considering the impairment status of the loan, we evaluate the collateral and future cash flows as well as the anticipated support of any repayment guarantor. In many cases the strength of the guarantor provides sufficient assurance that full repayment of the loan is expected. When full and timely collection of the loan becomes uncertain, including the performance of the guarantor, we place the loan on nonaccrual status and we charge-off all or a portion of the loan based on the fair value of the collateral securing the loan, if any.
     Our ability to seek performance under a guarantee is directly related to the guarantor’s creditworthiness, capacity and willingness to perform, which is evaluated on an annual basis, or more frequently as warranted. Our evaluation is based on the most current financial information available and is focused on various key financial metrics, including net worth, leverage, and current and future liquidity. We consider the guarantor’s reputation, creditworthiness, and willingness to work with us based on our analysis as well as other lenders’ experience with the guarantor. Our assessment of the guarantor’s credit strength is reflected in our loan risk ratings for such loans. The loan risk rating and accruing status are important factors in our allowance methodology for commercial and industrial and CRE loans.
      


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     FOREIGN LOANS At June 30, 2011, foreign loans represented approximately 5% of our total consolidated loans outstanding and approximately 3% of our total assets. The United Kingdom was the only individual foreign country with cross-border outstandings, defined to include loans, acceptances, interest-bearing deposits with other banks, other interest bearing investments and any other monetary assets that exceeded 0.75% of our consolidated assets at June 30, 2011. The United Kingdom cross-border outstandings amounted to approximately $9.5 billion, or 0.75% of our consolidated assets, and included $1.7 billion of sovereign claims. Recently, there has been increased focus on the exposure of U.S. banks to Greece, Ireland, Italy, Portugal and Spain, which have experienced credit deterioration due to economic weakness and their respective fiscal situations. At June 30, 2011, our gross outside exposure to these five countries, including cross-border claims on an ultimate risk basis, and foreign exchange and derivative products, aggregated approximately $3.2 billion. Of this amount, we held approximately $100 million in sovereign claims, substantially all for Ireland, and no sovereign claims for Greece, Portugal and Spain. We did not have any sovereign credit default swaps that we have written or received associated with Greece, Ireland, Italy, Portugal and Spain.
     Our foreign country risk monitoring process incorporates frequent dialogue with our foreign financial institution customers, counterparties and regulatory agencies, enhanced by centralized monitoring of macroeconomic and capital markets conditions. We establish exposure limits for each country via a centralized oversight process based on the needs of our customers, and in consideration of relevant economic, political, social, legal, and transfer risks. We monitor exposures closely and adjust our limits in response to changing conditions.
      


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Risk Management – Credit Risk Management (continued)
REAL ESTATE 1-4 FAMILY MORTGAGE LOANS Our real estate 1-4 family mortgage loans primarily include loans that we have made to customers and retained as part of our asset liability management strategy. These loans also include the Pick-a-Pay Portfolio acquired from Wachovia and the Home Equity Portfolio, which are discussed below. In addition, these loans include other purchased loans and loans included on our balance sheet due to the adoption of consolidation accounting guidance related to VIEs.
     Our underwriting of loans collateralized by residential real property includes appraisals or estimates from automated valuation models (AVMs) to support property values. AVMs are computer-based tools used to estimate the market value of homes. AVMs are a lower-cost alternative to appraisals and support valuations of large numbers of properties in a short period of time using market comparables and price trends for local market areas. The primary risk associated with the use of AVMs is that the value of an individual property may vary significantly from the average for the market area. We have processes to periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. AVMs are generally used in underwriting to support property values on loan originations only where the loan amount is under $250,000. We generally require property visitation appraisals by a qualified independent appraiser for larger residential property loans.
     Some of our real estate 1-4 family first and junior lien mortgage loans include an interest-only feature as part of the loan terms. These interest-only loans were approximately 25% of total loans at both June 30, 2011 and December 31, 2010. Substantially all of these interest-only loans at origination were considered to be prime or near prime.
     We believe we have manageable adjustable-rate mortgage (ARM) reset risk across our Wells Fargo owned mortgage loan portfolios. We do not offer option ARM products, nor do we offer variable-rate mortgage products with fixed payment amounts, commonly referred to within the financial services industry as negative amortizing mortgage loans. Our option ARM portfolio was acquired in the Wachovia acquisition.
     We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers in the current difficult economic cycle. Loans are underwritten at the time of the modification in accordance with underwriting guidelines established for governmental and proprietary loan modification programs. As a participant in the U.S. Treasury’s Making Home Affordable (MHA) programs, we are focused on helping customers stay in their homes. The MHA programs create a standardization of modification terms including incentives paid to borrowers, servicers, and investors. MHA includes the Home Affordable Modification Program (HAMP) for first lien loans and the Second Lien Modification Program (2MP) for junior lien loans. Under both our proprietary programs and the MHA programs, we may provide concessions such as interest rate reductions, forbearance of principal, and in some cases, principal forgiveness. These programs generally include trial periods of three months, and after successful completion and compliance with terms during this period, the loan is considered to be modified. See the “Allowance for Credit Losses” section in this Report for discussion on how we determine the allowance attributable to our modified residential real estate portfolios.


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     The concentrations of real estate 1-4 family first and junior lien mortgage loans by state are presented in Table 16. Our real estate 1-4 family mortgage loans to borrowers in California represented approximately 14% of total loans (3% of this amount were PCI loans from Wachovia) at June 30, 2011, mostly within the larger metropolitan areas, with no single California metropolitan area consisting of more than 3% of total loans. We continuously monitor changes in real estate values and underlying economic or market conditions for all geographic areas of our real estate 1-4 family mortgage portfolio as part of our credit risk management process.
     Part of our credit monitoring includes tracking delinquency, FICO scores and collateral values (LTV/CLTV) on the entire real estate 1-4 family mortgage loan portfolio. All three credit risk metrics showed improvement in second quarter 2011, on the non-PCI mortgage portfolio. Loans 30 days or more delinquent at June 30, 2011, totaled $18.4 billion, or 7%, of total non-PCI mortgages, down 9% from December 31, 2010. Loans with FICO scores lower than 640 totaled $47.0 billion at June 30, 2011 or 17% of all non-PCI mortgages, a decline of 8% from year-end. Mortgages with a LTV/CLTV greater than 100% totaled $79.4 billion at June 30, 2011 or 28% of total non-PCI mortgages, a 7% decline from year-end. Information regarding credit risk trends can be found in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
Table 16: Real Estate 1-4 Family Mortgage Loans by State
 
                                 
    June 30, 2011  
 
    Real estate     Real estate     Total real        
 
    1-4 family     1-4 family     estate 1-4     % of  
 
    first     junior lien     family     total  
 
(in millions)   mortgage     mortgage     mortgage     loans  
   
 
PCI loans:
                               
California
  $ 20,540       45       20,585       3   %
Florida
    2,899       46       2,945       *  
New Jersey
    1,294       29       1,323       *  
Other (1)
    6,715       109       6,824       *  
   
 
Total PCI loans
  $ 31,448       229       31,677       4   %
   
 
All other loans:
                               
California
  $ 54,622       25,126       79,748       11   %
Florida
    16,636       7,962       24,598       3  
New Jersey
    9,038       6,364       15,402       2  
New York
    8,431       3,695       12,126       2  
Virginia
    5,962       4,541       10,503       1  
Pennsylvania
    6,102       4,021       10,123       1  
North Carolina
    5,804       3,617       9,421       1  
Georgia
    4,696       3,499       8,195       1  
Texas
    6,447       1,435       7,882       1  
Other (2)
    73,688       29,458       103,146       15  
   
 
Total all
                               
other loans
  $ 191,426       89,718       281,144       38   %
   
 
Total
  $ 222,874       89,947       312,821       42   %
   
 
*   Less than 1%.
 
(1)   Consists of 46 states; no state had loans in excess of $733 million.
 
(2)   Consists of 41 states; no state had loans in excess of $6.7 billion. Includes $15.7 billion in loans that are insured by the Federal Housing Authority (FHA) or guaranteed by the Department of Veterans Affairs (VA).


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Risk Management — Credit Risk Management (continued)

PICK-A-PAY PORTFOLIO The Pick-a-Pay portfolio was one of the consumer residential first mortgage portfolios we acquired from Wachovia. We considered a majority of the Pick-a-Pay loans to be PCI loans. The Pick-a-Pay portfolio is a liquidating portfolio, as Wachovia ceased originating new Pick-a-Pay loans in 2008.
     The Pick-a-Pay portfolio includes loans that offer payment options (Pick-a-Pay option payment loans), and also includes loans that were originated without the option payment feature, loans that no longer offer the option feature as a result of our
modification efforts since the acquisition, and loans where the customer voluntarily converted to a fixed-rate product. The Pick-a-Pay portfolio is included in the consumer real estate 1-4 family first mortgage class of loans throughout this Report. Real estate 1-4 family junior lien mortgages and lines of credit associated with Pick-a-Pay loans are reported in the Home Equity portfolio. Table 17 provides balances over time related to the types of loans included in the portfolio since acquisition.


Table 17: Pick-a-Pay Portfolio — Balances Over Time
 
                                                 
    June 30,     December 31,  
 
    2011     2010     2008  
 
    Adjusted             Adjusted             Adjusted        
    unpaid             unpaid             unpaid        
    principal             principal             principal        
(in millions)   balance     % of total     balance     % of total     balance     % of total  
   
 
Option payment loans (1)
  $ 44,157       56   %   $ 49,958       59   %   $ 99,937       86   %
Non-option payment adjustable-rate
and fixed-rate loans (1)
    10,577       14       11,070       13       15,763       14  
Full-term loan modifications (1)
    23,481       30       23,132       28       -       -  
   
 
Total adjusted unpaid principal balance (1)
  $ 78,215       100   %   $ 84,160       100   %   $ 115,700       100   %
   
 
Total carrying value
  $ 69,587             $ 74,815             $ 95,315          
 
   
 
(1)   Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

    PCI loans in the Pick-a-Pay portfolio had an adjusted unpaid principal balance of $39.5 billion and a carrying value of $30.7 billion at June 30, 2011. The carrying value of the PCI loans is net of remaining purchase accounting write-downs, which reflected their fair value at acquisition. At acquisition, we recorded a $22.4 billion write-down in purchase accounting on Pick-a-Pay loans that were impaired.
     Pick-a-Pay option payment loans may be adjustable or fixed rate. They are home mortgages on which the customer has the option each month to select from among four payment options: (1) a minimum payment as described below, (2) an interest-only payment, (3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment.
     The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The new minimum monthly payment amount usually cannot increase by more than 7.5% of the then-existing principal and interest payment amount. The minimum payment may not be sufficient to pay the monthly interest due and in those situations a loan on which the customer has made a minimum payment is subject to “negative amortization,” where unpaid interest is added to the principal balance of the loan. The amount of interest that has been added to a loan balance is referred to as “deferred interest.” Total deferred interest of $2.3 billion at June 30, 2011, down from $2.7 billion at December 31, 2010, was due to loan modification efforts as well as falling interest rates resulting in the minimum payment option covering interest and some principal on many loans. Approximately 79% of the Pick-a-Pay customers making a minimum payment in June 2011 did not defer interest.
     Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to or below 85% have a cap of 125% of the original loan balance, and these loans represent substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its principal cap, or the 10-year anniversary of the loan. For a small population of Pick-a-Pay loans, the recast occurs at the five-year anniversary. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.
     Due to the terms of the Pick-a-Pay portfolio, there is little recast risk in the near term. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balances of loans to recast based on reaching the principal cap: $1 million for the remainder of 2011, $3 million in 2012, and $30 million in 2013. In second quarter 2011, no loans were recast based on reaching the principal cap. In addition, in a flat rate environment, we would expect the following balances of loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change at the recast date greater than the annual 7.5% reset:


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$11 million for the remainder of 2011, $66 million in 2012, and $289 million in 2013. In second quarter 2011, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $4 million.
     Table 18 reflects the geographic distribution of the Pick-a-Pay portfolio broken out between PCI loans and all other loans. In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is a useful metric in
predicting future real estate 1-4 family first mortgage loan performance, including potential charge-offs. Because PCI loans were initially recorded at fair value, including write-downs for expected credit losses, the ratio of the carrying value to the current collateral value will be lower compared with the LTV based on the adjusted unpaid principal balance. For informational purposes, we have included both ratios for PCI loans in the following table.


Table 18: Pick-a-Pay Portfolio (1)
 
                                                 
    June 30, 2011  
 
       
    PCI loans     All other loans  
 
       
                            Ratio of             Ratio of  
    Adjusted                     carrying             carrying  
    unpaid     Current             value to             value to  
    principal     LTV     Carrying     current     Carrying     current  
(in millions)   balance (2)     ratio (3)     value (4)     value (5)     value (4)     value (5)  
 
 
       
California
  $ 26,851       119   %   $ 20,464       90   %   $ 19,011       84   %
Florida
    3,621       124       2,759       89       4,002       103  
New Jersey
    1,384       93       1,231       82       2,450       79  
Texas
    356       79       325       72       1,589       65  
New York
    772       92       681       80       1,062       81  
Other states
    6,499       110       5,239       88       10,774       87  
                                     
 
       
Total Pick-a-Pay loans
  $ 39,483             $ 30,699             $ 38,888          
                                     
 
 
(1)   The individual states shown in this table represent the top five states based on the total net carrying value of the Pick-a-Pay loans at the beginning of 2011.
 
(2)   Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
 
(3)   The current LTV ratio is calculated as the adjusted unpaid principal balance divided by the collateral value. Collateral values are generally determined using automated valuation models (AVM) and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas.
 
(4)   Carrying value, which does not reflect the allowance for loan losses, includes remaining purchase accounting adjustments, which, for PCI loans may include the nonaccretable difference and the accretable yield and, for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent charge-offs.
 
(5)   The ratio of carrying value to current value is calculated as the carrying value divided by the collateral value.

     To maximize return and allow flexibility for customers to avoid foreclosure, we have in place several loss mitigation strategies for our Pick-a-Pay loan portfolio. We contact customers who are experiencing difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.
     We also have taken steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we offer combinations of term extensions of up to 40 years (from 30 years), interest rate reductions, forbearance of principal, and, in geographies with substantial property value declines, we may offer permanent principal reductions.
     In second quarter 2011, we completed more than 5,000 proprietary and HAMP Pick-a-Pay loan modifications and have completed more than 90,000 modifications since the Wachovia acquisition, resulting in $4.0 billion of principal forgiveness to our Pick-a-Pay customers. As announced in October 2010, we entered into agreements with certain state attorneys general whereby we agreed to offer loan modifications to eligible Pick-a-Pay customers through June 2013. These agreements cover the majority of our option payment loan portfolio and require that we offer modifications (both HAMP and proprietary) to eligible
customers with the option payment loan product. In response to these agreements, we developed an enhanced proprietary modification product that allows for various means of principal forgiveness along with changes to other loan terms. Given that these agreements cover all modification efforts to eligible customers for the applicable states, a majority of our modifications (both HAMP and proprietary) for our Pick-a-Pay loan portfolio performed in second quarter 2011 are consistent with these agreements.
     Due to better than expected performance observed on the Pick-a-Pay portfolio compared with the original acquisition estimates, we have reclassified $2.4 billion from the nonaccretable difference to the accretable yield since acquisition. Our performance is primarily attributable to significant modification efforts as well as the portfolio’s delinquency stabilization. The resulting increase in the accretable yield will be realized over the remaining life of the portfolio, which is estimated to have a weighted-average life of approximately ten years. The accretable yield percentage in second quarter 2011 was 4.54%, consistent with fourth quarter 2010. Fluctuations in the accretable yield are driven by changes in interest rate indices for variable rate PCI loans, prepayment assumptions, and expected principal and interest payments over the estimated life


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Risk Management — Credit Risk Management (continued)

of the portfolio. Changes in the projected timing of cash flow events, including loan liquidations, modifications and short
sales, can also affect the accretable yield percentage and the estimated weighted-average life of the portfolio.


HOME EQUITY PORTFOLIOS Our Home Equity Portfolios consist of real estate 1-4 family junior lien mortgages and first and junior lines of credit secured by real estate. Our first lien lines of credit represent 19% of our home equity portfolio and are included in real estate 1-4 family first mortgages. The majority of our junior lien loan products are amortizing payment loans with fixed interest rates and repayment periods between 5 to 30 years. Junior lien loans with balloon payments at the end of the repayment term represent a small portion of our junior lien loans.
     Our first and junior lien lines of credit products generally have a draw period of 10 years with variable interest rates and payment options during the draw period of (1) interest only or (2) 1.5% of total outstanding balance. During the draw period, the borrower has the option of converting all or a portion of the line from a variable interest rate to a fixed rate with terms including interest-only payments for a fixed period between three to seven years or a fully amortizing payment with a fixed period between five to 30 years. At the end of the draw period, a line of credit generally converts to an amortizing payment loan with repayment terms of up to 30 years based on the balance at time of conversion. The draw periods for a majority of our lines of credit end after 2015.
     We continuously monitor the credit performance of our junior lien mortgage portfolio for trends and factors that influence the frequency and severity of loss. We have observed that the severity of loss for junior lien mortgages is high and generally not affected by whether we or a third party own or service the related first mortgage, but that the frequency of loss is lower when we own or service the first mortgage. Although we have observed that delinquency and default rates are lower when we own or service the related first mortgage, we have limited information available to identify which of our junior liens are behind delinquent third party originated or serviced first mortgages. To capture this loss content, we refined our allowance process during second quarter 2011 utilizing the experience of our junior lien mortgages behind delinquent first liens that are owned or serviced by us adjusted for observed higher delinquency rates associated with junior lien mortgages behind third party first mortgages. We then incorporated this expected loss content into our allowance for loan losses, which added $210 million to our allowance. Table 19 summarizes delinquency and loss rates by the holder of the lien.
Table 19: Home Equity Portfolios Performance by Holder of 1st Lien (1)
 
                         
            % of        
            loans two     Loss rate  
            payments     (annualized)  
    Outstanding     or more     quarter  
(in millions)   balance     past due     ended  
 
 
June 30, 2011
                       
First lien lines
  $ 20,941       2.85 %     0.82  
Junior lien behind Wells Fargo owned or serviced first lien
    44,963       2.78       3.76  
Junior lien behind Third party first lien
    44,779       3.53       4.32  
                 
 
Total
  $ 110,683       3.09       3.43  
 
 
(1)   Excludes PCI loans and includes $1.6 billion at June 30, 2011, associated with the Pick-a-Pay portfolio.


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     We also monitor the number of borrowers paying the minimum amount due on a monthly basis. In June 2011, approximately 93% of our borrowers with outstanding balances paid at least the minimum amount due, which included 46% of our borrowers paying only the minimum amount due.
     The home equity liquidating portfolio includes home equity loans generated through third party channels, including correspondent loans. This liquidating portfolio represents less than 1% of our total loans outstanding at June 30, 2011, and
contains some of the highest risk in our home equity portfolio, with a loss rate of 9.22% compared with 3.08% for the core (non-liquidating) home equity portfolio. Table 20 shows the credit attributes of the core and liquidating home equity portfolios and lists the top five states in each portfolio showing that California loans represent the largest state concentration in each of these portfolios. The decrease in outstanding balances primarily reflects loan paydowns and charge-offs.


Table 20: Home Equity Portfolios (1)
 
                                                 
                    % of loans     Loss rate  
                    two payments     (annualized)  
    Outstanding balance     or more past due     quarter ended  
    June 30,     Dec. 31,     June 30,     Dec. 31,     June 30,     Dec. 31,  
(in millions)   2011     2010     2011     2010     2011     2010  
 
 
Core portfolio (2)
                                               
California
  $ 26,651       27,850       2.98 %     3.30       3.69       3.95  
Florida
    11,200       12,036       4.91       5.46       5.23       5.84  
New Jersey
    8,010       8,629       3.57       3.44       2.05       1.83  
Virginia
    5,358       5,667       2.19       2.33       1.85       1.70  
Pennsylvania
    5,161       5,432       2.39       2.48       1.49       1.11  
Other
    48,037       50,976       2.60       2.83       2.70       2.86  
                                 
 
Total
    104,417       110,590       2.99       3.24       3.08       3.24  
                                 
 
Liquidating portfolio
                                               
California
    2,233       2,555       5.69       6.66       12.73       13.48  
Florida
    288       330       6.97       8.85       10.52       10.59  
Arizona
    127       149       7.01       6.91       14.01       18.45  
Texas
    106       125       1.12       2.02       3.40       2.95  
Minnesota
    80       91       3.87       5.39       7.83       8.73  
Other
    3,432       3,654       4.04       4.53       6.73       6.46  
                                 
 
Total
    6,266       6,904       4.77       5.54       9.22       9.49  
                                 
 
Total core and liquidating portfolios
  $ 110,683       117,494       3.09       3.37       3.43       3.61  
                                 
 
                                               
 
 
(1)   Consists predominantly of real estate 1-4 family junior lien mortgages and first and junior lines of credit secured by real estate, excluding PCI loans.
 
(2)   Includes $1.6 billion and $1.7 billion at June 30, 2011, and December 31, 2010, respectively, associated with the Pick-a-Pay portfolio.

CREDIT CARDS Our credit card portfolio totaled $21.2 billion at June 30, 2011, which represented 3% of our total outstanding loans. The quarterly net charge-off rate (annualized) for our credit card loans declined throughout 2010 and was 5.63% for second quarter 2011 compared with 10.45% for second quarter 2010.
OTHER REVOLVING CREDIT AND INSTALLMENT Other revolving credit and installment loans totaled $87.2 billion at June 30, 2011, and predominantly include automobile, student and security-based margin loans. The quarterly loss rate (annualized) for other revolving credit and installment loans was 1.03% for second quarter 2011 compared with 1.63% for second quarter 2010. Excluding government guaranteed student loans, the loss rates were 1.23% and 2.02% for second quarter 2011 and 2010, respectively.


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Risk Management — Credit Risk Management (continued)
NONACCRUAL LOANS AND FORECLOSED ASSETS We generally place loans on nonaccrual status when:
  the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any);
  they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest or principal, unless both well-secured and in the process of collection; or
  part of the principal balance has been charged off and no restructuring has occurred.
     Table 21 shows a quarterly trend for nonaccrual loans and foreclosed assets, and, beginning in fourth quarter 2010, shows a decline in the total balance from the prior quarter for the first time since the acquisition of Wachovia. The decline continued in the first two quarters of 2011.


Table 21: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)
 
                                                                 
    June 30, 2011     March 31, 2011     December 31, 2010     September 30, 2010  
            % of             % of             % of             % of  
            total             total             total             total  
($ in millions)   Balances     loans     Balances     loans     Balances     loans     Balances     loans  
 
Commercial:
                                                               
Commercial and industrial
  $ 2,393       1.52   %   $ 2,653       1.76   %   $ 3,213       2.12   %   $ 4,103       2.79   %
Real estate mortgage
    4,691       4.62       5,239       5.18       5,227       5.26       5,079       5.14  
Real estate construction
    2,043       9.56       2,239       9.79       2,676       10.56       3,198       11.46  
Lease financing
    79       0.61       95       0.73       108       0.82       138       1.06  
Foreign
    59       0.16       86       0.24       127       0.39       126       0.42  
                                                   
Total commercial (1)
    9,265       2.80       10,312       3.19       11,351       3.52       12,644       3.99  
                                                   
Consumer:
                                                               
Real estate 1-4 family first mortgage (2)
    11,427       5.13       12,143       5.36       12,289       5.34       12,969       5.69  
Real estate 1-4 family junior lien mortgage
    2,098       2.33       2,235       2.40       2,302       2.39       2,380       2.40  
Other revolving credit and installment
    255       0.29       275       0.31       300       0.35       312       0.35  
                                                   
Total consumer
    13,780       3.27       14,653       3.42       14,891       3.42       15,661       3.58  
                                                   
Total nonaccrual loans (3)(4)(5)
    23,045       3.06       24,965       3.32       26,242       3.47       28,305       3.76  
                                                   
Foreclosed assets:
                                                               
Government insured/guaranteed (6)
    1,320               1,457               1,479               1,492          
Non-government insured/guaranteed
    3,541               4,055               4,530               4,635          
                                                   
Total foreclosed assets
    4,861               5,512               6,009               6,127          
                                                   
Total nonperforming assets
  $ 27,906       3.71   %   $ 30,477       4.06   %   $ 32,251       4.26   %   $ 34,432       4.57   %
                                                   
Change from prior quarter
  $ (2,571 )             (1,774 )             (2,181 )             1,627          
 
 
(1)   Includes LHFS of $52 million, $17 million, $3 million and $89 million at June 30 and March 31, 2011, and December 31, and September 30, 2010, respectively.
 
(2)   Includes MHFS of $304 million, $430 million, $426 million and $448 million at June 30 and March 31, 2011, and December 31 and September 30, 2010, respectively.
 
(3)   Excludes loans acquired from Wachovia that are accounted for as PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
 
(4)   Real estate 1-4 family mortgage loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veteran Affairs (VA) and student loans predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the Federal Family Education Loan Program are not placed on nonaccrual status because they are insured or guaranteed.
 
(5)   See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2010 Form 10-K for further information on impaired loans.
 
(6)   Consistent with regulatory reporting requirements, foreclosed real estate securing government insured/guaranteed loans is classified as nonperforming. Both principal and interest for government insured/guaranteed loans secured by the foreclosed real estate are collectible because the loans are insured by the FHA or guaranteed by the VA.

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     Total NPAs were $27.9 billion (3.71% of total loans) at June 30, 2011, and included $23.0 billion of nonaccrual loans and $4.9 billion of foreclosed assets. Since the peak in third quarter 2010, NPAs have declined for all loan and other asset types
through June 30, 2011. New inflows to nonaccrual loans continued to decline. Table 22 provides an analysis of the changes in nonaccrual loans.


Table 22: Analysis of Changes in Nonaccrual Loans
 
                                         
    Quarter ended  
    June 30,     Mar. 31,     Dec. 31,     Sept. 30,     June 30,  
(in millions)   2011     2011     2010     2010     2010  
 
 
Commercial nonaccrual loans
                                       
Balance, beginning of quarter
  $ 10,312       11,351       12,644       12,239       12,265  
Inflows
    1,622       1,881       2,329       2,807       2,560  
Outflows
    (2,669 )     (2,920 )     (3,622 )     (2,402 )     (2,586 )
 
Balance, end of quarter
    9,265       10,312       11,351       12,644       12,239  
 
 
Consumer nonaccrual loans
                                       
Balance, beginning of quarter
    14,653       14,891       15,661       15,572       15,036  
Inflows
    3,443       3,955       4,357       4,866       4,733  
Outflows
    (4,316 )     (4,193 )     (5,127 )     (4,777 )     (4,197 )
 
 
Balance, end of quarter
    13,780       14,653       14,891       15,661       15,572  
 
 
Total nonaccrual loans
  $ 23,045       24,965       26,242       28,305       27,811  
 
     Typically, changes to nonaccrual loans period-over-period represent inflows for loans that reach a specified past due status, offset by reductions for loans that are charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual because they return to accrual status.
     While nonaccrual loans are not free of loss content, we believe exposure to loss is significantly mitigated by four factors. First, 99% of consumer nonaccrual loans and 95% of commercial nonaccrual loans are secured. Of the $13.8 billion of consumer nonaccrual loans at June 30, 2011, 98% are secured by real estate and 36% have a combined LTV (CLTV) ratio of 80% or below. Second, losses have already been recognized on 52% of the remaining balance of consumer nonaccruals and commercial nonaccruals have been written down by $2.4 billion. Generally, when a consumer real estate loan is 120 days past due, we transfer it to nonaccrual status. When the loan reaches 180 days past due it is our policy to write these loans down to net realizable value (fair value of collateral less estimated costs to sell), except for modifications in their trial period which are not written down as long as trial payments are made on time. Thereafter, we revalue each loan regularly and recognize additional write-downs if needed. Third, as of June 30, 2011, 57% of commercial nonaccrual loans were current on interest. Fourth, the inherent risk of loss in all nonaccruals has been considered and we believe is adequately covered by the allowance for loan losses.
     Under both our proprietary modification programs and the MHA programs, customers may be required to provide updated documentation, and some programs require completion of trial payment periods to demonstrate sustained performance, before the loan can be removed from nonaccrual status. In addition, for loans in foreclosure, many states, including California, Florida and New Jersey, have enacted legislation that significantly increases the time frames to complete the foreclosure process, meaning that loans will
remain in nonaccrual status for longer periods. At the conclusion of the foreclosure process, we continue to sell real estate owned in a timely manner.
     Table 23 provides a summary of foreclosed assets and an analysis of the changes.


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Risk Management – Credit Risk Management (continued)
Table 23: Foreclosed Assets
 
                                         
    June 30,     Mar. 31,     Dec. 31,     Sept. 30,     June 30,  
(in millions)   2011     2011     2010     2010     2010  
 
 
Balance, period end
                                       
Government insured/guaranteed (1)
  $ 1,320       1,457       1,479       1,492       1,344  
PCI loans:
                                       
Commercial
    993       1,005       967       1,043       940  
Consumer
    469       741       1,068       1,109       722  
 
 
Total PCI loans
    1,462       1,746       2,035       2,152       1,662  
 
 
All other loans:
                                       
Commercial
    1,409       1,408       1,412       1,343       1,087  
Consumer
    670       901       1,083       1,140       901  
 
 
Total all other loans
    2,079       2,309       2,495       2,483       1,988  
 
 
Total foreclosed assets
  $ 4,861       5,512       6,009       6,127       4,994  
 
 
Analysis of changes in foreclosed assets
                                       
Balance, beginning of quarter
  $ 5,512       6,009       6,127       4,994       4,081  
Foreclosed assets acquired
    862       1,340       2,072       2,837       2,337  
Reductions:
                                       
Sales
    (1,413 )     (1,657 )     (1,776 )     (1,304 )     (1,246 )
Write-downs and loss on sales
    (100 )     (180 )     (414 )     (400 )     (178 )
 
 
Total reductions
    (1,513 )     (1,837 )     (2,190 )     (1,704 )     (1,424 )
 
 
Balance, end of quarter
  $ 4,861       5,512       6,009       6,127       4,994  
 
 
(1)   Consistent with regulatory reporting requirements, foreclosed real estate securing government insured/guaranteed loans is classified as nonperforming. Both principal and interest for government insured/guaranteed loans secured by the foreclosed real estate are collectible because the loans are insured by the FHA or guaranteed by the VA.

     NPAs at June 30, 2011, included $1.3 billion of foreclosed real estate that is FHA insured or VA guaranteed and expected to have little to no loss content, and $3.6 billion of foreclosed assets, which have been written down to net realizable value. Foreclosed assets decreased $133 million, or 3%, year over year in second quarter 2011. Of this decrease, $200 million were foreclosed loans from the PCI portfolio that are now recorded as foreclosed assets. At June 30, 2011, most of our foreclosed assets of $4.9 billion have been in the foreclosed assets portfolio one year or less.
     Given our real estate-secured loan concentrations and current economic conditions, we anticipate continuing to hold a high level of NPAs on our balance sheet. The loss content in the nonaccrual loans has been recognized through charge-offs or provided for in the allowance for credit losses at June 30, 2011. The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors affecting a particular borrower. See the “Risk Management — Allowance for Credit Losses” section in this Report for additional information.
     We process foreclosures on a regular basis for the loans we service for others as well as those we hold in our loan portfolio. We utilize foreclosure, however, only as a last resort for dealing with borrowers experiencing financial hardships. We employ extensive contact and restructuring procedures to attempt to find other solutions for our borrowers. We maintain appropriate staffing in our workout and collection teams to ensure troubled borrowers receive appropriate attention and assistance.


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TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 24: Troubled Debt Restructurings (TDRs)
 
                                         
    June 30,     Mar. 31,     Dec. 31,     Sept. 30,     June 30,  
(in millions)   2011     2011     2010     2010     2010  
 
 
Consumer TDRs:
                                       
Real estate 1-4 family first mortgage
  $ 12,938       12,261       11,603       10,951       9,525  
Real estate 1-4 family junior lien mortgage
    1,910       1,824       1,626       1,566       1,469  
Other revolving credit and installment
    838       859       778       674       502  
 
 
Total consumer TDRs
    15,686       14,944       14,007       13,191       11,496  
 
 
Commercial TDRs
    2,595       2,352       1,751       1,350       656  
 
 
Total TDRs
  $ 18,281       17,296       15,758       14,541       12,152  
 
 
TDRs on nonaccrual status
  $ 5,308       5,041       5,185       5,177       3,877  
TDRs on accrual status
    12,973       12,255       10,573       9,364       8,275  
 
 
Total TDRs
  $ 18,281       17,296       15,758       14,541       12,152  
 
     Table 24 provides information regarding the recorded investment of loans modified in TDRs. The allowance for TDR loans was $4.5 billion at June 30, 2011, and $3.9 billion at December 31, 2010. Total charge-offs related to loans modified in a TDR that were still held on the balance sheet at period end were $491 million and $486 million for the first half of 2011 and 2010, respectively.
     We do not forgive principal for a majority of our TDRs, but in those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged off to the extent not done so prior to the modification. We sometimes delay the timing on the repayment of a portion of principal (principal forbearance) and charge off the amount of forbearance if that amount is not considered fully collectible.
     Our nonaccrual policies are generally the same for all loan types when a restructuring is involved. We underwrite loans at the time of restructuring to determine whether there is sufficient evidence of sustained repayment capacity based on the borrower’s documented income, debt to income ratios, and other factors. Any loans lacking sufficient evidence of sustained repayment capacity at the time of modification are charged down to the fair value of the collateral, if applicable. For an accruing loan that has been modified, if the borrower has demonstrated performance under the previous terms and the underwriting process shows the capacity to continue to perform under the restructured terms, the loan will remain in accruing status. Otherwise, the loan will be placed in nonaccrual status generally until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments, or equivalent, inclusive of consecutive payments made prior to modification. Loans will also be placed on nonaccrual, and a corresponding charge-off is recorded to the loan balance, if we believe that principal and interest contractually due under the modified agreement will not be collectible.


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Risk Management – Credit Risk Management (continued)
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Loans included in this category are 90 days or more past due as to interest or principal and still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $9.8 billion, $10.8 billion, $11.6 billion, $13.0 billion, and $15.1 billion at June 30 and March 31, 2011, and December 31, September 30 and June 30, 2010, respectively, are excluded from this disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.
     Excluding insured/guaranteed loans, loans 90 days or more past due and still accruing at June 30, 2011, were down $819 million, or 31%, from December 31, 2010. The decline was due to loss mitigation activities including modifications and increased collection capacity/process improvements, charge-offs, lower early stage delinquency levels and credit stabilization.
     Table 25 reflects non-PCI loans 90 days or more past due and still accruing by class for loans not government insured/guaranteed. For additional information on delinquencies by loan class, see Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.


Table 25: Loans 90 Days or More Past Due and Still Accruing
 
                                         
    June 30,     Mar. 31,     Dec. 31,     Sept. 30,     June 30,  
(in millions)   2011     2011     2010     2010     2010  
 
 
Total (excluding PCI):
  $ 17,318       17,901       18,488       18,815       19,384  
Less: FHA insured/guaranteed by the VA (1)
    14,474       14,353       14,733       14,529       14,387  
Less: Student loans guaranteed under the FFELP (2)
    1,014       1,120       1,106       1,113       1,122  
 
 
Total, not government insured/guaranteed
  $ 1,830       2,428       2,649       3,173       3,875  
 
 
By segment and class, not government insured/guaranteed:
                                       
Commercial:
                                       
Commercial and industrial
  $ 110       338       308       222       540  
Real estate mortgage
    137       177       104       463       654  
Real estate construction
    86       156       193       332       471  
Foreign
    12       16       22       27       21  
 
 
Total commercial
    345       687       627       1,044       1,686  
 
 
Consumer:
                                       
Real estate 1-4 family first mortgage (3)
    728       858       941       1,016       1,049  
Real estate 1-4 family junior lien mortgage (3)
    286       325       366       361       352  
Credit card
    334       413       516       560       610  
Other revolving credit and installment
    137       145       199       192       178  
 
 
Total consumer
    1,485       1,741       2,022       2,129       2,189  
 
 
Total, not government insured/guaranteed
  $ 1,830       2,428       2,649       3,173       3,875  
 
 
(1)   Represents loans whose repayments are insured by the FHA or guaranteed by the VA.
 
(2)   Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the Federal Family Education Loan Program (FFELP).
 
(3)   Includes mortgages held for sale 90 days or more past due and still accruing.

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NET CHARGE-OFFS
Table 26: Net Charge-offs
                                                                                 
    Quarter ended  
    June 30, 2011     March 31, 2011     December 31, 2010     September 30, 2010     June 30, 2010  
    Net loan     % of     Net loan     % of     Net loan     % of     Net loan     % of     Net loan     % of  
    charge-     avg.     charge-     avg.     charge-     avg.     charge-     avg.     charge-     avg.  
($ in millions)   offs     loans(1)     offs     loans (1)     offs     loans (1)     offs     loans (1)     offs     loans (1)  
 
Commercial:
                                                                               
Commercial and industrial
  $ 254       0.66   %   $ 354       0.96   %   $ 500       1.34   %   $ 509       1.38   %   $ 689       1.87   %
Real estate mortgage
    128       0.50       152       0.62       234       0.94       218       0.87       360       1.47  
Real estate construction
    72       1.32       83       1.38       171       2.51       276       3.72       238       2.90  
Lease financing
    1       0.01       6       0.18       21       0.61       23       0.71       27       0.78  
Foreign
    47       0.52       28       0.34       28       0.36       39       0.52       42       0.57  
 
                                                                     
Total commercial
    502       0.62       623       0.79       954       1.19       1,065       1.33       1,356       1.69  
 
                                                                     
Consumer:
                                                                               
Real estate 1-4 family first mortgage
    909       1.62       904       1.60       1,024       1.77       1,034       1.78       1,009       1.70  
Real estate 1-4 family junior lien mortgage
    909       3.97       994       4.25       1,005       4.08       1,085       4.30       1,184       4.62  
Credit card
    294       5.63       382       7.21       452       8.21       504       9.06       579       10.45  
Other revolving credit and installment
    224       1.03       307       1.42       404       1.84       407       1.83       361       1.64  
 
                                                                     
Total consumer
    2,336       2.21       2,587       2.42       2,885       2.63       3,030       2.72       3,133       2.79  
 
                                                                     
Total
  $ 2,838       1.52   %   $ 3,210       1.73   %   $ 3,839       2.02   %   $ 4,095       2.14   %   $ 4,489       2.33   %
 
                                                                     
 
                                                                               
 
(1) Quarterly net charge-offs as a percentage of average respective loans are annualized.
     Table 26 presents net charge-offs for second quarter 2011 and the previous four quarters. Net charge-offs in second quarter 2011 were $2.8 billion (1.52% of average total loans outstanding) compared with $4.5 billion (2.33%) in second quarter 2010.
     Net charge-offs in the 1-4 family first mortgage portfolio totaled $909 million in second quarter 2011. Our 1-4 family first mortgage portfolio continued to reflect relatively low loss rates, although until housing prices fully stabilize, these credit losses will continue to remain elevated.
     Net charge-offs in the real estate 1-4 family junior lien portfolio were $909 million in second quarter 2011. More information about the Home Equity portfolio, which includes substantially all of our real estate 1-4 family junior lien mortgage loans, is available in Table 20 in this Report and the related discussion.
     Credit card net charge-offs of $294 million in second quarter 2011 decreased $285 million from a year ago.
     Commercial net charge-offs were $502 million in second quarter 2011 compared with $1.4 billion a year ago. Commercial credit results continued to improve from second quarter 2010 as market liquidity and improving market conditions helped stabilize performance results.
      


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Risk Management — Credit Risk Management (continued)

ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio and unfunded credit commitments at the balance sheet date, excluding loans carried at fair value. The detail of the changes in the allowance for credit losses by portfolio segment (including charge-offs and recoveries by loan class) is in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report. Table 27 provides a summary of our allowance for credit losses.
     We employ a disciplined process and methodology to establish our allowance for credit losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific loss factors. The process involves subjective as well as complex judgments. In addition, we review a variety of credit metrics and trends. These trends, however, do not solely determine the adequacy of the allowance as we use several analytical tools in determining its adequacy. For additional information on our allowance for credit losses, see the “Critical Accounting Policies — Allowance for Credit Losses” section in our 2010 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.


Table 27: Allowance for Credit Losses
                                         
    June 30,     Mar. 31,     Dec. 31,     Sept. 30,     June 30,  
(in millions)   2011     2011     2010     2010     2010  
 
Components:
                                       
Allowance for loan losses
  $ 20,893       21,983       23,022       23,939       24,584  
Allowance for unfunded credit commitments
    369       400       441       433       501  
 
Allowance for credit losses
    21,262       22,383       23,463       24,372       25,085  
 
Allowance for credit losses related to PCI loans
  $ 273       257       298       379       225  
 
Allowance for loan losses as a percentage of total loans
    2.78 %     2.93       3.04       3.18       3.21  
Allowance for loan losses as a percentage of annualized net charge-offs
    184       169       151       147       137  
Allowance for credit losses as a percentage of total loans
    2.83       2.98       3.10       3.23       3.27  
Allowance for credit losses as a percentage of total nonaccrual loans
    92       90       89       86       90  
 

     In addition to the allowance for credit losses, there was $12.1 billion at June 30, 2011, and $12.9 billion at March 31, 2011, of nonaccretable difference to absorb losses for PCI loans. For additional information on PCI loans, see the “Risk Management — Credit Risk Management — Purchased Credit-Impaired Loans” section and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
     The ratio of the allowance for credit losses to total nonaccrual loans may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, borrower credit strength and the value and marketability of collateral. Over half of nonaccrual loans were home mortgages at June 30, 2011.
     The $1.1 billion linked-quarter decline in the allowance for loan losses in second quarter 2011 reflected continued improvement in consumer delinquency trends, reduced nonperforming loans and improved portfolio performance. Additionally, the loan portfolio at June 30, 2011, consisted of higher percentages of more recent vintage loans subjected to tightened underwriting standards.
     Total provision for credit losses was $1.8 billion in second quarter 2011, compared with $4.0 billion a year ago. The second quarter 2011 provision was $1.0 billion less than net charge-offs, compared with a provision that was $500 million less than net charge-offs in second quarter 2010.
     In determining the appropriate allowance attributable to our residential mortgage portfolio, we incorporate the default rates and high severity of loss for junior lien mortgages behind
delinquent first lien mortgages into our loss forecasting calculations. In addition, the loss rates we use in determining our allowance include the impact of our established loan modification programs. When modifications occur or are probable to occur, our allowance considers the impact of these modifications, taking into consideration the associated credit cost, including re-defaults of modified loans and projected loss severity. Accordingly, the loss content associated with the effects of existing and probable loan modifications and junior lien mortgages behind delinquent first lien mortgages has been captured in our allowance methodology.
     Changes in the allowance reflect changes in statistically derived loss estimates, historical loss experience, current trends in borrower risk and/or general economic activity on portfolio performance, and management’s estimate for imprecision and uncertainty, including ongoing discussions with regulatory and government agencies regarding mortgage foreclosure-related matters.


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     We believe the allowance for credit losses of $21.3 billion is adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at June 30, 2011. The allowance for credit losses is subject to change and considers existing factors at the time, including economic or market conditions and ongoing internal and external examination processes. Due to the sensitivity of the allowance for credit losses to changes in our external business environment, it is possible that we will have to record incremental credit losses not anticipated as of the balance sheet date. However, absent significant deterioration in the economy, we expect future reserve releases. Our process for determining the allowance for credit losses is discussed in the “Critical Accounting Policies — Allowance for Credit Losses” section in our 2010 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to the Financial Statements in this Report.
      


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Risk Management — Credit Risk Management (continued)

LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES We sell residential mortgage loans to various parties, including (1) government-sponsored entities Freddie Mac and Fannie Mae (GSEs) who include the mortgage loans in GSE-guaranteed mortgage securitizations, (2) special purpose entities (SPEs) that issue private label mortgage-backed securities (MBS), and (3) other financial institutions that purchase mortgage loans for investment or private label securitization. In addition, we pool FHA-insured and VA-guaranteed mortgage loans that back securities guaranteed by GNMA. We may be required to repurchase these mortgage loans, indemnify the securitization trust, investor or insurer, or reimburse the securitization trust, investor or insurer for credit losses incurred on loans (collectively “repurchase”) in the event of a breach of contractual representations or warranties that is not remedied within a period (usually 90 days or less) after we receive notice of the breach. For additional information see our 2010 Form 10-K.
     We have established a mortgage repurchase liability related to various representations and warranties that reflect management’s estimate of losses for loans for which we have a repurchase obligation, whether or not we currently service those loans, based on a combination of factors. Our mortgage repurchase liability estimation process also incorporates projected and on hand mortgage insurance rescissions that we deem to be probable to result in a repurchase demand. Currently, repurchase demands primarily relate to 2006 through 2008 vintages and to GSE-guaranteed MBS.
     During second quarter 2011, we observed a decline in our level of total repurchases and losses as we continued to work through the remaining risk associated with the 2006 through 2008 vintages. We repurchased or reimbursed investors for incurred losses on mortgage loans with original balances of $598 million. In second quarter 2011, we also negotiated a settlement on a pool of mortgage loans with original sold balances of $302 million. This settlement occurred with a private investor to whom we had sold the loans and settled all future mortgage repurchase requests for this pool of loans with this counterparty. We incurred net losses on repurchased loans, investor reimbursements and loan pool global settlements of $261 million in second quarter 2011.
     Table 28 provides the number of unresolved repurchase demands and mortgage insurance rescissions. We do not typically receive repurchase requests from GNMA, FHA/HUD or VA. As an originator of an FHA insured or VA guaranteed loan, we are responsible for obtaining the insurance with FHA or the guarantee with the VA. To the extent we are not able to obtain the insurance or the guarantee we can request to repurchase the loan from the GNMA pool. Such repurchases from GNMA pools typically represent a self-initiated process upon discovery of the uninsurable loan (usually within 180 days from funding of the loan). Alternatively, in lieu of repurchasing loans from GNMA pools, we may be asked by the FHA/HUD or the VA to indemnify loans due to defects found in the Post Endorsement Technical Review process or audits performed by FHA/HUD or the VA. Our liability for mortgage loan repurchase losses incorporates probable losses associated with indemnified loans in GNMA pools and uninsurable loans.


Table 28: Unresolved Repurchase Demands and Mortgage Insurance Rescissions
                                                                 
    Government                     Mortgage insurance        
    sponsored entities (1)     Private     rescissions with no demand (2)     Total  
    Number of     Original loan     Number of     Original loan     Number of     Original loan     Number of     Original loan  
($ in millions)   loans     balance (3)     loans     balance (3)     loans     balance (3)     loans     balance (3)  
 
2011
                                                               
June 30,
    6,876     $ 1,565       695     $ 230       2,019     $ 444       9,590     $ 2,239  
March 31,
    6,210       1,395       1,973       424       2,885       674       11,068       2,493  
 
                                                               
2010
                                                               
December 31,
    6,501       1,467       2,899       680       3,248       801       12,648       2,948  
September 30,
    9,887       2,212       3,605       882       3,035       748       16,527       3,842  
June 30,
    12,536       2,840       3,160       707       2,979       760       18,675       4,307  
March 31,
    10,804       2,499       2,320       519       2,843       737       15,967       3,755  
 
                                                               
 
(1)   Includes repurchase demands of 892 and $179 million, 685 and $132 million, 1,495 and $291 million, 2,263 and $437 million, 2,141 and $417 million, and 1,824 and $372 million for June 30 and March 31, 2011, and December 31, September 30, June 30, and March 31, 2010, respectively, received from investors on mortgage servicing rights acquired from other originators. We generally have the right of recourse against the seller and may be able to recover losses related to such repurchase demands subject to counterparty risk associated with the seller.
(2)   As part of our representations and warranties in our loan sales contracts, we typically represent to GSEs and private investors that certain loans have mortgage insurance to the extent there are loans that have loan to value ratios in excess of 80% which require mortgage insurance. To the extent the mortgage insurance is rescinded by the mortgage insurer, the lack of insurance may result in a repurchase demand from an investor. Similar to repurchase demands, we evaluate mortgage insurance rescission notices for validity and appeal for reinstatement if the rescission was not based on a contractual breach. When investor demands are received due to lack of mortgage insurance, they are reported as unresolved repurchase demands based on the applicable investor category for the loan (GSE or private). Over the last year, approximately 20% of our repurchase demands from GSEs had mortgage insurance rescission as one of the reasons for the repurchase demand. Of all the mortgage insurance rescissions notices received in 2010, approximately 70% have resulted in repurchase demands through June of 2011. Not all mortgage insurance rescissions received in 2010 have been completed through the appeals process with the mortgage insurer and upon successful appeal, we work with the investor to rescind the repurchase demand.
(3)   While original loan balance related to these demands is presented above, the establishment of the repurchase liability is based on a combination of factors, such as our appeals success rates, reimbursement by correspondent and other third party originators, and projected loss severity, which is driven by the difference between the current loan balance and the estimated collateral value less costs to sell the property.

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     The level of repurchase demands outstanding at June 30, 2011, was down from a year ago in both number of outstanding loans and in total dollar balances as we continued to work through the demands. While GSE repurchase demands outstanding have increased from December 31, 2010, due to an acceleration of timing of demand requests, which can fluctuate, we do not expect these demands to remain elevated and we do not believe these demands indicate an increased frequency of demands in the future. Customary with industry practice, we have the right of recourse against correspondent lenders from whom we have purchased loans with respect to representations and warranties. Of the repurchase demands presented in Table 28, approximately 20% relate to loans purchased from correspondent lenders. Due primarily to the financial difficulties of some correspondent lenders, we typically recover on average approximately 50% of losses from these lenders. Historical recovery rates as well as projected lender performance are incorporated in the establishment of our mortgage repurchase liability.
     Our liability for repurchases, included in “Accrued expenses and other liabilities” in our consolidated financial statements, was $1.2 billion at June 30 and March 31, 2011. In the quarter ended June 30, 2011, $242 million of additions to the liability were recorded, which reduced net gains on mortgage loan origination/sales activities. Our additions to the repurchase liability in the quarter ended June 30, 2011, reflect updated assumptions about repurchase risk on outstanding demands, particularly on the 2006-2008 vintages.
     We believe we have a high quality residential mortgage loan servicing portfolio. Of the $1.8 trillion in the residential mortgage loan servicing portfolio at June 30, 2011, 93% was current, less than 2% was subprime at origination, and approximately 1% was home equity securitizations. Our combined delinquency and foreclosure rate on this portfolio was 7.44% at June 30, 2011, compared with 7.22% at March 31, 2011. In this portfolio 6% are private securitizations where we originated the loan and therefore have some repurchase risk. For this private securitization segment of our residential mortgage loan servicing portfolio, 58% are loans from 2005 vintages or earlier (weighted average age of 69 months); 80% were prime at origination; and approximately 70% are jumbo loans. The weighted-average LTV as of June 30, 2011, for this private securitization segment was 77%. We believe the highest risk segment of these private securitizations is the subprime loans originated in 2006 and 2007. These subprime loans have seller representations and warranties and currently have LTVs close to or exceeding 100%, and represent 8% of the 6% private securitization portion of the residential mortgage servicing portfolio. We had only $72 million of repurchased loans related to private securitizations in second quarter 2011. Of the servicing portfolio, 4% is non-agency acquired servicing and 2% is private whole loan sales. We did not underwrite and securitize the non-agency acquired servicing and therefore we have no obligation on that portion of our servicing portfolio to the investor for any repurchase demands arising from origination practices. For the private whole loan segment, while we do have repurchase risk on these prior loan sales, less than 3% were subprime at origination and loans that were sold and subsequently securitized are included in the private securitization segment discussed above.
     Table 29 summarizes the changes in our mortgage repurchase liability.


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Risk Management — Credit Risk Management (continued)
Table 29: Changes in Mortgage Repurchase Liability
                                         
    Quarter ended  
    June 30,     Mar. 31,     Dec. 31,     Sept. 30,     June 30,  
(in millions)   2011     2011     2010     2010     2010  
 
 
Balance, beginning of period
  $ 1,207       1,289       1,331       1,375       1,263  
 
Provision for repurchase losses:
                                       
 
Loan sales
    20       35       35       29       36  
 
Change in estimate — primarily due to credit deterioration
    222       214       429       341       346  
 
 
Total additions
    242       249       464       370       382  
 
Losses
    (261 )     (331 )     (506 )     (414 )     (270 )
 
 
Balance, end of period
  $ 1,188       1,207       1,289       1,331       1,375  
 

     The mortgage repurchase liability of $1.2 billion at June 30, 2011, represents our best estimate of the probable loss that we will incur related to representations and warranties in the contractual provisions of our sales of mortgage loans. Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. We maintain regular contact with the GSEs and other significant investors to monitor and address their repurchase demand practices and concerns. Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that are reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss, and is based on currently available information, significant judgment, and a number of assumptions that are subject to change. The high end of this range of reasonably possible losses in excess of our recorded liability was $1.8 billion at June 30, 2011, and was determined based upon modifying the assumptions utilized in our best estimate of probable loss to reflect what we believe to be the high end of reasonably possible adverse assumptions. For additional information on our repurchase liability, see the “Critical Accounting Policies — Liability for Mortgage Loan Repurchase Losses” section in our 2010 Form 10-K and Note 8 (Mortgage Banking Activities) to Financial Statements in this Report.
     To the extent that economic conditions and the housing market do not recover or future investor repurchase demands and appeals success rates differ from past experience, we could continue to have increased demands and increased loss severity on repurchases, causing future additions to the repurchase liability. However, some of the underwriting standards that were permitted by the GSEs for conforming loans in the 2006 through 2008 vintages, which significantly contributed to recent levels of repurchase demands, were tightened starting in mid to late 2008. Accordingly, we do not expect a similar rate of repurchase requests from the 2009 and prospective vintages, absent deterioration in economic conditions or changes in investor behavior.
RISKS RELATING TO SERVICING ACTIVITIES In addition to servicing loans in our portfolio, we act as servicer and/or master servicer of residential mortgage loans included in GSE-guaranteed mortgage securitizations, GNMA-guaranteed mortgage securitizations and private label mortgage securitizations, as well as for unsecuritized loans owned by institutional investors. The loans we service were originated by us or by other mortgage loan originators. As servicer, our primary duties are typically to (1) collect payment due from borrowers, (2) advance certain delinquent payments of principal and interest, (3) maintain and administer any hazard, title or primary mortgage insurance policies relating to the mortgage loans, (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments, and (5) foreclose on defaulted mortgage loans or, to the extent consistent with the documents governing a securitization, consider alternatives to foreclosure, such as loan modifications or short sales. As master servicer, our primary duties are typically to (1) supervise, monitor and oversee the servicing of the mortgage loans by the servicer, (2) consult with each servicer and use reasonable efforts to cause the servicer to observe its servicing obligations, (3) prepare monthly distribution statements to security holders and, if required by the securitization documents, certain periodic reports required to be filed with the Securities and Exchange Commission (SEC), (4) if required by the securitization documents, calculate distributions and loss allocations on the mortgage-backed securities, (5) prepare tax and information returns of the securitization trust, and (6) advance amounts required by non-affiliated servicers who fail to perform their advancing obligations.
     Each agreement under which we act as servicer or master servicer generally specifies a standard of responsibility for actions we take in such capacity and provides protection against expenses and liabilities we incur when acting in compliance with the specified standard. For example, most private label securitization agreements under which we act as servicer or master servicer typically provide that the servicer and the master servicer are entitled to indemnification by the securitization trust for taking action or refraining from taking action in good faith or for errors in judgment. However, we are not indemnified, but rather are required to indemnify the securitization trustee, against any failure by us, as servicer or master servicer, to perform our servicing obligations or any of our acts or omissions that involve wilful misfeasance, bad faith


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or gross negligence in the performance of, or reckless disregard of, our duties. In addition, if we commit a material breach of our obligations as servicer or master servicer, we may be subject to termination if the breach is not cured within a specified period following notice, which can generally be given by the securitization trustee or a specified percentage of security holders. Whole loan sale contracts under which we act as servicer generally include similar provisions with respect to our actions as servicer. The standards governing servicing in GSE-guaranteed securitizations, and the possible remedies for violations of such standards, vary, and those standards and remedies are determined by servicing guides maintained by the GSEs, contracts between the GSEs and individual servicers and topical guides published by the GSEs from time to time. Such remedies could include indemnification or repurchase of an affected mortgage loan.
     For additional information regarding risks relating to our servicing activities, see pages 75-76 in our 2010 Form 10-K.
     The FRB and OCC completed a joint interagency horizontal examination of foreclosure processing at large mortgage servicers, including Wells Fargo, to evaluate the adequacy of their controls and governance over bank foreclosure processes, including compliance with applicable federal and state law. The OCC and other federal banking regulators published this review on April 13, 2011. We have entered into consent orders with the OCC and FRB, both of which were made public on April 13, 2011. These orders incorporate remedial requirements for identified deficiencies; however, civil money penalties have not been assessed at this time. We have been working with our regulators for an extended period on servicing improvements and have already instituted enhancements. For additional information, see the discussion of mortgage related regulatory investigations in Note 11 (Legal Actions) to Financial Statements in this Report. Changes in servicing and foreclosure practices will increase the Company’s costs of servicing mortgage loans. As part of our quarterly MSR valuation process, we assess changes in expected future servicing and foreclosure costs, which in the first half of 2011, includes the estimated impact from the regulatory consent orders.
      


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Risk Management — Credit Risk Management (continued)

Asset/Liability Management
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee (Corporate ALCO), which oversees these risks and reports periodically to the Finance Committee of the Board, consists of senior financial and business executives. Each of our principal business groups has its own asset/liability management committee and process linked to the Corporate ALCO process.
INTEREST RATE RISK Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We assess interest rate risk by comparing our most likely earnings plan with various earnings simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, as of June 30, 2011, our most recent simulation indicated estimated earnings at risk of less than 1% of our most likely earnings plan over the next 12 months using a scenario in which the federal funds rate rises to 4.25% and the 10-year Constant Maturity Treasury bond yield rises to 5.50%. Simulation estimates depend on, and will change with, the size and mix of our actual and projected balance sheet at the time of each simulation. Due to timing differences between the quarterly valuation of MSRs and the eventual impact of interest rates on mortgage banking volumes, earnings at risk in any particular quarter could be higher than the average earnings at risk over the 12-month simulation period, depending on the path of interest rates and on our hedging strategies for MSRs. See the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section in this Report for more information.
     We use exchange-traded and over-the-counter (OTC) interest rate derivatives to hedge our interest rate exposures. The notional or contractual amount, credit risk amount and estimated net fair value of these derivatives as of June 30, 2011, and December 31, 2010, are presented in Note 12 (Derivatives) to Financial Statements in this Report.
     For additional information regarding interest rate risk, see page 76 of our 2010 Form 10-K.
MORTGAGE BANKING INTEREST RATE AND MARKET RISK We originate, fund and service mortgage loans, which subjects us to various risks, including credit, liquidity and interest rate risks. For a discussion of mortgage banking interest rate and market risk, see pages 76-78 of our 2010 Form 10-K.
     While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in the value of ARM production held for sale from changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR index-based financial instruments used as economic hedges for such ARMs. Additionally, the hedge-carry income we earn on our economic hedges for the MSRs may not continue if the spread between short-term and long-term rates decreases, we shift composition of the hedge to more interest rate swaps, or there
are other changes in the market for mortgage forwards that affect the implied carry.
     The total carrying value of our residential and commercial MSRs was $16.2 billion at June 30, 2011, and $15.9 billion at December 31, 2010. The weighted-average note rate on our portfolio of loans serviced for others was 5.26% at June 30, 2011, and 5.39% at December 31, 2010. Our total MSRs represented 0.87% of mortgage loans serviced for others at June 30, 2011, and 0.86% at December 31, 2010.
MARKET RISK — TRADING ACTIVITIES From a market risk perspective, our net gains from trading activities are impacted by changes in interest rates, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. We are exposed to market risk through customer accommodation trading, certain economic hedges classified as trading positions and, to a lesser extent, proprietary trading. Trading positions and related market risk exposure are subject to risk limits established and monitored by the Market Risk Committee and Corporate ALCO. These trading positions consist of both securities and derivative instruments. The primary purpose of our trading businesses is to accommodate customers in management of their market price risk. Net gains from trading activities are attributable to the following types of activity:
Table 30: Trading Activities
                                 
                    Six months  
    Quarter ended June 30,     ended June 30,  
(in millions)   2011     2010     2011     2010  
 
Customer accommodation
  $ 190       281       687       826  
Economic hedging
    247       (127 )     348       (167
Proprietary
    (23 )     (45 )     (9 )     (13 )
 
Total net trading gains
  $ 414       109       1,026       646  
 
     The amounts reflected in the table above capture only gains (losses) due to changes in fair value of our trading positions and are reported within net gains on trading activities within noninterest income line item of the income statement. These amounts do not include interest income and other fees earned from related activities, which are reported within interest income from trading assets and other fees within noninterest income line items of the income statement. Categorization of net gains from trading activities in the table above is based on our own definition of those categories, as further described below, because no uniform definitions currently exist.
     Customer accommodation trading consists of security or derivative transactions conducted in an effort to help customers manage their market price risks which are done on their behalf or driven by their investment needs. For the majority of our customer accommodation trading we serve as intermediary between buyer and seller. For example, we may enter into financial instruments with customers that use the instruments for risk management purposes and offset our exposure on such contracts by entering into separate instruments. Customer accommodation trading


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also includes net gains related to market-making activities in which we take positions to facilitate expected customer order flow.
     Economic hedges consist primarily of cash or derivative positions used to facilitate certain of our balance sheet risk management activities that did not qualify for hedge accounting or were not designated in a hedge accounting relationship. Economic hedges may also include securities which we elected to carry at fair value with changes in fair value recorded to earnings in order to mitigate accounting measurement mismatches or avoid embedded derivative accounting complexities.
     Proprietary trading consists of security or derivative positions executed for our own account based on market expectations or to benefit from price differences between financial instruments and markets. Proprietary trading activity is expected to be restricted by the Dodd-Frank Act section known as the “Volcker Rule,” which has not yet been finalized. Given that future rule-making is required by various governmental regulatory agencies to define proprietary trading within the context of the final “Volcker Rule,” our definition of proprietary trading may change. However, we have reduced or exited certain business activities in anticipation of the final “Volcker Rule.” As discussed within the noninterest income section of our financial results, proprietary trading activity is not significant to our financial results.
     The fair value of our trading derivatives is reported in Notes 12 (Derivatives) and 13 (Fair Value) to Financial Statements in this Report. The fair value of our trading securities is reported in Note 13 (Fair Value) to Financial Statements in this Report.
     The standardized approach for monitoring and reporting market risk for the trading activities consists of value-at-risk (VaR) metrics complemented with sensitivity analysis and stress testing. VaR measures the worst expected loss over a given time interval and within a given confidence interval. We measure and report daily VaR at a 99% confidence interval based on actual changes in rates and prices over the past 250 trading days. The analysis captures all financial instruments that are considered trading positions. The average one-day VaR throughout second quarter 2011 was $28 million, with a lower bound of $19 million and an upper bound of $37 million.
MARKET RISK — EQUITY MARKETS We are directly and indirectly affected by changes in the equity markets. For additional information regarding market risk related to equity markets, see page 79 of our 2010 Form 10-K.
     Table 31 provides information regarding our marketable and nonmarketable equity investments.
Table 31: Nonmarketable and Marketable Equity Investments
                 
    June 30,     Dec. 31,  
(in millions)   2011     2010  
 
Nonmarketable equity investments:
               
Private equity investments:
               
Cost method
  $ 3,143       3,240  
Equity method
    7,758       7,624  
Federal bank stock
    4,886       5,254  
Principal investments
    291       305  
 
 
               
Total nonmarketable equity investments (1)
  $ 16,078       16,423  
 
 
               
Marketable equity securities:
               
Cost
  $ 3,499       4,258  
Net unrealized gains
    856       931  
 
 
               
Total marketable equity securities (2)
  $ 4,355       5,189  
 
(1)   Included in other assets on the balance sheet. See Note 6 (Other Assets) to Financial Statements in this Report for additional information.
(2)   Included in securities available for sale. See Note 4 (Securities Available for Sale) to Financial Statements in this Report for additional information.


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Risk Management – Asset/Liability Management (continued)

LIQUIDITY AND FUNDING The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, the Corporate ALCO establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. We set these guidelines for both the consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.
     Unencumbered debt and equity securities in the securities available-for-sale portfolio provide asset liquidity, in addition to
the immediately liquid resources of cash and due from banks and federal funds sold, securities purchased under resale agreements and other short-term investments. Asset liquidity is further enhanced by our ability to sell or securitize loans in secondary markets and to pledge loans to access secured borrowing facilities through the Federal Home Loan Banks (FHLB) and the FRB.
     Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. At June 30, 2011, core deposits funded 108% of total loans compared with 99% a year ago. Additional funding is provided by long-term debt, other foreign deposits, and short-term borrowings.
     Table 32 shows selected information for short-term borrowings, which generally mature in less than 30 days.


Table 32: Short-Term Borrowings
 
                                         
    Quarter ended  
 
    June 30,     Mar. 31,     Dec. 31,     Sept. 30,     June 30,  
 
(in millions)   2011     2011     2010     2010     2010  
 
 
Balance, period end
                                       
Commercial paper and other short-term borrowings
  $ 17,357       17,228       17,454       16,856       16,604  
Federal funds purchased and securities sold under agreements to repurchase
    36,524       37,509       37,947       33,859       28,583  
 
 
Total
  $ 53,881       54,737       55,401       50,715       45,187  
 
 
Average daily balance for period
                                       
Commercial paper and other short-term borrowings
  $ 17,105       17,005       16,370       15,761       16,316  
Federal funds purchased and securities sold under agreements to repurchase
    36,235       37,746       34,239       30,707       28,766  
 
 
Total
  $ 53,340       54,751       50,609       46,468       45,082  
 
 
Maximum month-end balance for period
                                       
Commercial paper and other short-term borrowings (1)
  $ 18,234       17,597       17,454       16,856       17,388  
Federal funds purchased and securities sold under agreements to repurchase (2)
    36,524       37,509       37,947       33,859       28,807  
 
 
 
(1)   Highest month-end balance in each of the last five quarters was in April and February 2011 and December, September and April 2010.
(2)   Highest month-end balance in each of the last five quarters was in June and March 2011 and December, September and May 2010.
     Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding through issuances of registered debt securities, private placements and asset-backed secured funding. Investors in the long-term capital markets generally will consider, among other factors, a company’s debt rating in making investment decisions. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, the level and quality of earnings, and rating agency assumptions regarding the probability and extent of Federal financial assistance or support for certain large financial institutions. Adverse changes in these factors could result in a reduction of our credit rating; however, a reduction in credit rating would not cause us to violate any of our debt covenants. See the “Risk Factors” section in this Report for additional information regarding the potential effect of the Dodd-Frank Act on our credit ratings.
     We continue to evaluate the potential impact on liquidity management of regulatory proposals, including Basel III and
those required under the Dodd-Frank Act, throughout the rule-making process.
Parent Under SEC rules, the Parent is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. In June 2009, the Parent filed a registration statement with the SEC for the issuance of senior and subordinated notes, preferred stock and other securities. The Parent’s ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. The Parent is currently authorized by the Board to issue $60 billion in outstanding short-term debt and $170 billion in outstanding long-term debt. During the first half of 2011, the Parent issued $6.4 billion in registered senior notes. In February 2011, the Parent remarketed $2.5 billion of junior subordinated notes owned by an unconsolidated, wholly-owned trust. The purchasers of the junior subordinated notes exchanged them with the Parent for newly issued senior notes, which are included in the Parent issuances described above. Proceeds of the remarketed junior subordinated notes were used by the trust to


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purchase $2.5 billion of Class A, Series I Preferred Stock issued by the Parent.
     Parent’s proceeds from securities issued in the first half of 2011 were used for general corporate purposes, and, unless otherwise specified in the applicable prospectus or prospectus supplement, we expect that the proceeds from securities issued in the future will also be used for the same purposes.
     Table 33 provides information regarding the Parent’s medium-term note (MTN) programs. The Parent may issue senior and subordinated debt securities under Series I & J, and the European and Australian programmes. Under Series K, the Parent may issue senior debt securities linked to one or more indices.
Table 33: Medium-Term Note (MTN) Programs
 
                         
            June 30, 2011  
 
            Debt     Available  
 
    Date     issuance     for  
 
(in billions)   established     authority     issuance  
 
 
MTN program:
                       
Series I & J (1)
  August 2009   $ 25.0       18.3  
Series K (1)
  April 2010     25.0       24.4  
European (2)
  December 2009     25.0       25.0  
Australian (2)(3)
  June 2005  AUD   10.0       6.8  
 
 
 
(1)   SEC registered.
(2)   Not registered with the SEC. May not be offered in the United States without applicable exemptions from registration.
(3)   As amended in October 2005 and March 2010.
Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is authorized by its board of directors to issue $100 billion in outstanding short-term debt and $125 billion in outstanding long-term debt. At June 30, 2011, Wells Fargo Bank, N.A. had available $100 billion in short-term debt issuance authority and $99.2 billion in long-term debt issuance authority.
Wells Fargo Financial Canada Corporation In January 2010, Wells Fargo Financial Canada Corporation (WFFCC), an indirect wholly owned Canadian subsidiary of the Parent, qualified with the Canadian provincial securities commissions CAD$7.0 billion in medium-term notes for distribution from time to time in Canada. During the first half of 2011, WFFCC issued CAD$500 million in medium-term notes. At June 30, 2011, CAD$6.5 billion remained available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.
FEDERAL HOME LOAN BANK MEMBERSHIP We are a member of the Federal Home Loan Banks based in Dallas, Des Moines and San Francisco (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.


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Capital Management
 
We have an active program for managing stockholders’ equity and regulatory capital and we maintain a comprehensive process for assessing the Company’s overall capital adequacy. We generate capital internally primarily through the retention of earnings net of dividends. Our objective is to maintain capital levels at the Company and its bank subsidiaries above the regulatory “well-capitalized” thresholds by an amount commensurate with our risk profile and risk tolerance objectives. Our potential sources of stockholders’ equity include retained earnings and issuances of common and preferred stock. Retained earnings increased $6.0 billion from December 31, 2010, predominantly from Wells Fargo net income of $7.7 billion, less common and preferred stock dividends of $1.7 billion. During the first half of 2011, we issued approximately 53 million shares of common stock, with net proceeds of $801 million.
     On March 18, 2011, the Company was notified by the FRB that it did not object to the capital plan the Company submitted on January 7, 2011, as part of the Comprehensive Capital Analysis and Review (CCAR). Following that notification, the Company initiated several capital actions contemplated in its capital plan, including increasing the quarterly common stock dividend to $0.12 a share, authorizing the repurchase of an additional 200 million shares of our common stock, and issuing notice to call $3.4 billion of trust preferred securities that will no longer count as Tier 1 capital under the Dodd-Frank Act and the proposed Basel III capital standards. Consistent with the CCAR process and the FRB’s existing supervisory guidance regarding internal capital assessment, planning and adequacy, the FRB recently proposed rules that will require large bank holding companies such as the Company to submit annual capital plans to the FRB and to provide prior notice to the FRB before making a capital distribution under certain circumstances, including if the FRB objected to a capital plan or if certain minimum capital requirements were not maintained.
     From time to time the Board authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Additionally, we may enter into plans to purchase stock that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for acquisitions and employee benefit plans, market conditions (including the trading price of our stock), and regulatory and legal considerations.
     In 2008, the Board authorized the repurchase of up to 25 million additional shares of our outstanding common stock. In first quarter 2011, the Board authorized the repurchase of an additional 200 million shares. During second quarter 2011, we
repurchased 35 million shares of our common stock in the open market and from our employee benefit plans. At June 30, 2011, we had utilized all previously remaining common stock repurchase authority from the 2008 authorization and had remaining authority from the 2011 authorization to purchase approximately 166 million shares. For more information about share repurchases during second quarter 2011, see Part II, Item 2 of this Report.
     Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities Exchange Act of 1934 including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.
     In connection with our participation in the Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP), we issued to the U.S. Treasury Department warrants to purchase 110,261,688 shares of our common stock with an exercise price of $34.01 per share expiring on October 28, 2018. The Board has authorized the repurchase by the Company of up to $1 billion of the warrants. On May 26, 2010, in an auction by the U.S. Treasury, we purchased 70,165,963 of the warrants at a price of $7.70 per warrant. We have purchased an additional 651,244 warrants since the U.S. Treasury auction; however, no purchases were made during the first half of 2011. At June 30, 2011, there were 39,444,481 warrants outstanding and exercisable and $455 million of unused warrant repurchase authority. Depending on market conditions, we may purchase from time to time additional warrants and/or our outstanding debt securities in privately negotiated or open market transactions, by tender offer or otherwise.
     Subsequent to the remarketing of certain junior subordinated notes issued in connection with Wachovia’s 2006 issuance of 5.80% fixed-to-floating rate trust preferred securities, the Company issued 25,010 shares of Class A, Series I Preferred Stock, with a par value of $2.5 billion to Wachovia Capital Trust III (Trust), an unconsolidated wholly-owned trust. The action completed the Company’s and the Trust’s obligations under an agreement dated February 1, 2006, as amended, between the Trust and the Company (as successor to Wachovia Corporation) and the Series I preferred stock replaces the trust preferred securities.
     The Company and each of our subsidiary banks are subject to various regulatory capital adequacy requirements administered by the FRB and the OCC. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different


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categories of assets and off-balance sheet exposures. At June 30, 2011, the Company and each of our subsidiary banks were “well-capitalized” under applicable regulatory capital adequacy guidelines. See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
     Current regulatory RBC rules are based primarily on broad credit-risk considerations and limited market-related risks, but do not take into account other types of risk a financial company may be exposed to. Our capital adequacy assessment process contemplates a wide range of risks that the Company is exposed to and also takes into consideration our performance under a variety of stressed economic conditions, as well as regulatory expectations and guidance, rating agency viewpoints and the view of capital market participants.
     In July 2009, the Basel Committee on Bank Supervision published an additional set of international guidelines for review known as Basel III and finalized these guidelines in December 2010. The additional guidelines were developed in response to the financial crisis of 2008 and 2009 and address many of the weaknesses identified in the banking sector as contributing to the crisis including excessive leverage, inadequate and low quality capital and insufficient liquidity buffers. The guidelines, among other things, increase minimum capital requirements and when fully phased in require bank holding companies to maintain a minimum ratio of Tier 1 common equity to risk-weighted assets of at least 7.0%. The U.S. regulatory bodies are reviewing the final international standards and final U.S. rulemaking is expected to be completed in 2011. The Basel Committee recently proposed additional Tier 1 common equity surcharge requirements for global systemically important banks ranging from 1% to 3.5% depending on the bank’s systemic importance to be determined under an indicator-based approach that would consider five broad categories including cross-jurisdictional activity, size, inter-connectedness, substitutability and complexity. These additional capital requirements, which would be phased in beginning in January 2016 and become fully effective on January 1, 2019, would be in addition to the Basel III 7.0% Tier 1 common equity requirement finalized in December 2010. Regulatory authorities have not yet determined the global systemically important banks that would be subject to the surcharge and the amount of the surcharge for these banks. The Dodd-Frank Act also requires the FRB to adopt rules subjecting large bank holding companies, such as the Company, to more stringent capital requirements, including stress testing requirements and enhanced capital and liquidity requirements, and these rules may be similar to or more restrictive than those proposed by the Basel Committee. Although uncertainty exists regarding final capital rules, including the FRB’s approach to capital requirements, we evaluate the impact of Basel III on our capital ratios based on our interpretation of the proposed capital requirements and we estimate that our Tier 1 common equity ratio under the Basel III proposal exceeded the fully-phased in minimum of 7.0% by 35 basis points at the end of second quarter 2011. This estimate is subject to change depending on final promulgation of Basel III capital rulemaking and interpretations thereof by regulatory authorities.
     We are well underway toward Basel II and Basel III implementation and are currently on schedule to enter the parallel run phase of Basel II in 2012 with regulatory approval. Our delayed entry into the parallel run phase was approved by the FRB in 2010 as a result of the acquisition of Wachovia.
     At June 30, 2011, stockholders’ equity and Tier 1 common equity levels were higher than the quarter ended prior to the Wachovia acquisition. During 2009, as regulators and the market focused on the composition of regulatory capital, the Tier 1 common equity ratio gained significant prominence as a metric of capital strength. There is no mandated minimum or “well-capitalized” standard for Tier 1 common equity; instead the RBC rules state voting common stockholders’ equity should be the dominant element within Tier 1 common equity. Tier 1 common equity was $88.8 billion at June 30, 2011, or 9.15% of risk-weighted assets, an increase of $7.5 billion from December 31, 2010. Table 34 and Table 35 provide the details of the Tier 1 common equity calculation under Basel I and as estimated under Basel III, respectively.


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Capital Management (continued)
Table 34: Tier 1 Common Equity Under Basel I (1)
 
                         
            June 30,     Dec. 31,  
 
(in billions)           2011     2010  
 
 
Total equity
          $ 137.9       127.9  
Noncontrolling interests
            (1.5 )     (1.5 )
 
 
Total Wells Fargo stockholders’ equity
            136.4       126.4  
 
 
Adjustments:
                       
Preferred equity (2)
            (10.6 )     (8.1 )
Goodwill and intangible assets (other than MSRs)
            (34.6 )     (35.5 )
Applicable deferred taxes
            4.1       4.3  
MSRs over specified limitations
            (0.9 )     (0.9 )
Cumulative other comprehensive income
            (5.3 )     (4.6 )
Other
            (0.3 )     (0.3 )
 
 
Tier 1 common equity
    (A)      $ 88.8       81.3  
 
 
Total risk-weighted assets (3)
    (B)      $ 970.2       980.0  
 
 
Tier 1 common equity to total risk-weighted assets
    (A)/ (B)     9.15  %     8.30  
 
(1)   Tier 1 common equity is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews Tier 1 common equity along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.
(2)   In March 2011, we issued $2.5 billion of Series I Preferred Stock to an unconsolidated wholly-owned trust.
(3)   Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.
Table 35: Tier 1 Common Equity Under Basel III (Estimated) (1)
 
                 
            June 30,  
 
(in billions)           2011  
   
 
Tier 1 common equity under Basel I
          $ 88.8  
   
 
Adjustments from Basel I to Basel III:
               
Cumulative other comprehensive income (1)
            5.3  
Threshold deductions defined under Basel III (1) (2)
            (4.6 )
Other
            (0.3 )
   
 
Tier 1 common equity under Basel III
    (C)      $ 89.2  
   
 
Total risk-weighted assets anticipated under Basel III (3)
    (D)      $ 1,212.9  
   
 
Tier 1 common equity to total risk-weighted assets anticipated under Basel III
    (C)/ (D)     7.35  %
   
 
(1)   Volatility in interest rates can have a significant impact on the valuation of cumulative other comprehensive income and MSRs and therefore, impact adjustments under Basel III in future reporting periods.
(2)   Threshold deductions under Basel III include individual and aggregate limitations, as a percentage of Tier 1 common equity (as defined under Basel III), with respect to MSRs, deferred tax assets and investments in unconsolidated financial companies.
(3)   Under current Basel proposals, risk-weighted assets incorporate different classifications of assets, with certain risk weights based on a borrower’s credit rating or Wells Fargo’s own risk models, along with adjustments to address a combination of credit/counterparty, operational and market risks, and other Basel III elements. The amount of risk-weighted assets anticipated under Basel III is preliminary and subject to change depending on final promulgation of Basel III capital rulemaking and interpretations thereof by regulatory authorities.

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Critical Accounting Policies

Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2010 Form 10-K) are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Six of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:
  the allowance for credit losses;
 
  purchased credit-impaired (PCI) loans;
 
  the valuation of residential mortgage servicing rights (MSRs);
 
  liability for mortgage loan repurchase losses;
 
  the fair valuation of financial instruments; and
 
  income taxes.
     Management has reviewed and approved these critical accounting policies and has discussed these policies with the Board’s Audit and Examination Committee. These policies are described further in the “Financial Review — Critical Accounting Policies” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2010 Form 10-K.


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Current Accounting Developments

The following accounting pronouncements have been issued by the Financial Accounting Standards Board (FASB) but are not yet effective:
  Accounting Standards Update (ASU or Update) 2011-05, Presentation of Comprehensive Income;
 
  ASU 2011-4, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs;
 
  ASU 2011-3, Reconsideration of Effective Control for Repurchase Agreements; and
 
  ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.
ASU 2011-05 eliminates the option for companies to include the components of other comprehensive income in the statement of changes in stockholders’ equity. The Update requires entities to present the components of comprehensive income in either a single statement or in two separate statements, with the statement of other comprehensive income immediately following the statement of income. This guidance is effective for us in first quarter 2012 with retrospective application. Early adoption is permitted. The Update will not affect our financial results as it amends only the presentation of comprehensive income.
ASU 2011-04 modifies accounting guidance and expands existing disclosure requirements for fair value measurements. The Update clarifies how fair values should be measured for instruments classified in stockholders’ equity and under what circumstances premiums and discounts should be applied in fair value measurements. The guidance also permits entities to measure fair value on a net basis for financial instruments that are managed based on net exposure to market risks and/or counterparty credit risk. Required new disclosures for financial instruments classified as Level 3 include: 1) quantitative information about unobservable inputs used in measuring fair value, 2) qualitative discussion of the sensitivity of fair value measurements to changes in unobservable inputs, and 3) a description of valuation processes used. The Update also requires disclosure of fair value levels for financial instruments that are not recorded at fair value but for which fair value is required to be disclosed. The guidance is effective for us in first quarter 2012 with prospective application. Early adoption is not permitted. We are evaluating the effect these accounting changes may have on our consolidated financial statements.
ASU 2011-03 amends the criteria companies use to determine if repurchase and similar agreements should be accounted for as sales or financings. Specifically, the Update removes the criterion for transferors to have the ability to meet contractual obligations through collateral maintenance provisions, even if transferees fail to return transferred assets pursuant to the agreements. This guidance is effective for us in first quarter 2012 with prospective application to new transactions and existing transactions
modified on or after January 1, 2012. Early adoption is not permitted. We do not expect these accounting changes to have a material effect on our consolidated financial statements.
ASU 2011-02 provides guidance clarifying under what circumstances a creditor should classify a restructured receivable as a troubled debt restructuring (TDR). A receivable is a TDR if both of the following exist: 1) a creditor has granted a concession to the debtor, and 2) the debtor is experiencing financial difficulties. The Update clarifies that a creditor should consider all aspects of a restructuring when evaluating whether it has granted a concession, which include determining whether a debtor can obtain funds from another source at market rates and assessing the value of additional collateral and guarantees obtained at the time of restructuring. The Update also provides factors a creditor should consider when determining if a debtor is experiencing financial difficulties, such as probability of payment default and bankruptcy declarations. The Update is effective for us in third quarter 2011 with retrospective application to January 1, 2011. Early adoption is permitted. These accounting changes will impact our TDR disclosures but are not expected to have a material effect on our financial results.


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Regulatory and Other Developments

The Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC) recently issued consent orders that require us to correct deficiencies in our residential mortgage loan servicing and foreclosure practices that were identified by federal banking regulators in their review conducted in fourth quarter 2010. The consent orders also require that we improve our servicing and foreclosure practices. We are committed to full compliance with the consent orders and support the development of national servicing standards that will provide greater clarity for servicers, investors and customers. We continue to be committed to modifying mortgages for at-risk customers. We have been working with our regulators for an extended period to improve our processes and have already made some of the operational changes that will result from the expanded servicing responsibilities outlined in the consent orders. We are an industry leader in loan modifications for homeowners. As of June 30, 2011, approximately 695,000 Wells Fargo mortgage customers were in active trial or had completed loan modifications since the beginning of 2009.
     On July 20, 2011, the FRB issued a consent cease and desist order regarding home mortgage lending conducted by Wells Fargo Financial prior to the reorganization of its lending operations into Wells Fargo Bank, N.A. The order addressed allegations that some Wells Fargo Financial employees had steered potential prime borrowers into more costly nonprime loans and had falsified income information in mortgage applications so that borrowers qualified for loans when they would not have qualified based on their actual incomes. In addition to assessing an $85 million civil money penalty against the Company, the order requires the Company to compensate borrowers affected by these practices.
     This quarter we reached a preliminary settlement of $125 million to address securities law claims by buyers of private label mortgage-backed securities. This settlement should resolve pending securities law claims for most purchasers of our private label mortgage-backed securities. The settlement has been considered in our reserve for litigation claims and should not affect our future income if approved.
     In 2009, the FRB announced regulatory changes to debit card and ATM overdraft practices, which have reduced our service charges on deposit accounts. The Durbin Amendment contained in the Dodd-Frank Act authorized the FRB to issue regulations governing debit card interchange fees, and in June 2011, the FRB issued final rules limiting debit card interchange fees. As a result of the new FRB rules, which will become effective on October 1, 2011, we currently expect that beginning in fourth quarter 2011 our quarterly income will be reduced by approximately $250 million (after tax), before the impact of any offsetting actions.
     For more information, see Note 11 (Legal Actions) to Financial Statements in this Report.


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Forward-Looking Statements

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “target,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. Examples of forward-looking statements in this Report include, but are not limited to, statements we make about: (i) future results of the Company; (ii) our targeted noninterest expense for fourth quarter 2012 as part of our expense management initiatives; (iii) future credit quality and expectations regarding future loan losses in our loan portfolios and life-of-loan estimates; the level and loss content of NPAs and nonaccrual loans; the adequacy of the allowance for credit losses, including our current expectation of future reductions in the allowance for credit losses; and the reduction or mitigation of risk in our loan portfolios and the effects of loan modification programs; (iv) future capital levels and our estimate regarding our Tier 1 common equity ratio under proposed Basel III capital standards as of June 30, 2011; (v) the merger integration of the Company and Wachovia, including, merger costs, revenue synergies and store conversions; (vi) our current estimate of our 2011 effective tax rate; (vii) our mortgage repurchase exposure and exposure relating to our mortgage foreclosure practices; (viii) the expected outcome and impact of legal, regulatory and legislative developments, including the Dodd-Frank Act and FRB restrictions on debit interchange fees; and (ix) the Company’s plans, objectives and strategies.
     Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
  current and future economic and market conditions, including the effects of further declines in housing prices, high unemployment rates, and uncertainty regarding U. S. debt and budget matters;
 
  our capital and liquidity requirements (including under regulatory capital standards, such as the proposed Basel III capital standards, as determined and interpreted by applicable regulatory authorities) and our ability to generate capital internally or raise capital on favorable terms;
  financial services reform and other current, pending or future legislation or regulation that could have a negative
    effect on our revenue and businesses, including the Dodd-Frank Act and legislation and regulation relating to overdraft fees (and changes to our overdraft practices as a result thereof), debit card interchange fees, credit cards, and other bank services, as well as the extent of our ability to offset the loss of revenue and income from financial services reform and other legislation and regulation;
 
  legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;
 
  the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications or changes in such requirements or guidance;
 
  the amount of mortgage loan repurchase demands that we receive and our ability to satisfy any such demands without having to repurchase loans related thereto or otherwise indemnify or reimburse third parties, and the credit quality of or losses on such repurchased mortgage loans;
 
  negative effects relating to mortgage foreclosures, including changes in our procedures or practices and/or industry standards or practices, regulatory or judicial requirements, penalties or fines, increased servicing and other costs or obligations, including loan modification requirements, or delays or moratoriums on foreclosures;
 
  our ability to realize our noninterest expense target as part of our expense management initiatives when and in the amount targeted, including as a result of business and economic cyclicality, seasonality, changes in our business composition and operating environment, growth in our businesses and/or acquisitions, and unexpected expenses relating to, among other things, litigation and regulatory matters;
 
  our ability to successfully integrate the Wachovia merger and realize all of the expected cost savings and other benefits and the effects of any delays or disruptions in systems conversions relating to the Wachovia integration;
 
  recognition of OTTI on securities held in our available-for-sale portfolio;
 
  the effect of changes in interest rates on our net interest margin and our mortgage originations, MSRs and MHFS;
 
  hedging gains or losses;
 
  disruptions in the capital markets and reduced investor demand for mortgage loans;
 
  our ability to sell more products to our customers;
 
  the effect of economic conditions on the demand for our products and services;
 
  the effect of a fall in stock market prices on our investment banking business and our fee income from our brokerage, asset and wealth management businesses;
 
  our election to provide support to our mutual funds for structured credit products they may hold;
 
  changes in the value of our venture capital investments;
 
  changes in our accounting policies or in accounting standards or in how accounting standards are to be applied or interpreted;


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  mergers, acquisitions and divestitures;
 
  changes in the Company’s credit ratings and changes in the credit quality of the Company’s customers or counterparties;
 
  reputational damage from negative publicity, fines, penalties and other negative consequences from regulatory violations and legal actions;
 
  the loss of checking and savings account deposits to other investments such as the stock market, and the resulting increase in our funding costs and impact on our net interest margin;
 
  fiscal and monetary policies of the FRB; and
 
  the other risk factors and uncertainties described under “Risk Factors” in this Report.
     In addition to the above factors, we also caution that there is no assurance that our allowance for credit losses will be adequate to cover future credit losses, especially if credit markets, housing prices and unemployment do not continue to stabilize or improve. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially adversely affect our financial results and condition.
     Any forward-looking statement made by us in this Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.


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Risk Factors
An investment in the Company involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. We discuss previously under “Forward-Looking Statements” and elsewhere in this Report, as well as in other documents we file with the SEC, risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in the Company. We refer you to the Financial Review section and Financial Statements (and related Notes) in this Report for more information about credit, interest rate, market, and litigation risks and to the “Regulation and Supervision” section of our 2010 Form 10-K for more information about legislative and regulatory risks. In addition, the following risk factors amend and restate in their entirety the risk factors set forth in the “Risk Factors” section on pages 92 through 101 of our 2010 Form 10-K.
RISKS RELATING TO ECONOMIC AND MARKET CONDITIONS AND REGULATORY ACTIVITY
As one of the largest lenders in the U.S. and a provider of financial products and services to consumers and businesses across the U.S. and internationally, our financial results have been, and may continue to be, materially affected by general economic conditions, particularly unemployment levels and home prices in the U.S., and a deterioration in economic conditions or in the financial markets may materially adversely affect our lending and other businesses and our financial results and condition. We generate revenue from the interest and fees we charge on the loans and other products and services we sell, and a substantial amount of our revenue and earnings comes from the net interest income and fee income that we earn from our consumer and commercial lending and banking businesses, including our mortgage banking business where we currently are the largest mortgage originator in the U.S. These businesses have been, and may continue to be, materially affected by the state of the U.S. economy, particularly unemployment levels and home prices. Although the U.S. economy has continued to gradually improve from the severely depressed levels of 2008 and early 2009, economic growth has been slow and uneven and the housing market remains weak. In addition, financial uncertainty stemming from the sovereign debt crisis in Europe and U. S. debt and budget matters, including the raising of the debt limit, deficit reduction, and the possible downgrade of U. S. debt ratings, as well as other recent events and concerns such as the political unrest in the Middle East, the impact to the global supply chain resulting from the devastating earthquake and tsunami in Japan, the increased volatility of commodity prices and the increase in the price of oil, and the uncertainty surrounding financial regulatory reform and its effect on the revenues of financial services companies such as the Company, have impacted and may continue to impact the continuing global economic recovery. A prolonged period of slow growth in the U.S. economy or any deterioration in general economic conditions and/or the financial markets resulting from the above matters or any other events or factors that may disrupt or dampen the global economic recovery, could materially adversely affect our financial results and condition.
     The high unemployment rate in the U.S., together with elevated levels of distressed property sales and the significant decline in home prices across the U.S., including in many of our large banking markets such as California and Florida, may be causing consumers to delay home purchases and has resulted in elevated credit costs and nonperforming asset levels, which have adversely affected our credit performance and our financial results and condition. If unemployment levels do not improve or continue to rise or if home prices continue to fall we would expect to incur higher than normal charge-offs and provision expense from increases in our allowance for credit losses. These conditions may adversely affect not only consumer loan performance but also commercial and CRE loans, especially for those business borrowers that rely on the health of industries or properties that may experience deteriorating economic conditions. The ability of these borrowers to repay their loans may be hurt, causing us, as one of the largest commercial lenders and the largest CRE lender in the U.S., to incur significantly higher credit losses. In addition, current economic conditions have made it more challenging for us to increase our consumer and commercial loan portfolios by making loans to creditworthy borrowers at attractive yields. Although we have significant capacity to add loans to our balance sheet, loan demand has been soft resulting in our retaining a much higher amount of lower yielding liquid assets on our balance sheet. If economic conditions do not continue to improve or if the economy worsens and unemployment rises, which would likely result in a decrease in consumer and business confidence and spending, the demand for our credit products, including our mortgages, may fall, reducing our interest and fee income and our earnings.
     A deterioration in business and economic conditions, which may erode consumer and investor confidence levels, and/or increased volatility of financial markets, also could adversely affect financial results for our fee-based businesses, including our investment advisory, mutual fund, securities brokerage, wealth management, and investment banking businesses. As a result of the Wachovia merger, a greater percentage of our revenue depends on our fee income from these businesses. We earn fee income from managing assets for others and providing brokerage and other investment advisory and wealth management services. Because investment management fees are often based on the value of assets under management, a fall in the market prices of those assets could reduce our fee income. Changes in stock market prices could affect the trading activity of investors, reducing commissions and other fees we earn from our brokerage business. Poor economic conditions and volatile or unstable financial markets also can negatively affect our debt and equity underwriting and advisory businesses, as well as our trading and venture capital businesses. Our acquisition of


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Risk Factors (continued)
Wachovia also expanded our international businesses, particularly our global financial institution and correspondent banking services, and any deterioration in global financial markets and economies may adversely affect the revenues and earnings of these businesses.
     For more information, refer to the “Risk Management — Asset/Liability Management” and “ — Credit Risk Management” sections in our 2010 Form 10-K and in this Report.
Effective liquidity management, which ensures that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and other unpredictable circumstances of industry or financial market stress, is essential for the operation of our business, and our financial results and condition could be materially adversely affected if we do not effectively manage our liquidity. Our liquidity is essential for the operation of our business. We primarily rely on bank deposits to be a low cost and stable source of funding for the loans we make and the operation of our business. Core customer deposits, which include noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits, have historically provided us with a sizeable source of relatively stable and low-cost funds (average core deposits funded 65% of our average total assets in second quarter 2011). In addition to customer deposits, our sources of liquidity include investments in our securities portfolio, our ability to sell or securitize loans in secondary markets and to pledge loans to access secured borrowing facilities through the Federal Home Loan Bank and the FRB, and our ability to raise funds in domestic and international money and capital markets.
     Our liquidity and our ability to fund and run our business could be materially adversely affected by a variety of conditions and factors, including financial and credit market disruption and volatility or a lack of market or customer confidence in financial markets in general similar to what occurred during the financial crisis in 2008 and early 2009, which may result in a loss of customer deposits or outflows of cash or collateral and/or our inability to access capital markets on favorable terms. Other conditions and factors that could materially adversely affect our liquidity and funding include a lack of market or customer confidence in the Company or negative news about the Company or the financial services industry generally which also may result in a loss of deposits and/or negatively affect our ability to access the capital markets; the loss of customer deposits to alternative investments; our inability to sell or securitize loans or other assets, and reductions in one or more of our credit ratings, which could adversely affect our ability to borrow funds and raise the costs of our borrowings substantially and could cause creditors and business counterparties to raise collateral requirements or take other actions that could adversely affect our ability to raise capital. Many of the above conditions and factors may be caused by events over which we have little or no control such as what occurred during the financial crisis. While market conditions have stabilized and, in many cases, improved, there can be no assurance that significant disruption and volatility in the financial markets will not occur in the future. For example, recent concerns regarding the potential failure to raise the U.S. debt limit and continuing concerns about a potential downgrade of U.S. debt ratings have caused uncertainty in financial markets. Although the U.S. debt limit was increased, a failure to raise the U.S. debt limit and/or a downgrade of U.S. debt ratings in the future could, in addition to causing economic and financial market disruptions, materially adversely affect the market value of the U.S. government securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms, as well as have other material adverse effects on the operation of our business and our financial results and condition. Other material adverse effects could include a reduction in our credit ratings resulting from a further decrease in the probability of government support for large financial institutions such as the Company assumed by the ratings agencies in their current credit ratings as described below in our risk factor relating to the impact of the Dodd-Frank Act.
     If we are unable to continue to fund our assets through customer bank deposits or access capital markets on favorable terms or if we suffer an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our liquidity, operating margins, financial results and condition may be materially adversely affected. As we did during the financial crisis, we may also need to raise additional capital through the issuance of common stock, which could dilute the ownership of existing stockholders, or reduce or even eliminate our common stock dividend to preserve capital or in order to raise additional capital.
     As a bank holding company, Wells Fargo & Company, the parent holding company, also relies on dividends from its subsidiaries for revenue, and federal and state law limit the amount of dividends that our subsidiaries may pay to the Parent. Limitations in the payments of dividends that Wells Fargo & Company receives from its subsidiaries could also reduce our liquidity position.
     For more information, refer to the “Risk Management — Asset/Liability Management” section in our 2010 Form 10-K and in this Report.


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Enacted legislation and regulation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as well as future legislation and/or regulation, could require us to change certain of our business practices, reduce our revenue, impose additional costs on us or otherwise adversely affect our business operations and/or competitive position. We are subject to significant regulation under state and federal laws in the U.S., as well as the applicable laws of the various jurisdictions outside of the U.S. where we conduct business. Economic, financial, market and political conditions during the past few years have led to significant new legislation and regulation in the United States and in other jurisdictions outside of the United States where we conduct business. These laws and regulations may affect the manner in which we do business and the products and services that we provide, affect or restrict our ability to compete in our current businesses or our ability to enter into or acquire new businesses, reduce or limit our revenue in businesses or impose additional fees, assessments or taxes on us, intensify the regulatory supervision of us and the financial services industry, and adversely affect our business operations or have other negative consequences.
     For example, in 2009 several legislative and regulatory initiatives were adopted that will have an impact on our businesses and financial results, including FRB amendments to Regulation E, which, among other things, affect the way we may charge overdraft fees, and the enactment of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Card Act), which, among other things, affects our ability to change interest rates and assess certain fees on card accounts. In third quarter 2009, we also implemented policy changes to help customers limit overdraft and returned item fees. The impact on our revenue of the Regulation E amendments, as well as our policy changes, and the Card Act reduced our 2010 and first half 2011 fee revenue and the continuing impact on our future revenue could vary materially due to a variety of factors, including changes in customer behavior, economic conditions and other potential offsetting factors.
     On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act, among other things, (i) establishes a new Financial Stability Oversight Council to monitor systemic risk posed by financial firms and imposes additional and enhanced FRB regulations, including capital and liquidity requirements, on certain large, interconnected bank holding companies and systemically significant nonbanking firms intended to promote financial stability; (ii) creates a liquidation framework for the resolution of covered financial companies, the costs of which would be paid through assessments on surviving covered financial companies; (iii) makes significant changes to the structure of bank and bank holding company regulation and activities in a variety of areas, including prohibiting proprietary
trading and private fund investment activities, subject to certain exceptions; (iv) creates a new framework for the regulation of over-the-counter derivatives and new regulations for the securitization market and strengthens the regulatory oversight of securities and capital markets by the SEC; (v) establishes the Bureau of Consumer Financial Protection within the FRB, which will have sweeping powers to administer and enforce a new federal regulatory framework of consumer financial regulation; (vi) may limit the existing pre-emption of state laws with respect to the application of such laws to national banks, makes federal pre-emption no longer applicable to operating subsidiaries of national banks, and gives state authorities, under certain circumstances, the ability to enforce state laws and federal consumer regulations against national banks; (vii) provides for increased regulation of residential mortgage activities; (viii) revises the FDIC’s assessment base for deposit insurance by changing from an assessment base defined by deposit liabilities to a risk-based system based on total assets; (ix) authorizes the FRB under the Durbin Amendment to issue regulations establishing, among other things, standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions; and (x) includes several corporate governance and executive compensation provisions and requirements, including mandating an advisory stockholder vote on executive compensation.
     The Dodd-Frank Act and many of its provisions became generally effective in July 2010, and on July 21, 2011, the one-year anniversary of its enactment, many other provisions became effective. However, a number of these and other provisions of the Dodd Frank Act still require extensive rulemaking, guidance, and interpretation by regulatory authorities and have extended implementation periods and delayed effective dates. Accordingly, in many respects the ultimate impact of the Dodd-Frank Act and its effects on the U.S. financial system and the Company will not be known for an extended period of time. Nevertheless, the Dodd-Frank Act, including current and future rules implementing its provisions and the interpretation of those rules, could result in a loss of revenue, require us to change certain of our business practices, limit our ability to pursue certain business opportunities, increase our capital requirements and impose additional assessments and costs on us and otherwise adversely affect our business operations and have other negative consequences. For example, the FRB recently issued final rules regarding debit card interchange fees, which implement the Durbin Amendment and become effective on October 1, 2011. As a result of the new rules, we currently expect that starting in fourth quarter 2011 our quarterly income will be reduced by approximately $250 million (after tax) before the impact of any offsetting actions. Although we expect to recapture a portion of this lost income over time through volume and product changes, there can be no assurance that we will be successful in our efforts to mitigate the negative impact to our financial results from the Durbin Amendment. Other negative consequences relating to the Dodd-Frank Act could include a reduction in our credit ratings to the extent the legislation reduces the probability of future federal financial assistance or support currently assumed by the ratings agencies in their credit ratings. Recently, one ratings agency reiterated its view that the uplift incorporated into the ratings of the Company and other large systemically important financial institutions for government support may no longer be appropriate because of the Dodd-Frank Act and it placed certain of the Company’s debt


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Risk Factors (continued)
ratings on review for possible downgrade. As noted above, a reduction in one or more of our credit ratings could adversely affect our ability to borrow funds and raise the costs of our borrowings substantially and could cause creditors and business counterparties to raise collateral requirements or take other actions, which could adversely affect our ability to raise capital.
     In February 2011, the Obama Administration delivered a report to Congress regarding proposals to reform the housing finance market in the United States. The report, among other things, outlined various potential proposals to wind down the GSEs and reduce or eliminate over time the role of the GSEs in guaranteeing mortgages and providing funding for mortgage loans, as well as proposals to implement reforms relating to borrowers, lenders, and investors in the mortgage market, including reducing the maximum size of a loan that the GSEs can guarantee, phasing in a minimum down payment requirement for borrowers, improving underwriting standards, and increasing accountability and transparency in the securitization process. The extent and timing of any regulatory reform regarding the GSEs and the home mortgage market, as well as any effect on the Company’s business and financial results, are uncertain.
     Any other future legislation and/or regulation, if adopted, also could have a material adverse effect on our business operations, income, and/or competitive position and may have other negative consequences.
     For more information, refer to the “Regulation and Supervision” section in our 2010 Form 10-K.
Bank regulations, including proposed Basel capital standards and FRB guidelines and rules, may require higher capital and liquidity levels, limiting our ability to pay common stock dividends, repurchase our common stock, invest in our business or provide loans to our customers. Federal banking regulators continually monitor the capital position of banks and bank holding companies. In July 2009, the Basel Committee on Bank Supervision published a set of international guidelines for determining regulatory capital known as Basel III. These guidelines, which were finalized in December 2010, followed earlier guidelines by the Basel Committee and are designed to address many of the weaknesses identified in the banking sector as contributing to the financial crisis of 2008 - 2009 by, among other things, increasing minimum capital requirements, increasing the quality of capital, increasing the risk coverage of the capital framework, and increasing standards for the supervisory review process and public disclosure. When fully phased in, the Basel III proposals require bank holding companies to maintain a minimum ratio of Tier 1 common equity to risk-weighted assets of at least 7.0%. The Basel Committee also proposed certain liquidity coverage and funding ratios. In June 2011, the Basel Committee proposed additional Tier 1 common equity surcharge requirements for
global systemically important banks ranging from 1.0% to 3.5% depending on the bank’s systemic importance to be determined based on certain factors. These new surcharge capital requirements, which would be phased in beginning in January 2016 and become fully effective on January 1, 2019, would be in addition to the Basel III 7.0% Tier 1 common equity requirement proposed in December 2010. Regulatory authorities have not yet determined the global systemically important banks that would be subject to the surcharge and the amount of the surcharge for those banks. The Basel proposals are subject to final rulemaking, including FRB rules implementing the internationally agreed Basel III standards for U.S. financial institutions, and the ultimate impact of the proposals on our capital and liquidity will depend on such rulemaking and regulatory interpretations of the rules as we, along with our regulatory authorities, apply the final rules during the implementation process.
     In 2010, the FRB issued guidelines for evaluating proposals by large bank holding companies, including the Company, to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock. Pursuant to those FRB guidelines, the Company submitted a proposed Capital Plan Review to the FRB, which was approved by the FRB in March 2011. Consistent with these guidelines and the FRB’s existing supervisory guidance regarding internal capital assessment, planning and adequacy, the FRB recently proposed rules that would require large bank holding companies such as the Company to submit annual capital plans to the FRB and to provide prior notice to the FRB before making a capital distribution under certain circumstances, including if the FRB objected to a capital plan or if certain minimum capital requirements were not maintained. There can be no assurance that the FRB would respond favorably to the Company’s future capital plan reviews. The FRB also is expected to issue proposed rules under the Dodd-Frank Act that will impose enhanced prudential standards on large bank holding companies such as the Company, including enhanced capital and liquidity requirements, which may be similar to or more restrictive than those proposed by the Basel Committee.
     The Basel standards and FRB regulatory capital and liquidity requirements may limit or otherwise restrict how we utilize our capital, including common stock dividends and stock repurchases, and may require us to increase our capital and/or liquidity. Any requirement that we increase our regulatory capital, regulatory capital ratios or liquidity could require us to liquidate assets or otherwise change our business and/or investment plans, which may negatively affect our financial results. Although not currently anticipated, the proposed Basel capital rules and/or our regulators may require us to raise additional capital in the future. Issuing additional common stock may dilute the ownership of existing stockholders.
     For more information, refer to the “Capital Management” section in our 2010 Form 10-K and in this Report.
Bankruptcy laws may be changed to allow mortgage “cram-downs,” or court-ordered modifications to our mortgage loans including the reduction of principal balances. Under current bankruptcy laws, courts cannot force a modification of mortgage and home equity loans secured by primary residences. In response to the financial crisis, legislation has been proposed to allow mortgage loan “cram-downs,” which would empower courts to modify the terms of mortgage and home equity loans including a reduction in the principal amount to reflect lower underlying property values. This could result in


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writing down the balance of our mortgage and home equity loans to reflect their lower loan values. There is also risk that home equity loans in a second lien position (i.e., behind a mortgage) could experience significantly higher losses to the extent they become unsecured as a result of a cram-down. The availability of principal reductions or other modifications to mortgage loan terms could make bankruptcy a more attractive option for troubled borrowers, leading to increased bankruptcy filings and accelerated defaults.
RISKS RELATING TO THE WACHOVIA MERGER
Our financial results and condition could be adversely affected if we fail to realize all of the expected benefits of the Wachovia merger or it takes longer than expected to realize those benefits. The merger with Wachovia requires the integration of the businesses of Wachovia and Wells Fargo. The integration process may result in the disruption of ongoing businesses and the loss of customers and their business and deposits. It may also divert management attention and resources from other operations and limit the Company’s ability to pursue other acquisitions. There is no assurance that we will realize all of the financial benefits of the merger when and in the amounts expected. As a result of our integration efforts and the conversion of many of our retail banking stores, including the conversion of our stores in our western and northeastern states, 83% of our banking customers are now on a single deposit system. There can be no assurance that conversion of the remaining banking stores, including our stores in Maryland, North Carolina, South Carolina, Virginia, and Washington, D.C., will not result in the loss of customers and deposits or other disruptions relating to the conversion.
We may incur losses on loans, securities and other acquired assets of Wachovia that are materially greater than reflected in our fair value adjustments. We accounted for the Wachovia merger under the purchase method of accounting, recording the acquired assets and liabilities of Wachovia at fair value. All PCI loans acquired in the merger were recorded at fair value based on the present value of their expected cash flows. We estimated cash flows using internal credit, interest rate and prepayment risk models using assumptions about matters that are inherently uncertain. We may not realize the estimated cash flows or fair value of these loans. In addition, although the difference between the pre-merger carrying value of the credit-impaired loans and their expected cash flows — the “nonaccretable difference” — is available to absorb future charge-offs, we may be required to increase our allowance for credit losses and related provision expense because of subsequent additional credit deterioration in these loans.
     For more information, refer to the “Critical Accounting Policies — Purchased Credit-Impaired (PCI) Loans)” and “Risk Management — Credit Risk Management” sections in our 2010 Form 10-K and the “Risk Management — Credit Risk Management” section in this Report.
ADDITIONAL RISKS RELATING TO OUR BUSINESS
As one of the largest lenders in the U.S., increased credit risk, whether resulting from deteriorating economic conditions or underestimating the credit losses inherent in our loan portfolio, could require us to increase our provision for credit losses and allowance for credit losses and could have a material adverse effect on our results of operations and financial condition. When we loan money or commit to loan money we incur credit risk, or the risk of losses if our borrowers do not repay their loans. As one of the largest lenders in the U.S., the credit performance of our loan portfolios significantly affects our financial results and condition. As noted above, if the current economic environment were to deteriorate, more of our customers may have difficulty in repaying their loans or other obligations which could result in a higher level of credit losses and provision for credit losses. We reserve for credit losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of credit losses inherent in our loan portfolio (including unfunded credit commitments). The process for determining the amount of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans.
     We might underestimate the credit losses inherent in our loan portfolio and have credit losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions, including falling home prices and higher unemployment, or other factors such as changes in borrower behavior. As an example, borrowers may “strategically default,” or discontinue making payments on their real estate-secured loans if the value of the real estate is less than what they owe, even if they are still financially able to make the payments.
     While we believe that our allowance for credit losses was adequate at June 30, 2011, there is no assurance that it will be sufficient to cover future credit losses, especially if housing and employment conditions worsen. In the event of significant deterioration in economic conditions, we may be required to build reserves in future periods, which would reduce our earnings.
     For more information, refer to the “Risk Management — Credit Risk Management” and “Critical Accounting Policies — Allowance for Credit Losses” sections in our 2010 Form 10-K and the “Risk Management — Credit Risk Management” section in this Report.


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Risk Factors (continued)
We may have more credit risk and higher credit losses to the extent our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. Our credit risk and credit losses can increase if our loans are concentrated to borrowers engaged in the same or similar activities or to borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions. We experienced the effect of concentration risk in 2009 and 2010 when we incurred greater than expected losses in our Home Equity loan portfolio due to a housing slowdown and greater than expected deterioration in residential real estate values in many markets, including the Central Valley California market and several Southern California metropolitan statistical areas. As California is our largest banking state in terms of loans and deposits, continued deterioration in real estate values and underlying economic conditions in those markets or elsewhere in California could result in materially higher credit losses. As a result of the Wachovia merger, we have increased our exposure to California, as well as to Arizona and Florida, two states that have also suffered significant declines in home values, as well as significant declines in economic activity. A deterioration in economic conditions, housing conditions and real estate values in these states and generally across the country could result in materially higher credit losses, including for our Home Equity portfolio.
     The Wachovia merger also increased our commercial real estate exposure, particularly in California and Florida, and we are currently the largest CRE lender in the U.S. A deterioration in economic conditions that negatively affects the business performance of our CRE borrowers, including increases in interest rates and/or declines in commercial property values, could result in materially higher credit losses and have a material adverse effect on our financial results and condition.
     For more information, refer to the “Risk Management — Credit Risk Management” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2010 Form 10-K and “Risk Management — Credit Risk Management” section and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
Loss of customer deposits and market illiquidity could increase our funding costs. We rely heavily on bank deposits to be a low cost and stable source of funding for the loans we make. We compete with banks and other financial services companies for deposits. If our competitors raise the rates they pay on deposits our funding costs may increase, either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources of funding. Higher funding costs reduce our net interest margin and net interest income. As discussed above, the continued integration of Wells Fargo and Wachovia may result in the loss of customer deposits. In addition, our bank customers could take their money out of the bank and put it in alternative investments, causing us to lose a lower cost source of funding. Checking and savings account balances and other forms of customer deposits may decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff.
When customers move money out of bank deposits and into other investments, we may lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income.
     We sell most of the mortgage loans we originate in order to reduce our credit risk and provide funding for additional loans. We rely on GSEs to purchase loans that meet their conforming loan requirements and on other capital markets investors to purchase loans that do not meet those requirements — referred to as “nonconforming” loans. Since 2007, investor demand for nonconforming loans has fallen sharply, increasing credit spreads and reducing the liquidity for those loans. In response to the reduced liquidity in the capital markets, we may retain more nonconforming loans. When we retain a loan not only do we keep the credit risk of the loan but we also do not receive any sale proceeds that could be used to generate new loans. Continued lack of liquidity could limit our ability to fund — and thus originate — new mortgage loans, reducing the fees we earn from originating and servicing loans. In addition, we cannot assure that GSEs will not materially limit their purchases of conforming loans due to capital constraints or change their criteria for conforming loans (e.g., maximum loan amount or borrower eligibility). As previously noted, the Obama Administration recently outlined proposals to reform the housing finance market in the United States, including the role of the GSEs in the housing finance market. The extent and timing of any such regulatory reform regarding the housing finance market and the GSEs, as well as any effect on the Company’s business and financial results, are uncertain.
Changes in interest rates could reduce our net interest income and earnings. Our net interest income is the interest we earn on loans, debt securities and other assets we hold less the interest we pay on our deposits, long-term and short-term debt, and other liabilities. Net interest income is a measure of both our net interest margin — the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding — and the amount of earning assets we hold. Changes in either our net interest margin or the amount of earning assets we hold could affect our net interest income and our earnings. Changes in interest rates can affect our net interest margin. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. When interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up.
     The amount and type of earning assets we hold can affect our yield and net interest margin. We hold earning assets in the form of loans and investment securities, among other assets. As noted above, if current economic conditions persist, we may continue to see lower demand for loans by creditworthy customers, reducing our yield. In addition, we may invest in lower yielding


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investment securities for a variety of reasons, including in anticipation that interest rates are likely to increase.
     Changes in the slope of the “yield curve” — or the spread between short-term and long-term interest rates — could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, our net interest margin could decrease as our cost of funds increases relative to the yield we can earn on our assets.
     The interest we earn on our loans may be tied to U.S.-denominated interest rates such as the federal funds rate while the interest we pay on our debt may be based on international rates such as LIBOR. If the federal funds rate were to fall without a corresponding decrease in LIBOR, we might earn less on our loans without any offsetting decrease in our funding costs. This could lower our net interest margin and our net interest income.
     We assess our interest rate risk by estimating the effect on our earnings under various scenarios that differ based on assumptions about the direction, magnitude and speed of interest rate changes and the slope of the yield curve. We hedge some of that interest rate risk with interest rate derivatives. We also rely on the “natural hedge” that our mortgage loan originations and servicing rights can provide.
     We may not hedge all of our interest rate risk. There is always the risk that changes in interest rates could reduce our net interest income and our earnings in material amounts, especially if actual conditions turn out to be materially different than what we assumed. For example, if interest rates rise or fall faster than we assumed or the slope of the yield curve changes, we may incur significant losses on debt securities we hold as investments. To reduce our interest rate risk, we may rebalance our investment and loan portfolios, refinance our debt and take other strategic actions. We may incur losses when we take such actions.
     For more information, refer to the “Risk Management — Asset/Liability Management — Interest Rate Risk” section in our 2010 Form 10-K and in this Report.
Changes in interest rates could also reduce the value of our MSRs and MHFS, reducing our earnings. As the second largest residential mortgage servicer in the U.S., we have a sizeable portfolio of MSRs. An MSR is the right to service a mortgage loan — collect principal, interest and escrow amounts — for a fee. We acquire MSRs when we keep the servicing rights after we sell or securitize the loans we have originated or when we purchase the servicing rights to mortgage loans originated by other lenders. We initially measure all and carry substantially all our residential MSRs using the fair value measurement method. Fair value is the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.
     Changes in interest rates can affect prepayment assumptions and thus fair value. When interest rates fall, borrowers are usually more likely to prepay their mortgage loans by refinancing them at a lower rate. As the likelihood of prepayment increases, the fair value of our MSRs can decrease. Each quarter we evaluate the fair value of our MSRs, and any decrease in fair
value reduces earnings in the period in which the decrease occurs.
     We measure at fair value prime MHFS for which an active secondary market and readily available market prices exist. We also measure at fair value certain other interests we hold related to residential loan sales and securitizations. Similar to other interest-bearing securities, the value of these MHFS and other interests may be negatively affected by changes in interest rates. For example, if market interest rates increase relative to the yield on these MHFS and other interests, their fair value may fall. We may not hedge this risk, and even if we do hedge the risk with derivatives and other instruments we may still incur significant losses from changes in the value of these MHFS and other interests or from changes in the value of the hedging instruments.
     For more information, refer to the “Risk Management — Asset/Liability Management — Mortgage Banking Interest Rate and Market Risk” and “Critical Accounting Policies” sections in our 2010 Form 10-K and the “Risk Management — Asset/Liability Management” section in this Report.
Our mortgage banking revenue can be volatile from quarter to quarter. We are the largest mortgage originator and second largest residential mortgage servicer in the U.S., and we earn revenue from fees we receive for originating mortgage loans and for servicing mortgage loans. When rates rise, the demand for mortgage loans usually tends to fall, reducing the revenue we receive from loan originations. Under the same conditions, revenue from our MSRs can increase through increases in fair value. When rates fall, mortgage originations usually tend to increase and the value of our MSRs usually tends to decline, also with some offsetting revenue effect. Even though they can act as a “natural hedge,” the hedge is not perfect, either in amount or timing. For example, the negative effect on revenue from a decrease in the fair value of residential MSRs is generally immediate, but any offsetting revenue benefit from more originations and the MSRs relating to the new loans would generally accrue over time. It is also possible that, because of economic conditions and/or a deteriorating housing market similar to current market conditions, even if interest rates were to fall, mortgage originations may also fall or any increase in mortgage originations may not be enough to offset the decrease in the MSRs value caused by the lower rates.
     We typically use derivatives and other instruments to hedge our mortgage banking interest rate risk. We generally do not hedge all of our risk, and we may not be successful in hedging any of the risk. Hedging is a complex process, requiring sophisticated models and constant monitoring, and is not a perfect science. We may use hedging instruments tied to U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly correlate with the value or income being hedged. We could incur significant losses from our hedging activities. There may be periods where we elect not to use derivatives and other instruments to hedge mortgage banking interest rate risk.
     For more information, refer to the “Risk Management — Asset/Liability Management — Mortgage Banking Interest Rate


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Risk Factors (continued)
and Market Risk” section in our 2010 Form 10-K and in this Report.
We may be required to repurchase mortgage loans or reimburse investors and others as a result of breaches in contractual representations and warranties. We sell residential mortgage loans to various parties, including GSEs, SPEs that issue private label MBS, and other financial institutions that purchase mortgage loans for investment or private label securitization. We may also pool FHA-insured and VA-guaranteed mortgage loans which back securities guaranteed by GNMA. The agreements under which we sell mortgage loans and the insurance or guaranty agreements with the FHA and VA contain various representations and warranties regarding the origination and characteristics of the mortgage loans, including ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing the loan, and compliance with applicable origination laws. We may be required to repurchase mortgage loans, indemnify the securitization trust, investor or insurer, or reimburse the securitization trust, investor or insurer for credit losses incurred on loans in the event of a breach of contractual representations or warranties that is not remedied within a period (usually 90 days or less) after we receive notice of the breach. Contracts for mortgage loan sales to the GSEs include various types of specific remedies and penalties that could be applied to inadequate responses to repurchase requests. Similarly, the agreements under which we sell mortgage loans require us to deliver various documents to the securitization trust or investor, and we may be obligated to repurchase any mortgage loan as to which the required documents are not delivered or are defective. We may negotiate global settlements in order to resolve a pipeline of demands in lieu of repurchasing the loans. If economic conditions and the housing market do not recover or future investor repurchase demand and our success at appealing repurchase requests differ from past experience, we could continue to have increased repurchase obligations and increased loss severity on repurchases, requiring material additions to the repurchase reserve.
     For more information, refer to the “Risk Management — Liability for Mortgage Loan Repurchase Losses” section in our 2010 Form 10-K and in this Report.
We may be terminated as a servicer or master servicer, be required to repurchase a mortgage loan or reimburse investors for credit losses on a mortgage loan, or incur costs, liabilities, fines and other sanctions if we fail to satisfy our servicing obligations, including our obligations with respect to mortgage loan foreclosure actions. We act as servicer and/or master servicer for mortgage loans included in securitizations and for unsecuritized mortgage loans owned by investors. As a servicer or master servicer for those loans we have certain contractual obligations to the securitization trusts, investors or other third parties, including, in our capacity as a servicer, foreclosing on defaulted mortgage loans or, to the extent consistent with the
applicable securitization or other investor agreement, considering alternatives to foreclosure such as loan modifications or short sales and, in our capacity as a master servicer, overseeing the servicing of mortgage loans by the servicer. If we commit a material breach of our obligations as servicer or master servicer, we may be subject to termination if the breach is not cured within a specified period of time following notice, which can generally be given by the securitization trustee or a specified percentage of security holders, causing us to lose servicing income. In addition, we may be required to indemnify the securitization trustee against losses from any failure by us, as a servicer or master servicer, to perform our servicing obligations or any act or omission on our part that involves wilful misfeasance, bad faith or gross negligence. For certain investors and/or certain transactions, we may be contractually obligated to repurchase a mortgage loan or reimburse the investor for credit losses incurred on the loan as a remedy for servicing errors with respect to the loan. If we have increased repurchase obligations because of claims that we did not satisfy our obligations as a servicer or master servicer, or increased loss severity on such repurchases, we may have to materially increase our repurchase reserve.
     We may incur costs if we are required to, or if we elect to re-execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the required process was not followed. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. In addition, if certain documents required for a foreclosure action are missing or defective, we could be obligated to cure the defect or repurchase the loan. We may incur liability to securitization investors relating to delays or deficiencies in our processing of mortgage assignments or other documents necessary to comply with state law governing foreclosures. The fair value of our MSRs may be negatively affected to the extent our servicing costs increase because of higher foreclosure costs. We may be subject to fines and other sanctions, including a foreclosure moratorium or suspension or a requirement to forgive or modify the loan obligations of certain of our borrowers, imposed by Federal or state regulators as a result of actual or perceived deficiencies in our foreclosure practices or in the foreclosure practices of other mortgage loan servicers. Any of these actions may harm our reputation or negatively affect our residential mortgage origination or servicing business. Recently, we entered into consent orders with the OCC and the FRB following a joint interagency horizontal examination of foreclosure processing at large mortgage servicers, including the Company. These orders incorporate remedial requirements for identified deficiencies and require the Company to, among other things, take certain actions with respect to our mortgage servicing and foreclosure operations, including submitting various action plans to ensure that our mortgage servicing and foreclosure operations comply


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with legal requirements, regulatory guidance and the consent orders. As noted above, any increase in our servicing costs from changes in our foreclosure and other servicing practices, including resulting from the consent orders, negatively affects the fair value of our MSRs. The consent orders did not provide for civil money penalties but both government entities reserved the ability to seek such penalties. Other government agencies, including state attorneys general and the U.S. Department of Justice, continue to investigate various mortgage related practices of the Company, and these investigations could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions and result in significant legal costs in responding to governmental investigations and additional litigation.
     For more information, refer to the “Earnings Performance — Noninterest Income,” “Risk Management — Liability for Mortgage Loan Repurchase Losses” and “— Risks Relating to Servicing Activities,” and “Critical Accounting Policies — Valuation of Residential Mortgage Servicing Rights” sections and Note 14 (Guarantees and Legal Actions) to Financial Statements in our 2010 Form 10-K and “Risk Management — Liability for Mortgage Loan Repurchase Losses” and “— Risks Relating to Servicing Activities” sections in this Report and Note 11 (Legal Actions) to Financial Statements in this Report .
We could recognize OTTI on securities held in our available-for-sale portfolio if economic and market conditions do not improve. Our securities available-for-sale portfolio had gross unrealized losses of $1.9 billion at June 30, 2011. We analyze securities held in our available-for-sale portfolio for OTTI on a quarterly basis. The process for determining whether impairment is other than temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers and the performance of the underlying collateral, we may be required to recognize OTTI in future periods, thus reducing earnings.
     For more information, refer to the “Balance Sheet Analysis — Securities Available for Sale” section and Note 5 (Securities Available for Sale) to Financial Statements in our 2010 Form 10-K and the “Balance Sheet Analysis — Securities Available for Sale” section in this Report.
We rely on our systems and certain counterparties, and certain failures could materially adversely affect our operations. Our businesses are dependent on our ability to process, record and monitor a large number of complex transactions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Third parties with which we do business could also be sources of operational risk to us, including relating to breakdowns or failures of such parties’ own systems. Any of these occurrences could diminish our ability
to operate one or more of our businesses, or result in potential liability to clients, reputational damage and regulatory intervention, any of which could materially adversely affect us.
     If personal, confidential or proprietary information of customers or clients in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
     We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, natural disasters, disease pandemics or other damage to property or physical assets, or events arising from local or larger scale politics, including terrorist acts. Such disruptions may give rise to losses in service to customers and loss or liability to us.
Our framework for managing risks may not be effective in mitigating risk and loss to us. Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. For example, the recent financial and credit crisis and resulting regulatory reform highlighted both the importance and some of the limitations of managing unanticipated risks. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.
Financial difficulties or credit downgrades of mortgage and bond insurers may negatively affect our servicing and investment portfolios. Our servicing portfolio includes certain mortgage loans that carry some level of insurance from one or more mortgage insurance companies. To the extent that any of these companies experience financial difficulties or credit downgrades, we may be required, as servicer of the insured loan on behalf of the investor, to obtain replacement coverage with another provider, possibly at a higher cost than the coverage we would replace. We may be responsible for some or all of the incremental cost of the new coverage for certain loans depending on the terms of our servicing agreement with the investor and other circumstances. Similarly, some of the mortgage loans we hold for investment or for sale carry mortgage insurance. If a mortgage insurer is unable to meet its credit obligations with respect to an insured loan, we might incur higher credit losses if replacement coverage is not obtained. We also have investments in municipal bonds that are guaranteed against loss by bond insurers. The value of these bonds and the payment of principal


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Risk Factors (continued)
and interest on them may be negatively affected by financial difficulties or credit downgrades experienced by the bond insurers.
     For more information, refer to the “Earnings Performance — Balance Sheet Analysis — Securities Available for Sale” and “Risk Management — Credit Risk Management” sections in our 2010 Form 10-K and in this Report.
Our “cross-selling” efforts to increase the number of products our customers buy from us and offer them all of the financial products that fulfill their needs is a key part of our growth strategy, and our failure to execute this strategy effectively could have a material adverse effect on our revenue growth and financial results. Selling more products to our customers — “cross-selling” — is very important to our business model and key to our ability to grow revenue and earnings especially during periods of slow economic growth as being experienced in the current economic environment. Many of our competitors also focus on cross-selling, especially in retail banking and mortgage lending. This can limit our ability to sell more products to our customers or influence us to sell our products at lower prices, reducing our net interest income and revenue from our fee-based products. It could also affect our ability to keep existing customers. New technologies could require us to spend more to modify or adapt our products to attract and retain customers. Our cross-sell strategy also is dependent on earning more business from our Wachovia customers, which may be negatively affected by our merger integration activities, as well as some of the above factors. Increasing our cross-sell ratio — or the average number of products sold to existing customers — may become more challenging and we might not attain our goal of selling an average of eight products to each customer.
We may elect to provide capital support to our mutual funds relating to investments in structured credit products. The money market mutual funds we advise are allowed to hold investments in structured investment vehicles (SIVs) in accordance with approved investment parameters for the respective funds and, therefore, we may have indirect exposure to CDOs. Although we generally are not responsible for investment losses incurred by our mutual funds, we may from time to time elect to provide support to a fund even though we are not contractually obligated to do so. For example, in February 2008, to maintain an investment rating of AAA for certain money market mutual funds, we elected to enter into a capital support agreement for up to $130 million related to one SIV held by those funds. If we provide capital support to a mutual fund we advise, and the fund’s investment losses require the capital to be utilized, we may incur losses, thus reducing earnings.
     For more information, refer to Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in our 2010 Form 10-K and to Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.
Our venture capital business can also be volatile from quarter to quarter. Certain of our venture capital businesses are carried under the cost or equity method, and others (e.g., principal investments) are carried at fair value with unrealized gains and losses reflected in earnings. Our venture capital investments tend to be in technology and other volatile industries so the value of our public and private equity portfolios may fluctuate widely. Earnings from our venture capital investments may be volatile and hard to predict and may have a significant effect on our earnings from period to period. When, and if, we recognize gains may depend on a number of factors, including general economic conditions, the prospects of the companies in which we invest, when these companies go public, the size of our position relative to the public float, and whether we are subject to any resale restrictions.
     Our venture capital investments could result in significant losses, either OTTI losses for those investments carried under the cost or equity method or mark-to-market losses for principal investments. Our assessment for OTTI is based on a number of factors, including the then current market value of each investment compared with its carrying value. If we determine there is OTTI for an investment, we write-down the carrying value of the investment, resulting in a charge to earnings. The amount of this charge could be significant. Further, our principal investing portfolio could incur significant mark-to-market losses especially if these investments have been written up because of higher market prices.
     As noted above, regulations associated with the Dodd-Frank Act are expected to include prohibitions or limitations on proprietary trading and private fund investment activities. These restrictions, known as the “Volcker Rule,” are subject to final rulemaking and interpretation, and the ultimate impact of the Volcker Rule on our venture capital business is uncertain.
     For more information, refer to the “Risk Management — Asset/Liability Management — Market Risk —Trading Activities” and “— Equity Markets” sections in our 2010 Form 10-K and in this Report.
We rely on dividends from our subsidiaries for revenue, and federal and state law can limit those dividends. Wells Fargo & Company, the parent holding company, is a separate and distinct legal entity from its subsidiaries. It receives a significant portion of its revenue from dividends from its subsidiaries. We generally use these dividends, among other things, to pay dividends on our common and preferred stock and interest and principal on our debt. Federal and state laws limit the amount of dividends that our bank and some of our nonbank subsidiaries may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
     For more information, refer to the “Regulation and Supervision — Dividend Restrictions” and “—Holding Company Structure” sections in our 2010 Form 10-K and to Note 3 (Cash, Loan and Dividend Restrictions) and Note 25 (Regulatory and Agency Capital Requirements) to Financial Statements in our 2010 Form 10-K.


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Changes in accounting policies or accounting standards, and changes in how accounting standards are interpreted or applied, could materially affect how we report our financial results and condition. Our accounting policies are fundamental to determining and understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Several of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. For a description of these policies, refer to the “Critical Accounting Policies” section in our 2010 Form 10-K and in this Report.
     From time to time the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our external financial statements. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, SEC, banking regulators and our outside auditors) may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond our control, can be hard to predict and could materially affect how we report our financial results and condition. We may be required to apply a new or revised standard retroactively or apply an existing standard differently, also retroactively, in each case resulting in our potentially restating prior period financial statements in material amounts.
Our financial statements are based in part on assumptions and estimates which, if wrong, could cause unexpected losses in the future. Pursuant to U.S. GAAP, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses.
     Certain of our financial instruments, including trading assets and liabilities, available-for-sale securities, certain loans, MSRs, private equity investments, structured notes and certain repurchase and resale agreements, among other items, require a determination of their fair value in order to prepare our financial statements. Where quoted market prices are not available, we may make fair value determinations based on internally developed models or other means which ultimately rely to some degree on management judgment. Some of these and other assets and liabilities may have no direct observable price levels, making their valuation particularly subjective, being based on significant estimation and judgment. In addition, sudden illiquidity in markets or declines in prices of certain loans and securities may make it more difficult to value certain balance sheet items, which may lead to the possibility that such
valuations will be subject to further change or adjustment and could lead to declines in our earnings.
Acquisitions could reduce our stock price upon announcement and reduce our earnings if we overpay or have difficulty integrating them. We regularly explore opportunities to acquire companies in the financial services industry. We cannot predict the frequency, size or timing of our acquisitions, and we typically do not comment publicly on a possible acquisition until we have signed a definitive agreement. When we do announce an acquisition, our stock price may fall depending on the size of the acquisition, the purchase price and the potential dilution to existing stockholders. It is also possible that an acquisition could dilute earnings per share.
     We generally must receive federal regulatory approvals before we can acquire a bank or bank holding company. In deciding whether to approve a proposed acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition, and future prospects including current and projected capital ratios and levels, the competence, experience, and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including our record of compliance under the Community Reinvestment Act, and our effectiveness in combating money laundering. Also, we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We might be required to sell banks, branches and/or business units as a condition to receiving regulatory approval.
     Difficulty in integrating an acquired company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of our business or the business of the acquired company, or otherwise harm our ability to retain customers and employees or achieve the anticipated benefits of the acquisition. Time and resources spent on integration may also impair our ability to grow our existing businesses. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. Federal and state regulations can restrict our business, and non-compliance with regulations could result in penalties, litigation and damage to our reputation. As described above, our parent company, our subsidiary banks and many of our nonbank subsidiaries such as those related to our retail brokerage and mutual fund businesses are heavily regulated at the federal and/or state levels. This regulation is to protect depositors, federal deposit insurance funds, consumers, investors and the banking system as a whole, not necessarily our stockholders. Federal and state regulations can significantly restrict our businesses, and we could be fined or otherwise penalized if we are found to be out of compliance.
     The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) limits the types of non-audit services our outside auditors may provide to us in order to preserve their independence from us. If our auditors were found not to be “independent” of us under SEC


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Risk Factors (continued)
rules, we could be required to engage new auditors and file new financial statements and audit reports with the SEC. We could be out of compliance with SEC rules until new financial statements and audit reports were filed, limiting our ability to raise capital and resulting in other adverse consequences.
     Sarbanes-Oxley also requires our management to evaluate the Company’s disclosure controls and procedures and its internal control over financial reporting and requires our auditors to issue a report on our internal control over financial reporting. We are required to disclose, in our annual report on Form 10-K, the existence of any “material weaknesses” in our internal control. We cannot assure that we will not find one or more material weaknesses as of the end of any given year, nor can we predict the effect on our stock price of disclosure of a material weakness.
     From time to time Congress considers and/or adopts legislation, such as the Dodd-Frank Act, that could significantly change our regulatory environment and increase our cost of doing business, limit the activities we may pursue or affect the competitive balance among banks, savings associations, credit unions, and other financial services companies.
     For more information, refer to the “Regulation and Supervision” section in our 2010 Form 10-K.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations. We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. For example, we are subject to regulations issued by the Office of Foreign Assets Control (OFAC) that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. There may be other negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage our reputation (see below) and could restrict the ability of institutional investment managers to invest in our securities.
Negative publicity could damage our reputation and business. Reputation risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business and increased substantially because of the financial crisis and the increase in our size and profile in the financial services industry following our acquisition of Wachovia. The reputation of the financial services industry in general has been damaged as a result of the financial crisis and other matters affecting the financial services industry, including mortgage foreclosure issues, and negative public opinion about the financial services industry generally or Wells Fargo specifically
could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including mortgage lending practices, servicing and foreclosure activities, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Because we conduct most of our businesses under the “Wells Fargo” brand, negative public opinion about one business could affect our other businesses and also could negatively affect our “cross-sell” strategy.
Federal Reserve Board policies can significantly affect business and economic conditions and our financial results and condition. The FRB regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which affect our net interest margin. They also can materially affect the value of financial instruments we hold, such as debt securities and MSRs. Its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in FRB policies are beyond our control and can be hard to predict.
Risks Relating to Legal Proceedings. Wells Fargo and some of its subsidiaries are involved in judicial, regulatory and arbitration proceedings concerning matters arising from our business activities. Although we believe we have a meritorious defense in all material significant litigation pending against us, there can be no assurance as to the ultimate outcome. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. We may still incur legal costs for a matter even if we have not established a reserve. In addition, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter. The ultimate resolution of a pending legal proceeding, depending on the remedy sought and granted, could materially adversely affect our results of operations and financial condition.
     For more information, refer to Note 14 (Guarantees and Legal Actions) to Financial Statements in our 2010 Form 10-K and to Note 11 (Legal Actions) in this Report.


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Risks Affecting Our Stock Price Our stock price can fluctuate widely in response to a variety of factors, in addition to those described above, including:
  general business and economic conditions;
 
  recommendations by securities analysts;
 
  new technology used, or services offered, by our competitors;
 
  operating and stock price performance of other companies that investors deem comparable to us;
 
  news reports relating to trends, concerns and other issues in the financial services industry;
 
  changes in government regulations;
 
  natural disasters; and
 
  geopolitical conditions such as acts or threats of terrorism or military conflicts.
     Any factor described in this Report or in any of our other SEC filings could by itself, or together with other factors, adversely affect our financial results and condition. Refer to our quarterly reports on Form 10-Q filed with the SEC in 2011 for material changes to the discussion of risk factors. There are factors not discussed above or elsewhere in this Report that could adversely affect our financial results and condition.


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Controls and Procedures
Disclosure Controls and Procedures
 
As required by SEC rules, the Company’s management evaluated the effectiveness, as of June 30, 2011, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2011.
Internal Control Over Financial Reporting
 
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:
  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;
  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during second quarter 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Wells Fargo & Company and Subsidiaries
Consolidated Statement of Income (Unaudited)
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
 
(in millions, except per share amounts)   2011     2010     2011     2010  
 
 
                               
Interest income
                               
Trading assets
  $ 347       266       697       533  
Securities available for sale
    2,166       2,385       4,330       4,800  
Mortgages held for sale
    362       405       799       792  
Loans held for sale
    17       30       29       64  
Loans
    9,361       10,277       18,748       20,315  
Other interest income
    131       109       253       193  
 
 
                               
Total interest income
    12,384       13,472       24,856       26,697  
 
 
                               
Interest expense
                               
Deposits
    594       714       1,209       1,449  
Short-term borrowings
    20       21       46       39  
Long-term debt
    1,009       1,233       2,113       2,509  
Other interest expense
    83       55       159       104  
 
 
                               
Total interest expense
    1,706       2,023       3,527       4,101  
 
 
                               
Net interest income
    10,678       11,449       21,329       22,596  
Provision for credit losses
    1,838       3,989       4,048       9,319  
 
 
                               
Net interest income after provision for credit losses
    8,840       7,460       17,281       13,277  
 
 
                               
Noninterest income
                               
Service charges on deposit accounts
    1,074       1,417       2,086       2,749  
Trust and investment fees
    2,944       2,743       5,860       5,412  
Card fees
    1,003       911       1,960       1,776  
Other fees
    1,023       982       2,012       1,923  
Mortgage banking
    1,619       2,011       3,635       4,481  
Insurance
    568       544       1,071       1,165  
Net gains from trading activities
    414       109       1,026       646  
Net gains (losses) on debt securities available for sale (1)
    (128 )     30       (294 )     58  
Net gains from equity investments (2)
    724       288       1,077       331  
Operating leases
    103       329       180       514  
Other
    364       581       773       1,191  
 
 
                               
Total noninterest income
    9,708       9,945       19,386       20,246  
 
 
                               
Noninterest expense
                               
Salaries
    3,584       3,564       7,038       6,878  
Commission and incentive compensation
    2,171       2,225       4,518       4,217  
Employee benefits
    1,164       1,063       2,556       2,385  
Equipment
    528       588       1,160       1,266  
Net occupancy
    749       742       1,501       1,538  
Core deposit and other intangibles
    464       553       947       1,102  
FDIC and other deposit assessments
    315       295       620       596  
Other
    3,500       3,716       6,868       6,881  
 
 
                               
Total noninterest expense
    12,475       12,746       25,208       24,863  
 
 
                               
Income before income tax expense
    6,073       4,659       11,459       8,660  
Income tax expense
    2,001       1,514       3,573       2,915  
 
 
                               
Net income before noncontrolling interests
    4,072       3,145       7,886       5,745  
Less: Net income from noncontrolling interests
    124       83       179       136  
 
 
                               
Wells Fargo net income
  $ 3,948       3,062       7,707       5,609  
 
 
                               
Less: Preferred stock dividends and other
    220       184       409       359  
 
 
                               
Wells Fargo net income applicable to common stock
  $ 3,728       2,878       7,298       5,250  
 
 
                               
Per share information
                               
Earnings per common share
  $ 0.70       0.55       1.38       1.01  
Diluted earnings per common share
    0.70       0.55       1.37       1.00  
Dividends declared per common share
    0.12       0.05       0.24       0.10  
Average common shares outstanding
    5,286.5       5,219.7       5,282.7       5,205.1  
Diluted average common shares outstanding
    5,331.7       5,260.8       5,329.9       5,243.0  
 
(1)   Includes other-than-temporary impairment (OTTI) losses of $189 million and $106 million recognized in earnings for second quarter 2011 and 2010, respectively. Total OTTI losses (gains) were $129 million and $49 million, net of $(60) million and $(57) million recognized as non-credit related OTTI in other comprehensive income for second quarter 2011 and 2010, respectively. Includes other-than-temporary impairment (OTTI) losses of $269 million and $198 million recognized in earnings for the first half of 2011 and 2010, respectively. Total OTTI losses (gains) were $53 million and $203 million, net of $(216) million and $5 million recognized as non-credit related OTTI in other comprehensive income for the first half of 2011 and 2010, respectively.
 
(2)   Includes OTTI losses of $16 million and $62 million for second quarter 2011 and 2010, respectively, and $57 million and $167 million for the first half of 2011 and 2010, respectively.
The accompanying notes are an integral part of these statements.

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Wells Fargo & Company and Subsidiaries
Consolidated Balance Sheet (Unaudited)
 
                 
    June 30,     Dec. 31,  
 
(in millions, except shares)   2011     2010  
 
 
               
Assets
               
Cash and due from banks
  $ 24,059       16,044  
Federal funds sold, securities purchased under resale agreements and other short-term investments
    88,406       80,637  
Trading assets
    54,770       51,414  
Securities available for sale
    186,298       172,654  
Mortgages held for sale (includes $25,175 and $47,531 carried at fair value)
    31,254       51,763  
Loans held for sale (includes $1,102 and $873 carried at fair value)
    1,512       1,290  
 
               
Loans (includes $0 and $309 carried at fair value)
    751,921       757,267  
Allowance for loan losses
    (20,893 )     (23,022 )
 
 
               
Net loans
    731,028       734,245  
 
 
               
Mortgage servicing rights:
               
Measured at fair value
    14,778       14,467  
Amortized
    1,422       1,419  
Premises and equipment, net
    9,613       9,644  
Goodwill
    24,776       24,770  
Other assets
    91,818       99,781  
 
 
               
Total assets (1)
  $ 1,259,734       1,258,128  
 
 
               
Liabilities
               
Noninterest-bearing deposits
  $ 202,143       191,256  
Interest-bearing deposits
    651,492       656,686  
 
 
               
Total deposits
    853,635       847,942  
Short-term borrowings
    53,881       55,401  
Accrued expenses and other liabilities
    71,430       69,913  
Long-term debt (includes $0 and $306 carried at fair value)
    142,872       156,983  
 
 
               
Total liabilities (2)
    1,121,818       1,130,239  
 
 
               
Equity
               
Wells Fargo stockholders’ equity:
               
Preferred stock
    11,730       8,689  
Common stock — $1-2/3 par value, authorized 9,000,000,000 shares; issued 5,325,393,921 shares and 5,272,414,622 shares
    8,876       8,787  
Additional paid-in capital
    55,226       53,426  
Retained earnings
    57,942       51,918  
Cumulative other comprehensive income
    5,422       4,738  
Treasury stock — 47,222,127 shares and 10,131,394 shares
    (1,546 )     (487 )
Unearned ESOP shares
    (1,249 )     (663 )
 
 
               
Total Wells Fargo stockholders’ equity
    136,401       126,408  
Noncontrolling interests
    1,515       1,481  
 
 
               
Total equity
    137,916       127,889  
 
 
               
Total liabilities and equity
  $ 1,259,734       1,258,128  
 
(1)   Our consolidated assets at June 30, 2011, and December 31, 2010, include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash and due from banks, $172 million and $200 million; Trading assets, $95 million and $143 million; Securities available for sale, $2.3 billion and $2.2 billion; Mortgages held for sale, $408 million and $634 million; Loans held for sale, $135 million and $0; Net loans, $13.6 billion and $16.7 billion; Other assets, $1.6 billion and $2.1 billion, and Total assets, $18.3 billion and $21.9 billion, respectively.
 
(2)   Our consolidated liabilities at June 30, 2011 and December 31, 2010, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Short-term borrowings, $26 million and $7 million; Accrued expenses and other liabilities, $121 million and $98 million; Long-term debt, $6.2 billion and $8.3 billion; and Total liabilities, $6.3 billion and $8.4 billion, respectively.
The accompanying notes are an integral part of these statements.

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Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity and Comprehensive Income (Unaudited)
 
                                 
   
 
 
    Preferred stock   Common stock
(in millions, except shares)   Shares   Amount   Shares   Amount
 
 
                               
Balance January 1, 2010
    9,980,940     $ 8,485       5,178,624,593     $ 8,743  
 
Cumulative effect from change in accounting for VIEs
                               
Comprehensive income:
                               
Net income
                               
 
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
 
Net unrealized gains on securities available for sale, net of reclassification of $134 million of net gains included in net income
                               
 
Net unrealized gains on derivatives and hedging activities, net of reclassification of $204 million of net gains on cash flow hedges included in net income
                               
 
Unamortized losses under defined benefit plans, net of amortization
                               
 
Total comprehensive income
                               
 
Noncontrolling interests
                               
 
Common stock issued
                    37,142,817          
 
Common stock repurchased
                    (2,206,165 )        
 
Preferred stock issued to ESOP
    1,000,000       1,000                  
 
Preferred stock released by ESOP
                               
 
Preferred stock converted to common shares
    (504,847 )     (505 )     17,834,436          
 
Common stock warrants repurchased
                               
 
Common stock dividends
                               
 
Preferred stock dividends
                               
 
Tax benefit upon exercise of stock options
                               
 
Stock incentive compensation expense
                               
 
Net change in deferred compensation and related plans
                               
 
Net change
    495,153       495       52,771,088       -  
 
Balance June 30, 2010
    10,476,093     $ 8,980       5,231,395,681     $ 8,743  
 
 
Balance January 1, 2011
    10,185,303     $ 8,689       5,262,283,228     $ 8,787  
 
Comprehensive income:
                               
Net income
                               
 
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
 
Net unrealized gains on securities available for sale, net of reclassification of $114 million of net gains included in net income
                               
 
Net unrealized losses on derivatives and hedging activities, net of reclassification of $27 million of net gains on cash flow hedges included in net income
                               
 
Unamortized gains under defined benefit plans, net of amortization
                               
 
Total comprehensive income
                               
 
Noncontrolling interests
                               
 
Common stock issued
                    31,512,347       53  
 
Common stock repurchased
                    (37,090,733 )        
 
Preferred stock issued to ESOP
    1,200,000       1,200                  
 
Preferred stock released by ESOP
                               
 
Preferred stock converted to common shares
    (659,999 )     (660 )     21,466,952       36  
 
Preferred stock issued
    25,010       2,501                  
 
Common stock dividends
                               
 
Preferred stock dividends
                               
 
Tax benefit upon exercise of stock options
                               
 
Stock incentive compensation expense
                               
 
Net change in deferred compensation and related plans
                               
 
Net change
    565,011       3,041       15,888,566       89  
 
Balance June 30, 2011
    10,750,314     $ 11,730       5,278,171,794     $ 8,876  
 
The accompanying notes are an integral part of these statements.

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Consolidated Statement of Changes in Equity and Comprehensive Income
                                                             
Wells Fargo stockholders’ equity                
                Cumulative                     Total                
Additional             other             Unearned     Wells Fargo                
paid-in     Retained     comprehensive     Treasury     ESOP     stockholders’       Noncontrolling       Total  
capital     earnings     income     stock     shares     equity       interests       equity  
 
  52,878       41,563       3,009       (2,450 )     (442 )     111,786       2,573       114,359  
 
          183                               183               183  
 
 
          5,609                               5,609       136       5,745  
 
 
                  (13 )                     (13 )     (1 )     (14 )
 
 
                  1,672                       1,672       11       1,683  
 
 
                  144                       144               144  
 
                  32                       32               32  
 
                                          7,444       146       7,590  
 
  17                                       17       (1,093 )     (1,076 )
 
  21       (338 )             1,182               865               865  
 
                          (68 )             (68 )             (68 )
 
  80                               (1,080 )     -               -  
 
  (40 )                             545       505               505  
 
  (62 )                     567               -               -  
 
  (540 )                                     (540 )             (540 )
 
  2       (522 )                             (520 )             (520 )
 
          (369 )                             (369 )             (369 )
 
  76                                       76               76  
 
  279                                       279               279  
 
  (24 )                     138               114               114  
 
  (191 )     4,563       1,835       1,819       (535 )     7,986       (947 )     7,039  
 
  52,687       46,126       4,844       (631 )     (977 )     119,772       1,626       121,398  
 
  53,426       51,918       4,738       (487 )     (663 )     126,408       1,481       127,889  
 
 
          7,707                               7,707       179       7,886  
 
 
                  18                       18               18  
 
 
                  748                       748       (4 )     744  
 
 
                  (110 )                     (110 )             (110 )
 
                  28                       28               28  
 
                                          8,391       175       8,566  
 
  (42 )                                     (42 )     (141 )     (183 )
 
  748                                       801               801  
 
                          (1,072 )             (1,072 )             (1,072 )
 
  102                               (1,302 )     -               -  
 
  (56 )                             716       660               660  
 
  624                                       -               -  
 
                                          2,501               2,501  
 
  10       (1,279 )                             (1,269 )             (1,269 )
 
          (404 )                             (404 )             (404 )
 
  62                                       62               62  
 
  376                                       376               376  
 
  (24 )                     13               (11 )             (11 )
 
  1,800       6,024       684       (1,059 )     (586 )     9,993       34       10,027  
 
  55,226       57,942       5,422       (1,546 )     (1,249 )     136,401       1,515       137,916  
 

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Wells Fargo & Company and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
                 
    Six months ended June 30,  
(in millions)   2011     2010  
 
Cash flows from operating activities:
               
Net income before noncontrolling interests
  $ 7,886       5,745  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    4,048       9,319  
Changes in fair value of MSRs, MHFS and LHFS carried at fair value
    (187 )     1,384  
Depreciation and amortization
    968       1,335  
Other net losses (gains)
    (300 )     2,351  
Preferred stock released by ESOP
    660       505  
Stock incentive compensation expense
    376       279  
Excess tax benefits related to stock option payments
    (64 )     (75 )
Originations of MHFS
    (143,488 )     (153,453 )
Proceeds from sales of and principal collected on mortgages originated for sale
    151,707       161,908  
Originations of LHFS
    -       (4,206 )
Proceeds from sales of and principal collected on LHFS
    5,165       10,555  
Purchases of LHFS
    (5,248 )     (4,673 )
Net change in:
               
Trading assets
    15,028       (3,938 )
Deferred income taxes
    1,318       2,416  
Accrued interest receivable
    (114 )     727  
Accrued interest payable
    (43 )     (56 )
Other assets, net
    (1,378 )     (4,595 )
Other accrued expenses and liabilities, net
    (7,773 )     (8,674 )
 
Net cash provided by operating activities
    28,561       16,854  
 
Cash flows from investing activities:
               
Net change in:
               
Federal funds sold, securities purchased under resale agreements and other short-term investments
    (7,769 )     (33,013 )
Securities available for sale:
               
Sales proceeds
    18,801       3,981  
Prepayments and maturities
    21,079       22,741  
Purchases
    (45,125 )     (11,095 )
Loans:
               
Loans originated by banking subsidiaries, net of principal collected
    (5,803 )     20,904  
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries
    3,492       3,556  
Purchases (including participations) of loans by banking subsidiaries
    (2,277 )     (1,201 )
Principal collected on nonbank entities’ loans
    5,543       8,006  
Loans originated by nonbank entities
    (3,988 )     (5,309 )
Proceeds from sales of foreclosed assets
    3,061       2,346  
Changes in MSRs from purchases and sales
    (81 )     (15 )
Other, net
    2,804       819  
 
Net cash provided (used) by investing activities
    (10,263 )     11,720  
 
Cash flows from financing activities:
               
Net change in:
               
Deposits
    5,693       (8,395 )
Short-term borrowings
    (1,441 )     1,094  
Long-term debt:
               
Proceeds from issuance
    6,702       2,165  
Repayment
    (21,691 )     (31,925 )
Preferred stock:
               
Proceeds from issuance
    2,501       -  
Cash dividends paid
    (404 )     (369 )
Common stock:
               
Proceeds from issuance
    801       865  
Repurchased
    (1,072 )     (68 )
Cash dividends paid
    (1,269 )     (520 )
Common stock warrants repurchased
    -       (540 )
Excess tax benefits related to stock option payments
    64       75  
Net change in noncontrolling interests
    (167 )     (465 )
 
Net cash used by financing activities
    (10,283 )     (38,083 )
 
Net change in cash and due from banks
    8,015       (9,509 )
Cash and due from banks at beginning of period
    16,044       27,080  
 
Cash and due from banks at end of period
  $ 24,059       17,571  
 
Supplemental cash flow disclosures:
               
Cash paid for interest
  $ 3,570       4,157  
Cash paid for income taxes
    2,581       625  
 
The accompanying notes are an integral part of these statements. See Note 1 for noncash activities.

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See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Statements and related Notes of this Form 10-Q.
Note 1: Summary of Significant Accounting Policies
Wells Fargo & Company is a diversified financial services company. We provide banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage, and consumer and commercial finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia, and in other countries. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Form 10-Q, we mean Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company. We also hold a majority interest in a real estate investment trust, which has publicly traded preferred stock outstanding.
     Our accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates in several areas, including other-than-temporary impairment (OTTI) on investment securities (Note 4), allowance for credit losses and purchased credit-impaired (PCI) loans (Note 5), valuations of residential mortgage servicing rights (MSRs) (Notes 7 and 8) and financial instruments (Note 13), liability for mortgage loan repurchase losses (Note 8) and income taxes. Actual results could differ from those estimates.
     The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
Accounting Standards Adopted in 2011
In first quarter 2011, we adopted certain provisions of Accounting Standards Update (ASU or Update) 2010-6, Improving Disclosures about Fair Value Measurements.
ASU 2010-6 amends the disclosure requirements for fair value measurements. Companies are required to disclose significant transfers in and out of Levels 1 and 2 of the fair value hierarchy. The Update also clarifies that fair value measurement disclosures should be presented for each asset and liability class, which is generally a subset of a line item in the statement of financial position. In the rollforward of Level 3 activity, companies must present information on purchases, sales, issuances, and settlements on a gross basis rather than on a net basis. Companies should also provide information about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring instruments classified as either Level 2 or Level 3. In first quarter 2011, we adopted the requirement for gross presentation in the Level 3 rollforward with prospective application. The remaining provisions were effective for us in first quarter 2010. Our adoption of the Update did not affect our consolidated financial statement results since it amends only the disclosure requirements for fair value measurements.


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Note 1: Summary of Significant Accounting Policies (continued)
SUPPLEMENTAL CASH FLOW INFORMATION Noncash activities are presented below, including information on transfers affecting MHFS, LHFS, and MSRs.
 
                 
    Six months ended June 30,  
 
(in millions)   2011     2010  
 
Transfers from loans to securities available for sale
  $ -       3,468  
Trading assets retained from securitization of MHFS
    18,393       -  
Capitalization of MSRs from sale of MHFS
    2,058       2,025  
Transfers from MHFS to foreclosed assets
    78       102  
Transfers from loans to MHFS
    50       99  
Transfers from (to) loans to (from) LHFS
    170       (77 )
Transfers from loans to foreclosed assets
    2,164       5,481  
Changes in consolidations of variable interest entities:
               
Trading assets
    -       155  
Securities available for sale
    156       (7,590 )
Loans
    (1,004 )     25,657  
Other assets
    -       193  
Short-term borrowings
    -       5,127  
Long-term debt
    (770 )     13,134  
Accrued expenses and other liabilities
    -       (32 )
Decrease in noncontrolling interests due to deconsolidation of subsidiaries
    -       240  
Transfer from noncontrolling interests to long-term debt
    -       345  
 
               
 
SUBSEQUENT EVENTS We have evaluated the effects of subsequent events that have occurred subsequent to period end June 30, 2011, and there have been no material events that
would require recognition in our second quarter 2011 consolidated financial statements or disclosure in the Notes to the financial statements.


Note 2: Business Combinations
We regularly explore opportunities to acquire financial services companies and businesses. Generally, we do not make a public announcement about an acquisition opportunity until a definitive agreement has been signed. For information on additional consideration related to acquisitions, which is considered to be a guarantee, see Note 10.
      In the first half of 2011, we completed two insurance brokerage business acquisitions with combined total assets of $4 million. At June 30, 2011, we had four acquisitions pending, two
of which closed on July 1, 2011 consisting of a channel finance business with total assets of approximately $354 million and an insurance brokerage business with total assets of approximately $18 million. We expect to complete the two other acquisitions during the remainder of 2011. Additionally, during second quarter 2011 we announced the divestiture of our H.D. Vest Financial Services business. We expect to complete the sale during fourth quarter 2011.


Note 3: Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments
The following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
 
                 
    June 30,     Dec. 31,  
 
(in millions)   2011     2010  
 
 
               
Federal funds sold and securities purchased under resale agreements
  $ 25,009       24,880  
Interest-earning deposits
    61,783       53,433  
Other short-term investments
    1,614       2,324  
 
 
               
Total
  $ 88,406       80,637  
 
We receive collateral from other entities under resale agreements and securities borrowings. For additional information, see Note 10.


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Note 4: Securities Available for Sale
The following table provides the cost and fair value for the major categories of securities available for sale carried at fair value. The net unrealized gains (losses) are reported on an after-tax basis as
a component of cumulative OCI. There were no securities classified as held to maturity as of the periods presented.


 
                                 
            Gross     Gross        
            unrealized     unrealized     Fair  
(in millions)   Cost     gains     losses     value  
 
 
                               
June 30, 2011
                               
 
Securities of U.S. Treasury and federal agencies
  $ 10,490       46       (13 )     10,523  
Securities of U.S. states and political subdivisions
    24,173       802       (563 )     24,412  
Mortgage-backed securities:
                               
Federal agencies
    74,472       3,892       (26 )     78,338  
Residential
    16,835       1,843       (318 )     18,360  
Commercial
    13,889       1,335       (496 )     14,728  
 
 
                               
Total mortgage-backed securities
    105,196       7,070       (840 )     111,426  
 
Corporate debt securities
    10,584       1,388       (75 )     11,897  
Collateralized debt obligations (1)
    6,951       467       (186 )     7,232  
Other (2)
    16,132       507       (186 )     16,453  
 
 
                               
Total debt securities
    173,526       10,280       (1,863 )     181,943  
 
Marketable equity securities:
                               
Perpetual preferred securities
    2,930       286       (72 )     3,144  
Other marketable equity securities
    569       645       (3 )     1,211  
 
 
                               
Total marketable equity securities
    3,499       931       (75 )     4,355  
 
 
                               
Total
  $ 177,025       11,211       (1,938 )     186,298  
 
 
December 31, 2010
                               
 
                               
Securities of U.S. Treasury and federal agencies
  $ 1,570       49       (15 )     1,604  
Securities of U.S. states and political subdivisions
    18,923       568       (837 )     18,654  
Mortgage-backed securities:
                               
Federal agencies
    78,578       3,555       (96 )     82,037  
Residential
    18,294       2,398       (489 )     20,203  
Commercial
    12,990       1,199       (635 )     13,554  
 
 
                               
Total mortgage-backed securities
    109,862       7,152       (1,220 )     115,794  
 
Corporate debt securities
    9,015       1,301       (37 )     10,279  
Collateralized debt obligations (1)
    4,638       369       (229 )     4,778  
Other (2)
    16,063       576       (283 )     16,356  
 
 
                               
Total debt securities
    160,071       10,015       (2,621 )     167,465  
 
Marketable equity securities:
                               
Perpetual preferred securities
    3,671       250       (89 )     3,832  
Other marketable equity securities
    587       771       (1 )     1,357  
 
 
                               
Total marketable equity securities
    4,258       1,021       (90 )     5,189  
 
 
                               
Total
  $ 164,329       11,036       (2,711 )     172,654  
 
(1)   Includes collateralized loan obligations with a cost basis and fair value of $6.3 billion and $6.6 billion, respectively, at June 30, 2011, and $4.0 billion and $4.2 billion, respectively, at December 31, 2010.
 
(2)   Included in the “Other” category are asset-backed securities collateralized by auto leases or loans and cash reserves with a cost basis and fair value of $4.0 billion and $4.0 billion, respectively, at June 30, 2011, and $6.2 billion and $6.4 billion, respectively, at December 31, 2010. Also included in the “Other” category are asset-backed securities collateralized by home equity loans with a cost basis and fair value of $1.3 billion and $1.4 billion, respectively, at June 30, 2011, and $927 million and $1.1 billion, respectively, at December 31, 2010. The remaining balances primarily include asset-backed securities collateralized by credit cards and student loans.

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Note 4: Securities Available for Sale (continued)
Gross Unrealized Losses and Fair Value
The following table shows the gross unrealized losses and fair value of securities in the securities available-for-sale portfolio by length of time that individual securities in each category had been in a continuous loss position. Debt securities on which we
have taken only credit-related OTTI write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.


 
                                                 
    Less than 12 months     12 months or more     Total  
    Gross             Gross             Gross        
    unrealized     Fair     unrealized     Fair     unrealized     Fair  
(in millions)   losses     value     losses     value     losses     value  
 
 
                                               
June 30, 2011
                                               
 
                                               
Securities of U.S. Treasury and federal agencies
  $ (13 )     7,267       -       -       (13 )     7,267  
Securities of U.S. states and political subdivisions
    (124 )     5,237       (439 )     3,576       (563 )     8,813  
Mortgage-backed securities:
                                               
Federal agencies
    (19 )     4,045       (7 )     676       (26 )     4,721  
Residential
    (39 )     1,751       (279 )     3,571       (318 )     5,322  
Commercial
    (39 )     1,342       (457 )     3,936       (496 )     5,278  
 
 
                                               
Total mortgage-backed securities
    (97 )     7,138       (743 )     8,183       (840 )     15,321  
 
Corporate debt securities
    (16 )     1,291       (59 )     227       (75 )     1,518  
Collateralized debt obligations
    (25 )     1,933       (161 )     501       (186 )     2,434  
Other
    (18 )     2,124       (168 )     659       (186 )     2,783  
 
 
                                               
Total debt securities
    (293 )     24,990       (1,570 )     13,146       (1,863 )     38,136  
 
Marketable equity securities:
                                               
Perpetual preferred securities
    (5 )     303       (67 )     817       (72 )     1,120  
Other marketable equity securities
    (3 )     25       -       -       (3 )     25  
 
 
                                               
Total marketable equity securities
    (8 )     328       (67 )     817       (75 )     1,145  
 
 
                                               
Total
  $ (301 )     25,318       (1,637 )     13,963       (1,938 )     39,281  
 
 
                                               
December 31, 2010
                                               
 
                                               
Securities of U.S. Treasury and federal agencies
  $ (15 )     544       -       -       (15 )     544  
Securities of U.S. states and political subdivisions
    (322 )     6,242       (515 )     2,720       (837 )     8,962  
Mortgage-backed securities:
                                               
Federal agencies
    (95 )     8,103       (1 )     60       (96 )     8,163  
Residential
    (35 )     1,023       (454 )     4,440       (489 )     5,463  
Commercial
    (9 )     441       (626 )     5,141       (635 )     5,582  
 
 
                                               
Total mortgage-backed securities
    (139 )     9,567       (1,081 )     9,641       (1,220 )     19,208  
 
Corporate debt securities
    (10 )     477       (27 )     157       (37 )     634  
Collateralized debt obligations
    (13 )     679       (216 )     456       (229 )     1,135  
Other
    (13 )     1,985       (270 )     757       (283 )     2,742  
 
 
                                               
Total debt securities
    (512 )     19,494       (2,109 )     13,731       (2,621 )     33,225  
 
Marketable equity securities:
                                               
Perpetual preferred securities
    (41 )     962       (48 )     467       (89 )     1,429  
Other marketable equity securities
    -       -       (1 )     7       (1 )     7  
 
 
                                               
Total marketable equity securities
    (41 )     962       (49 )     474       (90 )     1,436  
 
 
                                               
Total
  $ (553 )     20,456       (2,158 )     14,205       (2,711 )     34,661  
 

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We do not have the intent to sell any securities included in the previous table. For debt securities included in the table, we have concluded it is more likely than not that we will not be required to sell prior to recovery of the amortized cost basis. We have assessed each security for credit impairment. For debt securities, we evaluate, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities’ amortized cost basis. For equity securities, we consider numerous factors in determining whether impairment exists, including our intent and ability to hold the securities for a period of time sufficient to recover the cost basis of the securities.
     For complete descriptions of the factors we consider when analyzing debt securities for impairment, see Note 5 in our 2010 Form 10-K. There have been no material changes to our methodologies for assessing impairment in the first half of 2011.
SECURITIES OF U.S. TREASURY AND FEDERAL AGENCIES AND FEDERAL AGENCY MORTGAGE-BACKED SECURITIES (MBS)
The unrealized losses associated with U.S. Treasury and federal agency securities and federal agency MBS are primarily driven by changes in interest rates and not due to credit losses given the explicit or implicit guarantees provided by the U.S. government.
SECURITIES OF U.S. STATES AND POLITICAL SUBDIVISIONS
The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and not due to the credit quality of the securities. Substantially all of these investments are investment grade. The securities were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These investments will continue to be monitored as part of our ongoing impairment analysis, but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. As a result, we expect to recover the entire amortized cost basis of these securities.
RESIDENTIAL AND COMMERCIAL MORTGAGE-BACKED SECURITIES (MBS) The unrealized losses associated with private residential MBS and commercial MBS are primarily driven by changes in projected collateral losses, credit spreads and interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. We estimate losses to a security by forecasting the underlying mortgage loans in each transaction. We use forecasted loan performance to project cash flows to the various tranches in the structure. We also consider cash flow forecasts and, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
CORPORATE DEBT SECURITIES The unrealized losses associated with corporate debt securities are primarily related to
unsecured debt obligations issued by various corporations. We evaluate the financial performance of each issuer on a quarterly basis to determine that the issuer can make all contractual principal and interest payments. Based upon this assessment, we expect to recover the entire amortized cost basis of these securities.
COLLATERALIZED DEBT OBLIGATIONS (CDOs) The unrealized losses associated with CDOs relate to securities primarily backed by commercial, residential or other consumer collateral. The losses are primarily driven by changes in projected collateral losses, credit spreads and interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. We also consider cash flow forecasts and, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
OTHER DEBT SECURITIES The unrealized losses associated with other debt securities primarily relate to other asset-backed securities. The losses are primarily driven by changes in projected collateral losses, credit spreads and interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
MARKETABLE EQUITY SECURITIES Our marketable equity securities include investments in perpetual preferred securities, which provide very attractive tax-equivalent yields. We evaluated these hybrid financial instruments with investment-grade ratings for impairment using an evaluation methodology similar to that used for debt securities. Perpetual preferred securities are not considered to be other-than-temporarily impaired if there is no evidence of credit deterioration or investment rating downgrades of any issuers to below investment grade, and we expect to continue to receive full contractual payments. We will continue to evaluate the prospects for these securities for recovery in their market value in accordance with our policy for estimating OTTI. We have recorded impairment write-downs on perpetual preferred securities where there was evidence of credit deterioration.
     The fair values of our investment securities could decline in the future if the underlying performance of the collateral for the residential and commercial MBS or other securities deteriorate and our credit enhancement levels do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that significant OTTI may occur in the future.
     The following table shows the gross unrealized losses and fair value of debt and perpetual preferred securities available for sale by those rated investment grade and those rated less than investment grade, according to their lowest credit rating by


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Note 4: Securities Available for Sale (continued)
Standard & Poor’s Rating Services (S&P) or Moody’s Investors Service (Moody’s). Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by S&P or Baa3 or higher by Moody’s, are generally considered by the rating agencies and market participants to be low credit risk. Conversely, securities rated below investment grade, labeled as “speculative grade” by the rating agencies, are considered to be distinctively higher credit risk than investment grade securities. We have also included securities not rated by S&P or Moody’s in the table
below based on the internal credit grade of the securities (used for credit risk management purposes) equivalent to the credit rating assigned by major credit agencies. The unrealized losses and fair value of unrated securities categorized as investment grade based on internal credit grades were $190 million and $3.0 billion, respectively, at June 30, 2011, and $83 million and $1.3 billion, respectively, at December 31, 2010. If an internal credit grade was not assigned, we categorized the security as non-investment grade.

 
                                 
    Investment grade   Non-investment grade
 
    Gross           Gross    
 
    unrealized   Fair   unrealized   Fair
 
(in millions)   losses   value   losses   value
 
 
June 30, 2011
                               
 
                               
Securities of U.S. Treasury and federal agencies
  $ (13 )     7,267       -       -  
Securities of U.S. states and political subdivisions
    (467 )     8,340       (96 )     473  
Mortgage-backed securities:
                               
Federal agencies
    (26 )     4,721       -       -  
Residential
    (14 )     544       (304 )     4,778  
Commercial
    (239 )     4,286       (257 )     992  
 
 
Total mortgage-backed securities
    (279 )     9,551       (561 )     5,770  
 
Corporate debt securities
    (18 )     839       (57 )     679  
Collateralized debt obligations
    (47 )     2,069       (139 )     365  
Other
    (164 )     2,522       (22 )     261  
 
 
Total debt securities
    (988 )     30,588       (875 )     7,548  
Perpetual preferred securities
    (69 )     1,002       (3 )     118  
 
 
Total
  $ (1,057 )     31,590       (878 )     7,666  
 
 
                               
December 31, 2010
                               
 
                               
Securities of U.S. Treasury and federal agencies
  $ (15 )     544       -       -  
Securities of U.S. states and political subdivisions
    (722 )     8,423       (115 )     539  
Mortgage-backed securities:
                               
Federal agencies
    (96 )     8,163       -       -  
Residential
    (23 )     888       (466 )     4,575  
Commercial
    (299 )     4,679       (336 )     903  
 
 
Total mortgage-backed securities
    (418 )     13,730       (802 )     5,478  
 
Corporate debt securities
    (22 )     330       (15 )     304  
Collateralized debt obligations
    (42 )     613       (187 )     522  
Other
    (180 )     2,510       (103 )     232  
 
 
Total debt securities
    (1,399 )     26,150       (1,222 )     7,075  
Perpetual preferred securities
    (81 )     1,327       (8 )     102  
 
 
Total
  $ (1,480 )     27,477       (1,230 )     7,177  
 

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Contractual Maturities
The following table shows the remaining contractual maturities and contractual yields of debt securities available for sale. The remaining contractual principal maturities for MBS do not consider prepayments. Remaining expected maturities will differ
from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature.

 
                                                                                 
                    Remaining contractual maturity  
 
            Weighted-                     After one year     After five years        
 
    Total     average     Within one year     through five years     through ten years     After ten years  
 
(in millions)   amount     yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
 
 
June 30, 2011
                                                                               
 
Securities of U.S. Treasury and federal agencies
  $ 10,523       1.06 %   $ 8       5.35 %   $ 9,913       0.89 %   $ 511       3.70 %   $ 91       3.97 %
Securities of U.S. states and political subdivisions
    24,412       5.35       501       3.49       5,065       2.88       2,075       5.60       16,771       6.12  
Mortgage-backed securities:
                                                                               
Federal agencies
    78,338       4.86       11       6.58       480       2.61       743       4.66       77,104       4.88  
Residential
    18,360       4.82       -       -       -       -       707       1.89       17,653       4.93  
Commercial
    14,728       5.48       -       -       1       1.55       194       5.69       14,533       5.48  
 
                                                                     
 
Total mortgage-backed securities
    111,426       4.94       11       6.58       481       2.60       1,644       3.59       109,290       4.97  
 
                                                                     
 
Corporate debt securities
    11,897       5.39       577       5.51       5,748       4.54       4,195       6.47       1,377       5.59  
Collateralized debt obligations
    7,232       0.81       -       -       527       0.87       4,787       0.70       1,918       1.06  
Other
    16,453       2.17       897       1.30       7,948       2.05       3,317       2.54       4,291       2.28  
 
                                                                     
 
Total debt securities at fair value
  $ 181,943       4.38 %   $ 1,994       3.11 %   $ 29,682       2.27 %   $ 16,529       3.53 %   $ 133,738       4.97 %
 
 
                                                                               
December 31, 2010
                                                                               
 
                                                                               
Securities of U.S. Treasury and federal agencies
  $ 1,604       2.54 %   $ 9       5.07 %   $ 641       1.72 %   $ 852       2.94 %   $ 102       4.15 %
Securities of U.S. states and political subdivisions
    18,654       5.99       322       3.83       3,210       3.57       1,884       6.13       13,238       6.60  
Mortgage-backed securities:
                                                                               
Federal agencies
    82,037       5.01       5       6.63       28       6.58       420       5.23       81,584       5.00  
Residential
    20,203       4.98       -       -       -       -       341       3.20       19,862       5.01  
Commercial
    13,554       5.39       -       -       1       1.38       215       5.28       13,338       5.39  
 
                                                                     
 
Total mortgage-backed securities
    115,794       5.05       5       6.63       29       6.38       976       4.53       114,784       5.05  
 
                                                                     
 
Corporate debt securities
    10,279       5.94       545       7.82       3,853       6.01       4,817       5.62       1,064       6.21  
Collateralized debt obligations
    4,778       0.80       -       -       545       0.88       2,581       0.72       1,652       0.90  
Other
    16,356       2.53       1,588       2.89       7,887       3.00       4,367       2.01       2,514       1.72  
 
                                                                     
 
Total debt securities at fair value
  $ 167,465       4.81 %   $ 2,469       4.12 %   $ 16,165       3.72 %   $ 15,477       3.63 %   $ 133,354       5.10 %
 

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Note 4: Securities Available for Sale (continued)
Realized Gains and Losses
The following table shows the gross realized gains and losses on sales and OTTI write-downs related to the securities available-for-sale portfolio, which includes marketable equity securities, as well as net realized gains and losses on nonmarketable equity securities (see Note 6 — Other Assets).
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2011     2010     2011     2010  
 
 
Gross realized gains
  $ 430       260       500       444  
Gross realized losses
    (7 )     (3 )     (49 )     (18 )
OTTI write-downs
    (189 )     (106 )     (269 )     (212 )
 
 
Net realized gains from securities available for sale
    234       151       182       214  
 
 
Net realized gains from principal and private equity investments
    362       167       601       175  
 
 
Net realized gains from debt securities and equity investments
  $ 596       318       783       389  
 


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Other-Than-Temporary Impairment
The following table shows the detail of total OTTI write-downs included in earnings for debt securities and marketable and nonmarketable equity securities.

     
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
             
(in millions)   2011     2010     2011     2010  
 
OTTI write-downs included in earnings
                               
Debt securities:
                               
U.S. states and political subdivisions
  $ 2       3       2       8  
Mortgage-backed securities:
                               
Residential
    144       37       206       76  
Commercial
    9       42       23       55  
Corporate debt securities
    -       4       -       5  
Collateralized debt obligations
    -       5       -       11  
Other debt securities
    34       15       38       43  
             
 
Total debt securities
    189       106       269       198  
             
 
Equity securities:
                               
Marketable equity securities:
                               
Perpetual preferred securities
    -       -       -       14  
             
 
Total marketable equity securities
    -       -       -       14  
             
 
Total securities available for sale
    189       106       269       212  
Nonmarketable equity securities
    16       62       57       153  
             
 
Total OTTI write-downs included in earnings
  $ 205       168       326       365  
 

Other-Than-Temporarily Impaired Debt Securities
The following table shows the detail of OTTI write-downs on debt securities available for sale included in earnings and the related changes in OCI for the same securities.

     
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
             
(in millions)   2011     2010     2011     2010  
             
 
OTTI on debt securities
                               
Recorded as part of gross realized losses:
                               
Credit-related OTTI
  $ 189       106       268       195  
Intent-to-sell OTTI
    -       -       1       3  
             
 
Total recorded as part of gross realized losses
    189       106       269       198  
             
 
Recorded directly to OCI for non-credit-related impairment:
                               
U.S. states and political subdivisions
    (1 )     (1 )     (1 )     (5 )
Residential mortgage-backed securities
    (64 )     (124 )     (168 )     (98 )
Commercial mortgage-backed securities
    17       84       (36 )     82  
Collateralized debt obligations
    -       (3 )     -       56  
Other debt securities
    (12 )     (13 )     (11 )     (30 )
             
 
Total recorded directly to OCI for increase (decrease) in non-credit-related impairment (1)
    (60 )     (57 )     (216 )     5  
             
 
Total OTTI losses recorded on debt securities
  $ 129       49       53       203  
 
 
(1)   Represents amounts recorded to OCI on debt securities in periods OTTI write-downs have occurred. Changes in fair value in subsequent periods on such securities, to the extent additional credit-related OTTI did not occur, are not reflected in this total. For the quarter ended June 30, 2011, the non-credit-related impairment recorded to OCI was a $60 million reduction in total OTTI because the fair value of the security increased due to factors other than credit. This fair value increase (net of the $189 million decrease related to credit) was not sufficient to recover the full amount of the unrealized loss on such securities and therefore required recognition of OTTI.

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Note 4: Securities Available for Sale (continued)
The following table presents a rollforward of the credit loss component recognized in earnings for debt securities we still own (referred to as “credit-impaired” debt securities). The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. OTTI recognized in earnings for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not
the first time the debt security was credit-impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive or expect to receive cash flows in excess of what we previously expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down.
     Changes in the credit loss component of credit-impaired debt securities that we do not intend to sell were:


 
                                 
    Quarter ended June 30,     Six months ended June 30,  
 
                               
(in millions)   2011     2010     2011     2010  
             
         
Credit loss component, beginning of period
  $ 1,087       1,002       1,043       1,187  
Additions:
                               
Initial credit impairments
    31       39       42       59  
Subsequent credit impairments
    158       67       226       136  
             
         
Total additions
    189       106       268       195  
             
         
Reductions:
                               
For securities sold
    (15 )     (51 )     (38 )     (76 )
For securities derecognized resulting from adoption of consolidation accounting guidance
    -       -       -       (242 )
Due to change in intent to sell or requirement to sell
    -       (2 )     -       (2 )
For recoveries of previous credit impairments (1)
    (10 )     (6 )     (22 )     (13 )
             
         
Total reductions
    (25 )     (59 )     (60 )     (333 )
             
         
Credit loss component, end of period
  $ 1,251       1,049       1,251       1,049  
         
         
(1)   Recoveries of previous credit impairments result from increases in expected cash flows subsequent to credit loss recognition. Such recoveries are reflected prospectively as interest yield adjustments using the effective interest method.

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For asset-backed securities (e.g., residential MBS), we estimated expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordinated interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which consider current delinquencies and nonperforming assets
(NPAs), future expected default rates and collateral value by vintage and geographic region) and prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. Total credit impairment losses on residential MBS that we do not intend to sell are shown in the table below. The table also presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings for residential MBS.

                                 
 
 
    Quarter ended June 30,     Six months ended June 30,  
 
($ in millions)   2011     2010     2011     2010  
 
Credit impairment losses on residential MBS
                               
Investment grade
  $ -       -       5       -  
Non-investment grade
    144       37       201       76  
 
 
Total credit impairment losses on residential MBS
  $ 144       37       206       76  
 
 
Significant inputs (non-agency — non-investment grade MBS)
                               
Expected remaining life of loan losses (1):
                               
Range (2)
    0-40 %     1-40       0-40       1-40  
Credit impairment distribution (3):
                               
0 - 10% range
    40       54       45       53  
10 - 20% range
    13       8       16       14  
20 - 30% range
    35       34       30       29  
Greater than 30%
    12       4       9       4  
Weighted average (4)
    12       8       11       9  
Current subordination levels (5):
                               
Range (2)
    0-13       0-25       0-13       0-25  
Weighted average (4)
    4       7       5       7  
Prepayment speed (annual CPR (6)):
                               
Range (2)
    5-14       3-17       5-15       3-17  
Weighted average (4)
    11       9       11       9  
 
 
(1)   Represents future expected credit losses on underlying pool of loans expressed as a percentage of total current outstanding loan balance.
 
(2)   Represents the range of inputs/assumptions based upon the individual securities within each category.
 
(3)   Represents distribution of credit impairment losses recognized in earnings categorized based on range of expected remaining life of loan losses. For example 40% of credit impairment losses recognized in earnings for the quarter ended June 30, 2011, had expected remaining life of loan loss assumptions of 0 to 10%.
 
(4)   Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
 
(5)   Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance.
 
(6)   Constant prepayment rate.

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Note 5: Loans and Allowance for Credit Losses
The following table presents total loans outstanding by portfolio segment and class of financing receivable. Outstanding balances are presented net of unearned income, net deferred loan fees, and unamortized discounts and premiums totaling a net reduction of $10.2 billion and $11.3 billion at June 30, 2011, and
December 31, 2010, respectively. Outstanding balances also include PCI loans net of any remaining purchase accounting adjustments. Information about PCI loans is presented separately in the “Purchased Credit-Impaired Loans” section of this Note.


                 
 
 
    June 30,     Dec. 31,  
(in millions)   2011     2010  
 
 
Commercial:
               
Commercial and industrial
  $ 157,095       151,284  
Real estate mortgage
    101,458       99,435  
Real estate construction
    21,374       25,333  
Lease financing
    12,907       13,094  
Foreign (1)
    37,855       32,912  
 
 
Total commercial
    330,689       322,058  
 
 
Consumer:
               
Real estate 1-4 family first mortgage
    222,874       230,235  
Real estate 1-4 family junior lien mortgage
    89,947       96,149  
Credit card
    21,191       22,260  
Other revolving credit and installment
    87,220       86,565  
 
 
Total consumer
    421,232       435,209  
 
 
Total loans
  $ 751,921       757,267  
 
     
(1)   Substantially all of our foreign loan portfolio is commercial loans. Loans are classified as foreign if the borrower’s primary address is outside of the United States.

The following table summarizes the proceeds paid or received for purchases and sales of loans. It also includes transfers from (to) mortgages/loans held for sale at lower of cost or market. The table excludes PCI loans and loans recorded at fair value,
including loans originated for sale. This activity primarily includes purchases or sales of commercial loan participation interests, whereby we receive or transfer a portion of a loan after origination.


                                                 
 
 
                    2011                     2010  
(in millions)   Commercial     Consumer     Total     Commercial     Consumer     Total  
 
 
Quarter ended June 30,
                                               
 
Purchases
  $ 1,462       -       1,462       509       126       635  
Sales
    (895 )     (313 )     (1,208 )     (1,507 )     (295 )     (1,802 )
Transfers from/(to) MHFS/LHFS
    64       25       89       72       53       125  
 
 
 
                                               
 
 
Six months ended June 30,
                                               
 
Purchases
  $ 2,106       -       2,106       1,052       150       1,202  
Sales
    (2,466 )     (314 )     (2,780 )     (2,575 )     (295 )     (2,870 )
Transfers from/(to) MHFS/LHFS
    170       50       220       57       (35 )     22  
 
 

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Allowance for Credit Losses (ACL)
The ACL is management’s estimate of credit losses inherent in the loan portfolio, including unfunded credit commitments, at the balance sheet date. We have an established process to determine the adequacy of the allowance for credit losses that assesses the losses inherent in our portfolio and related unfunded credit commitments. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio and unfunded credit commitments.
     Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, losses are estimated collectively for groups of loans with similar characteristics, individually for impaired loans or, for PCI loans, based on the changes in cash flows expected to be collected.
     Our allowance levels are influenced by loan volumes, loan grade migration or delinquency status, historic loss experience influencing loss factors, and other conditions influencing loss expectations, such as economic conditions.
COMMERCIAL PORTFOLIO SEGMENT ACL METHODOLOGY
Generally, commercial loans are assessed for estimated losses by grading each loan using various risk factors as identified through periodic reviews. We apply historic grade-specific loss factors to the aggregation of each funded grade pool. These historic loss factors are also used to estimate losses for unfunded credit commitments. In the development of our statistically derived loan grade loss factors, we observe historical losses over a relevant period for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of long-term average loss experience compared to previously forecasted losses, external loss data or other risks identified from current economic conditions and credit quality trends.
     The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a TDR, whether on accrual or nonaccrual status.
CONSUMER PORTFOLIO SEGMENT ACL METHODOLOGY For consumer loans, not identified as a TDR, we determine the allowance on a collective basis utilizing forecasted losses to represent our best estimate of inherent loss. We pool loans, generally by product types with similar risk characteristics, such as residential real estate mortgages and credit cards. As appropriate, to achieve greater accuracy, we may further stratify selected portfolios by sub-product, origination channel, vintage, loss type, geographic location and other predictive characteristics. Models designed for each pool are utilized to develop the loss estimates. We use assumptions for these pools in our forecast models, such as historic delinquency and default, loss severity, home price trends, unemployment trends, and other key economic variables that may influence the frequency and severity of losses in the pool.
     We separately estimate impairment for consumer loans that have been modified in a TDR, whether on accrual or nonaccrual status.
OTHER ACL MATTERS Commercial and consumer PCI loans may require an allowance subsequent to their acquisition. This allowance requirement is due to probable decreases in expected principal and interest cash flows (other than due to decreases in interest rate indices and changes in prepayment assumptions).
     The allowance for credit losses for both portfolio segments includes an amount for imprecision or uncertainty that may change from period to period. This amount represents management’s judgment of risks inherent in the processes and assumptions used in establishing the allowance. This imprecision considers economic environmental factors, modeling assumptions and performance, process risk, and other subjective factors, including industry trends and ongoing discussions with regulatory and government agencies regarding mortgage foreclosure-related matters.


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Note 5: Loans and Allowance for Credit Losses (continued)
     The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded credit commitments. Changes in the allowance for credit losses were:
     
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
 
                               
(in millions)   2011     2010     2011     2010  
 
Balance, beginning of period
  $ 22,383       25,656       23,463       25,031  
Provision for credit losses
    1,838       3,989       4,048       9,319  
Interest income on certain impaired loans (1)
    (79 )     (62 )     (162 )     (136 )
Loan charge-offs:
                               
Commercial:
                               
Commercial and industrial
    (365 )     (810 )     (833 )     (1,577 )
Real estate mortgage
    (185 )     (364 )     (364 )     (645 )
Real estate construction
    (99 )     (289 )     (218 )     (694 )
Lease financing
    (7 )     (31 )     (20 )     (65 )
Foreign
    (57 )     (52 )     (96 )     (99 )
 
 
                               
Total commercial
    (713 )     (1,546 )     (1,531 )     (3,080 )
 
 
                               
Consumer:
                               
Real estate 1-4 family first mortgage
    (1,064 )     (1,140 )     (2,079 )     (2,537 )
Real estate 1-4 family junior lien mortgage
    (968 )     (1,239 )     (2,014 )     (2,735 )
Credit card
    (378 )     (639 )     (826 )     (1,335 )
Other revolving credit and installment
    (391 )     (542 )     (891 )     (1,292 )
 
 
                               
Total consumer
    (2,801 )     (3,560 )     (5,810 )     (7,899 )
 
 
                               
Total loan charge-offs
    (3,514 )     (5,106 )     (7,341 )     (10,979 )
 
 
                               
Loan recoveries:
                               
Commercial:
                               
Commercial and industrial
    111       121       225       238  
Real estate mortgage
    57       4       84       14  
Real estate construction
    27       51       63       62  
Lease financing
    6       4       13       9  
Foreign
    10       10       21       21  
 
 
                               
Total commercial
    211       190       406       344  
 
 
                               
Consumer:
                               
Real estate 1-4 family first mortgage
    155       131       266       217  
Real estate 1-4 family junior lien mortgage
    59       55       111       102  
Credit card
    84       60       150       113  
Other revolving credit and installment
    167       181       360       384  
 
 
                               
Total consumer
    465       427       887       816  
 
 
                               
Total loan recoveries
    676       617       1,293       1,160  
 
 
                               
Net loan charge-offs (2)
    (2,838 )     (4,489 )     (6,048 )     (9,819 )
 
 
                               
Allowances related to business combinations/other (3)
    (42 )     (9 )     (39 )     690  
 
 
                               
Balance, end of period
  $ 21,262       25,085       21,262       25,085  
 
 
                               
Components:
                               
Allowance for loan losses
  $ 20,893       24,584       20,893       24,584  
Allowance for unfunded credit commitments
    369       501       369       501  
 
 
                               
Allowance for credit losses (4)
  $ 21,262       25,085       21,262       25,085  
 
 
                               
Net loan charge-offs (annualized) as a percentage of average total loans (2)
    1.52 %     2.33       1.62 %     2.52  
Allowance for loan losses as a percentage of total loans (4)
    2.78       3.21       2.78       3.21  
Allowance for credit losses as a percentage of total loans (4)
    2.83       3.27       2.83       3.27  
 
     
(1)   Certain impaired loans with an allowance calculated by discounting expected cash flows using the loan’s effective interest rate over the remaining life of the loan recognize reductions in the allowance as interest income.
 
(2)   For PCI loans, charge-offs are only recorded to the extent that losses exceed the purchase accounting estimates.
 
(3)   Includes $693 million for the first half of 2010 related to the adoption of consolidation accounting guidance on January 1, 2010.
 
(4)   The allowance for credit losses includes $273 million and $225 million at June 30, 2011 and 2010, respectively, related to PCI loans acquired from Wachovia. Loans acquired from Wachovia are included in total loans net of related purchase accounting net write-downs.

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The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.
 
                                                 
    2011     2010  
(in millions)   Commercial     Consumer     Total     Commercial     Consumer     Total  
     
Quarter ended June 30,
                                               
Balance, beginning of period
  $ 7,973       14,410       22,383       8,833       16,823       25,656  
Provision for credit losses
    (27 )     1,865       1,838       1,117       2,872       3,989  
Interest income on certain impaired loans
    (39 )     (40 )     (79 )     (35 )     (27 )     (62 )
Loan charge-offs
    (713 )     (2,801 )     (3,514 )     (1,546 )     (3,560 )     (5,106 )
Loan recoveries
    211       465       676       190       427       617  
     
 
                                               
Net loan charge-offs
    (502 )     (2,336 )     (2,838 )     (1,356 )     (3,133 )     (4,489 )
     
 
                                               
Allowance related to business combinations/other
    8       (50 )     (42 )     -       (9 )     (9 )
     
 
                                               
Balance, end of period
  $ 7,413       13,849       21,262       8,559       16,526       25,085  
 
 
                                               
 
 
                                               
Six months ended June 30,
                                               
Balance, beginning of period
  $ 8,169       15,294       23,463       8,141       16,890       25,031  
Provision for credit losses
    445       3,603       4,048       3,221       6,098       9,319  
Interest income on certain impaired loans
    (84 )     (78 )     (162 )     (76 )     (60 )     (136 )
Loan charge-offs
    (1,531 )     (5,810 )     (7,341 )     (3,080 )     (7,899 )     (10,979 )
Loan recoveries
    406       887       1,293       344       816       1,160  
     
 
                                               
Net loan charge-offs
    (1,125 )     (4,923 )     (6,048 )     (2,736 )     (7,083 )     (9,819 )
     
 
                                               
Allowance related to business combinations/other
    8       (47 )     (39 )     9       681       690  
     
 
                                               
Balance, end of period
  $ 7,413       13,849       21,262       8,559       16,526       25,085  
 
 
                                               
The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
                                                 
    Allowance for credit losses     Recorded investment in loans  
(in millions)   Commercial     Consumer     Total     Commercial     Consumer     Total  
     
June 30, 2011
                                               
 
                                               
Collectively evaluated (1)
  $ 4,799       9,636       14,435       313,514       373,869       687,383  
Individually evaluated (2)
    2,399       4,155       6,554       10,159       15,686       25,845  
PCI (3)
    215       58       273       7,016       31,677       38,693  
     
 
                                               
Total
  $ 7,413       13,849       21,262       330,689       421,232       751,921  
     
 
                                               
December 31, 2010
                                               
 
                                               
Collectively evaluated (1)
  $ 5,424       11,539       16,963       302,392       387,707       690,099  
Individually evaluated (2)
    2,479       3,723       6,202       11,731       14,007       25,738  
PCI (3)
    266       32       298       7,935       33,495       41,430  
     
 
                                               
Total
  $ 8,169       15,294       23,463       322,058       435,209       757,267  
     
     
(1)   Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans.
 
(2)   Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
 
(3)   Represents the allowance and related loan carrying value determined in accordance with ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI loans.

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Note 5: Loans and Allowance for Credit Losses (continued)

Credit Quality
We monitor credit quality as indicated by evaluating various attributes and utilize such information in our evaluation of the adequacy of the allowance for credit losses. The following sections provide the credit quality indicators we most closely monitor. See the “Purchased Credit-Impaired Loans” section of this Note for credit quality information on our PCI portfolio.
     The majority of credit quality indicators are based on June 30, 2011, information, with the exception of updated FICO and updated loan-to-value (LTV)/combined LTV (CLTV), which are obtained at least quarterly. Generally, these indicators are updated in the second month of each quarter, with updates no older than March 31, 2011.
COMMERCIAL CREDIT QUALITY INDICATORS In addition to monitoring commercial loan concentration risk, we manage a
consistent process for assessing commercial loan credit quality. Commercial loans are subject to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to Pass and Criticized categories. The Criticized category includes Special Mention, Substandard, and Doubtful categories which are defined by banking regulatory agencies.
     The table below provides a breakdown of outstanding commercial loans by risk category. Both the CRE mortgage and construction criticized totals are relatively high as a result of the current conditions in the real estate market. Of the $33.1 billion in criticized CRE loans, $6.7 billion has been placed on nonaccrual status and written down to net realizable value. Loans in both populations have a high level of surveillance and monitoring in place to manage these assets and mitigate any loss exposure.


 
                                                 
    Commercial     Real     Real                    
    and     estate     estate     Lease              
(in millions)   industrial     mortgage     construction     financing     Foreign     Total  
 
 
June 30, 2011
                                               
 
                                               
By risk category:
                                               
Pass
  $ 133,685       74,182       10,546       12,349       35,108       265,870  
Criticized
    22,883       24,476       8,640       558       1,246       57,803  
 
 
                                               
Total commercial loans (excluding PCI)
    156,568       98,658       19,186       12,907       36,354       323,673  
Total commercial PCI loans (carrying value)
    527       2,800       2,188       -       1,501       7,016  
 
 
                                               
Total commercial loans
  $ 157,095       101,458       21,374       12,907       37,855       330,689  
 
 
                                               
December 31, 2010
                                               
 
                                               
By risk category:
                                               
Pass
  $ 126,058       70,597       11,256       12,411       30,341       250,663  
Criticized
    24,508       25,983       11,128       683       1,158       63,460  
 
 
                                               
Total commercial loans (excluding PCI)
    150,566       96,580       22,384       13,094       31,499       314,123  
Total commercial PCI loans (carrying value)
    718       2,855       2,949       -       1,413       7,935  
 
 
                                               
Total commercial loans
  $ 151,284       99,435       25,333       13,094       32,912       322,058  
 

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      In addition, we monitor past due status as part of our credit risk management practices for commercial loans. The following
table provides past due information for commercial loans.


 
                                                 
    Commercial     Real     Real                    
    and     estate     estate     Lease              
(in millions)   industrial     mortgage     construction     financing     Foreign     Total  
 
 
                                               
June 30, 2011
                                               
 
                                               
By delinquency status:
                                               
 
                                               
Current-29 DPD
  $ 152,872       92,554       16,685       12,787       36,200       311,098  
30-89 DPD
    1,193       1,276       372       41       83       2,965  
90+ DPD and still accruing
    110       137       86       -       12       345  
Nonaccrual loans
    2,393       4,691       2,043       79       59       9,265  
 
 
                                               
Total commercial loans (excluding PCI)
    156,568       98,658       19,186       12,907       36,354       323,673  
Total commercial PCI loans (carrying value)
    527       2,800       2,188       -       1,501       7,016  
 
 
                                               
Total commercial loans
  $ 157,095       101,458       21,374       12,907       37,855       330,689  
 
 
                                               
December 31, 2010
                                               
 
                                               
By delinquency status:
                                               
Current-29 DPD
  $ 146,135       90,233       19,005       12,927       31,350       299,650  
30-89 DPD
    910       1,016       510       59       -       2,495  
90+ DPD and still accruing
    308       104       193       -       22       627  
Nonaccrual loans
    3,213       5,227       2,676       108       127       11,351  
 
 
                                               
Total commercial loans (excluding PCI)
    150,566       96,580       22,384       13,094       31,499       314,123  
Total commercial PCI loans (carrying value)
    718       2,855       2,949       -       1,413       7,935  
 
 
                                               
Total commercial loans
  $ 151,284       99,435       25,333       13,094       32,912       322,058  
 

CONSUMER CREDIT QUALITY INDICATORS We have various classes of consumer loans that present respective unique risks. Loan delinquency, FICO credit scores and LTV for loan types are common credit quality indicators that we monitor and utilize in our evaluation of the adequacy of the allowance for credit losses for the consumer portfolio segment.
      The majority of our loss estimation techniques used for the allowance for credit losses rely on delinquency matrix models or delinquency roll rate models. Therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses.


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Note 5: Loans and Allowance for Credit Losses (continued)
The following table provides the outstanding balances of our consumer portfolio by delinquency status.
 
                                         
    Real estate     Real estate             Other        
    1-4 family     1-4 family             revolving        
    first     junior lien     Credit     credit and        
(in millions)   mortgage     mortgage     card     installment     Total  
 
 
                                       
June 30, 2011
                                       
 
                                       
By delinquency status:
                                       
Current
  $ 153,943       83,423       19,866       62,689       319,921  
1-29 DPD
    6,105       3,524       645       6,930       17,204  
30-59 DPD
    4,181       770       198       884       6,033  
60-89 DPD
    1,916       510       148       268       2,842  
90-119 DPD
    1,169       359       121       127       1,776  
120-179 DPD
    1,585       587       212       42       2,426  
180+ DPD
    6,803       545       1       9       7,358  
Government insured/guaranteed loans (1)
    15,724       -       -       16,271       31,995  
 
 
                                       
Total consumer loans (excluding PCI)
    191,426       89,718       21,191       87,220       389,555  
Total consumer PCI loans (carrying value)
    31,448       229       -       -       31,677  
 
 
                                       
Total consumer loans
  $ 222,874       89,947       21,191       87,220       421,232  
 
 
                                       
 
December 31, 2010 (2)
                                       
 
                                       
By delinquency status:
                                       
Current
  $ 158,961       89,408       20,546       59,295       328,210  
1-29 DPD
    5,597       3,104       730       7,834       17,265  
30-59 DPD
    4,516       917       262       1,261       6,956  
60-89 DPD
    2,173       608       207       376       3,364  
90-119 DPD
    1,399       476       190       171       2,236  
120-179 DPD
    2,080       764       324       58       3,226  
180+ DPD
    6,750       622       1       117       7,490  
Government insured/guaranteed loans (1)
    15,514       -       -       17,453       32,967  
 
 
                                       
Total consumer loans (excluding PCI)
    196,990       95,899       22,260       86,565       401,714  
Total consumer PCI loans (carrying value)
    33,245       250       -       -       33,495  
 
 
                                       
Total consumer loans
  $ 230,235       96,149       22,260       86,565       435,209  
 
     
(1)   Represents loans whose repayments are insured by the FHA or guaranteed by the VA and student loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the Federal Family Education Loan Program (FFELP).
 
(2)   Amounts at December 31, 2010, have been revised to conform to the current presentation.

      Of the $11.6 billion of loans that are 90 days or more past due at June 30, 2011, $1.5 billion was accruing, compared with $13.0 billion and $2.0 billion, respectively, at December 31, 2010.
      Real estate 1-4 family first mortgage loans 180 days or more past due totaled $6.8 billion, or 3.6% of total first mortgages (excluding PCI), up slightly from 3.4% at December 31, 2010. The aging of the delinquent real estate 1-4 family first mortgage loans is a result of the prolonged foreclosure process and our effort to help customers stay in their homes through various loan modification programs, as loans continue to age until these processes are complete.
      The following table provides a breakdown of our consumer portfolio by updated FICO. We obtain FICO scores at loan origination and the scores are updated at least quarterly. FICO is not available for certain loan types and may not be obtained if we deem it unnecessary due to strong collateral and other borrower attributes, primarily securities-based margin loans of $5.2 billion at June 30, 2011, and $4.1 billion at December 31, 2010. The majority of our portfolio is underwritten with a FICO score of 680 and above.


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    Real estate     Real estate             Other        
    1-4 family     1-4 family             revolving        
    first     junior lien     Credit     credit and        
(in millions)   mortgage     mortgage     card     installment     Total  
 
June 30, 2011
                                       
 
                                       
By updated FICO:
                                       
< 600
  $ 23,444       8,026       2,365       9,560       43,395  
600-639
    11,020       4,157       1,722       5,847       22,746  
640-679
    15,584       7,107       3,146       8,760       34,597  
680-719
    24,184       12,359       4,399       9,837       50,779  
720-759
    27,527       17,928       4,407       9,014       58,876  
760-799
    47,007       25,576       3,189       9,576       85,348  
800+
    20,690       10,963       1,746       4,850       38,249  
No FICO available
    6,246       3,602       217       8,318       18,383  
FICO not required
    -       -       -       5,187       5,187  
Government insured/guaranteed loans (1)
    15,724       -       -       16,271       31,995  
 
 
                                       
Total consumer loans (excluding PCI)
    191,426       89,718       21,191       87,220       389,555  
Total consumer PCI loans (carrying value)
    31,448       229       -       -       31,677  
 
 
                                       
Total consumer loans
  $ 222,874       89,947       21,191       87,220       421,232  
 
 
                                       
December 31, 2010 (2)
                                       
 
                                       
By updated FICO:
                                       
< 600
  $ 26,013       9,126       2,872       10,806       48,817  
600-639
    11,105       4,457       1,826       5,965       23,353  
640-679
    16,202       7,678       3,305       8,344       35,529  
680-719
    25,549       13,759       4,522       9,480       53,310  
720-759
    29,443       20,334       4,441       8,808       63,026  
760-799
    47,250       27,222       3,215       9,357       87,044  
800+
    19,719       10,607       1,794       4,692       36,812  
No FICO available
    6,195       2,716       285       7,528       16,724  
FICO not required
    -       -       -       4,132       4,132  
Government insured/guaranteed loans (1)
    15,514       -       -       17,453       32,967  
 
 
                                       
Total consumer loans (excluding PCI)
    196,990       95,899       22,260       86,565       401,714  
Total consumer PCI loans (carrying value)
    33,245       250       -       -       33,495  
 
 
                                       
Total consumer loans
  $ 230,235       96,149       22,260       86,565       435,209  
 
(1)   Represents loans whose repayments are insured by the FHA or guaranteed by the VA and student loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under FFELP.
 
(2)   Amounts at December 31, 2010, have been revised to conform to the current presentation.

LTV refers to the ratio comparing the loan’s unpaid principal balance to the property’s collateral value. CLTV refers to the combination of first mortgage and junior lien mortgage ratios. LTVs and CLTVs are updated quarterly using a cascade approach which first uses values provided by automated valuation models (AVMs) for the property. If an AVM is not available, then the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is used. The HPI value is normally the only method considered for high value properties as the AVM values have proven less accurate for these properties.
      The following table shows the most updated LTV and CLTV distribution of the real estate 1-4 family first and junior lien mortgage loan portfolios. In recent years, the residential real estate markets have experienced significant declines in property values and several markets, particularly California and Florida have experienced declines that turned out to be more significant than the national decline. These trends are considered in the way that we monitor credit risk and establish our allowance for credit
losses. LTV does not necessarily reflect the likelihood of performance of a given loan, but does provide an indication of collateral value. In the event of a default, any loss should be limited to the portion of the loan amount in excess of the net realizable value of the underlying real estate collateral value. Certain loans do not have an LTV or CLTV primarily due to industry data availability and portfolios acquired from or serviced by other institutions.


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Note 5:  Loans and Allowance for Credit Losses (continued)
                                                 
 
 
    June 30, 2011             December 31, 2010 (3)  
    Real estate     Real estate             Real estate     Real estate        
    1-4 family     1-4 family             1-4 family     1-4 family        
    first     junior lien             first     junior lien        
    mortgage     mortgage             mortgage     mortgage        
(in millions)   by LTV     by CLTV     Total     by LTV     by CLTV     Total  
 
 
                                               
By LTV/CLTV:
                                               
0-60%
  $ 45,661       13,462       59,123       47,808       14,814       62,622  
60.01-80%
    43,602       16,479       60,081       42,542       17,744       60,286  
80.01-100%
    38,982       21,220       60,202       39,497       24,255       63,752  
100.01-120% (1)
    22,913       16,633       39,546       24,147       17,887       42,034  
> 120% (1)
    20,814       19,013       39,827       24,243       18,628       42,871  
No LTV/CLTV available
    3,730       2,911       6,641       3,239       2,571       5,810  
Government insured/guaranteed loans (2)
    15,724       -       15,724       15,514       -       15,514  
 
Total consumer loans (excluding PCI)
    191,426       89,718       281,144       196,990       95,899       292,889  
Total consumer PCI loans (carrying value)
    31,448       229       31,677       33,245       250       33,495  
 
 
                                               
Total consumer loans
  $ 222,874       89,947       312,821       230,235       96,149       326,384  
 
(1)   Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of 100% LTV/CLTV.
 
(2)   Represents loans whose repayments are insured by the FHA or guaranteed by the VA.
 
(3)   Amounts at December 31, 2010, have been revised to conform to the current presentation.

NONACCRUAL LOANS The following table provides loans on nonaccrual status. PCI loans are excluded from this table due to the existence of the accretable yield.
                 
 
    June 30,     Dec. 31,  
(in millions)   2011     2010  
 
 
Commercial:
               
Commercial and industrial
  $ 2,393       3,213  
Real estate mortgage
    4,691       5,227  
Real estate construction
    2,043       2,676  
Lease financing
    79       108  
Foreign
    59       127  
 
 
               
Total commercial (1)
    9,265       11,351  
 
 
               
 
               
Consumer:
               
Real estate 1-4 family first mortgage (2)
    11,427       12,289  
Real estate 1-4 family junior lien mortgage
    2,098       2,302  
Other revolving credit and installment
    255       300  
 
 
               
Total consumer
    13,780       14,891  
 
 
               
Total nonaccrual loans
               
(excluding PCI)
  $ 23,045       26,242  
 
(1)   Includes LHFS of $52 million at June 30, 2011, and $3 million at December 31, 2010.
 
(2)   Includes MHFS of $304 million at June 30, 2011, and $426 million at December 31, 2010.


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LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Certain loans 90 days or more past due as to interest or principal are still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $9.8 billion at June 30, 2011, and $11.6 billion at December 31, 2010, are excluded from this disclosure even though they are 90 days or more contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.
      The following table shows non-PCI loans 90 days or more past due and still accruing by class for loans not government insured/guaranteed.
                 
 
 
    June 30,     Dec. 31,  
(in millions)   2011     2010  
 
 
               
Total (excluding PCI):
  $ 17,318       18,488  
Less: FHA insured/guaranteed by the VA (1)
    14,474       14,733  
Less: Student loans guaranteed under the FFELP (2)
    1,014       1,106  
 
 
               
Total, not government insured/guaranteed
  $ 1,830       2,649  
 
 
               
By segment and class, not government insured/guaranteed:
               
Commercial:
               
Commercial and industrial
  $ 110       308  
Real estate mortgage
    137       104  
Real estate construction
    86       193  
Foreign
    12       22  
 
 
               
Total commercial
    345       627  
 
 
               
Consumer:
               
Real estate 1-4 family first mortgage (3)
    728       941  
Real estate 1-4 family junior lien mortgage (3)
    286       366  
Credit card
    334       516  
Other revolving credit and installment
    137       199  
 
 
               
Total consumer
    1,485       2,022  
 
 
               
Total, not government insured/guaranteed
  $ 1,830       2,649  
 
(1)   Represents loans whose repayments are insured by the FHA or guaranteed by the VA.
 
(2)   Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the FFELP.
 
(3)   Includes mortgage held for sale 90 days or more past due and still accruing.



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Note 5: Loans and Allowance for Credit Losses (continued)
     
IMPAIRED LOANS The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status in the commercial portfolio segment and loans modified in a TDR, whether on accrual or nonaccrual status.
  These impaired loans may have estimated impairment which is included in the allowance for credit losses. Impaired loans exclude PCI loans.
 
                                 
    Recorded investment        
                    Impaired loans        
    Unpaid             with related     Related  
    principal     Impaired     allowance for     allowance for  
(in millions)   balance     loans     credit losses     credit losses  
 
 
                               
June 30, 2011
                               
 
                               
Commercial:
                               
Commercial and industrial
  $ 6,975       2,733       2,433       552  
Real estate mortgage
    7,027       5,017       4,740       1,306  
Real estate construction
    4,103       2,313       2,225       508  
Lease financing
    111       83       83       27  
Foreign
    192       13       13       6  
 
Total commercial
    18,408       10,159       9,494       2,399  
 
Consumer:
                               
Real estate 1-4 family first mortgage
    14,613       12,938       12,938       3,021  
Real estate 1-4 family junior lien mortgage
    2,050       1,910       1,910       726  
Credit card
    572       572       572       363  
Other revolving credit and installment
    267       266       266       45  
 
Total consumer
    17,502       15,686       15,686       4,155  
 
Total impaired loans (excluding PCI)
  $ 35,910       25,845       25,180       6,554  
 
 
                               
December 31, 2010
                               
 
                               
Commercial:
                               
Commercial and industrial
  $ 8,190       3,600       3,276       607  
Real estate mortgage
    7,439       5,239       5,163       1,282  
Real estate construction
    4,676       2,786       2,786       548  
Lease financing
    149       91       91       34  
Foreign
    215       15       15       8  
 
Total commercial
    20,669       11,731       11,331       2,479  
 
Consumer:
                               
Real estate 1-4 family first mortgage
    12,834       11,603       11,603       2,754  
Real estate 1-4 family junior lien mortgage
    1,759       1,626       1,626       578  
Credit card
    548       548       548       333  
Other revolving credit and installment
    231       230       230       58  
 
Total consumer
    15,372       14,007       14,007       3,723  
 
Total impaired loans (excluding PCI)
  $ 36,041       25,738       25,338       6,202  
 

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  Commitments to lend additional funds on loans whose terms have been modified in a TDR amounted to $1.5 billion at June 30, 2011, and $1.2 billion at December 31, 2010. These commitments
  $1.1 billion at June 30, 2011, and $861 million at December 31, 2010.
      The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.
primarily relate to CRE loans, which, at the time of modification, had an amount of availability to the borrower that continues under the modified terms of the TDR and totaled
 
 
                                                                 
    Quarter ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
    Average     Recognized     Average     Recognized     Average     Recognized     Average     Recognized  
    recorded     interest     recorded     interest     recorded     interest     recorded     interest  
(in millions)   investment     income     investment     income     investment     income     investment     income  
 
Commercial:
                                                               
Commercial and industrial
  $ 2,860       21       3,346       20       3,016       45       3,455       49  
Real estate mortgage
    5,355       17       3,663       10       5,478       30       2,960       18  
Real estate construction
    2,426       11       3,002       8       2,560       25       2,891       12  
Lease financing
    91             24       -       100       -       48       -  
Foreign
    14             54       -       14       -       66       -  
     
Total commercial
    10,746       49       10,089       38       11,168       100       9,420       79  
     
Consumer:
                                                               
Real estate 1-4 family first mortgage
    12,471       154       8,854       130       12,144       305       8,164       234  
Real estate 1-4 family junior lien mortgage
    1,903       20       1,411       18       1,826       34       1,414       31  
Credit card
    587       6       274       5       579       12       226       6  
Other revolving credit and installment
    260       4       108       -       252       13       79       -  
     
Total consumer
    15,221       184       10,647       153       14,801       364       9,883       271  
     
Total impaired loans
  $ 25,967       233       20,736       191       25,969       464       19,303       350  
   
 
                                                               
Interest income:
                                                               
Cash basis of accounting
          $ 47               54               85               101  
Other (1)
            186               137               379               249  
 
                                                       
Total interest income
          $ 233               191               464               350  
 
(1)   Includes interest recognized on accruing TDRs, interest recognized related to certain impaired loans which have an allowance calculated using discounting, and amortization of purchase accounting adjustments related to certain impaired loans. See footnote 1 to the table of changes in the allowance for credit losses.

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Note 5: Loans and Allowance for Credit Losses (continued)

Purchased Credit-Impaired Loans
Certain loans acquired in the Wachovia acquisition are accounted for as PCI loans. The following table presents PCI loans net of any remaining purchase accounting adjustments.


                 
 
 
               
    June 30,     Dec. 31,  
(in millions)   2011     2010  
 
Commercial:
               
Commercial and industrial
  $ 527       718  
Real estate mortgage
    2,800       2,855  
Real estate construction
    2,188       2,949  
Foreign
    1,501       1,413  
 
 
               
Total commercial
    7,016       7,935  
 
 
               
Consumer:
               
Real estate 1-4 family first mortgage
    31,448       33,245  
Real estate 1-4 family junior lien mortgage
    229       250  
Other revolving credit and installment
    -       -  
 
 
               
Total consumer
    31,677       33,495  
 
 
               
Total PCI loans (carrying value)
  $ 38,693       41,430  
 
 
               
Total PCI loans (unpaid principal balance)
  $ 59,145       64,331  
 
 
ACCRETABLE YIELD The excess of cash flows expected to be collected over the carrying value of PCI loans is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan, or pools of loans. The accretable yield is affected by:
  Changes in interest rate indices for variable rate PCI loans — Expected future cash flows are based on the variable rates in effect at the time of the regular evaluations of cash flows expected to be collected;
 
  Changes in prepayment assumptions — Prepayments affect the estimated life of PCI loans which may change the amount of interest income, and possibly principal, expected to be collected; and
  Changes in the expected principal and interest payments over the estimated life — Updates to expected cash flows are driven by the credit outlook and actions taken with borrowers. Changes in expected future cash flows from loan modifications are included in the regular evaluations of cash flows expected to be collected.
     The change in the accretable yield related to PCI loans is presented in the following table.


                                 
 
 
    Quarter ended     Six months ended      
    June 30,     June 30,     Year ended Dec. 31,  
(in millions)   2011     2011     2010     2009  
 
Total, beginning of period
  $ 15,881       16,714       14,559       10,447  
Accretion into interest income (1)
    (556 )     (1,102 )     (2,392 )     (2,601 )
Accretion into noninterest income due to sales (2)
    (31 )     (186 )     (43 )     (5 )
Reclassification from nonaccretable difference for loans with improving credit-related cash flows
    95       210       3,399       441  
Changes in expected cash flows that do not affect nonaccretable difference (3)
    (518 )     (765 )     1,191       6,277  
 
 
                               
Total, end of period
  $ 14,871       14,871       16,714       14,559  
 
(1)   Includes accretable yield released as a result of settlements with borrowers, which is included in interest income.
 
(2)   Includes accretable yield released as a result of sales to third parties, which is included in noninterest income.
 
(3)   Represents changes in cash flows expected to be collected due to changes in interest rates on variable rate PCI loans, changes in prepayment assumptions and the impact of modifications.

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PCI ALLOWANCE Based on our regular evaluation of estimates of cash flows expected to be collected, we may establish an allowance for a PCI loan or pool of loans, with a charge to
income though the provision for losses. The following table summarizes the changes in allowance for PCI loan losses.


                                 
 
 
                    Other        
(in millions)   Commercial     Pick-a-Pay     consumer     Total  
 
 
                               
Balance, December 31, 2008
  $ -       -       -       -  
Provision for losses due to credit deterioration
    850       -       3       853  
Charge-offs
    (520 )     -       -       (520 )
 
 
                               
Balance, December 31, 2009
    330       -       3       333  
Provision for losses due to credit deterioration
    712       -       59       771  
Charge-offs
    (776 )     -       (30 )     (806 )
 
 
                               
Balance, December 31, 2010
    266       -       32       298  
Provision for losses due to credit deterioration
    55       -       38       93  
Charge-offs
    (106 )     -       (12 )     (118 )
 
 
                               
Balance, June 30, 2011
  $ 215       -       58       273  
 
 
                               
 
 
                               
Balance, March 31, 2011
  $ 234       -       23       257  
Provision for losses due to credit deterioration
    44       -       39       83  
Charge-offs
    (63 )     -       (4 )     (67 )
 
 
                               
Balance, June 30, 2011
  $ 215       -       58       273  
 
COMMERCIAL PCI CREDIT QUALITY INDICATORS The following table provides a breakdown of commercial PCI loans by risk category.
                                         
 
 
    Commercial     Real     Real              
    and     estate     estate              
(in millions)   industrial     mortgage     construction     Foreign     Total  
 
 
                                       
June 30, 2011
                                       
 
                                       
By risk category:
                                       
Pass
  $ 260       512       231       154       1,157  
Criticized
    267       2,288       1,957       1,347       5,859  
 
 
                                       
Total commercial PCI loans
  $ 527       2,800       2,188       1,501       7,016  
 
 
                                       
December 31, 2010
                                       
 
                                       
By risk category:
                                       
Pass
  $ 214       352       128       210       904  
Criticized
    504       2,503       2,821       1,203       7,031  
 
 
                                       
Total commercial PCI loans
  $ 718       2,855       2,949       1,413       7,935  
 

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Note 5: Loans and Allowance for Credit Losses (continued)
     The following table provides past due information for commercial PCI loans.
                                         
 
 
    Commercial     Real     Real              
    and     estate     estate              
(in millions)   industrial     mortgage     construction     Foreign     Total  
 
 
                                       
June 30, 2011
                                       
 
                                       
By delinquency status:
                                       
Current-29 DPD
  $ 434       2,420       1,182       1,281       5,317  
30-89 DPD
    33       82       166       -       281  
90+ DPD and still accruing
    60       298       840       220       1,418  
 
 
                                       
Total commercial PCI loans
  $ 527       2,800       2,188       1,501       7,016  
 
 
                                       
December 31, 2010
                                       
 
                                       
By delinquency status:
                                       
 
                                       
Current-29 DPD
  $ 612       2,295       1,395       1,209       5,511  
30-89 DPD
    22       113       178       -       313  
90+ DPD and still accruing
    84       447       1,376       204       2,111  
 
 
                                       
Total commercial PCI loans
  $ 718       2,855       2,949       1,413       7,935  
 

CONSUMER PCI CREDIT QUALITY INDICATORS Our consumer PCI loans were aggregated into several pools of loans at acquisition. Below, we have provided credit quality indicators based on the individual loans included in the pool, but we have
not allocated the remaining purchase accounting adjustments, which were established at a pool level. The following table provides the delinquency status of consumer PCI loans.


                                                 
 
 
    June 30, 2011     December 31, 2010  
    Real estate     Real estate             Real estate     Real estate        
    1-4 family     1-4 family             1-4 family     1-4 family        
    first     junior lien             first     junior lien        
(in millions)   mortgage     mortgage     Total     mortgage     mortgage     Total  
 
 
                                               
By delinquency status:
                                               
Current
  $ 27,778       222       28,000       29,253       357       29,610  
1-29 DPD
    39       72       111       44       79       123  
30-59 DPD
    3,403       19       3,422       3,586       30       3,616  
60-89 DPD
    1,360       9       1,369       1,364       17       1,381  
90-119 DPD
    696       8       704       881       13       894  
120-179 DPD
    1,072       12       1,084       1,346       19       1,365  
180+ DPD
    6,638       168       6,806       7,214       220       7,434  
 
 
                                               
Total consumer PCI loans
  $ 40,986       510       41,496       43,688       735       44,423  
 
 
                                               
Total consumer PCI loans (carrying value)
  $ 31,448       229       31,677       33,245       250       33,495  
 

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The following table provides FICO scores for consumer PCI loans.
                                                 
 
 
    June 30, 2011     December 31, 2010  
    Real estate     Real estate             Real estate     Real estate        
    1-4 family     1-4 family             1-4 family     1-4 family        
    first     junior lien             first     junior lien        
(in millions)   mortgage     mortgage     Total     mortgage     mortgage     Total  
 
 
                                               
By FICO:
                                               
< 600
  $ 19,365       241       19,606       22,334       363       22,697  
600-639
    7,671       85       7,756       7,563       109       7,672  
640-679
    6,554       85       6,639       6,185       96       6,281  
680-719
    3,907       49       3,956       3,949       60       4,009  
720-759
    1,957       15       1,972       2,057       17       2,074  
760-799
    997       6       1,003       1,087       7       1,094  
800+
    221       2       223       232       2       234  
No FICO available
    314       27       341       281       81       362  
 
 
                                               
Total consumer PCI loans
  $ 40,986       510       41,496       43,688       735       44,423  
 
 
                                               
Total consumer PCI loans (carrying value)
  $ 31,448       229       31,677       33,245       250       33,495  
 
The following table shows the distribution of consumer PCI loans by LTV for real estate 1-4 family first mortgages and by CLTV for real estate 1-4 family junior lien mortgages.
                                                 
 
 
    June 30, 2011     December 31, 2010  
    Real estate     Real estate             Real estate     Real estate        
    1-4 family     1-4 family             1-4 family     1-4 family        
    first     junior lien             first     junior lien        
    mortgage     mortgage             mortgage     mortgage        
(in millions)   by LTV     by CLTV     Total     by LTV     by CLTV     Total  
 
 
                                               
By LTV/CLTV:
                                               
0-60%
  $ 1,202       27       1,229       1,653       43       1,696  
60.01-80%
    4,273       53       4,326       5,513       42       5,555  
80.01-100%
    10,535       77       10,612       11,861       89       11,950  
100.01-120% (1)
    9,687       90       9,777       9,525       116       9,641  
> 120% (1)
    15,166       257       15,423       15,047       314       15,361  
No LTV/CLTV available
    123       6       129       89       131       220  
 
 
                                               
Total consumer PCI loans
  $ 40,986       510       41,496       43,688       735       44,423  
 
 
                                               
Total consumer PCI loans (carrying value)
  $ 31,448       229       31,677       33,245       250       33,495  
 
     
(1)   Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of 100% LTV/CLTV.

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Note 6: Other Assets
 

The components of other assets were:
                 
 
  June 30,     Dec. 31,
 
(in millions)   2011     2010  
 
 
               
Nonmarketable equity investments:
               
 
               
Cost method:
               
 
               
Private equity investments
  $ 3,143       3,240  
 
               
Federal bank stock
    4,886       5,254  
 
 
               
Total cost method
    8,029       8,494  
 
               
Equity method
    7,758       7,624  
 
               
Principal investments (1)
    291       305  
 
 
               
Total nonmarketable equity investments
    16,078       16,423  
 
               
Corporate/bank-owned life insurance
    20,018       19,845  
 
               
Accounts receivable
    19,375       23,763  
 
               
Interest receivable
    5,009       4,895  
 
               
Core deposit intangibles
    8,099       8,904  
 
               
Customer relationship and other amortized intangibles
    1,702       1,847  
 
               
Foreclosed assets:
               
 
               
Government insured/guaranteed (2)
    1,320       1,479  
 
               
Non-government insured/guaranteed
    3,541       4,530  
 
               
Operating lease assets
    1,757       1,873  
 
               
Due from customers on acceptances
    232       229  
Other
    14,687       15,993  
 
 
               
Total other assets
  $ 91,818       99,781  
 
     
(1)   Principal investments are recorded at fair value with realized and unrealized gains (losses) included in net gains (losses) from equity investments in the income statement.
 
(2)   These are foreclosed real estate securing FHA insured and VA guaranteed loans. Both principal and interest for these loans secured by the foreclosed real estate are collectible because they are insured/guaranteed.

Income related to nonmarketable investments was:
                                 
 
                    Six months  
    Quarter ended June 30,     ended June 30,  
(in millions)   2011     2010     2011     2010  
 
Net gains (losses) from:
                               
Private equity investments
  $ 348       155       569       154  
Principal investments
    14       12       32       21  
All other nonmarketable equity investments
    (121 )     (21 )     (181 )     (38 )
 
 
Net gains (losses) from nonmarketable equity investments
  $ 241       146       420       137  
 


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Note 7: Securitizations and Variable Interest Entities
 
Involvement with SPEs
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. Historically, the majority of SPEs were formed in connection with securitization transactions. In a securitization transaction, assets from our balance sheet are transferred to an SPE, which then issues to investors various forms of interests in those assets and may also enter into derivative transactions. In a securitization transaction, we typically receive cash and/or other interests in an SPE as proceeds for the assets we transfer. Also, in certain transactions, we may retain the right to service the transferred receivables and to repurchase those receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing such receivables. In addition, we may purchase the right to service loans in an SPE that were transferred to the SPE by a third party.
      In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:
  underwriting securities issued by SPEs and subsequently making markets in those securities;
 
  providing liquidity facilities to support short-term obligations of SPEs issued to third party investors;
 
  providing credit enhancement on securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps;
 
  entering into other derivative contracts with SPEs;
 
  holding senior or subordinated interests in SPEs;
 
  acting as servicer or investment manager for SPEs; and
 
  providing administrative or trustee services to SPEs.
      SPEs are generally considered variable interest entities (VIEs). A VIE is an entity that has either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or whose equity investors lack the ability to control the entity’s activities. A VIE is consolidated by its primary beneficiary, the party that has both the power to direct the activities that most significantly impact the VIE and a variable interest that could potentially be significant to the VIE. A variable interest is a contractual, ownership or other interest that changes with changes in the fair value of the VIE’s net assets. To determine whether or not a variable interest we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE. We assess whether or not we are the primary beneficiary of a VIE on an on-going basis.
      We have segregated our involvement with VIEs between those VIEs which we consolidate, those which we do not consolidate and transfers of financial assets that are accounted for as secured borrowings. Secured borrowings are transactions involving transfers of our financial assets to third parties that are accounted for as financings with the assets pledged as collateral. Accordingly, the transferred assets remain recognized on our balance sheet. Subsequent tables within this Note further segregate these transactions by structure type.


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     The classifications of assets and liabilities in our balance sheet associated with our transactions with VIEs follow:
                                 
 
 
                    Transfers that        
 
    VIEs that we     VIEs     we account        
 
    do not     that we     for as secured        
 
(in millions)   consolidate     consolidate     borrowings     Total  
 
 
                               
June 30, 2011
                               
 
                               
Cash
  $ -       172       218       390  
 
                               
Trading assets
    4,723       95       30       4,848  
 
                               
Securities available for sale (1)
    20,338       2,315       9,671       32,324  
 
                               
Mortgages held for sale
    -       408       -       408  
 
                               
Loans held for sale
    -       135       -       135  
 
                               
Loans
    12,113       13,640       1,587       27,340  
 
                               
Mortgage servicing rights
    13,821       -       -       13,821  
 
                               
Other assets
    4,011       1,563       100       5,674  
 
 
                               
Total assets
    55,006       18,328       11,606       84,940  
 
 
                               
Short-term borrowings
    -       3,339 (3)     9,232       12,571  
 
                               
Accrued expenses and other liabilities
    3,497       724 (3)     16       4,237  
 
                               
Long-term debt
    -       6,277 (3)     1,664       7,941  
 
 
                               
Total liabilities
    3,497       10,340       10,912       24,749  
 
 
                               
Noncontrolling interests
    -       132       -       132  
 
 
                               
Net assets
  $ 51,509       7,856       694       60,059  
 
 
                               
December 31, 2010
                               
 
                               
Cash
  $ -       200       398       598  
 
                               
Trading assets
    5,351       143       32       5,526  
 
                               
Securities available for sale (1)
    24,001       2,159       7,834       33,994  
 
                               
Mortgages held for sale (2)
    -       634       -       634  
 
                               
Loans
    12,401       16,708       1,613       30,722  
 
                               
Mortgage servicing rights
    13,261       -       -       13,261  
 
                               
Other assets (2)
    3,783       2,071       90       5,944  
 
 
                               
Total assets
    58,797       21,915       9,967       90,679  
 
 
                               
Short-term borrowings
    -       3,636 (3)     7,773       11,409  
 
                               
Accrued expenses and other liabilities (2)
    3,514       743 (3)     14       4,271  
 
                               
Long-term debt
    -       8,377 (3)     1,700       10,077  
 
 
                               
Total liabilities
    3,514       12,756       9,487       25,757  
 
 
                               
Noncontrolling interests (2)
    -       94       -       94  
 
 
                               
Net assets
  $ 55,283       9,065       480       64,828  
 
     
(1)   Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and GNMA.
 
(2)   “VIEs that we consolidate” has been revised to correct previously reported amounts.
 
(3)   Includes the following VIE liabilities at June 30, 2011, and December 31, 2010, respectively, with recourse to the general credit of Wells Fargo: Short-term borrowings, $3.3 billion and $3.6 billion; Accrued expenses and other liabilities, $603 million and $645 million; and Long-term debt, $57 million and $53 million.

Transactions with Unconsolidated VIEs
Our transactions with VIEs include securitizations of consumer loans, CRE loans, student loans and auto loans; investment and financing activities involving CDOs backed by asset-backed and CRE securities, collateralized loan obligations (CLOs) backed by corporate loans, and other types of structured financing. We have various forms of involvement with VIEs, including holding senior or subordinated interests, entering into liquidity arrangements, credit default swaps and other derivative contracts. These involvements with unconsolidated VIEs are recorded on our balance sheet primarily in trading assets, securities available for sale, loans, MSRs, other assets and other liabilities, as appropriate.
      The following tables provide a summary of unconsolidated VIEs with which we have significant continuing involvement, but are not the primary beneficiary. The balances presented represent our unconsolidated VIEs for which we consider our involvement to be significant. Our definition of significant continuing involvement excludes unconsolidated VIEs when our continuing involvement relates to third-party sponsored VIEs for which we were not the transferor, and unconsolidated VIEs for which we were the sponsor but do not have any other significant continuing involvement.
      Significant continuing involvement includes transactions where we were the sponsor or transferor and have other significant forms of involvement. Sponsorship includes transactions with unconsolidated VIEs where we solely or materially participated in the initial design or structuring of the


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entity or marketing of the transaction to investors. When we transfer assets to a VIE and account for the transfer as a sale, we are considered the transferor. We consider investments in securities held outside of trading, loans, guarantees, liquidity agreements, written options and servicing of collateral to be other forms of involvement that may be significant. We have
excluded certain transactions with unconsolidated VIEs from the balances presented in the table below where we have determined that our continuing involvement is not significant due to the temporary nature and size of our variable interests, because we were not the transferor or because we were not involved in the design or operations of the unconsolidated VIEs.


     
 
                                                 
                                    Other        
    Total     Debt and                     commitments        
    VIE     equity     Servicing             and     Net  
(in millions)   assets     interests (1)     assets     Derivatives     guarantees     assets  
 
 
                                               
June 30, 2011
                                               
 
                                               
 
                Carrying value - asset (liability)    
             
Residential mortgage loan securitizations:
                                               
 
                                               
Conforming
  $ 1,107,281       5,389       12,711       -       (975 )     17,125  
 
                                               
Other/nonconforming
    67,786       2,766       456       2       (2 )     3,222  
 
                                               
Commercial mortgage loan securitizations
    184,762       5,568       617       266       -       6,451  
 
                                               
Collateralized debt obligations:
                                               
 
                                               
Debt securities
    17,956       1,233       -       766       -       1,999  
 
                                               
Loans (2)
    9,973       9,722       -       -       -       9,722  
Asset-based finance structures
    6,273       4,102       -       (98 )     -       4,004  
 
                                               
Tax credit structures
    18,281       3,759       -       -       (1,285 )     2,474  
 
                                               
Collateralized loan obligations
    12,879       2,619       -       58       -       2,677  
 
                                               
Investment funds
    8,238       1,457       -       -       -       1,457  
 
                                               
Other (3)
    18,951       2,088       37       256       (3 )     2,378  
 
 
                                               
Total
  $ 1,452,380       38,703       13,821       1,250       (2,265 )     51,509  
 
 
                                               
 
                Maximum exposure to loss    
             
Residential mortgage loan securitizations:
                                               
 
                                               
Conforming
          $ 5,389       12,711       -       3,487       21,587  
 
                                               
Other/nonconforming
            2,766       456       2       265       3,489  
 
                                               
Commercial mortgage loan securitizations
            5,568       617       491       -       6,676  
 
                                               
Collateralized debt obligations:
                                               
 
                                               
Debt securities
            1,233       -       2,689       1       3,923  
 
                                               
Loans (2)
            9,722       -       -       -       9,722  
 
                                               
Asset-based finance structures
            4,102       -       98       2,216       6,416  
 
                                               
Tax credit structures
            3,759       -       -       -       3,759  
 
                                               
Collateralized loan obligations
            2,619       -       58       521       3,198  
 
                                               
Investment funds
            1,457       -       -       52       1,509  
 
                                               
Other (3)
            2,088       37       762       150       3,037  
 
 
                                               
Total
          $ 38,703       13,821       4,100       6,692       63,316  
 
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                                    Other        
    Total     Debt and                     commitments        
    VIE     equity     Servicing             and     Net  
(in millions)   assets     interests (1)     assets     Derivatives     guarantees     assets  
 
 
                                               
December 31, 2010
                                               
 
                                               
 
                Carrying value - asset (liability)
             
Residential mortgage loan securitizations:
                                               
 
                                               
Conforming
  $ 1,068,737       5,527       12,115       -       (928 )     16,714  
 
                                               
Other/nonconforming
    76,304       2,997       495       6       (107 )     3,391  
 
                                               
Commercial mortgage loan securitizations
    190,377       5,506       608       261       -       6,375  
 
                                               
Collateralized debt obligations:
                                               
 
                                               
Debt securities
    20,046       1,436       -       844       -       2,280  
 
                                               
Loans (2)
    9,970       9,689       -       -       -       9,689  
 
                                               
Asset-based finance structures
    12,055       6,556       -       (118 )     -       6,438  
 
                                               
Tax credit structures
    20,981       3,614       -       -       (1,129 )     2,485  
 
                                               
Collateralized loan obligations
    13,196       2,804       -       56       -       2,860  
 
                                               
Investment funds
    10,522       1,416       -       -       -       1,416  
 
                                               
Other (3)
    20,031       3,221       43       377       (6 )     3,635  
 
 
                                               
Total
  $ 1,442,219       42,766       13,261       1,426       (2,170 )     55,283  
 
 
                                               
 
            Maximum exposure to loss
             
Residential mortgage loan securitizations:
                                               
 
                                               
Conforming
          $ 5,527       12,115       -       4,248       21,890  
 
                                               
Other/nonconforming
            2,997       495       6       233       3,731  
 
                                               
Commercial mortgage loan securitizations
            5,506       608       488       -       6,602  
 
                                               
Collateralized debt obligations:
                                               
 
                                               
Debt securities
            1,436       -       2,850       7       4,293  
 
                                               
Loans (2)
            9,689       -       -       -       9,689  
 
                                               
Asset-based finance structures
            6,556       -       118       2,175       8,849  
 
                                               
Tax credit structures
            3,614       -       -       1       3,615  
 
                                               
Collateralized loan obligations
            2,804       -       56       519       3,379  
 
                                               
Investment funds
            1,416       -       -       87       1,503  
 
                                               
Other (3)
            3,221       43       916       162       4,342  
 
 
                                               
Total
          $ 42,766       13,261       4,434       7,432       67,893  
 
 
(1)   Includes total equity interests of $422 million and $316 million at June 30, 2011, and December 31, 2010, respectively. Also includes debt interests in the form of both loans and securities. Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA.
 
(2)   Represents senior loans to trusts that are collateralized by asset-backed securities. The trusts invest primarily in senior tranches from a diversified pool of primarily U.S. asset securitizations, of which all are current, and over 91% were rated as investment grade by the primary rating agencies at June 30, 2011. These senior loans were acquired in the Wachovia business combination and are accounted for at amortized cost as initially determined under purchase accounting and are subject to the Company’s allowance and credit charge-off policies.
 
(3)   Includes structured financing, student loan securitizations, auto loan securitizations and credit-linked note structures. Also contains investments in auction rate securities (ARS) issued by VIEs that we do not sponsor and, accordingly, are unable to obtain the total assets of the entity.

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     In the two preceding tables, “Total VIE assets” represents the remaining principal balance of assets held by unconsolidated VIEs using the most current information available. For VIEs that obtain exposure to assets synthetically through derivative instruments, the remaining notional amount of the derivative is included in the asset balance. “Carrying value” is the amount in our consolidated balance sheet related to our involvement with the unconsolidated VIEs. “Maximum exposure to loss” from our involvement with off-balance sheet entities, which is a required disclosure under GAAP, is determined as the carrying value of our involvement with off-balance sheet (unconsolidated) VIEs plus the remaining undrawn liquidity and lending commitments, the notional amount of net written derivative contracts, and generally the notional amount of, or stressed loss estimate for, other commitments and guarantees. It represents estimated loss that would be incurred under severe, hypothetical circumstances, for which we believe the possibility is extremely remote, such as where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.
RESIDENTIAL MORTGAGE LOANS Residential mortgage loan securitizations are financed through the issuance of fixed- or floating-rate-asset-backed-securities, which are collateralized by the loans transferred to a VIE. We typically transfer loans we originated to these VIEs, account for the transfers as sales, retain the right to service the loans and may hold other beneficial interests issued by the VIEs. We also may be exposed to limited liability related to recourse agreements and repurchase agreements we make to our issuers and purchasers, which are included in other commitments and guarantees. In certain instances, we may service residential mortgage loan securitizations structured by third parties whose loans we did not originate or transfer. Our residential mortgage loan securitizations consist of conforming and nonconforming securitizations.
     Conforming residential mortgage loan securitizations are those that are guaranteed by GSEs, including GNMA. We do not consolidate our conforming residential mortgage loan securitizations because we do not have power over the VIEs.
     The loans sold to the VIEs in nonconforming residential mortgage loan securitizations are those that do not qualify for a GSE guarantee. We may hold variable interests issued by the VIEs, primarily in the form of senior securities. We do not consolidate the nonconforming residential mortgage loan securitizations included in the table because we either do not hold any variable interests, hold variable interests that we do not consider potentially significant or are not the primary servicer for a majority of the VIE assets.
     Other commitments and guarantees include amounts related to loans sold that we may be required to repurchase, or otherwise indemnify or reimburse the investor or insurer for losses incurred, due to material breach of contractual representations and warranties. The maximum exposure to loss for material breach of contractual representations and warranties represents a stressed case estimate we utilize for
determining stressed case regulatory capital needs and is considered to be a remote scenario.
COMMERCIAL MORTGAGE LOAN SECURITIZATIONS Commercial mortgage loan securitizations are financed through the issuance of fixed- or floating-rate-asset-backed-securities, which are collateralized by the loans transferred to the VIE. In a typical securitization, we may transfer loans we originate to these VIEs, account for the transfers as sales, retain the right to service the loans and may hold other beneficial interests issued by the VIEs. In certain instances, we may service commercial mortgage loan securitizations structured by third parties whose loans we did not originate or transfer. We typically serve as primary or master servicer of these VIEs. The primary or master servicer in a commercial mortgage loan securitization typically cannot make the most significant decisions impacting the performance of the VIE and therefore does not have power over the VIE. We do not consolidate the commercial mortgage loan securitizations included in the disclosure because we either do not have power or do not have a variable interest that could potentially be significant to the VIE.
COLLATERALIZED DEBT OBLIGATIONS (CDOs) A CDO is a securitization where an SPE purchases a pool of assets consisting of asset-backed securities and issues multiple tranches of equity or notes to investors. In some transactions, a portion of the assets are obtained synthetically through the use of derivatives such as credit default swaps or total return swaps.
     Prior to 2008, we engaged in the structuring of CDOs on behalf of third party asset managers who would select and manage the assets for the CDO. Typically, the asset manager has some discretion to manage the sale of assets of, or derivatives used by the CDO, which generally gives the asset manager the power over the CDO. We have not structured these types of transactions since the credit market disruption began in late 2007.
     In addition to our role as arranger we may have other forms of involvement with these transactions, including transactions established prior to 2008. Such involvement may include acting as liquidity provider, derivative counterparty, secondary market maker or investor. For certain transactions, we may also act as the collateral manager or servicer. We receive fees in connection with our role as collateral manager or servicer.
     We assess whether we are the primary beneficiary of CDOs based on our role in the transaction in combination with the variable interests we hold. Subsequently, we monitor our ongoing involvement in these transactions to determine if the nature of our involvement has changed. We are not the primary beneficiary of these transactions in most cases because we do not act as the collateral manager or servicer, which generally denotes power. In cases where we are the collateral manager or servicer, we are not the primary beneficiary because we do not hold interests that could potentially be significant to the VIE.
COLLATERALIZED LOAN OBLIGATIONS (CLOs) A CLO is a securitization where an SPE purchases a pool of assets consisting of loans and issues multiple tranches of equity or notes to investors. Generally, CLOs are structured on behalf of a third


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party asset manager that typically selects and manages the assets for the term of the CLO. Typically, the asset manager has the power over the significant decisions of the VIE through its discretion to manage the assets of the CLO. We assess whether we are the primary beneficiary of CLOs based on our role in the transaction and the variable interests we hold. In most cases, we are not the primary beneficiary of these transactions because we do not have the power to manage the collateral in the VIE.
     In addition to our role as arranger, we may have other forms of involvement with these transactions. Such involvement may include acting as underwriter, derivative counterparty, secondary market maker or investor. For certain transactions, we may also act as the servicer, for which we receive fees in connection with that role. We also earn fees for arranging these transactions and distributing the securities.
ASSET-BASED FINANCE STRUCTURES We engage in various forms of structured finance arrangements with VIEs that are collateralized by various asset classes including energy contracts, auto and other transportation leases, intellectual property, equipment and general corporate credit. We typically provide senior financing, and may act as an interest rate swap or commodity derivative counterparty when necessary. In most cases, we are not the primary beneficiary of these structures because we do not have power over the significant activities of the VIEs involved in these transactions.
     For example, we have investments in asset-backed securities that are collateralized by auto leases or loans and cash reserves. These fixed-rate and variable-rate securities have been structured as single-tranche, fully amortizing, unrated bonds that are equivalent to investment-grade securities due to their significant overcollateralization. The securities are issued by VIEs that have been formed by third party auto financing institutions primarily because they require a source of liquidity to fund ongoing vehicle sales operations. The third party auto financing institutions manage the collateral in the VIEs, which is indicative of power in these transactions and we therefore do not consolidate these VIEs.
TAX CREDIT STRUCTURES We co-sponsor and make investments in affordable housing and sustainable energy projects that are designed to generate a return primarily through the realization of federal tax credits. In some instances, our investments in these structures may require that we fund future capital commitments at the discretion of the project sponsors. While the size of our investment in a single entity may at times exceed 50% of the outstanding equity interests, we do not consolidate these structures due to the project sponsor’s ability to manage the projects, which is indicative of power in these transactions.
INVESTMENT FUNDS At June 30, 2011, we had investments of $1.5 billion and no lending arrangements with certain funds managed by one of our majority owned subsidiaries compared with investments of $1.4 billion and lending arrangements of $14 million at December 31, 2010. In addition, we also provide a default protection agreement to a third party lender to one of these funds. Our involvement in these funds is either senior or of
equal priority to third party investors. We do not consolidate the investment funds because we do not absorb the majority of the expected future variability associated with the funds’ assets, including variability associated with credit, interest rate and liquidity risks.
OTHER TRANSACTIONS WITH VIEs In August 2008, Wachovia reached an agreement to purchase at par auction rate securities (ARS) that were sold to third-party investors by certain of its subsidiaries. ARS are debt instruments with long-term maturities, but which re-price more frequently, and preferred equities with no maturity. All remaining ARS issued by VIEs subject to the agreement were redeemed. At June 30, 2011, we held in our securities available-for-sale portfolio $839 million of ARS issued by VIEs redeemed pursuant to this agreement, compared with $1.6 billion at December 31, 2010.
     On November 18, 2009, we reached agreements to purchase additional ARS from eligible investors who bought ARS through one of our broker-dealer subsidiaries. All remaining ARS issued by VIEs subject to the agreement were redeemed. As of June 30, 2011, we held in our securities available-for-sale portfolio $681 million of ARS issued by VIEs redeemed pursuant to this agreement, compared with $901 million at December 31, 2010.
     We do not consolidate the VIEs that issued the ARS because we do not have power over the activities of the VIEs.
TRUST PREFERRED SECURITIES In addition to the involvements disclosed in the preceding table, through the issuance of trust preferred securities we had junior subordinated debt financing with a carrying value of $13.2 billion at June 30, 2011, and $19.3 billion at December 31, 2010, and $2.5 billion of preferred stock at June 30, 2011. In these transactions, VIEs that we wholly own issue debt securities or preferred equity to third party investors. All of the proceeds of the issuance are invested in debt securities or preferred equity that we issue to the VIEs. The VIEs’ operations and cash flows relate only to the issuance, administration and repayment of the securities held by third parties. We do not consolidate these VIEs because the sole assets of the VIEs are receivables from us. This is the case even though we own all of the voting equity shares of the VIEs, have fully guaranteed the obligations of the VIEs and may have the right to redeem the third party securities under certain circumstances. We report the debt securities issued to the VIEs as long-term debt and the preferred equity securities issued to the VIEs as preferred stock in our consolidated balance sheet.
     In the first half of 2011, we called $3.4 billion of trust preferred securities that will no longer count as Tier 1 capital under the Dodd-Frank Act and the Basel Committee recommendations known as the Basel III standards.


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Securitization Activity Related to Unconsolidated VIEs
We use VIEs to securitize consumer and CRE loans and other types of financial assets, including student loans and auto loans. We typically retain the servicing rights from these sales and may continue to hold other beneficial interests in the VIEs. We may also provide liquidity to investors in the beneficial interests and credit enhancements in the form of standby letters of credit. Through these securitizations we may be exposed to liability under limited amounts of recourse as well as standard
representations and warranties we make to purchasers and issuers.
     We recognized net gains of $32 million and $66 million from transfers accounted for as sales of financial assets in securitizations in the second quarter and first half of 2011, respectively, and net gains of $6 million and $8 million, respectively, in the same periods of 2010. Additionally, we had the following cash flows with our securitization trusts that were involved in transfers accounted for as sales.


 
                                 
    2011     2010  
 
                               
            Other             Other  
 
                               
    Mortgage     financial     Mortgage     financial  
 
                               
(in millions)   loans     assets     loans     assets  
 
 
                               
Quarter ended June 30,
                               
 
                               
Sales proceeds from securitizations (1)
  $ 70,973       -       81,435       -  
 
                               
Servicing fees
    1,105       3       1,057       9  
 
                               
Other interests held
    513       53       445       132  
 
                               
Purchases of delinquent assets
    2       -       10       -  
 
                               
Net servicing advances
    (11 )     -       10       -  
 
                               
 
 
                               
Six months ended June 30,
                               
 
                               
Sales proceeds from securitizations (1)
  $ 171,214       -       163,757       -  
 
                               
Servicing fees
    2,193       6       2,097       18  
 
                               
Other interests held
    1,016       140       852       244  
 
                               
Purchases of delinquent assets
    5       -       10       -  
 
                               
Net servicing advances
    (20 )     -       29       -  
 
                               
 
     
(1)   Represents cash flow data for all loans securitized in the period presented.

     Sales with continuing involvement during the second quarter and first half of 2011 and 2010 predominantly related to conforming residential mortgage securitizations. During the second quarter and first half of 2011 we transferred $70.9 billion and $172.3 billion, respectively, in fair value of conforming residential mortgages to unconsolidated VIEs and recorded the transfers as sales, compared with $82.3 billion and $165.7 billion, respectively, in the same periods of 2010. These transfers did not result in a gain or loss because the
 
                 
    2011     2010  
 
 
               
Quarter ended June 30,
               
 
               
Prepayment speed (annual CPR (1))
    13.1 %     13.6  
 
               
Life (in years)
    5.9       5.4  
 
               
Discount rate
    7.9 %     8.0  
 
               
 
 
               
Six months ended June 30,
               
 
               
Prepayment speed (annual CPR (1))
    12.0 %     13.0  
 
               
Life (in years)
    6.2       5.6  
 
               
Discount rate
    7.9 %     8.2  
 
               
 
     
(1)   Constant prepayment rate.
loans are already carried at fair value. In connection with these transfers, in the first half of 2011 we recorded a $2.0 billion servicing asset, measured at fair value using a Level 3 measurement technique, and a $55 million liability for repurchase reserves, compared with a $2.0 billion servicing asset and an $80 million liability in the first half of 2010.
     We used the following key assumptions to measure mortgage servicing assets at the date of securitization:


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     Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at June 30, 2011, for residential and commercial mortgage servicing rights, and other interests held related primarily to residential mortgage loan securitizations are presented in the following table. In the following table “Other interests held” exclude securities retained in securitizations issued through GSEs such as FNMA, FHLMC and GNMA because we do not
believe the value of these securities would be materially affected by the adverse changes in assumptions noted in the table. Subordinated interests include only those bonds whose credit rating was below AAA by a major rating agency at issuance. Senior interests include only those bonds whose credit rating was AAA by a major rating agency at issuance. The information presented excludes trading positions held in inventory.


 
                                 
            Other interests held  
 
                               
    Mortgage     Interest-              
 
                               
    servicing     only     Subordinated     Senior  
 
                               
(in millions)   rights     strips     bonds     bonds  
 
 
                               
Fair value of interests held at June 30, 2011
  $ 16,583       248       48       393  
 
                               
Expected weighted-average life (in years)
    5.7       4.8       5.7       6.1  
 
                               
Prepayment speed assumption (annual CPR)
    11.7 %     10.1       7.9       11.9  
 
                               
Decrease in fair value from:
                               
 
                               
10% adverse change
  $ 942       6       -       1  
 
                               
25% adverse change
    2,228       16       1       3  
 
                               
Discount rate assumption
    7.7 %     15.6       11.0       6.5  
 
                               
Decrease in fair value from:
                               
 
                               
100 basis point increase
  $ 838       7       2       16  
 
                               
200 basis point increase
    1,602       12       5       31  
 
                               
Credit loss assumption
                    1.2 %     4.5  
 
                               
Decrease in fair value from:
                               
 
                               
10% higher losses
                  $ -       1  
 
                               
25% higher losses
                    -       2  
 
                               
 

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      The sensitivities in the preceding table are hypothetical and caution should be exercised when relying on this data. Changes in value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in value may not be linear. Also, the effect of a variation in a particular assumption on the value of the other interests held is calculated independently without changing any other assumptions. In reality, changes in one factor may result in changes in others (for example, changes in prepayment speed estimates could result in changes in the credit losses), which might magnify or counteract the sensitivities.
      The following table presents information about the principal balances of off-balance sheet securitized loans, including residential mortgages sold to FNMA, FHLMC, GNMA and securitizations where servicing is our only form of continuing involvement. Delinquent loans include loans 90 days or more past due and still accruing interest as well as nonaccrual loans. In securitizations where servicing is our only form of continuing involvement, we would only experience a loss if required to repurchase a delinquent loan due to a breach in representations and warranties associated with our loan sale or servicing contracts. Net charge-offs exclude loans sold to FNMA, FHLMC and GNMA as we do not service or manage the underlying real estate upon foreclosure and, as such, do not have access to net charge-off information.


                                                 
 
 
                                    Net charge-offs
 
    Total loans   Delinquent loans   Six months
    June 30,   Dec. 31,   June 30,   Dec. 31,   ended June 30,
(in millions)   2011   2010   2011   2010   2011   2010
 
 
                                               
Commercial:
                                               
 
                                               
Commercial and industrial
  $ 1       1       -       -       -       -  
 
                                               
Real estate mortgage
    141,686       207,015       8,704       11,515       229       143  
 
 
                                               
Total commercial
    141,687       207,016       8,704       11,515       229       143  
 
 
                                               
Consumer:
                                               
 
                                               
Real estate 1-4 family first mortgage
    1,151,474       1,090,755       23,789       25,067 (1)     848       696  
 
                                               
Real estate 1-4 family junior lien mortgage
    686       1       22       -       11       -  
 
                                               
Other revolving credit and installment
    2,362       2,454       111       102       -       -  
 
Total consumer
    1,154,522       1,093,210       23,922       25,169       859       696  
 
 
                                               
Total off-balance sheet securitized loans
  $ 1,296,209       1,300,226       32,626       36,684       1,088       839  
 
                                               
 
     
(1)   Balances have been revised to conform with current period presentation.

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Transactions with Consolidated VIEs and Secured Borrowings
The following table presents a summary of transfers of financial assets accounted for as secured borrowings and involvements with consolidated VIEs. “Consolidated assets” are presented using GAAP measurement methods, which may include fair
value, credit impairment or other adjustments, and therefore in some instances will differ from “Total VIE assets.” On the consolidated balance sheet, we separately disclose the consolidated assets of certain VIEs that can only be used to settle the liabilities of those VIEs.


                                         
 
 
            Carrying value
 
    Total           Third            
    VIE   Consolidated   party   Noncontrolling   Net
(in millions)   assets   assets   liabilities   interests   assets
 
June 30, 2011
                                       
 
                                       
Secured borrowings:
                                       
Municipal tender option bond securitizations
  $ 12,540       9,695       (9,238 )     -       457  
Commercial real estate loans
    1,348       1,348       (1,274 )     -       74  
Residential mortgage securitizations
    634       563       (400 )     -       163  
 
 
                                       
Total secured borrowings
    14,522       11,606       (10,912 )     -       694  
 
Consolidated VIEs:
                                       
Nonconforming residential mortgage loan securitizations
    11,514       10,756       (4,871 )     -       5,885  
Multi-seller commercial paper conduit
    2,936       2,936       (3,045 )     -       (109 )
Auto loan securitizations
    489       489       (431 )     -       58  
Structured asset finance
    217       217       (19 )     -       198  
Investment funds
    1,123       1,123       (58 )     (14 )     1,051  
Other
    2,925       2,807       (1,916 )     (118 )     773  
 
 
                                       
Total consolidated VIEs
    19,204       18,328       (10,340 )     (132 )     7,856  
 
 
                                       
Total secured borrowings and consolidated VIEs
  $ 33,726       29,934       (21,252 )     (132 )     8,550  
 
 
                                       
December 31, 2010
                                       
 
                                       
Secured borrowings:
                                       
Municipal tender option bond securitizations
  $ 10,687       7,874       (7,779 )     -       95  
Auto loan securitizations
    154       154       -       -       154  
Commercial real estate loans
    1,321       1,321       (1,272 )     -       49  
Residential mortgage securitizations
    700       618       (436 )     -       182  
 
 
                                       
Total secured borrowings
    12,862       9,967       (9,487 )     -       480  
 
 
                                       
Consolidated VIEs:
                                       
Nonconforming residential mortgage loan securitizations
    14,518       13,529       (6,723 )     -       6,806  
Multi-seller commercial paper conduit
    3,197       3,197       (3,279 )     -       (82 )
Auto loan securitizations
    1,010       1,010       (955 )     -       55  
Structured asset finance
    146       146       (21 )     (11 )     114  
Investment funds
    1,197       1,197       (54 )     (14 )     1,129  
Other (1)
    2,938       2,836       (1,724 )     (69 )     1,043  
 
 
                                       
Total consolidated VIEs
    23,006       21,915       (12,756 )     (94 )     9,065  
 
 
                                       
Total secured borrowings and consolidated VIEs
  $ 35,868       31,882       (22,243 )     (94 )     9,545  
 
 
(1)   Revised to correct previously reported amounts.
      In addition to the transactions included in the table above, at June 30, 2011, we had issued approximately $6.0 billion of private placement debt financing through a consolidated VIE. The issuance is classified as long-term debt in our consolidated financial statements. At June 30, 2011, we had pledged approximately $6.3 billion in loans, $360 million in securities available for sale and $2 million in cash and cash equivalents to collateralize the VIE’s borrowings. Such assets were not transferred to the VIE and accordingly we have excluded the VIE from the previous table.
      We have raised financing through the securitization of certain financial assets in transactions with VIEs accounted for as secured borrowings. We also consolidate VIEs where we are the primary beneficiary. In certain transactions other than the multi-seller commercial paper conduit, we provide contractual support in the form of limited recourse and liquidity to facilitate the remarketing of short-term securities issued to third party investors. Other than this limited contractual support, the assets of the VIEs are the sole source of repayment of the securities held by third parties. The liquidity support we provide to the multi-seller commercial paper conduit ensures timely repayment


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of commercial paper issued by the conduit and is described further below.
NONCONFORMING RESIDENTIAL MORTGAGE LOAN SECURITIZATIONS We have consolidated certain of our nonconforming residential mortgage loan securitizations in accordance with consolidation accounting guidance. We have determined we are the primary beneficiary of these securitizations because we have the power to direct the most significant activities of the entity through our role as primary servicer and also hold variable interests that we have determined to be significant. The nature of our variable interests in these entities may include beneficial interests issued by the VIE, mortgage servicing rights and recourse or repurchase reserve liabilities. The beneficial interests issued by the VIE that we hold include either subordinate or senior securities held in an amount that we consider potentially significant.
MULTI-SELLER COMMERCIAL PAPER CONDUIT We administer a multi-seller asset-based commercial paper conduit that finances certain client transactions. This conduit is a bankruptcy remote entity that makes loans to, or purchases certificated interests, generally from SPEs, established by our clients (sellers) and which are secured by pools of financial assets. The conduit funds itself through the issuance of highly rated commercial paper to third party investors. The primary source of repayment of the commercial paper is the cash flows from the conduit’s assets or the re-issuance of commercial paper upon maturity. The conduit’s assets are structured with deal-specific credit enhancements generally in the form of overcollateralization provided by the seller, but may also include subordinated interests, cash reserve accounts, third party credit support facilities and excess spread capture. The timely repayment of the commercial paper is further supported by asset-specific liquidity facilities in the form of liquidity asset purchase agreements that we provide. Each facility is equal to 102% of the conduit’s funding commitment to a client. The aggregate amount of liquidity must be equal to or greater than all the commercial paper issued by the conduit. At the discretion of the administrator, we may be required to purchase assets from the conduit at par value plus accrued interest or discount on the related commercial paper, including situations where the conduit is unable to issue commercial paper. Par value may be different from fair value.
      We receive fees in connection with our role as administrator and liquidity provider. We may also receive fees related to the structuring of the conduit’s transactions. In 2010, the conduit terminated its subordinated note to a third party investor and repaid all amounts due under the terms of the note agreement. We are the primary beneficiary of the conduit because we have power over the significant activities of the conduit and have a significant variable interest due to our liquidity arrangement.


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Note 8: Mortgage Banking Activities

Mortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, consist of residential and commercial mortgage originations and servicing.
     We apply the amortization method to all commercial and some residential MSRs and apply the fair value method to the other residential MSRs. The changes in MSRs measured using the fair value method were:


                                 
 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2011     2010     2011     2010  
 
Fair value, beginning of period
  $ 15,648       15,544       14,467       16,004  
Adjustments from adoption of consolidation accounting guidance
    -       -       -       (118 )
Servicing from securitizations or asset transfers
    740       943       2,002       1,997  
 
 
                               
Net additions
    740       943       2,002       1,879  
 
 
                               
Changes in fair value:
                               
Due to changes in valuation model inputs or assumptions (1)
    (1,075 )     (2,661 )     (576 )     (3,438 )
Other changes in fair value (2)
    (535 )     (575 )     (1,115 )     (1,194 )
 
 
                               
Total changes in fair value
    (1,610 )     (3,236 )     (1,691 )     (4,632 )
 
 
                               
Fair value, end of period
  $ 14,778       13,251       14,778       13,251  
 
(1)   Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates, and costs to service, including delinquency and foreclosure costs.
 
(2)   Represents changes due to collection/realization of expected cash flows over time.
     The changes in amortized MSRs were:
                                 
 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2011     2010     2011     2010  
 
Balance, beginning of period
  $ 1,432       1,069       1,422       1,119  
Adjustments from adoption of consolidation accounting guidance
    -       -       -       (5 )
Purchases
    36       7       81       8  
Servicing from securitizations or asset transfers
    27       17       56       28  
Amortization
    (63 )     (56 )     (127 )     (113 )
 
 
                               
Balance, end of period (1)
    1,432       1,037       1,432       1,037  
 
 
                               
Valuation allowance:
                               
Balance, beginning of period
    (9 )     -       (3 )     -  
Provision for MSRs in excess of fair value
    (1 )     -       (7 )     -  
 
 
                               
Balance, end of period (2)
    (10 )     -       (10 )     -  
 
 
                               
Amortized MSRs, net
  $ 1,422       1,037       1,422       1,037  
 
 
                               
Fair value of amortized MSRs:
                               
Beginning of period
  $ 1,898       1,283       1,812       1,261  
End of period (3)
    1,805       1,307       1,805       1,307  
 
(1)   Includes $379 million in residential amortized MSRs at June 30, 2011. The June 30, 2010, balance is commercial amortized MSRs. For the quarter and first half of 2011, the residential MSR amortization was $(11) million and $(21) million, respectively.
 
(2)   Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) and non-agency. There was no valuation allowance recorded for the periods presented on the commercial amortized MSRs. Residential amortized MSRs are evaluated for impairment purposes by the following risk strata: Mortgages sold to GSEs (FHLMC and FNMA) and mortgages sold to GNMA, each by interest rate stratifications. A valuation allowance of $10 million was recorded on the residential amortized MSRs at June 30, 2011.
 
(3)   Includes fair value of $410 million in residential amortized MSRs and $1,395 million in commercial amortized MSRs at June 30, 2011.

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     We present the components of our managed servicing portfolio in the following table at unpaid principal balance for
loans serviced and subserviced for others and at book value for owned loans serviced.


                 
 
    June 30,     Dec. 31,  
(in billions)   2011     2010  
 
Residential mortgage servicing:
               
Serviced for others
  $ 1,464       1,429  
Owned loans serviced
    338       371  
Subservicing
    8       9  
 
 
               
Total residential servicing
    1,810       1,809  
 
 
               
Commercial mortgage servicing:
               
Serviced for others
    402       408  
Owned loans serviced
    101       99  
Subservicing
    14       13  
 
 
               
Total commercial servicing
    517       520  
 
 
               
Total managed servicing portfolio
  $ 2,327       2,329  
 
 
               
Total serviced for others
  $ 1,866       1,837  
Ratio of MSRs to related loans serviced for others
    0.87 %     0.86  
 
               
 
     The components of mortgage banking noninterest income were:
                                 
 
    Quarter ended June 30,   Six months ended June 30,  
(in millions)   2011   2010   2011   2010  
 
Servicing income, net:
                               
Servicing fees:
                               
Contractually specified servicing fees
  $ 1,175       1,154       2,320       2,261  
Late charges
    75       88       169       178  
Ancillary fees
    74       111       163       217  
Unreimbursed direct servicing costs (1)
    (222 )     (130 )     (413 )     (380 )
 
 
                               
Net servicing fees
    1,102       1,223       2,239       2,276  
Changes in fair value of MSRs carried at fair value:
                               
Due to changes in valuation model inputs or assumptions (2)
    (1,075 )     (2,661 )     (576 )     (3,438 )
Other changes in fair value (3)
    (535 )     (575 )     (1,115 )     (1,194 )
 
 
                               
Total changes in fair value of MSRs carried at fair value
    (1,610 )     (3,236 )     (1,691 )     (4,632 )
Amortization
    (63 )     (56 )     (127 )     (113 )
Provision for MSRs in excess of fair value
    (1 )           (7 )      
Net derivative gains from economic hedges (4)
    1,449       3,287       1,329       5,053  
 
 
                               
Total servicing income, net
    877       1,218       1,743       2,584  
Net gains on mortgage loan origination/sales activities
    742       793       1,892       1,897  
 
 
                               
Total mortgage banking noninterest income
  $ 1,619       2,011       3,635       4,481  
 
 
                               
Market-related valuation changes to MSRs, net of hedge results (2) + (4)
  $ 374       626       753       1,615  
 
                               
 
(1)   Primarily associated with foreclosure expenses and other interest costs.
 
(2)   Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates and costs to service, including delinquency and foreclosure costs.
 
(3)   Represents changes due to collection/realization of expected cash flows over time.
 
(4)   Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 12 – Free-Standing Derivatives for additional discussion and detail.

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     The table below summarizes the changes in our liability for mortgage loan repurchase losses. This liability is in “Accrued expenses and other liabilities” in our consolidated financial statements and the provision for repurchase losses reduces net gains on mortgage loan origination/sales activities. Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. We maintain regular contact with the GSEs and other significant investors to monitor and address their repurchase demand practices and concerns. Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that are reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss, and is based on currently available information, significant judgment, and a number of assumptions that are subject to change. The high end of this range of reasonably possible losses in excess of our recorded liability was $1.8 billion at June 30, 2011, and was determined based upon modifying the assumptions utilized in our best estimate of probable loss to reflect what we believe to be the high end of reasonably possible adverse assumptions.


                                 
 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2011     2010     2011     2010  
 
Balance, beginning of period
  $ 1,207       1,263       1,289       1,033  
Provision for repurchase losses:
                               
Loan sales
    20       36       55       80  
Change in estimate – primarily due to credit deterioration
    222       346       436       704  
 
 
                               
Total additions
    242       382       491       784  
Losses
    (261 )     (270 )     (592 )     (442 )
 
 
                               
Balance, end of period
  $ 1,188       1,375       1,188       1,375  
 

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Note 9: Intangible Assets
The gross carrying value of intangible assets and accumulated amortization was:
 
                                                 
    June 30, 2011     December 31, 2010  
    Gross             Net     Gross             Net  
    carrying     Accumulated     carrying     carrying     Accumulated     carrying  
(in millions)   value     amortization     value     value     amortization     value  
 
Amortized intangible assets (1):
                                               
MSRs (2)
  $ 2,261       (839 )     1,422       2,131       (712 )     1,419  
Core deposit intangibles
    15,079       (6,980 )     8,099       15,133       (6,229 )     8,904  
Customer relationship and other intangibles
    3,078       (1,376 )     1,702       3,077       (1,230 )     1,847  
 
 
                                               
Total amortized intangible assets
  $ 20,418       (9,195 )     11,223       20,341       (8,171 )     12,170  
 
 
                                               
MSRs (carried at fair value) (2)
  $ 14,778               14,778       14,467               14,467  
Goodwill
    24,776               24,776       24,770               24,770  
Trademark
    14               14       14               14  
 
                                               
 
(1)   Excludes fully amortized intangible assets.
 
(2)   See Note 8 for additional information on MSRs.
     We based our projections of amortization expense shown below on existing asset balances at June 30, 2011. Future amortization expense may vary from these projections.
     The following table provides the current year and estimated future amortization expense for amortized intangible assets.
 
                                 
                    Customer        
            Core     relationship        
    Amortized     deposit     and other        
(in millions)   MSRs     intangibles     intangibles     Total  
 
Six months ended June 30, 2011 (actual)
  $ 127       806       146       1,079  
 
 
                               
Estimate for the remainder of 2011
  $ 127       787       142       1,056  
Estimate for year ended December 31,
                               
2012
    235       1,396       270       1,901  
2013
    197       1,241       250       1,688  
2014
    169       1,113       234       1,516  
2015
    152       1,022       212       1,386  
2016
    116       919       202       1,237  
 
                               
 

     For our goodwill impairment analysis, we allocate all of the goodwill to the individual operating segments. We identify reporting units that are one level below an operating segment (referred to as a component), and distinguish these reporting units based on how the segments and components are managed, taking into consideration the economic characteristics, nature of
the products and customers of the components. We allocate goodwill to reporting units based on relative fair value, using certain performance metrics. See Note 17 for further information on management reporting.
     The following table shows the allocation of goodwill to our operating segments for purposes of goodwill impairment testing.


                                 
 
                    Wealth,        
    Community     Wholesale     Brokerage and     Consolidated  
(in millions)   Banking     Banking     Retirement     Company  
 
 
                               
December 31, 2009
  $ 17,974       6,465       373       24,812  
Goodwill from business combinations
    -       8       -       8  
 
 
                               
June 30, 2010
  $ 17,974       6,473       373       24,820  
 
 
                               
December 31, 2010
  $ 17,922       6,475       373       24,770  
Reduction in goodwill related to divested businesses
    -       (6 )     -       (6 )
Goodwill from business combinations
    -       12       -       12  
 
 
                               
June 30, 2011
  $ 17,922       6,481       373       24,776  
 
 
                               

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Note 10: Guarantees, Pledged Assets and Collateral
 
Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of standby letters of credit, securities lending and other indemnifications, liquidity agreements,
written put options, recourse obligations, residual value guarantees, and contingent consideration. The following table shows carrying value, maximum exposure to loss on our guarantees and the amount with a higher risk of performance.


 
                                                 
    June 30, 2011   December 31, 2010
 
            Maximum   Non-           Maximum   Non-
 
    Carrying   exposure   investment   Carrying   exposure   investment
 
(in millions)   value   to loss   grade   value   to loss   grade
 
 
                                               
Standby letters of credit
  $ 107       41,817       20,595       142       42,159       19,596  
Securities lending and other indemnifications
    17       8,378       1,969       45       13,645       3,993  
Liquidity agreements (1)
    -       1       1       -       49       1  
Written put options (1)(2)
    843       8,066       2,289       747       8,134       2,615  
Loans and MHFS sold with recourse
    113       5,925       3,763       119       5,474       3,564  
Residual value guarantees
    8       197       -       8       197       -  
Contingent consideration
    21       95       93       23       118       116  
Other guarantees
    2       151       1       -       73       -  
 
 
                                               
Total guarantees
  $ 1,111       64,630       28,711       1,084       69,849       29,885  
 
(1)   Certain of these agreements included in this table are related to off-balance sheet entities and, accordingly, are also disclosed in Note 7.
(2)   Written put options, which are in the form of derivatives, are also included in the derivative disclosures in Note 12.
“Maximum exposure to loss” and “Non-investment grade” are required disclosures under GAAP. Non-investment grade represents those guarantees on which we have a higher risk of being required to perform under the terms of the guarantee. If the underlying assets under the guarantee are non-investment grade (that is, an external rating that is below investment grade or an internal credit default grade that is equivalent to a below investment grade external rating), we consider the risk of performance to be high. Internal credit default grades are determined based upon the same credit policies that we use to evaluate the risk of payment or performance when making loans and other extensions of credit. These credit policies are more fully described in Note 5.
     Maximum exposure to loss represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite what we believe is its extremely remote possibility, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss. We believe the carrying value, which is either fair value for derivative related products or the allowance for lending related commitments, is more representative of our exposure to loss than maximum exposure to loss.
STANDBY LETTERS OF CREDIT We issue standby letters of credit, which include performance and financial guarantees, for customers in connection with contracts between our customers and third parties. Standby letters of credit are agreements where we are obligated to make payment to a third party on behalf of a customer in the event the customer fails to meet their contractual obligations. We consider the credit risk in standby letters of credit and commercial and similar letters of credit in determining the allowance for credit losses.
SECURITIES LENDING AND OTHER INDEMNIFICATIONS As a securities lending agent, we lend securities from participating institutional clients’ portfolios to third-party borrowers. We indemnify our clients against default by the borrower in returning these lent securities. This indemnity is supported by collateral received from the borrowers. Collateral is generally in the form of cash or highly liquid securities that are marked to market daily. There was $8.5 billion at June 30, 2011, and $14.0 billion at December 31, 2010, in collateral supporting loaned securities with values of $8.4 billion and $13.6 billion, respectively.
     We enter into other types of indemnification agreements in the ordinary course of business under which we agree to indemnify third parties against any damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with us. These relationships or transactions include those arising from service as a director or officer of the Company, underwriting agreements relating to our securities, acquisition agreements and various other business transactions or arrangements. Because the extent of our obligations under these agreements depends entirely upon the occurrence of future events, our potential future liability under these agreements we are unable to determine. We do, however, record a liability for residential mortgage loans that we may have to repurchase pursuant to various representations and warranties. See Note 8 for additional information on the liability for mortgage loan repurchase losses.
LIQUIDITY AGREEMENTS We provide liquidity facilities on all commercial paper issued by the conduit we administer. We also provide liquidity to certain off-balance sheet entities that hold securitized fixed-rate municipal bonds and consumer or commercial assets that are partially funded with the issuance of


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money market and other short-term notes. See Note 7 for additional information on these arrangements.
WRITTEN PUT OPTIONS Written put options are contracts that give the counterparty the right to sell to us an underlying instrument held by the counterparty at a specified price, and include options, floors, caps and credit default swaps. These written put option contracts generally permit net settlement. While these derivative transactions expose us to risk in the event the option is exercised, we manage this risk by entering into offsetting trades or by taking short positions in the underlying instrument. We offset substantially all put options written to customers with purchased options. Additionally, for certain of these contracts, we require the counterparty to pledge the underlying instrument as collateral for the transaction. Our ultimate obligation under written put options is based on future market conditions and is only quantifiable at settlement. See Note 7 for additional information regarding transactions with VIEs and Note 12 for additional information regarding written derivative contracts.
LOANS AND MHFS SOLD WITH RECOURSE In certain loan sales or securitizations, we provide recourse whereby we are required to indemnify the buyer for any loss on the loan up to par value plus accrued interest. We provide recourse, predominantly to the GSEs, on loans sold under various programs and arrangements. Primarily all of these programs and arrangements require that we share in the loans’ credit exposure for their remaining life by providing recourse to the GSE in the event of borrower default, up to 33.33% of actual losses incurred on a pro-rata basis. Under the remaining recourse programs and arrangements, if certain events occur within a specified period of time from transfer date, we have to provide limited recourse to the buyer to indemnify them for losses incurred for the remaining life of the loans. The maximum exposure to loss reported in the accompanying table represents the outstanding principal balance of the loans sold or securitized that are subject to recourse provisions or the maximum losses per the contractual agreements. However, we believe, the likelihood of loss of the entire balance due to these recourse agreements is remote and amounts paid can be recovered in whole or in part from the sale of collateral. In second quarter 2011, we repurchased $9 million of loans associated with these agreements. We also provide representation and warranty guarantees on loans sold under the various recourse programs and arrangements. Our loss exposure relative to these guarantees is separately considered and provided for, as necessary, in determination of our liability for loan repurchases due to breaches of representations and warranties. See Note 8 for additional information on the liability for mortgage loan repurchase losses.
RESIDUAL VALUE GUARANTEES We have provided residual value guarantees as part of certain leasing transactions of corporate assets. At June 30, 2011, the only remaining residual value guarantee is related to a leasing transaction on certain corporate buildings. The lessors in these leases are generally large financial institutions or their leasing subsidiaries. These guarantees protect the lessor from loss on sale of the related
asset at the end of the lease term. To the extent that a sale of the leased assets results in proceeds less than a stated percent (generally 80% to 89%) of the asset’s cost, we would be required to reimburse the lessor under our guarantee.
CONTINGENT CONSIDERATION In connection with certain brokerage, asset management, insurance agency and other acquisitions we have made, the terms of the acquisition agreements provide for deferred payments or additional consideration, based on certain performance targets.
     We have entered into various contingent performance guarantees through credit risk participation arrangements. Under these agreements, if a customer defaults on its obligation to perform under certain credit agreements with third parties, we will be required to make payments to the third parties.
Pledged Assets and Collateral
As part of our liquidity management strategy, we pledge assets to secure trust and public deposits, borrowings from the FHLB and FRB and for other purposes as required or permitted by law. The following table provides pledged loans and securities available for sale where the secured party does not have the right to sell or repledge the collateral. At June 30, 2011, and December 31, 2010, we did not pledge any loans or securities available for sale where the secured party has the right to sell or repledge the collateral. The table excludes pledged assets related to VIEs, which can only be used to settle the liabilities of those entities. See Note 7 for additional information on consolidated VIE assets.
 
                 
    June 30,     Dec. 31,  
 
(in millions)   2011     2010  
 
 
Securities available for sale
  $ 87,926       94,212  
 
Loans
    285,411       312,602  
 
 
Total
  $ 373,337       406,814  
 
     We also pledge certain financial instruments that we own to collateralize repurchase agreements and other securities financings. The types of collateral we pledge include securities issued by federal agencies, government-sponsored entities (GSEs), and domestic and foreign companies. We pledged $28.2 billion at June 30, 2011, and $27.3 billion at December 31, 2010, under agreements that permit the secured parties to sell or repledge the collateral. Pledged collateral where the secured party cannot sell or repledge was $4.4 billion and $5.9 billion at the same period ends, respectively.
     We receive collateral from other entities under resale agreements and securities borrowings. We received $20.6 billion at June 30, 2011, and $22.5 billion at December 31, 2010, for which we have the right to sell or repledge the collateral. These amounts include securities we have sold or repledged to others with a fair value of $19.7 billion at June 30, 2011, and $14.6 billion at December 31, 2010.


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Note 11: Legal Actions
 
The following supplements and amends our discussion of certain matters previously reported in Item 3 (Legal Proceedings) of our 2010 Form 10-K, and Part II, Item 1 (Legal Proceedings) of our 2011 first quarter Quarterly Report on Form 10-Q for events occurring in second quarter 2011.
ELAVON LITIGATION On May 23, 2011, the Court entered an order granting plaintiff’s motion for partial summary judgment and denying Wells Fargo’s motion for partial summary judgment, ruling that Wells Fargo’s termination of the contract at issue was invalid and dismissing several of Wells Fargo’s affirmative defenses. The Court has set a trial date of the remaining issues for September 21, 2011.
ERISA LITIGATION The U.S. District Court for the District of Minnesota is considering final approval of the $17.5 million settlement in Figas v. Wells Fargo & Company, et al.
IN RE WELLS FARGO MORTGAGE-BACKED CERTIFICATES LITIGATION On May 27, 2011, Wells Fargo and the plaintiffs agreed to settle the matter captioned In re Wells Fargo Mortgage-Backed Securities Litigation for $125 million. On July 26, 2011, the Court entered an order preliminarily approving the settlement.
     On April 20, 2011, a case captioned Federal Home Loan of Boston v. Ally Financial, Inc., et al., was filed in the Superior Court of the Commonwealth of Massachusetts for the County of Suffolk. The case names, among a large number of parties, Wells Fargo & Company, Wells Fargo Asset Securitization Corporation and Wells Fargo Bank, National Association as parties and contains allegations substantially similar to the cases filed by the other Federal Home Loan Banks.
     On April 28, 2011, a case captioned The Union Central Life Insurance Company, et al. v. Credit Suisse First Boston Securities Corp., et al., was filed in the U.S. District Court for the Southern District of New York. Among other defendants, it names Wells Fargo Asset Securitization Corporation and Wells Fargo Bank, National Association. The case asserts various state law fraud claims and claims for violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of three insurance companies, relating to offerings of mortgage-backed securities from 2005 through 2007.
     In addition, there are other cases involving other issuers of mortgage-backed certificates where Wells Fargo may have indemnity obligations because the pools of mortgages backing the certificates contain mortgages originated by Wells Fargo.
MORTGAGE RELATED REGULATORY INVESTIGATIONS On March 31, 2011, Wells Fargo Bank, N.A. (the Bank) entered into a Consent Order with the Office of the Comptroller of the Currency (OCC) under which the OCC made certain findings in connection with the Bank’s foreclosure practices, which findings the Bank neither admitted nor denied. The Bank agreed in the consent order, among other things, and subject to the OCC’s approval (i) to establish a Compliance Committee to monitor and coordinate the Bank’s compliance with the Consent Order;
(ii) to create a comprehensive Action Plan describing the actions needed to achieve compliance with the Consent Order; (iii) to submit an acceptable compliance plan to ensure that its mortgage servicing and foreclosure operations, including loss mitigation and loan modification, comply with legal requirements, OCC supervisory guidance, and the terms of the Consent Order; (iv) to submit a plan to ensure appropriate controls and oversight of the Bank’s activities with respect to the Mortgage Electronic Registration System; (v) to take certain other actions with respect to its mortgage servicing and foreclosure operations; and (vi) to conduct a foreclosure review through an independent consultant on certain residential foreclosure actions. On April 4, 2011, Wells Fargo & Company (Wells Fargo) entered into a Consent Order with the Board of Governors of the Federal Reserve pursuant to which Wells Fargo agreed, among other things, (i) to ensure the Bank’s compliance with the OCC Consent Order; (ii) to develop for the Federal Reserve’s approval a written plan to enhance its Enterprise Risk Management with respect to oversight of residential mortgage loan servicing; (iii) to develop for the Federal Reserve’s approval a written plan to enhance its enterprise-wide compliance program with respect to oversight of residential mortgage loan servicing; and (iv) to develop for the Federal Reserve’s approval a written plan to enhance the internal audit program with respect to residential mortgage loan servicing. Neither Consent Order provided for civil money penalties but both government entities reserved the ability to seek such penalties and Wells Fargo reserved the ability to oppose the imposition of such penalties.
     On July 20, 2011, Wells Fargo & Company and Wells Fargo Financial, Inc. entered into an Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent (the “Order”) with the Board of Governors of the Federal Reserve System (FRB) which resolved an investigation of Wells Fargo Financial’s mortgage lending activities by the FRB. The Order provides, among other things, that (i) Wells Fargo shall submit to the FRB within 90 days of the Order a plan, acceptable to the FRB, for overseeing fraud prevention and detection and for compliance with certain federal and state laws applicable to unfair and deceptive practices and certain other laws applicable to mortgage lending; (ii) Wells Fargo shall submit to the FRB within 90 days of the Order a plan, acceptable to the FRB, for overseeing the implementation and modification of incentive compensation and performance management programs for sales, sales management and underwriting personnel with respect to mortgage lending within the Wells Fargo organization; (iii) Wells Fargo shall submit within 90 days of the Order a plan, acceptable to the FRB, for the remediation to


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borrowers who entered into loans with Wells Fargo Financial beginning January 1, 2004 through September 2008 where the loans were based on income documents that were altered or falsified by sales personnel; (iv) Wells Fargo shall submit within 90 days of the Order a plan, acceptable to the FRB, for the remediation to borrowers who received mortgage loans through Wells Fargo Financial at non-prime prices during the period from January 1, 2006 through September 2008 but whose mortgage loans may have qualified for prime pricing. In addition to these provisions to submit plans for compliance and compensation changes and for remediation payments to certain Wells Fargo Financial borrowers, the Order imposes a civil money penalty of $85 million on Wells Fargo.
     Other government agencies, including state attorneys general and the U.S. Department of Justice, continue to investigate various mortgage related practices of the Bank. These investigations could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs in responding to governmental investigations and additional litigation.
WACHOVIA EQUITY SECURITIES AND BONDS/NOTES LITIGATION The plaintiffs in the In re Wachovia Equity Securities Litigation and the Stichting Pensioenfords ABP, FC Holdings AB, Deka Investments GmbH and Forsta AP-Fonden cases have appealed the March 31, 2011 Decision and Order dismissing their cases.
     Wells Fargo and the plaintiffs have agreed in principle to settle the In re Wachovia Preferred Securities and Bond/Notes Litigation for $590 million. The proposed settlement is subject to Court approval. The proposed settlement amount has been reflected in Wells Fargo’s financial statements and will not have a material adverse effect on Wells Fargo’s consolidated financial position.
OUTLOOK The Company establishes a liability for contingent litigation losses when it determines that a potential loss is both probable and estimable. In addition, for significant matters, the Company determines a range of potential loss that is reasonably possible. The high end of the range of reasonably possible potential litigation losses in excess of the Company’s liability for probable and estimable losses was $1.6 billion as of June 30, 2011. For these matters and others where an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses in excess of the established liability that cannot be estimated. Based on information currently available, advice of counsel, available insurance coverage and established reserves, Wells Fargo believes that the eventual outcome of the actions against Wells Fargo and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material adverse effect on Wells Fargo’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to Wells Fargo’s results of operations for any particular period.


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Note 12: Derivatives
 
We use derivatives to manage exposure to market risk, interest rate risk, credit risk and foreign currency risk, to generate profits from proprietary trading and to assist customers with their risk management objectives. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged, but is used only as the basis on which interest and other payments are determined.
     Our asset/liability management approach to interest rate, foreign currency and certain other risks includes the use of derivatives. Such derivatives are typically designated as fair value or cash flow hedges, or economic hedge derivatives for those that do not qualify for hedge accounting. This helps minimize significant, unplanned fluctuations in earnings, fair values of assets and liabilities, and cash flows caused by interest rate, foreign currency and other market value volatility. This approach involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates, foreign currency and other exposures do not have a significant adverse effect on the net interest margin, cash flows and earnings. As a result of fluctuations in these exposures, hedged assets and liabilities will gain or lose market value. In a fair value or economic hedge, the effect of this unrealized gain or loss will generally be offset by the gain or loss on the derivatives linked to the hedged assets and liabilities. In a cash flow hedge, where we manage the variability of cash payments due to interest rate fluctuations by the effective use of derivatives linked to hedged assets and liabilities, the unrealized gain or loss on the derivatives or the hedged asset or liability is generally not reflected in earnings.
     We also offer various derivatives, including interest rate, commodity, equity, credit and foreign exchange contracts, to our customers but usually offset our exposure from such contracts by purchasing other financial contracts. The customer accommodations and any offsetting financial contracts are treated as free-standing derivatives. Free-standing derivatives also include derivatives we enter into for risk management that do not otherwise qualify for hedge accounting, including economic hedge derivatives. To a lesser extent, we take positions based on market expectations or to benefit from price differentials between financial instruments and markets. Additionally, free-standing derivatives include embedded derivatives that are required to be separately accounted for from their host contracts.
     The following table presents the total notional or contractual amounts and fair values for derivatives, the fair values of derivatives designated as qualifying hedge contracts, which are used as asset/liability management hedges, and free-standing derivatives (economic hedges) not designated as hedging instruments that are recorded on the balance sheet in other assets or other liabilities. Customer accommodation, trading and other free-standing derivatives are recorded on the balance sheet at fair value in trading assets or other liabilities.


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    June 30, 2011     December 31, 2010  
    Notional or     Fair value     Notional or     Fair value  
    contractual     Asset     Liability     contractual     Asset     Liability  
(in millions)   amount     derivatives     derivatives     amount     derivatives     derivatives  
 
Qualifying hedge contracts
                                               
Interest rate contracts (1)
  $ 96,071       6,495       1,556       110,314       7,126       1,614  
Foreign exchange contracts
    25,437       1,939       545       25,904       1,527       727  
                         
Total derivatives designated as qualifying hedging instruments
            8,434       2,101               8,653       2,341  
                         
Derivatives not designated as hedging instruments
                                               
Free-standing derivatives (economic hedges):
                                               
Interest rate contracts (2)
    292,787       1,076       1,050       408,563       2,898       2,625  
Equity contracts
    -       -       -       176       -       46  
Foreign exchange contracts
    6,045       35       83       5,528       23       53  
Credit contracts — protection purchased
    145       4       -       396       80       -  
Other derivatives
    2,524       1       34       2,538       -       35  
                         
Subtotal
            1,116       1,167               3,001       2,759  
                         
Customer accommodation, trading and other
                                               
free-standing derivatives:
                                               
Interest rate contracts
    2,859,012       55,599       56,975       2,809,387       58,225       59,329  
Commodity contracts
    91,410       4,808       3,974       83,114       4,133       3,918  
Equity contracts
    71,179       3,691       3,846       73,278       3,272       3,450  
Foreign exchange contracts
    146,093       3,035       2,596       110,889       2,800       2,682  
Credit contracts — protection sold
    44,536       569       5,257       47,699       605       5,826  
Credit contracts — protection purchased
    42,371       4,074       526       44,776       4,661       588  
Other derivatives
    -       -       -       190       8       -  
                         
Subtotal
            71,776       73,174               73,704       75,793  
                         
Total derivatives not designated as hedging instruments
            72,892       74,341               76,705       78,552  
                         
Total derivatives before netting
            81,326       76,442               85,358       80,893  
                         
Netting (3)
            (58,561 )     (65,082 )             (63,469 )     (70,009 )
                         
Total
          $ 22,765       11,360               21,889       10,884  
 
(1)   Notional amounts presented exclude $20.1 billion at June 30, 2011, and $20.9 billion at December 31, 2010, of basis swaps that are combined with receive fixed-rate/pay floating-rate swaps and designated as one hedging instrument.
 
(2)   Includes free-standing derivatives (economic hedges) used to hedge the risk of changes in the fair value of residential MSRs, MHFS and other interests held.
 
(3)   Represents netting of derivative asset and liability balances, and related cash collateral, with the same counterparty subject to master netting arrangements. The amount of cash collateral netted against derivative assets and liabilities was $6.1 billion and $12.6 billion, respectively, at June 30, 2011, and $5.5 billion and $12.1 billion, respectively, at December 31, 2010.

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Note 12: Derivatives (continued)
Fair Value Hedges
We use interest rate swaps to convert certain of our fixed-rate long-term debt and CDs to floating rates to hedge our exposure to interest rate risk. We also enter into cross-currency swaps, cross-currency interest rate swaps and forward contracts to hedge our exposure to foreign currency risk and interest rate risk associated with the issuance of non-U.S. dollar denominated long-term debt. In addition, we use interest rate swaps and forward contracts to hedge against changes in fair value of certain investments in available-for-sale debt securities due to changes in interest rates, foreign currency rates, or both. The entire derivative gain or loss is included in the assessment of hedge effectiveness for all fair value hedge relationships, except for those involving foreign-currency denominated securities available for sale and long-term debt hedged with foreign currency forward derivatives for which the component of the
derivative gain or loss related to the changes in the difference between the spot and forward price is excluded from the assessment of hedge effectiveness.
     We use statistical regression analysis to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset or liability being hedged due to changes in the hedged risk(s). The assessment includes an evaluation of the quantitative measures of the regression results used to validate the conclusion of high effectiveness.
     The following table shows the net gains (losses) recognized in the income statement related to derivatives in fair value hedging relationships.


 
                                         
                                    Total net  
    Interest rate     Foreign exchange     gains  
    contracts hedging:     contracts hedging:     (losses)  
    Securities             Securities             on fair  
    available     Long-term     available     Long-term     value  
(in millions)   for sale     debt     for sale     debt     hedges  
 
Quarter ended June 30, 2011
                                       
Gains (losses) recorded in net interest income
  $ (107 )     437       (3 )     105       432  
 
 
                                       
Gains (losses) recorded in noninterest income
                                       
Recognized on derivatives
    (280 )     736       11       515       982  
Recognized on hedged item
    279       (709 )     (18 )     (512 )     (960 )
 
Recognized on fair value hedges (ineffective portion) (1)
  $ (1 )     27       (7 )     3       22  
 
 
                                       
Quarter ended June 30, 2010
                                       
Gains (losses) recorded in net interest income
  $ (94 )     527       (1 )     87       519  
 
 
                                       
Gains (losses) recorded in noninterest income
                                       
Recognized on derivatives
    (642 )     1,744       70       (1,769 )     (597 )
Recognized on hedged item
    650       (1,626 )     (70 )     1,778       732  
 
Recognized on fair value hedges (ineffective portion) (1)
  $ 8       118       -       9       135  
 
 
                                       
Six months ended June 30, 2011
                                       
Gains (losses) recorded in net interest income
  $ (213 )     851       (4 )     195       829  
 
 
                                       
Gains (losses) recorded in noninterest income
                                       
Recognized on derivatives
    (111 )     91       46       1,595       1,621  
Recognized on hedged item
    42       (87 )     (51 )     (1,629 )     (1,725 )
 
Recognized on fair value hedges (ineffective portion) (1)
  $ (69 )     4       (5 )     (34 )     (104 )
 
 
                                       
Six months ended June 30, 2010
                                       
Gains (losses) recorded in net interest income
  $ (188 )     1,058       (2 )     184       1,052  
 
 
                                       
Gains (losses) recorded in noninterest income
                                       
Recognized on derivatives
    (768 )     2,276       189       (2,905 )     (1,208 )
Recognized on hedged item
    785       (2,143 )     (189 )     2,932       1,385  
 
Recognized on fair value hedges (ineffective portion) (1)
  $ 17       133       -       27       177  
 
 
(1)   The second quarter and first half of 2011 included $22 million and $30 million, respectively, and the second quarter and first half of 2010 included nil and $1 million, respectively, of gains (losses) on forward derivatives hedging foreign currency securities available for sale and long-term debt, representing the portion of derivatives gains (losses) excluded from the assessment of hedge effectiveness (time value).

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Cash Flow Hedges
We hedge floating-rate debt against future interest rate increases by using interest rate swaps, caps, floors and futures to limit variability of cash flows due to changes in the benchmark interest rate. We also use interest rate swaps and floors to hedge the variability in interest payments received on certain floating-rate commercial loans, due to changes in the benchmark interest rate. Gains and losses on derivatives that are reclassified from cumulative OCI to current period earnings are included in the line item in which the hedged item’s effect on earnings is recorded. All parts of gain or loss on these derivatives are included in the assessment of hedge effectiveness. We assess hedge effectiveness using regression analysis, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic changes in cash flows of the hedging instrument against the periodic
changes in cash flows of the forecasted transaction being hedged due to changes in the hedged risk(s). The assessment includes an evaluation of the quantitative measures of the regression results used to validate the conclusion of high effectiveness.
     Based upon current interest rates, we estimate that $323 million of deferred net gains on derivatives in OCI at June 30, 2011, will be reclassified as earnings during the next twelve months, compared with $367 million at December 31, 2010. Future changes to interest rates may significantly change actual amounts reclassified to earnings. We are hedging our exposure to the variability of future cash flows for all forecasted transactions for a maximum of 7 years for both hedges of floating-rate debt and floating-rate commercial loans.
     The following table shows the net gains (losses) recognized related to derivatives in cash flow hedging relationships.


                                 
 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2011     2010     2011     2010  
 
Gains (losses) (after tax) recognized in OCI on derivatives
  $ (84 )     190       (83 )     349  
Gains (pre tax) reclassified from cumulative OCI into net interest income
    157       186       313       328  
Gains (losses) (pre tax) recognized in noninterest income on derivatives (1)
    -       (1 )     (2 )     6  
 
 
(1)   None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness.

Free-Standing Derivatives
We use free-standing derivatives (economic hedges), in addition to debt securities available for sale, to hedge the risk of changes in the fair value of residential MSRs measured at fair value, certain residential MHFS, derivative loan commitments and other interests held. The resulting gain or loss on these economic hedges is reflected in other income.
     The derivatives used to hedge these MSRs measured at fair value, which include swaps, swaptions, forwards, Eurodollar and Treasury futures and options contracts, resulted in net derivative gains of $1.4 billion and $1.3 billion, respectively, in the second quarter and first half of 2011 and net derivative gains of $3.3 billion and $5.1 billion, respectively, in the same periods of 2010, which are included in mortgage banking noninterest income. The aggregate fair value of these derivatives was a net asset of $359 million at June 30, 2011, and a net liability of $943 million at December 31, 2010. Changes in fair value of debt securities available for sale (unrealized gains and losses) are not included in servicing income, but are reported in cumulative OCI (net of tax) or, upon sale, are reported in net gains (losses) on debt securities available for sale.
     Interest rate lock commitments for residential mortgage loans that we intend to sell are considered free-standing derivatives. Our interest rate exposure on these derivative loan commitments, as well as substantially all residential MHFS, is hedged with free-standing derivatives (economic hedges) such as forwards and options, Eurodollar futures and options, and Treasury futures, forwards and options contracts. The commitments, free-standing derivatives and residential MHFS are carried at fair value with changes in fair value included in mortgage banking noninterest income. For the fair value measurement of interest rate lock commitments we include, at
inception and during the life of the loan commitment, the expected net future cash flows related to the associated servicing of the loan. Fair value changes subsequent to inception are based on changes in fair value of the underlying loan resulting from the exercise of the commitment and changes in the probability that the loan will not fund within the terms of the commitment (referred to as a fall-out factor). The value of the underlying loan is affected primarily by changes in interest rates and the passage of time. However, changes in investor demand can also cause changes in the value of the underlying loan value that cannot be hedged. The aggregate fair value of derivative loan commitments in the balance sheet was a net liability of $48 million at June 30, 2011, and $271 million at December 31, 2010, and is included in the caption “Interest rate contracts” under “Customer accommodation, trading and other free-standing derivatives” in the first table in this Note.
     We also enter into various derivatives primarily to provide derivative products to customers. To a lesser extent, we take positions based on market expectations or to benefit from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities in the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. We also enter into free-standing derivatives for risk management that do not otherwise qualify for hedge accounting. They are carried at fair value with changes in fair value recorded as part of other noninterest income.
     Free-standing derivatives also include embedded derivatives that are required to be accounted for separate from their host contract. We periodically issue hybrid long-term notes and CDs where the performance of the hybrid instrument notes is linked to an equity, commodity or currency index, or basket of such


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Note 12: Derivatives (continued)
indices. These notes contain explicit terms that affect some or all of the cash flows or the value of the note in a manner similar to a derivative instrument and therefore are considered to contain an “embedded” derivative instrument. The indices on which the performance of the hybrid instrument is calculated are not clearly and closely related to the host debt instrument. The “embedded” derivative is separated from the host contract and accounted for as a free-standing derivative. Additionally, we may invest in hybrid instruments that contain embedded derivatives,
such as credit derivatives, that are not clearly and closely related to the host contract. In such instances, we either elect fair value option for the hybrid instrument or separate the embedded derivative from the host contract and account for the host contract and derivative separately.
      The following table shows the net gains recognized in the income statement related to derivatives not designated as hedging instruments.


                                 
 
 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2011     2010     2011     2010  
 
 
Gains (losses) recognized on free-standing derivatives (economic hedges):
                               
Interest rate contracts (1)
                               
Recognized in noninterest income:
                               
Mortgage banking
  $ 198       757       251       1,425  
Other
    (31 )     (30 )     (20 )     (36 )
Foreign exchange contracts (2)
    (105 )     69       (369 )     145  
Equity contracts (2)
    (5 )     -       (5 )     -  
Credit contracts (2)
    (3 )     (36 )     (8 )     (125 )
 
 
Subtotal
    54       760       (151 )     1,409  
 
Gains (losses) recognized on customer accommodation, trading and other free-standing derivatives:
                               
Interest rate contracts (3)
                               
Recognized in noninterest income:
                               
Mortgage banking
    759       1,644       1,159       2,547  
Other
    94       (154 )     290       165  
Commodity contracts (4)
    116       13       101       33  
Equity contracts (4)
    639       495       477       449  
Foreign exchange contracts (4)
    125       148       307       266  
Credit contracts (4)
    91       (58 )     44       (488 )
Other (4)
    (8 )     (12 )     (1 )     (19 )
 
 
Subtotal
    1,816       2,076       2,377       2,953  
 
 
Net gains recognized related to derivatives not designated as hedging instruments
  $ 1,870       2,836       2,226       4,362  
 
 
(1)   Predominantly mortgage banking noninterest income including gains (losses) on the derivatives used as economic hedges of MSRs measured at fair value, interest rate lock commitments and mortgages held for sale.
 
(2)   Predominantly included in other noninterest income.
 
(3)   Predominantly mortgage banking noninterest income including gains (losses) on interest rate lock commitments.
 
(4)   Predominantly included in net gains from trading activities in noninterest income.

Credit Derivatives
We use credit derivatives to manage exposure to credit risk related to lending and investing activity and to assist customers with their risk management objectives. This may include protection sold to offset purchased protection in structured product transactions, as well as liquidity agreements written to special purpose vehicles. The maximum exposure of sold credit derivatives is managed through posted collateral, purchased credit derivatives and similar products in order to achieve our desired credit risk profile. This credit risk management provides an ability to recover a significant portion of any amounts that would be paid under the sold credit derivatives. We would be required to perform under the noted credit derivatives in the event of default by the referenced obligors. Events of default include events such as bankruptcy, capital restructuring or lack of principal and/or interest payment. In certain cases, other triggers may exist, such as the credit downgrade of the referenced obligors or the inability of the special purpose vehicle for which we have provided liquidity to obtain funding.


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The following table provides details of sold and purchased credit derivatives.
                                                         
 
 
                                                       
            Notional amount        
                    Protection     Protection                    
                    sold -     purchased     Net              
                    non-     with     protection     Other        
    Fair value     Protection     investment     identical     sold     protection     Range of  
(in millions)   liability     sold (A)     grade     underlyings (B)     (A) - (B)     purchased     maturities  
 
 
                                                       
June 30, 2011
                                                       
Credit default swaps on:
                                                       
Corporate bonds
  $ 676       28,736       16,501       15,775       12,961       10,194       2011-2021  
Structured products
    3,826       5,499       5,015       4,765       734       2,383       2016-2056  
Credit protection on:
                                                       
Default swap index
    15       3,440       1,094       2,425       1,015       1,146       2011-2017  
Commercial mortgage- backed securities index
    641       1,564       499       750       814       678       2049-2052  
Asset-backed securities index
    89       99       99       10       89       130       2037-2046  
Loan deliverable credit default swaps
    1       491       467       379       112       266       2012-2016  
Other
    9       4,707       4,412       134       4,573       3,328       2011-2056  
         
 
                                                       
Total credit derivatives
  $ 5,257       44,536       28,087       24,238       20,298       18,125          
 
 
                                                       
December 31, 2010
                                                       
Credit default swaps on:
                                                       
Corporate bonds
  $ 810       30,445       16,360       17,978       12,467       9,440       2011-2020  
Structured products
    4,145       5,825       5,246       4,948       877       2,482       2016-2056  
Credit protection on:
                                                       
Default swap index
    12       2,700       909       2,167       533       1,106       2011-2017  
Commercial mortgage-backed securities index
    717       1,977       612       924       1,053       779       2049-2052  
Asset-backed securities index
    128       144       144       46       98       142       2037-2046  
Loan deliverable credit default swaps
    2       481       456       391       90       261       2011-2014  
Other
    12       6,127       5,348       41       6,086       2,745       2011-2056  
         
 
                                                       
Total credit derivatives
  $ 5,826       47,699       29,075       26,495       21,204       16,955          
 

      Protection sold represents the estimated maximum exposure to loss that would be incurred under an assumed hypothetical circumstance, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. We believe this hypothetical circumstance to be an extremely remote possibility and accordingly, this required disclosure is not an indication of expected loss. The amounts under non-investment grade represent the notional amounts of those credit derivatives on which we have a higher risk of being required to perform under the terms of the credit derivative and are a function of the underlying assets.
      We consider the risk of performance to be high if the underlying assets under the credit derivative have an external rating that is below investment grade or an internal credit default grade that is equivalent thereto. We believe the net protection sold, which is representative of the net notional amount of protection sold and purchased with identical underlyings, in combination with other protection purchased, is more representative of our exposure to loss than either non-investment grade or protection sold. Other protection purchased represents additional protection, which may offset the exposure to loss for protection sold, that was not purchased with an identical underlying of the protection sold.


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Note 12: Derivatives (continued)

Credit-Risk Contingent Features
Certain of our derivative contracts contain provisions whereby if the credit rating of our debt, based on certain major credit rating agencies indicated in the relevant contracts, were to fall below investment grade, the counterparty could demand additional collateral or require termination or replacement of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position was $13.9 billion at June 30, 2011, and $12.6 billion at December 31, 2010, respectively, for which we posted $12.8 billion and $12.0 billion, respectively, in collateral in the normal course of business. If the credit-risk-related contingent features underlying these agreements had been triggered on June 30, 2011, or December 31, 2010, we would have been required to post additional collateral of $1.5 billion or $1.0 billion, respectively, or potentially settle the contract in an amount equal to its fair value.
Counterparty Credit Risk
By using derivatives, we are exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset on our balance sheet. The amounts reported as a derivative asset are derivative contracts in a gain position, and to the extent subject to master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. To the extent the master netting arrangements and other criteria meet the applicable requirements, derivatives balances and related cash collateral amounts are shown net in the balance sheet. Counterparty credit risk related to derivatives is considered in determining fair value and our assessment of hedge effectiveness.


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Note 13: Fair Values of Assets and Liabilities
 

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Trading assets, securities available for sale, derivatives, substantially all prime residential MHFS, certain commercial LHFS, fair value MSRs, principal investments and securities sold but not yet purchased (short sale liabilities) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as certain residential and commercial MHFS, certain LHFS, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.
Fair Value Hierarchy
We group our assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
  Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.
 
  Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
  Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
      In the determination of the classification of financial instruments in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we use a predetermined percentage to evaluate the impact of fair value adjustments derived from weighting both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.
Determination of Fair Value
We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
      In instances where there is limited or no observable market data, fair value measurements for assets and liabilities are based primarily upon our own estimates or combination of our own estimates and independent vendor or broker pricing, and the measurements are often calculated based on current pricing for products we offer or issue, the economic and competitive environment, the characteristics of the asset or liability and other such factors. As with any valuation technique used to estimate fair value, changes in underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Accordingly, these fair value estimates may not be realized in an actual sale or immediate settlement of the asset or liability.
      We incorporate lack of liquidity into our fair value measurement based on the type of asset or liability measured and the valuation methodology used. For example, for certain residential MHFS and certain securities where the significant inputs have become unobservable due to illiquid markets and vendor or broker pricing is not used, we use a discounted cash flow technique to measure fair value. This technique incorporates forecasting of expected cash flows (adjusted for credit loss assumptions and estimated prepayment speeds) discounted at an appropriate market discount rate to reflect the lack of liquidity in the market that a market participant would consider. For other securities where vendor or broker pricing is used, we use either unadjusted broker quotes or vendor prices or vendor or broker prices adjusted by weighting them with internal discounted cash flow techniques to measure fair value. These unadjusted vendor or broker prices inherently reflect any lack of liquidity in the market as the fair value measurement represents an exit price from a market participant viewpoint.
      For complete descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value, see Note 16 in our 2010 Form 10-K. There have been no material changes to our valuation methodologies in the first half of 2011.


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Note 13: Fair Values of Assets and Liabilities (continued)

Fair Value Measurements from Independent Brokers or Independent Third Party Pricing Services
For certain assets and liabilities, we obtain fair value measurements from independent brokers or independent third party pricing services and record the unadjusted fair value in our
financial statements. The detail by level is shown in the table below. Fair value measurements obtained from independent brokers or independent third party pricing services that we have adjusted to determine the fair value recorded in our financial statements are not included in the following table.


     
 
                                                 
            Independent brokers             Third party pricing services  
(in millions)   Level 1     Level 2     Level 3     Level 1     Level 2     Level 3  
 
 
June 30, 2011
                                               
Trading assets (excluding derivatives)
  $ -       814       12       -       1,490       -  
Securities available for sale:
                                               
Securities of U.S. Treasury and federal agencies
    -       -       -       266       9,436       -  
Securities of U.S. states and political subdivisions
    -       16       -       -       17,549       -  
Mortgage-backed securities
    -       429       65       -       97,203       216  
Other debt securities
    -       609       6,457       -       16,475       234  
 
 
                                               
Total debt securities
    -       1,054       6,522       266       140,663       450  
Total marketable equity securities
    -       -       -       668       4,008       18  
 
 
                                               
Total securities available for sale
    -       1,054       6,522       934       144,671       468  
 
 
                                               
Derivatives (trading and other assets)
    -       53       2       -       658       3  
Loans held for sale
    -       -       -       -       1       -  
Derivatives (liabilities)
    -       50       1       753       2,402       1  
Other liabilities
    -       40       -       -       417       -  
 
                                               
 
 
                                               
December 31, 2010
                                               
Trading assets (excluding derivatives)
  $ -       1,211       6       21       2,123       -  
Securities available for sale:
                                               
Securities of U.S. Treasury and federal agencies
    -       -       -       936       263       -  
Securities of U.S. states and political subdivisions
    -       15       -       -       14,055       -  
Mortgage-backed securities
    -       3       50       -       102,206       169  
Other debt securities
    -       201       4,133       -       14,376       606  
 
 
                                               
Total debt securities
    -       219       4,183       936       130,900       775  
Total marketable equity securities
    -       -       -       201       727       16  
 
 
                                               
Total securities available for sale
    -       219       4,183       1,137       131,627       791  
 
 
                                               
Derivatives (trading and other assets)
    -       15       44       -       740       8  
Loans held for sale
    -       -       -       -       1       -  
Derivatives (liabilities)
    -       -       46       -       841       -  
Other liabilities
    -       20       -       -       393       -  
 
                                               
 

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Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis.


 
                                         
(in millions)   Level 1     Level 2     Level 3     Netting     Total  
 
June 30, 2011
                                       
Trading assets (excluding derivatives)
                                       
Securities of U.S. Treasury and federal agencies
  $ 2,518       3,806       -       -       6,324  
Securities of U.S. states and political subdivisions
    -       1,976       135       -       2,111  
Collateralized debt obligations (1)
    -       -       1,801       -       1,801  
Corporate debt securities
    -       9,879       103       -       9,982  
Mortgage-backed securities
    -       9,962       223       -       10,185  
Asset-backed securities
    -       1,451       181       -       1,632  
Equity securities
    2,068       329       4       -       2,401  
 
Total trading securities
    4,586       27,403       2,447       -       34,436  
 
Other trading assets
    1,121       985       144       -       2,250  
 
Total trading assets (excluding derivatives)
    5,707       28,388       2,591       -       36,686  
 
Securities of U.S. Treasury and federal agencies
    934       9,589       -       -       10,523  
Securities of U.S. states and political subdivisions
    -       17,717       6,695       -       24,412  
Mortgage-backed securities:
                                       
Federal agencies
    -       78,338       -       -       78,338  
Residential
    -       18,354       6       -       18,360  
Commercial
    -       14,446       282       -       14,728  
 
Total mortgage-backed securities
    -       111,138       288       -       111,426  
 
Corporate debt securities
    43       11,337       517       -       11,897  
Collateralized debt obligations (2)
    -       -       7,232       -       7,232  
Asset-backed securities:
                                       
Auto loans and leases
    -       143       3,900       -       4,043  
Home equity loans
    -       1,344       76       -       1,420  
Other asset-backed securities
    -       7,981       2,629       -       10,610  
 
Total asset-backed securities
    -       9,468       6,605       -       16,073  
 
Other debt securities
    -       380       -       -       380  
 
Total debt securities
    977       159,629       21,337       -       181,943  
 
Marketable equity securities:
                                       
Perpetual preferred securities (3)
    895       704       1,545       -       3,144  
Other marketable equity securities
    1,066       109       36       -       1,211  
 
Total marketable equity securities
    1,961       813       1,581       -       4,355  
 
Total securities available for sale
    2,938       160,442       22,918       -       186,298  
 
Mortgages held for sale
    -       21,815       3,360       -       25,175  
Loans held for sale
    -       1,102       -       -       1,102  
Loans
    -       -       -       -       -  
Mortgage servicing rights (residential)
    -       -       14,778       -       14,778  
Derivative assets:
                                       
Interest rate contracts
    -       62,461       709       -       63,170  
Commodity contracts
    -       4,759       49       -       4,808  
Equity contracts
    538       2,435       718       -       3,691  
Foreign exchange contracts
    47       4,936       26       -       5,009  
Credit contracts
    -       1,912       2,735       -       4,647  
Other derivative contracts
    -       -       1       -       1  
 
Netting
    -       -       -       (58,561) (4)     (58,561 )
 
Total derivative assets (5)
    585       76,503       4,238       (58,561 )     22,765  
 
Other assets
    33       147       300       -       480  
 
Total assets recorded at fair value
  $ 9,263       288,397       48,185       (58,561 )     287,284  
 
Derivative liabilities:
                                       
Interest rate contracts
  $ (12 )     (59,100 )     (469 )     -       (59,581 )
Commodity contracts
    -       (3,923 )     (51 )     -       (3,974 )
Equity contracts
    (258 )     (2,684 )     (904 )     -       (3,846 )
Foreign exchange contracts
    (34 )     (3,189 )     (1 )     -       (3,224 )
Credit contracts
    -       (1,943 )     (3,840 )     -       (5,783 )
Other derivative contracts
    -       -       (34 )     -       (34 )
 
Netting
    -       -       -       65,082 (4)     65,082  
 
Total derivative liabilities (6)
    (304 )     (70,839 )     (5,299 )     65,082       (11,360 )
 
Short sale liabilities:
                                       
Securities of U.S. Treasury and federal agencies
    (4,885 )     (1,144 )     -       -       (6,029 )
Corporate debt securities
    -       (4,259 )     -       -       (4,259 )
Equity securities
    (1,716 )     (54 )     -       -       (1,770 )
Other securities
    -       (100 )     -       -       (100 )
 
Total short sale liabilities
    (6,601 )     (5,557 )     -       -       (12,158 )
 
Other liabilities
    -       (135 )     (37 )     -       (172 )
 
Total liabilities recorded at fair value
  $ (6,905 )     (76,531 )     (5,336 )     65,082       (23,690 )
 
 
(1)   Includes collateralized loan obligations of $663 million that are classified as trading assets.
 
(2)   Includes collateralized loan obligations of $6.6 billion that are classified as securities available for sale.
 
(3)   Perpetual preferred securities are primarily ARS. See Note 7 for additional information.
 
(4)   Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.
 
(5)   Derivative assets include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets.
 
(6)   Derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading liabilities.
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Note 13: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
 
                                         
(in millions)   Level 1     Level 2     Level 3     Netting     Total  
 
December 31, 2010
                                       
Trading assets (excluding derivatives)
                                       
Securities of U.S. Treasury and federal agencies
  $ 1,340       3,335       -       -       4,675  
Securities of U.S. states and political subdivisions
    -       1,893       5       -       1,898  
Collateralized debt obligations (1)
    -       -       1,915       -       1,915  
Corporate debt securities
    -       10,164       166       -       10,330  
Mortgage-backed securities
    -       9,137       117       -       9,254  
Asset-backed securities
    -       1,811       366       -       2,177  
Equity securities
    2,143       625       34       -       2,802  
 
Total trading securities
    3,483       26,965       2,603       -       33,051  
 
Other trading assets
    816       987       136       -       1,939  
 
Total trading assets (excluding derivatives)
    4,299       27,952       2,739       -       34,990  
 
Securities of U.S. Treasury and federal agencies
    938       666       -       -       1,604  
Securities of U.S. states and political subdivisions
    -       14,090       4,564       -       18,654  
Mortgage-backed securities:
                                       
Federal agencies
    -       82,037       -       -       82,037  
Residential
    -       20,183       20       -       20,203  
Commercial
    -       13,337       217       -       13,554  
 
Total mortgage-backed securities
    -       115,557       237       -       115,794  
 
Corporate debt securities
    -       9,846       433       -       10,279  
Collateralized debt obligations (2)
    -       -       4,778       -       4,778  
Asset-backed securities:
                                       
Auto loans and leases
    -       223       6,133       -       6,356  
Home equity loans
    -       998       112       -       1,110  
Other asset-backed securities
    -       5,285       3,150       -       8,435  
 
Total asset-backed securities
    -       6,506       9,395       -       15,901  
 
Other debt securities
    -       370       85       -       455  
 
Total debt securities
    938       147,035       19,492       -       167,465  
 
Marketable equity securities:
                                       
Perpetual preferred securities (3)
    721       677       2,434       -       3,832  
Other marketable equity securities
    1,224       101       32       -       1,357  
 
Total marketable equity securities
    1,945       778       2,466       -       5,189  
 
Total securities available for sale
    2,883       147,813       21,958       -       172,654  
 
Mortgages held for sale
    -       44,226       3,305       -       47,531  
Loans held for sale
    -       873       -       -       873  
Loans
    -       -       309       -       309  
Mortgage servicing rights (residential)
    -       -       14,467       -       14,467  
Derivative assets:
                                       
Interest rate contracts
    -       67,380       869       -       68,249  
Commodity contracts
    -       4,133       -       -       4,133  
Equity contracts
    511       2,040       721       -       3,272  
Foreign exchange contracts
    42       4,257       51       -       4,350  
Credit contracts
    -       2,148       3,198       -       5,346  
Other derivative contracts
    8       -       -       -       8  
 
Netting
    -       -       -       (63,469 ) (4)     (63,469 )
 
Total derivative assets (5)
    561       79,958       4,839       (63,469 )     21,889  
 
Other assets
    38       45       314       -       397  
 
Total assets recorded at fair value
  $ 7,781       300,867       47,931       (63,469 )     293,110  
 
Derivative liabilities:
                                       
Interest rate contracts
  $ (7 )     (62,769 )     (792 )     -       (63,568 )
Commodity contracts
    -       (3,917 )     (1 )     -       (3,918 )
Equity contracts
    (259 )     (2,291 )     (946 )     -       (3,496 )
Foreign exchange contracts
    (69 )     (3,351 )     (42 )     -       (3,462 )
Credit contracts
    -       (2,199 )     (4,215 )     -       (6,414 )
Other derivative contracts
    -       -       (35 )     -       (35 )
 
Netting
    -       -       -       70,009  (4)     70,009  
 
Total derivative liabilities (6)
    (335 )     (74,527 )     (6,031 )     70,009       (10,884 )
 
Short sale liabilities:
                                       
Securities of U.S. Treasury and federal agencies
    (2,827 )     (1,129 )     -       -       (3,956 )
Corporate debt securities
    -       (3,798 )     -       -       (3,798 )
Equity securities
    (1,701 )     (178 )     -       -       (1,879 )
Other securities
    -       (347 )     -       -       (347 )
 
Total short sale liabilities
    (4,528 )     (5,452 )     -       -       (9,980 )
 
Other liabilities
    -       (36 )     (344 )     -       (380 )
 
Total liabilities recorded at fair value
  $ (4,863 )     (80,015 )     (6,375 )     70,009       (21,244 )
 
 
(1)   Includes collateralized loan obligations of $671 million that are classified as trading assets.
 
(2)   Includes collateralized loan obligations of $4.2 billion that are classified as securities available for sale.
 
(3)   Perpetual preferred securities are primarily ARS. See Note 7 for additional information.
 
(4)   Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.
 
(5)   Derivative assets include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets.
 
(6)   Derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading liabilities.

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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2011, are summarized as follows:
 
                                                                 
                                                            Net unrealized  
            Total net gains     Purchases,                             gains (losses)  
            (losses) included in     sales,                             included in net  
 
                                                               
                    Other     issuances                             income related  
    Balance,             compre-     and     Transfers     Transfers     Balance,     to assets and  
    beginning     Net     hensive     settlements,     into     out of     end of     liabilities held  
(in millions)   of period     income     income     net     Level 3     Level 3     period     at period end (1)  
 
 
                                                               
Quarter ended June 30, 2011
                                                               
Trading assets (excluding derivatives):
                                                               
Securities of U.S. states and political subdivisions
  $ 130       3       -       2       -       -       135       -  
Collateralized debt obligations
    1,910       (10 )     -       (88 )     -       (11 )     1,801       (33 )
Corporate debt securities
    97       1       -       5       -       -       103       1  
Mortgage-backed securities
    144       -       -       83       3       (7 )     223       -  
Asset-backed securities
    252       27       -       (87 )     -       (11 )     181       30  
Equity securities
    32       1       -       (29 )     -       -       4       (1 )
 
 
                                                               
Total trading securities
    2,565       22       -       (114 )     3       (29 )     2,447       (3 )
 
 
                                                               
Other trading assets
    144       1       -       (1 )     -       -       144       9  
 
 
                                                               
Total trading assets (excluding derivatives)
    2,709       23       -       (115 )     3       (29 )     2,591       6 (2)
 
Securities available for sale:
                                                               
Securities of U.S. states and political subdivisions
    5,030       3       (20 )     1,682       -       -       6,695       (9 )
Mortgage-backed securities:
                                                               
Residential
    10       (3 )     2       (1 )     1       (3 )     6       (3 )
Commercial
    281       4       (12 )     13       -       (4 )     282       (2 )
 
 
                                                               
Total mortgage-backed securities
    291       1       (10 )     12       1       (7 )     288       (5 )
 
 
                                                               
Corporate debt securities
    494       37       29       (48 )     5       -       517       -  
Collateralized debt obligations
    5,616       84       (12 )     1,536       8       -       7,232       -  
Asset-backed securities:
                                                               
Auto loans and leases
    4,244       1       4       (349 )     -       -       3,900       -  
Home equity loans
    98       (5 )     (5 )     (1 )     29       (40 )     76       (9 )
Other asset-backed securities
    3,411       3       (7 )     (259 )     -       (519 )     2,629       -  
 
 
                                                               
Total asset-backed securities
    7,753       (1 )     (8 )     (609 )     29       (559 )     6,605       (9 )
 
 
                                                               
Total debt securities
    19,184       124       (21 )     2,573       43       (566 )     21,337       (23) (3)
 
 
                                                               
Marketable equity securities:
                                                               
Perpetual preferred securities
    1,989       71       (8 )     (507 )     -       -       1,545       -  
Other marketable equity securities
    35       -       1       -       -       -       36       -  
 
 
                                                               
Total marketable equity securities
    2,024       71       (7 )     (507 )     -       -       1,581       - (4)
 
 
                                                               
Total securities available for sale
    21,208       195       (28 )     2,066       43       (566 )     22,918       (23 )
 
 
                                                               
Mortgages held for sale
    3,314       41       -       4       77       (76 )     3,360       40 (5)
Loans
    98       3       -       (101 )     -       -       -       -  
Mortgage servicing rights
    15,648       (1,610 )     -       740       -       -       14,778       (1,075) (5)
Net derivative assets and liabilities:
                                                               
Interest rate contracts
    299       884       -       (944 )     -       1       240       (147 )
Commodity contracts
    (3 )     -       -       -       -       1       (2 )     -  
Equity contracts
    (225 )     46       -       5       (4 )     (8 )     (186 )     6  
Foreign exchange contracts
    23       6       -       (4 )     -       -       25       2  
Credit contracts
    (1,151 )     128       -       (80 )     -       (2 )     (1,105 )     (70 )
Other derivative contracts
    (18 )     (16 )     -       1       -       -       (33 )     -  
 
 
                                                               
Total derivative contracts
    (1,075 )     1,048       -       (1,022 )     (4 )     (8 )     (1,061 )     (209) (6)
 
 
                                                               
Other assets
    311       6       -       (17 )     -       -       300       8 (2)
Short sale liabilities (corporate debt securities)
    (106 )     -       -       106       -       -       -       3  
Other liabilities (excluding derivatives)
    (136 )     -       -       99       -       -       (37 )     -  
 
                                                               
 
 
(1)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.
 
(2)   Included in trading activities and other noninterest income in the income statement.
 
(3)   Included in debt securities available for sale in the income statement.
 
(4)   Included in equity investments in the income statement.
 
(5)   Included in mortgage banking in the income statement.
 
(6)   Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)

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Note 13: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2011.
 
                                         
(in millions)   Purchases     Sales     Issuances     Settlements     Net  
 
 
                                       
Quarter ended June 30, 2011
                                       
Trading assets (excluding derivatives):
                                       
Securities of U.S. states and political subdivisions
  $ 89       (86 )     -       (1 )     2  
Collateralized debt obligations
    159       (222 )     -       (25 )     (88 )
Corporate debt securities
    18       (16 )     -       3       5  
Mortgage-backed securities
    224       (137 )     -       (4 )     83  
Asset-backed securities
    127       (218 )     -       4       (87 )
Equity securities
    1       (18 )     -       (12 )     (29 )
 
 
                                       
Total trading securities
    618       (697 )     -       (35 )     (114 )
 
 
                                       
Other trading assets
    -       -       -       (1 )     (1 )
 
Total trading assets (excluding derivatives)
    618       (697 )     -       (36 )     (115 )
 
 
                                       
Securities available for sale:
                                       
Securities of U.S. states and political subdivisions
    1,076       (5 )     877       (266 )     1,682  
Mortgage-backed securities:
                                       
Residential
    -       -       -       (1 )     (1 )
Commercial
    17       -       -       (4 )     13  
 
 
                                       
Total mortgage-backed securities
    17       -       -       (5 )     12  
 
 
                                       
Corporate debt securities
    1       (35 )     -       (14 )     (48 )
Collateralized debt obligations
    1,870       -       -       (334 )     1,536  
Asset-backed securities:
                                       
Auto loans and leases
    623       -       163       (1,135 )     (349 )
Home equity loans
    -       -       -       (1 )     (1 )
Other asset-backed securities
    171       (137 )     372       (665 )     (259 )
 
 
                                       
Total asset-backed securities
    794       (137 )     535       (1,801 )     (609 )
 
 
                                       
Total debt securities
    3,758       (177 )     1,412       (2,420 )     2,573  
 
 
                                       
Marketable equity securities:
                                       
Perpetual preferred securities
    -       -       -       (507 )     (507 )
Other marketable equity securities
    -       -       -       -       -  
 
 
                                       
Total marketable equity securities
    -       -       -       (507 )     (507 )
 
 
                                       
Total securities available for sale
    3,758       (177 )     1,412       (2,927 )     2,066  
 
 
                                       
Mortgages held for sale
    147       -       -       (143 )     4  
Loans
    -       (99 )     -       (2 )     (101 )
Mortgage servicing rights
    -       -       740       -       740  
Net derivative assets and liabilities:
                                       
Interest rate contracts
    6       (1 )     -       (949 )     (944 )
Commodity contracts
    -       -       -       -       -  
Equity contracts
    21       (50 )     -       34       5  
Foreign exchange contracts
    1       (1 )     -       (4 )     (4 )
Credit contracts
    2       (1 )     -       (81 )     (80 )
Other derivative contracts
    -       -       -       1       1  
 
 
                                       
Total derivative contracts
    30       (53 )     -       (999 )     (1,022 )
 
 
                                       
Other assets
    (11 )     1       -       (7 )     (17 )
Short sale liabilities (corporate debt securities)
    (1 )     107       -       -       106  
Other liabilities (excluding derivatives)
    (1 )     -       -       100       99  
 
                                       
 

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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2011, are summarized as follows:
 
                                                                 
                                                            Net unrealized  
            Total net gains     Purchases,                             gains (losses)  
            (losses) included in     sales,                             included in net  
 
                                                               
                    Other     issuances                             income related  
    Balance,             compre-     and     Transfers     Transfers     Balance,     to assets and  
    beginning     Net     hensive     settlements,     into     out of     end of     liabilities held  
(in millions)   of period     income     income     net     Level 3     Level 3     period     at period end (1)  
 
 
                                                               
Six months ended June 30, 2011
                                                               
Trading assets (excluding derivatives):
                                                               
Securities of U.S. states and political subdivisions
  $ 5       5       -       87       38       -       135       1  
Collateralized debt obligations
    1,915       3       -       (105 )     -       (12 )     1,801       (37 )
Corporate debt securities
    166       (1 )     -       (62 )     -       -       103       1  
Mortgage-backed securities
    117       5       -       101       7       (7 )     223       -  
Asset-backed securities
    366       36       -       (100 )     -       (121 )     181       39  
Equity securities
    34       -       -       (31 )     1       -       4       (3 )
 
 
                                                               
Total trading securities
    2,603       48       -       (110 )     46       (140 )     2,447       1  
 
 
                                                               
Other trading assets
    136       7       -       1       -       -       144       26  
 
 
                                                               
Total trading assets (excluding derivatives)
    2,739       55       -       (109 )     46       (140 )     2,591       27 (2)
 
 
                                                               
Securities available for sale:
                                                               
Securities of U.S. states and political subdivisions
    4,564       5       49       2,077       -       -       6,695       (7 )
Mortgage-backed securities:
                                                               
Residential
    20       (3 )     1       1       7       (20 )     6       (4 )
Commercial
    217       (4 )     58       15       -       (4 )     282       (4 )
 
 
                                                               
Total mortgage-backed securities
    237       (7 )     59       16       7       (24 )     288       (8 )
 
 
                                                               
Corporate debt securities
    433       39       38       1       6       -       517       -  
Collateralized debt obligations
    4,778       137       141       2,168       8       -       7,232       -  
Asset-backed securities:
                                                               
Auto loans and leases
    6,133       2       (35 )     (2,200 )     -       -       3,900       -  
Home equity loans
    112       (3 )     (4 )     (2 )     39       (66 )     76       (10 )
Other asset-backed securities
    3,150       (2 )     48       (97 )     49       (519 )     2,629       -  
 
 
                                                               
Total asset-backed securities
    9,395       (3 )     9       (2,299 )     88       (585 )     6,605       (10 )
 
 
                                                               
Other debt securities
    85       -       -       (85 )     -       -       -       -  
 
 
                                                               
Total debt securities
    19,492       171       296       1,878       109       (609 )     21,337       (25) (3)
 
 
                                                               
Marketable equity securities:
                                                               
Perpetual preferred securities
    2,434       139       (2 )     (1,026 )     -       -       1,545       -  
Other marketable equity securities
    32       -       1       3       -       -       36       -  
 
 
                                                               
Total marketable equity securities
    2,466       139       (1 )     (1,023 )     -       -       1,581       - (4)
 
 
                                                               
Total securities available for sale
    21,958       310       295       855       109       (609 )     22,918       (25 )
 
 
                                                               
Mortgages held for sale
    3,305       9       -       46       149       (149 )     3,360       13 (5)
Loans
    309       13       -       (322 )     -       -       -       -  
Mortgage servicing rights
    14,467       (1,691 )     -       2,002       -       -       14,778       (576) (5)
Net derivative assets and liabilities:
                                                               
Interest rate contracts
    77       1,290       -       (1,129 )     1       1       240       (197 )
Commodity contracts
    (1 )     -       -       1       (3 )     1       (2 )     -  
Equity contracts
    (225 )     46       -       11       (4 )     (14 )     (186 )     35  
Foreign exchange contracts
    9       27       -       (11 )     -       -       25       12  
Credit contracts
    (1,017 )     42       -       (128 )     -       (2 )     (1,105 )     (99 )
Other derivative contracts
    (35 )     1       -       1       -       -       (33 )     -  
 
 
                                                               
Total derivative contracts
    (1,192 )     1,406       -       (1,255 )     (6 )     (14 )     (1,061 )     (249) (6)
 
 
                                                               
Other assets
    314       8       -       (22 )     -       -       300       9 (2)
Short sale liabilities (corporate debt securities)
    -       1       -       (1 )     -       -       -       1  
Other liabilities (excluding derivatives)
    (344 )     (9 )     -       316       -       -       (37 )     -  
 
                                                               
 
     
(1)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.
 
(2)   Included in trading activities and other noninterest income in the income statement.
 
(3)   Included in debt securities available for sale in the income statement.
 
(4)   Included in equity investments in the income statement.
 
(5)   Included in mortgage banking in the income statement.
 
(6)   Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)

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Note 13: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2011.
                                         
 
 
(in millions)   Purchases     Sales     Issuances     Settlements     Net  
 
 
Six months ended June 30, 2011
                                       
Trading assets (excluding derivatives):
                                       
Securities of U.S. states and political subdivisions
  $ 186       (98 )     -       (1 )     87  
Collateralized debt obligations
    524       (588 )     -       (41 )     (105 )
Corporate debt securities
    31       (96 )     -       3       (62 )
Mortgage-backed securities
    569       (464 )     -       (4 )     101  
Asset-backed securities
    372       (461 )     -       (11 )     (100 )
Equity securities
    6       (25 )     -       (12 )     (31 )
 
 
Total trading securities
    1,688       (1,732 )     -       (66 )     (110 )
 
 
Other trading assets
    2       -       -       (1 )     1  
 
 
Total trading assets (excluding derivatives)
    1,690       (1,732 )     -       (67 )     (109 )
 
 
Securities available for sale:
                                       
Securities of U.S. states and political subdivisions
    1,633       1       877       (434 )     2,077  
Mortgage-backed securities:
                                       
Residential
    4       -       -       (3 )     1  
Commercial
    21       -       -       (6 )     15  
 
 
Total mortgage-backed securities
    25       -       -       (9 )     16  
 
 
Corporate debt securities
    96       (35 )     -       (60 )     1  
Collateralized debt obligations
    2,735       (20 )     -       (547 )     2,168  
Asset-backed securities:
                                       
Auto loans and leases
    989       -       163       (3,352 )     (2,200 )
Home equity loans
    -       -       -       (2 )     (2 )
Other asset-backed securities
    968       (154 )     372       (1,283 )     (97 )
 
 
Total asset-backed securities
    1,957       (154 )     535       (4,637 )     (2,299 )
 
 
Other debt securities
    -       (85 )     -       -       (85 )
 
 
Total debt securities
    6,446       (293 )     1,412       (5,687 )     1,878  
 
 
Marketable equity securities:
                                       
Perpetual preferred securities
    1       -       -       (1,027 )     (1,026 )
Other marketable equity securities
    3       -       -       -       3  
 
 
Total marketable equity securities
    4       -       -       (1,027 )     (1,023 )
 
 
Total securities available for sale
    6,450       (293 )     1,412       (6,714 )     855  
 
 
Mortgages held for sale
    366       -       -       (320 )     46  
Loans
    -       (309 )     -       (13 )     (322 )
Mortgage servicing rights
    -       -       2,002       -       2,002  
Net derivative assets and liabilities:
                                       
Interest rate contracts
    6       -       -       (1,135 )     (1,129 )
Commodity contracts
    -       -       -       1       1  
Equity contracts
    70       (174 )     -       115       11  
Foreign exchange contracts
    3       (3 )     -       (11 )     (11 )
Credit contracts
    3       (2 )     -       (129 )     (128 )
Other derivative contracts
    -       -       -       1       1  
 
Total derivative contracts
    82       (179 )     -       (1,158 )     (1,255 )
 
 
Other assets
    (11 )     -       -       (11 )     (22 )
Short sale liabilities (corporate debt securities)
    (115 )     114       -       -       (1 )
Other liabilities (excluding derivatives)
    (1 )     -       -       317       316  
 
 

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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2010, are summarized as follows:
                                                                 
   
 
                                                            Net unrealized  
            Total net gains     Purchases,                             gains (losses)  
            (losses) included in     sales,                             included in net  
                    Other     issuances                             income related  
    Balance,             compre-     and     Transfers     Transfers     Balance,     to assets and  
    beginning     Net     hensive     settlements,     into     out of     end of     liabilities held  
(in millions)   of period     income     income     net     Level 3     Level 3     period     at period end (1)  
         
 
Quarter ended June 30, 2010
                                                               
Trading assets (excluding derivatives):
                                                               
Securities of U.S. states and political subdivisions
  $ 12       5       -       (5 )     -       -       12       6  
Collateralized debt obligations
    1,889       31       -       (153 )     -       -       1,767       2  
Corporate debt securities
    276       6       -       22       -       (139 )     165       22  
Mortgage-backed securities
    141       7       -       (37 )     -       -       111       2  
Asset-backed securities
    249       13       -       (43 )     -       -       219       2  
Equity securities
    67       1       -       (16 )     -       -       52       -  
         
 
Total trading securities
    2,634       63       -       (232 )     -       (139 )     2,326       34  
         
 
Other trading assets
    174       (21 )     -       (4 )     -       -       149       6  
         
 
Total trading assets (excluding derivatives)
    2,808       42       -       (236 )     -       (139 )     2,475       40 (2)
         
 
Securities available for sale:
                                                               
Securities of U.S. states and political subdivisions
    2,871       3       32       (170 )     -       -       2,736       4  
Mortgage-backed securities:
                                                               
Residential
    406       -       (22 )     26       82       (139 )     353       -  
Commercial
    503       (17 )     368       (8 )     128       (77 )     897       -  
         
 
Total mortgage-backed securities
    909       (17 )     346       18       210       (216 )     1,250       -  
         
 
Corporate debt securities
    503       3       (2 )     (44 )     28       (108 )     380       -  
Collateralized debt obligations
    3,851       40       (114 )     254       -       -       4,031       (5 )
Asset-backed securities:
                                                               
Auto loans and leases
    7,587       -       (56 )     (428 )     1       -       7,104       -  
Home equity loans
    107       1       5       (1 )     98       (16 )     194       (2 )
Other asset-backed securities
    2,190       (6 )     (39 )     1,540       -       (344 )     3,341       (1 )
         
 
Total asset-backed securities
    9,884       (5 )     (90 )     1,111       99       (360 )     10,639       (3 )
         
 
Other debt securities
    79       -       2       7       -       -       88       -  
         
 
Total debt securities
    18,097       24       174       1,176       337       (684 )     19,124       (4) (3)
         
 
Marketable equity securities:
                                                               
Perpetual preferred securities
    2,967       58       (14 )     (381 )     -       (1 )     2,629       -  
Other marketable equity securities
    12       -       -       15       -       (11 )     16       -  
         
 
Total marketable equity securities
    2,979       58       (14 )     (366 )     -       (12 )     2,645       - (4)
         
 
Total securities available for sale
    21,076       82       160       810       337       (696 )     21,769       (4 )
         
 
Mortgages held for sale
    3,338       (17 )     -       (89 )     104       (76 )     3,260       (16) (5)
Loans
    371       8       -       (12 )     -       -       367       7 (5)
Mortgage servicing rights
    15,544       (3,237 )     -       944       -       -       13,251       (2,661) (5)
Net derivative assets and liabilities:
                                                               
Interest rate contracts
    257       1,685       -       (1,299 )     -       -       643       407  
Equity contracts
    (281 )     (87 )     -       122       30       (16 )     (232 )     -  
Foreign exchange contracts
    4       (8 )     -       2       -       -       (2 )     -  
Credit contracts
    (758 )     (202 )     -       (33 )     -       -       (993 )     (178 )
Other derivative contracts
    (30 )     (78 )     -       5       -       -       (103 )     -  
         
 
Total derivative contracts
    (808 )     1,310       -       (1,203 )     30       (16 )     (687 )     229 (6)
         
 
Other assets
    377       2       -       (19 )     -       -       360       (6) (2)
Short sale liabilities (corporate debt securities)
    (65 )     1       -       (5 )     -       65       (4 )     -  
Other liabilities (excluding derivatives) (7)
    (376 )     (18 )     -       6       -       -       (388 )     (18 )
 
         
 
(1)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.
 
(2)   Included in trading activities and other noninterest income in the income statement.
 
(3)   Included in debt securities available for sale in the income statement.
 
(4)   Included in equity investments in the income statement.
 
(5)   Included in mortgage banking in the income statement.
 
(6)   Included in mortgage banking, trading activities and other noninterest income in the income statement.
 
(7)   Balances have been revised to conform with current period presentation.

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Note 13: Fair Values of Assets and Liabilities (continued)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2010, are summarized as follows:
                                                                 
   
                                                            Net unrealized  
            Total net gains     Purchases,                             gains (losses)  
            (losses) included in     sales,                             included in net  
                    Other     issuances                             income related  
    Balance,             compre-     and     Transfers     Transfers     Balance,     to assets and  
    beginning     Net     hensive     settlements,     into     out of     end of     liabilities held  
(in millions)   of period     income     income     net     Level 3     Level 3     period     at period end (1)  
         
 
Six months ended June 30, 2010
                                                               
Trading assets (excluding derivatives):
                                                               
Securities of U.S. states and political subdivisions
  $ 5       7       -       (9 )     9       -       12       7  
Collateralized debt obligations
    1,133       382       -       252       -       -       1,767       16  
Corporate debt securities
    223       13       -       62       9       (142 )     165       23  
Mortgage-backed securities
    146       9       -       79       -       (123 )     111       2  
Asset-backed securities
    497       25       -       (233 )     1       (71 )     219       10  
Equity securities
    36       2       -       12       2       -       52       -  
         
 
Total trading securities
    2,040       438       -       163       21       (336 )     2,326       58  
         
 
Other trading assets
    271       (36 )     -       (4 )     -       (82 )     149       (11 )
         
 
Total trading assets (excluding derivatives)
    2,311       402       -       159       21       (418 )     2,475       47 (2)
         
 
Securities available for sale:
                                                               
Securities of U.S. states and political subdivisions
    818       4       94       1,798       28       (6 )     2,736       4  
Mortgage-backed securities:
                                                               
Residential
    1,084       (7 )     (15 )     (14 )     266       (961 )     353       (4 )
Commercial
    1,799       (17 )     373       (7 )     187       (1,438 )     897       (4 )
         
 
Total mortgage-backed securities
    2,883       (24 )     358       (21 )     453       (2,399 )     1,250       (8 )
         
 
Corporate debt securities
    367       4       42       (50 )     166       (149 )     380       -  
Collateralized debt obligations
    3,725       79       (38 )     477       -       (212 )     4,031       (10 )
Asset-backed securities:
                                                               
Auto loans and leases
    8,525       -       (123 )     (1,477 )     179       -       7,104       -  
Home equity loans
    1,677       -       12       (2 )     113       (1,606 )     194       (5 )
Other asset-backed securities
    2,308       48       (82 )     1,403       679       (1,015 )     3,341       (2 )
         
 
Total asset-backed securities
    12,510       48       (193 )     (76 )     971       (2,621 )     10,639       (7 )
         
 
Other debt securities
    77       -       (1 )     12       -       -       88       -  
         
 
Total debt securities
    20,380       111       262       2,140       1,618       (5,387 )     19,124       (21) (3)
         
 
Marketable equity securities:
                                                               
Perpetual preferred securities
    2,305       66       (26 )     297       -       (13 )     2,629       -  
Other marketable equity securities
    88       -       -       (38 )     -       (34 )     16       -  
         
 
Total marketable equity securities
    2,393       66       (26 )     259       -       (47 )     2,645       - (4)
         
 
Total securities available for sale
    22,773       177       236       2,399       1,618       (5,434 )     21,769       (21 )
         
 
Mortgages held for sale
    3,523       (15 )     -       (251 )     203       (200 )     3,260       (17) (5)
Loans
    -       52       -       (51 )     366       -       367       52 (5)
Mortgage servicing rights
    16,004       (4,633 )     -       1,998       -       (118 )     13,251       (3,438) (5)
Net derivative assets and liabilities:
                                                               
Interest rate contracts
    (114 )     2,673       -       (1,916 )     -       -       643       426  
Equity contracts
    (344 )     (7 )     -       142       2       (25 )     (232 )     29  
Foreign exchange contracts
    (1 )     (3 )     -       2       -       -       (2 )     -  
Credit contracts
    (330 )     (692 )     -       23       6       -       (993 )     (671 )
Other derivative contracts
    (43 )     (65 )     -       5       -       -       (103 )     -  
         
 
Total derivative contracts
    (832 )     1,906       -       (1,744 )     8       (25 )     (687 )     (216) (6)
         
 
Other assets
    1,373       25       -       (49 )     -       (989 )     360       (12) (2)
Short sale liabilities (corporate debt securities)
    (26 )     (1 )     -       (42 )     -       65       (4 )     -  
Other liabilities (excluding derivatives) (7)
    (10 )     (54 )     -       35       (359 )     -       (388 )     (55 )
 
         
 
(1)   Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time.
 
(2)   Included in trading activities and other noninterest income in the income statement.
 
(3)   Included in debt securities available for sale in the income statement.
 
(4)   Included in equity investments in the income statement.
 
(5)   Included in mortgage banking in the income statement.
 
(6)   Included in mortgage banking, trading activities and other noninterest income in the income statement.
 
(7)   Balances have been revised to conform with current period presentation.

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Changes in Fair Value Levels
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. The amounts reported as transfers represent the fair value as of the beginning of the quarter in which the transfer occurred.
     We evaluate the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. For the first half of 2011, there were no significant transfers between Levels 1 and 2. We transferred $609 million of debt securities available for sale from Level 3 to Level 2 due to an increase in the volume of trading activity for certain securities, which resulted in increased occurrences of observable market prices.
     Significant changes to Level 3 assets for the first half of 2010, are described as follows:
  We adopted new consolidation accounting guidance, which impacted Level 3 balances for certain financial instruments. Reductions in Level 3 balances, which represent derecognition of existing investments in newly consolidated VIEs, are reflected as transfers out for the following categories: trading assets, $276 million; securities available for sale, $1.9 billion; and mortgage servicing rights, $118 million. Increases in Level 3 balances, which represent newly consolidated VIE assets, are reflected as transfers in for the following categories: securities available for sale, $829 million; loans, $366 million; and long-term debt, $359 million.
 
  We transferred $3.5 billion of debt securities available for sale from Level 3 to Level 2 due to an increase in the volume of trading activity for certain securities.


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Note 13: Fair Values of Assets and Liabilities (continued)

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of LOCOM accounting or write-downs of individual
assets. For assets measured at fair value on a nonrecurring basis in the first half of 2011, and year ended December 31, 2010, that were still held in the balance sheet at each respective period end, the following table provides the fair value hierarchy and the carrying value of the related individual assets or portfolios at period end.


 
                                                                 
                    June 30, 2011                     December 31, 2010  
(in millions)   Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
     
 
                                                               
Mortgages held for sale (1)
  $ -       2,029       916       2,945       -       2,000       891       2,891  
Loans held for sale
    -       118       -       118       -       352       -       352  
Loans:
                                                               
Commercial
    -       1,129       29       1,158       -       2,480       67       2,547  
Consumer
    -       3,595       10       3,605       -       5,870       18       5,888  
     
 
                                                               
Total loans (2)
    -       4,724       39       4,763       -       8,350       85       8,435  
     
 
                                                               
Mortgage servicing rights (amortized)
    -       -       123       123       -       -       104       104  
Other assets (3)
    -       548       77       625       -       765       82       847  
 
 
(1)   Predominantly real estate 1-4 family first mortgage loans measured at LOCOM.
 
(2)   Represents carrying value of loans for which adjustments are based on the appraised value of the collateral.
 
(3)   Includes the fair value of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.

The following table presents the increase (decrease) in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the income statement.
 
                 
    Six months ended June 30,  
(in millions)   2011     2010  
 
 
               
Mortgages held for sale
  $ 8       23  
Loans held for sale
    -       9  
Loans:
               
Commercial (1)
    (684 )     (1,809 )
Consumer (2)
    (2,929 )     (5,118 )
 
 
               
Total loans
    (3,613 )     (6,927 )
 
 
               
Mortgage servicing rights (amortized)
    (7 )     -  
Other assets (3)
    (164 )     (144 )
 
Total
  $ (3,776 )     (7,039 )
 
 
(1)   Prior period amount has been revised to correct previously reported amounts.
 
(2)   Represents write-downs of loans based on the appraised value of the collateral. Prior period amount has been revised to conform with current period presentation.
 
(3)   Includes the losses on foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.


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Alternative Investments
The following table summarizes our investments in various types of funds, which are included in trading assets, securities available for sale and other assets. We use the funds’ net asset
values (NAVs) per share as a practical expedient to measure fair value on recurring and nonrecurring bases. The fair values presented in the table are based upon the funds’ NAVs or an equivalent measure.


 
                                 
                            Redemption  
    Fair     Unfunded     Redemption     notice  
(in millions)   value     commitments     frequency     period  
 
 
                               
June 30, 2011
                               
Offshore funds
  $ 1,739       -     Daily - Annually   1 - 180 days
Funds of funds
    4       -     Monthly - Quarterly   10 - 90 days
Hedge funds
    26       -     Quarterly - Annually   60 - 90 days
Private equity funds
    1,060       285       N/A       N/A  
Venture capital funds
    89       32       N/A       N/A  
                 
 
                               
Total
  $ 2,918       317                  
 
December 31, 2010
                               
Offshore funds
  $ 1,665       -     Daily - Annually   1 - 180 days
Funds of funds
    63       -     Monthly - Quarterly   10 - 90 days
Hedge funds
    23       -     Monthly - Annually   30 - 120 days
Private equity funds
    1,830       669       N/A       N/A  
Venture capital funds
    88       36       N/A       N/A  
                 
Total
  $ 3,669       705                  
 
N/A — Not applicable

     Offshore funds primarily invest in investment grade European fixed-income securities. Redemption restrictions are in place for investments with a fair value of $74 million at both June 30, 2011, and December 31, 2010, due to lock-up provisions that will remain in effect until November 2013.
     Private equity funds invest in equity and debt securities issued by private and publicly-held companies in connection with leveraged buyouts, recapitalizations and expansion opportunities. Substantially all of these investments do not allow redemptions. Alternatively, we receive distributions as the underlying assets of the funds liquidate, which we expect to occur over the next nine years.
     Venture capital funds invest in domestic and foreign companies in a variety of industries, including information technology, financial services and healthcare. These investments can never be redeemed with the funds. Instead, we receive distributions as the underlying assets of the fund liquidate, which we expect to occur over the next six years.


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Note 13: Fair Values of Assets and Liabilities (continued)
Fair Value Option
We measure MHFS at fair value for prime MHFS originations for which an active secondary market and readily available market prices exist to reliably support fair value pricing models used for these loans. Loan origination fees on these loans are recorded when earned, and related direct loan origination costs are recognized when incurred. We also measure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe fair value measurement for prime MHFS and other interests held, which we hedge with free-standing derivatives (economic hedges) along with our MSRs, measured at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets.
     Upon the acquisition of Wachovia, we elected to measure at fair value certain portfolios of LHFS that we intend to hold for trading purposes and that may be economically hedged with
derivative instruments. In addition, we elected to measure at fair value certain letters of credit that are hedged with derivative instruments to better reflect the economics of the transactions. These letters of credit are included in trading account assets or liabilities.
     Upon the adoption of new consolidation guidance on January 1, 2010, we elected to measure at fair value the eligible assets (loans) and liabilities (long-term debt) of certain nonconforming mortgage loan securitization VIEs. We elected the fair value option for such newly consolidated VIEs to continue fair value accounting as our interests prior to consolidation were predominantly carried at fair value with changes in fair value recognized in earnings.
     The following table reflects the differences between fair value carrying amount of certain assets and liabilities for which we have elected the fair value option and the contractual aggregate unpaid principal amount at maturity.


 
                                                 
    June 30, 2011     Dec. 31, 2010  
                    Fair value                     Fair value  
                    carrying                     carrying  
                    amount                     amount  
                    less                     less  
    Fair value     Aggregate     aggregate     Fair value     Aggregate     aggregate  
    carrying     unpaid     unpaid     carrying     unpaid     unpaid  
(in millions)   amount     principal     principal     amount     principal     principal  
 
 
                                               
Mortgages held for sale:
                                               
Total loans
  $ 25,175       25,174       1 (1)     47,531       47,818       (287) (1)
Nonaccrual loans
    261       549       (288 )     325       662       (337 )
Loans 90 days or more past due and still accruing
    32       41       (9 )     38       47       (9 )
Loans held for sale:
                                               
Total loans
    1,102       1,123       (21 )     873       897       (24 )
Nonaccrual loans
    16       22       (6 )     1       7       (6 )
Loans:
                                               
Total loans
    -       -       - (2)     309       348       (39 )
Nonaccrual loans
    -       -       -       13       16       (3 )
Loans 90 days or more past due and still accruing
    -       -       -       2       2       -  
Long-term debt
    -       -       - (2)     306       353       (47 )
 
 
(1)   The difference between fair value carrying amount and aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on the related loan commitment prior to funding, and premiums on acquired loans.
 
(2)   The quarter-end balance sheet amounts have been reduced to zero due to deconsolidations of nonconforming residential mortgage loan securitizations in second quarter 2011. There was related income in 2011 prior to the deconsolidations.

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The assets accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The changes in fair value related to
initial measurement and subsequent changes in fair value included in earnings for these assets measured at fair value are shown, by income statement line item, below.


 
                                 
    2011     2010  
 
    Mortgage banking             Mortgage banking        
    noninterest income             noninterest income        
    Net gains (losses) on     Other     Net gains (losses) on     Other  
    mortgage loan origination/     noninterest     mortgage loan origination/     noninterest  
(in millions)   sales activities     income     sales activities     income  
 
 
                               
Quarter ended June 30,
                               
Mortgages held for sale
  $ 1,199       -       1,769       -  
Loans held for sale
    -       12       -       3  
Loans
    3       -       8       -  
Long-term debt
    (1 )     -       (8 )     -  
Other interests held
    -       14       -       (6 )
 
                               
 
 
                               
Six months ended June 30,
                               
Mortgages held for sale
  $ 1,857       -       3,231       -  
Loans held for sale
    -       21       -       17  
Loans
    13       -       52       -  
Long-term debt
    (11 )     -       (45 )     -  
Other interests held
    -       24       -       (46 )
 
                               
 
     The following table shows the estimated gains and losses from earnings attributable to instrument-specific credit risk related to assets accounted for under the fair value option.
     
 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions)   2011     2010     2011     2010  
   
Gains (losses) attributable to instrument-specific credit risk:
                               
Mortgages held for sale
  $ (12 )     (25 )     (71 )     (47 )
Loans held for sale
    12       3       21       17  
 
Total
  $ -       (22 )     (50 )     (30 )
 
     For performing loans, instrument-specific credit risk gains or losses were derived principally by determining the change in fair value of the loans due to changes in the observable or implied credit spread. Credit spread is the market yield on the loans less the relevant risk-free benchmark interest rate. In recent years spreads have been significantly affected by the lack of liquidity in the secondary market for mortgage loans. For nonperforming loans, we attribute all changes in fair value to instrument-specific credit risk.

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Note 13: Fair Values of Assets and Liabilities (continued)
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments, excluding short-term financial assets and liabilities because carrying amounts approximate fair value, and excluding financial instruments recorded at fair value on a recurring basis. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.
     We have not included assets and liabilities that are not financial instruments in our disclosure, such as the value of the long-term relationships with our deposit, credit card and trust customers, amortized MSRs, premises and equipment, goodwill and other intangibles, deferred taxes and other liabilities. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.


 
                                 
    June 30, 2011     December 31, 2010  
    Carrying     Estimated     Carrying     Estimated  
(in millions)   amount     fair value     amount     fair value  
 
Financial assets
                               
Mortgages held for sale (1)
  $ 6,079       6,079       4,232       4,234  
Loans held for sale (2)
    410       422       417       441  
Loans, net (3)
    718,226       708,566       721,016       710,147  
Nonmarketable equity investments (cost method)
    8,029       8,540       8,494       8,814  
Financial liabilities
                               
Deposits
    853,635       855,262       847,942       849,642  
Long-term debt (3)(4)
    142,729       145,943       156,651       159,996  
 
 
                               
     
(1)   Balance excludes MHFS for which the fair value option was elected.
 
(2)   Balance excludes LHFS for which the fair value option was elected.
 
(3)   Loans exclude lease financing with a carrying amount of $12.9 billion at June 30, 2011, and $13.1 billion at December 31, 2010.
 
(4)   The carrying amount and fair value exclude obligations under capital leases of $143 million at June 30, 2011, and $26 million at December 31, 2010.

     Loan commitments, standby letters of credit and commercial and similar letters of credit are not included in the table above. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related allowance. This amounted to $581 million at June 30, 2011, and $673 million at December 31, 2010.


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Note 14: Preferred Stock
 

We are authorized to issue 20 million shares of preferred stock and 4 million shares of preference stock, both without par value. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. We have not issued any preference shares under this authorization. If issued, preference shares would be limited to one vote per share. Our total issued and outstanding
 
preferred stock includes Dividend Equalization Preferred (DEP) shares and Series I, J, K and L, which are presented in the following tables, and Employee Stock Ownership Plan (ESOP) Cumulative Convertible Preferred Stock, which are presented in the table on the following page.


                 
    June 30, 2011 and December 31, 2010  
    Liquidation     Shares  
    preference     authorized  
    per share     and designated  
 
 
               
DEP Shares
               
Dividend Equalization Preferred Shares
  $ 10       97,000  
 
               
Series A
               
Non-Cumulative Perpetual
               
Preferred Stock
    100,000       25,001  
 
               
Series B
               
Non-Cumulative Perpetual
               
Preferred Stock
    100,000       17,501  
 
               
Series G
               
7.25% Class A Preferred Stock
    15,000       50,000  
 
               
Series H
               
Floating Class A Preferred Stock
    20,000       50,000  
 
               
Series I
               
5.80% Fixed to Floating Class A
               
Preferred Stock
    100,000       25,010  
 
               
Series J
               
8.00% Non-Cumulative Perpetual
               
Class A Preferred Stock
    1,000       2,300,000  
 
               
Series K
               
7.98% Fixed-to-Floating Non-Cumulative
               
Perpetual Class A Preferred Stock
    1,000       3,500,000  
Series L
               
7.50% Non-Cumulative Perpetual
               
Convertible Class A Preferred Stock
    1,000       4,025,000  
 
               
 
Total
            10,089,512  
 


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    June 30, 2011     December 31, 2010  
 
                                                               
    Shares                             Shares                      
    issued and             Carrying             issued and             Carrying        
(in millions, except shares)   outstanding     Par value     value     Discount     outstanding     Par value     value     Discount  
 
 
                                                               
DEP Shares
                                                               
Dividend Equalization Preferred Shares
    96,546     $ -       -       -       96,546     $ -       -       -  
 
                                                               
Series I (1)
                                                               
5.80% Fixed to Floating Class A Preferred Stock
    25,010       2,501       2,501       -       -       -       -       -  
 
                                                               
Series J (1)
                                                               
8.00% Non-Cumulative Perpetual Class A Preferred Stock
    2,150,375       2,150       1,995       155       2,150,375       2,150       1,995       155  
 
                                                               
Series K (1)
                                                               
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
    3,352,000       3,352       2,876       476       3,352,000       3,352       2,876       476  
 
                                                               
Series L (1)
                                                               
7.50% Non-Cumulative Perpetual
                                                               
Convertible Class A Preferred Stock
    3,968,000       3,968       3,200       768       3,968,000       3,968       3,200       768  
 
 
                                                               
Total
    9,591,931     $ 11,971       10,572       1,399       9,566,921     $ 9,470       8,071       1,399  
 
 
(1)   Preferred shares qualify as Tier 1 capital.

     In March 2011, the Company issued preferred stock for Series I (25,010 shares with a par value of $2.5 billion) to an unconsolidated wholly-owned trust related to our income trust securities.
     We have a commitment to issue preferred stock for Series A ($2.5 billion) and Series B ($1.8 billion) to unconsolidated wholly-owned trusts. The issuance dates are dependent on the sale of our income trust securities held by these trusts to third party investors, but we expect those dates will be March 2013 and September 2013, respectively. See Note 7 for additional information on our trust preferred securities. We do not have a commitment to issue Series G or H preferred stock.


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ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All shares of our ESOP Cumulative Convertible Preferred Stock (ESOP Preferred Stock) were issued to a trustee acting on behalf of the Wells Fargo & Company 401(k) Plan (the 401(k) Plan). Dividends on the ESOP Preferred Stock are cumulative from the date of initial issuance and are payable quarterly at annual rates based upon the year of issuance. Each share of ESOP Preferred Stock released from the unallocated reserve of the 401(k) Plan is converted into shares of our common stock based on the stated
value of the ESOP Preferred Stock and the then current market price of our common stock. The ESOP Preferred Stock is also convertible at the option of the holder at any time, unless previously redeemed. We have the option to redeem the ESOP Preferred Stock at any time, in whole or in part, at a redemption price per share equal to the higher of (a) $1,000 per share plus accrued and unpaid dividends or (b) the fair market value, as defined in the Certificates of Designation for the ESOP Preferred Stock.


 
                                                 
    Shares issued and outstanding     Carrying value     Adjustable  
    June 30,     December 31,     June 30,     December 31,     dividend rate  
(in millions, except shares)   2011     2010     2011     2010     Minimum     Maximum  
 
                                               
ESOP Preferred Stock
                                               
$1,000 liquidation preference per share
                                               
2011
    560,186       -     $ 560       -       9.00 %     10.00  
2010
    274,761       287,161       275       287       9.50       10.50  
2008
    102,004       104,854       102       105       10.50       11.50  
2007
    81,204       82,994       81       83       10.75       11.75  
2006
    57,372       58,632       58       59       10.75       11.75  
2005
    39,992       40,892       40       41       9.75       10.75  
2004
    26,215       26,815       26       27       8.50       9.50  
2003
    13,286       13,591       13       13       8.50       9.50  
2002
    3,363       3,443       3       3       10.50       11.50  
                 
 
                                               
Total ESOP Preferred Stock (1)
    1,158,383       618,382     $ 1,158       618                  
                 
 
                                               
Unearned ESOP shares (2)
                  $ (1,249 )     (663 )                
 
                                               
 
(1)   At June 30, 2011, and December 31, 2010, additional paid-in capital included $91 million and $45 million, respectively, related to preferred stock.
 
(2)   We recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released.

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Note 15: Employee Benefits
 

We sponsor a noncontributory qualified defined benefit retirement plan, the Wells Fargo & Company Cash Balance Plan (Cash Balance Plan), which covers eligible employees of
Wells Fargo; the benefits earned under the Cash Balance Plan were frozen effective July 1, 2009.
     The net periodic benefit cost was:


 
                                                 
    2011     2010  
 
                                               
    Pension benefits             Pension benefits        
            Non-     Other             Non-     Other  
(in millions)   Qualified     qualified     benefits     Qualified     qualified     benefits  
 
 
                                               
Quarter ended June 30,
                                               
Service cost
  $ 2       -       4       2       -       3  
Interest cost
    130       8       18       138       9       19  
Expected return on plan assets
    (190 )     -       (11 )     (179 )     -       (7 )
Amortization of net actuarial loss
    22       2       -       26       1       -  
Amortization of prior service credit
    -       -       (1 )     -       -       (1 )
Settlement
    1       -       -       -       -       -  
 
 
                                               
Net periodic benefit cost (income)
  $ (35 )     10       10       (13 )     10       14  
 
 
                                               
Six months ended June 30,
                                               
Service cost
  $ 3       -       7       3       -       6  
Interest cost
    260       17       36       277       18       39  
Expected return on plan assets
    (379 )     -       (21 )     (358 )     -       (14 )
Amortization of net actuarial loss
    43       4       -       52       2       -  
Amortization of prior service credit
    -       -       (2 )     -       -       (2 )
Settlement
    3       -       -       -       -       -  
 
 
                                               
Net periodic benefit cost (income)
  $ (70 )     21       20       (26 )     20       29  
 

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Note 16: Earnings Per Common Share
 

The table below shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations.


 
                                 
    Quarter ended June 30,     Six months ended June 30,  
(in millions, except per share amounts)   2011     2010     2011     2010  
 
 
                               
Wells Fargo net income
  $ 3,948       3,062       7,707       5,609  
Less: Preferred stock dividends and other (1)
    220       184       409       359  
 
Wells Fargo net income applicable to common stock (numerator)
  $ 3,728       2,878       7,298       5,250  
 
 
                               
Earnings per common share
                               
Average common shares outstanding (denominator)
    5,286.5       5,219.7       5,282.7       5,205.1  
Per share
  $ 0.70       0.55       1.38       1.01  
 
 
                               
Diluted earnings per common share
                               
Average common shares outstanding
    5,286.5       5,219.7       5,282.7       5,205.1  
Add: Stock Options
    24.7       32.9       28.8       32.1  
Restricted share rights
    20.5       8.2       18.4       5.8  
 
 
                               
Diluted average common shares outstanding (denominator)
    5,331.7       5,260.8       5,329.9       5,243.0  
 
 
                               
Per share
  $ 0.70       0.55       1.37       1.00  
 
 
                               
 
(1)   Includes preferred stock dividends of $220 million and $185 million for second quarter 2011 and 2010 and $404 million and $369 million for the first half of 2011 and 2010, respectively.

     The following table presents the outstanding options and warrants to purchase shares of common stock that were anti-dilutive (the exercise price was higher than the weighted-average market price), and therefore not included in the calculation of diluted earnings per common share.
 
                                 
    Weighted-average shares  
 
                               
    Quarter ended June 30,     Six months ended June 30,  
 
                               
(in millions)   2011     2010     2011     2010  
 
 
                               
Options
    175.0       156.0       147.7       187.0  
Warrants
    39.4       78.6       39.4       94.4  
 
                               
 


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Note 17: Operating Segments
 

We have three operating segments for management reporting: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. The results for these operating segments are based on our management accounting process, for which there is no comprehensive, authoritative guidance equivalent to GAAP for financial accounting. The management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with similar information for other financial services companies. We define our operating segments by product type and customer segment. If the management structure and/or the allocation process changes, allocations, transfers and assignments may change. In first quarter 2010, we conformed certain funding and allocation methodologies of legacy Wachovia to those of Wells Fargo; in addition, integration expense related to mergers other than the Wachovia merger is now included in segment results. In fourth quarter 2010, we aligned certain lending businesses into Wholesale Banking from Community Banking to reflect our previously announced restructuring of Wells Fargo Financial. In first quarter 2011, we realigned a private equity business into Wholesale Banking from Community Banking. The prior periods have been revised to reflect these changes.
Community Banking offers a complete line of diversified financial products and services to consumers and small businesses with annual sales generally up to $20 million in which the owner generally is the financial decision maker. Community Banking also offers investment management and other services to retail customers and securities brokerage through affiliates. These products and services include the Wells Fargo Advantage FundsSM, a family of mutual funds. Loan products include lines of credit, auto floor plan lines, equity lines and loans, equipment and transportation loans, education loans, origination and purchase of residential mortgage loans and servicing of mortgage loans and credit cards. Other credit products and financial services available to small businesses and their owners include equipment leases, real estate and other commercial financing, Small Business Administration financing, venture capital financing, cash management, payroll services, retirement plans, Health Savings Accounts, credit cards, and merchant payment processing. Community Banking also purchases sales finance contracts from retail merchants throughout the United States and directly from auto dealers in Puerto Rico. Consumer and business deposit products include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts, time deposits and debit cards.
     Community Banking serves customers through a complete range of channels, including traditional banking stores, in-store banking centers, business centers, ATMs, Online and Mobile Banking, and Wells Fargo Customer Connection, a 24-hours a day, seven days a week telephone service.
Wholesale Banking provides financial solutions to businesses across the United States with annual sales generally in excess of $20 million and to financial institutions globally. Wholesale
Banking provides a complete line of commercial, corporate, capital markets, cash management and real estate banking products and services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, international trade facilities, trade financing, collection services, foreign exchange services, treasury management, investment management, institutional fixed-income sales, interest rate, commodity and equity risk management, online/electronic products such as the Commercial Electronic Office® (CEO®) portal, insurance, corporate trust fiduciary and agency services, and investment banking services. Wholesale Banking manages customer investments through institutional separate accounts and mutual funds, including the Wells Fargo Advantage Funds and Wells Capital Management. Wholesale Banking also supports the CRE market with products and services such as construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit, permanent loans for securitization, CRE loan servicing and real estate and mortgage brokerage services.
Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients using a planning approach to meet each client’s needs. Wealth Management provides affluent and high net worth clients with a complete range of wealth management solutions, including financial planning, private banking, credit, investment management and trust. Family Wealth meets the unique needs of ultra high net worth customers. Brokerage serves customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement is a national leader in providing institutional retirement and trust services (including 401(k) and pension plan record keeping) for businesses, retail retirement solutions for individuals, and reinsurance services for the life insurance industry.
Other includes corporate items (such as integration expenses related to the Wachovia merger) not specific to a business segment and elimination of certain items that are included in more than one business segment.


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                                            Wealth,                                
                                            Brokerage                                
(income/expense in millions,           Community Banking             Wholesale Banking             and Retirement             Other (1)             Consolidated Company  
                               
average balances in billions)   2011     2010     2011     2010     2011     2010     2011     2010     2011     2010  
 
Quarter ended June 30,
                                                                               
Net interest income (2)
  $ 7,359       8,063       2,968       3,028       691       684       (340 )     (326 )     10,678       11,449  
Provision for credit losses
    1,927       3,348       (97 )     635       61       81       (53 )     (75 )     1,838       3,989  
Noninterest income
    5,208       5,543       2,663       2,746       2,395       2,183       (558 )     (527 )     9,708       9,945  
Noninterest expense
    7,418       7,678       2,766       2,873       2,487       2,350       (196 )     (155 )     12,475       12,746  
 
Income (loss) before income
                                                                               
tax expense (benefit)
    3,222       2,580       2,962       2,266       538       436       (649 )     (623 )     6,073       4,659  
Income tax expense (benefit)
    1,031       783       1,012       803       204       165       (246 )     (237 )     2,001       1,514  
 
Net income (loss) before
                                                                               
noncontrolling interests
    2,191       1,797       1,950       1,463       334       271       (403 )     (386 )     4,072       3,145  
Less: Net income from
                                                                               
noncontrolling interests
    104       81       19       1       1       1       -       -       124       83  
 
Net income (loss) (3)
  $ 2,087       1,716       1,931       1,462       333       270       (403 )     (386 )     3,948       3,062  
 
Average loans
  $ 498.2       534.3       243.1       228.2       43.5       42.6       (33.5 )     (32.6 )     751.3       772.5  
Average assets
    752.5       771.3       415.7       369.5       147.7       141.0       (65.0 )     (57.6 )     1,250.9       1,224.2  
Average core deposits
    552.0       532.6       190.6       162.3       126.0       121.5       (61.1 )     (54.6 )     807.5       761.8  
 
Six months ended June 30,
                                                                               
Net interest income (2)
  $ 14,902       16,316       5,723       5,582       1,387       1,348       (683 )     (650 )     21,329       22,596  
Provision for credit losses
    3,992       7,867       37       1,445       102       144       (83 )     (137 )     4,048       9,319  
Noninterest income
    10,302       11,254       5,368       5,615       4,849       4,429       (1,133 )     (1,052 )     19,386       20,246  
Noninterest expense
    15,023       14,883       5,566       5,558       5,046       4,740       (427 )     (318 )     25,208       24,863  
 
Income (loss) before income
                                                                               
tax expense (benefit)
    6,189       4,820       5,488       4,194       1,088       893       (1,306 )     (1,247 )     11,459       8,660  
Income tax expense (benefit)
    1,773       1,560       1,884       1,491       412       338       (496 )     (474 )     3,573       2,915  
 
Net income (loss) before
                                                                               
noncontrolling interests
    4,416       3,260       3,604       2,703       676       555       (810 )     (773 )     7,886       5,745  
Less: Net income from
                                                                               
noncontrolling interests
    154       129       21       4       4       3       -       -       179       136  
 
Net income (loss) (3)
  $ 4,262       3,131       3,583       2,699       672       552       (810 )     (773 )     7,707       5,609  
 
Average loans
  $ 504.0       542.3       238.9       232.6       43.1       43.2       (33.3 )     (33.2 )     752.7       784.9  
Average assets
    756.2       774.0       407.7       369.5       147.1       139.4       (64.9 )     (57.8 )     1,246.1       1,225.1  
Average core deposits
    550.1       532.0       187.7       162.0       125.7       121.3       (61.3 )     (54.8 )     802.2       760.5  
 
(1)   Includes Wachovia integration expenses and the elimination of items that are included in both Community Banking and Wealth, Brokerage and Retirement, largely representing services and products for wealth management customers provided in Community Banking stores.
 
(2)   Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to other segments. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment.
 
(3)   Represents segment net income (loss) for Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement segments and Wells Fargo net income for the consolidated company.

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Note 18: Condensed Consolidating Financial Statements
 
Following are the condensed consolidating financial statements
of the Parent and Wells Fargo Financial, Inc. and its owned
subsidiaries (WFFI).
Condensed Consolidating Statement of Income
                                         
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
 
Quarter ended June 30, 2011
                                       
Dividends from subsidiaries:
                                       
Bank
  $ 3,103       -       -       (3,103 )     -  
Nonbank
    88       -       -       (88 )     -  
Interest income from loans
    -       551       8,886       (76 )     9,361  
Interest income from subsidiaries
    235       -       -       (235 )     -  
Other interest income
    57       28       2,938       -       3,023  
 
Total interest income
    3,483       579       11,824       (3,502 )     12,384  
 
Deposits
    -       -       594       -       594  
Short-term borrowings
    60       16       124       (180 )     20  
Long-term debt
    639       142       359       (131 )     1,009  
Other interest expense
    2       -       81       -       83  
 
Total interest expense
    701       158       1,158       (311 )     1,706  
 
Net interest income
    2,782       421       10,666       (3,191 )     10,678  
Provision for credit losses
    -       180       1,658       -       1,838  
 
Net interest income after provision for credit losses
    2,782       241       9,008       (3,191 )     8,840  
 
Noninterest income
                                       
Fee income — nonaffiliates
    -       24       6,020       -       6,044  
Other
    87       26       3,709       (158 )     3,664  
 
Total noninterest income
    87       50       9,729       (158 )     9,708  
 
Noninterest expense
                                       
Salaries and benefits
    (165 )     23       7,061       -       6,919  
Other
    (218 )     155       5,777       (158 )     5,556  
 
Total noninterest expense
    (383 )     178       12,838       (158 )     12,475  
 
Income (loss) before income tax expense (benefit) and
                                       
equity in undistributed income of subsidiaries
    3,252       113       5,899       (3,191 )     6,073  
Income tax expense (benefit)
    (30 )     26       2,005       -       2,001  
Equity in undistributed income of subsidiaries
    666       -       -       (666 )     -  
 
Net income (loss) before noncontrolling interests
    3,948       87       3,894       (3,857 )     4,072  
Less: Net income from noncontrolling interests
    -       -       124       -       124  
 
Parent, WFFI, Other and Wells Fargo net income (loss)
  $ 3,948       87       3,770       (3,857 )     3,948  
 
 
                                       
Quarter ended June 30, 2010
                                       
Dividends from subsidiaries:
                                       
Bank
  $ 5,975       -       -       (5,975 )     -  
Nonbank
    15       -       -       (15 )     -  
Interest income from loans
    -       693       9,622       (38 )     10,277  
Interest income from subsidiaries
    302       -       9       (311 )     -  
Other interest income
    86       30       3,079       -       3,195  
 
Total interest income
    6,378       723       12,710       (6,339 )     13,472  
 
Deposits
    -       -       714       -       714  
Short-term borrowings
    21       11       93       (104 )     21  
Long-term debt
    729       260       489       (245 )     1,233  
Other interest expense
    1       -       54       -       55  
 
Total interest expense
    751       271       1,350       (349 )     2,023  
 
Net interest income
    5,627       452       11,360       (5,990 )     11,449  
Provision for credit losses
    -       198       3,791       -       3,989  
 
Net interest income after provision for credit losses
    5,627       254       7,569       (5,990 )     7,460  
 
Noninterest income
                                       
Fee income — nonaffiliates
    -       26       6,027       -       6,053  
Other
    171       29       3,880       (188 )     3,892  
 
Total noninterest income
    171       55       9,907       (188 )     9,945  
 
Noninterest expense
                                       
Salaries and benefits
    (17 )     26       6,843       -       6,852  
Other
    207       210       5,665       (188 )     5,894  
 
Total noninterest expense
    190       236       12,508       (188 )     12,746  
 
Income (loss) before income tax expense (benefit) and
                                       
equity in undistributed income of subsidiaries
    5,608       73       4,968       (5,990 )     4,659  
Income tax expense (benefit)
    (118 )     26       1,606       -       1,514  
Equity in undistributed income of subsidiaries
    (2,664 )     -       -       2,664       -  
 
Net income (loss) before noncontrolling interests
    3,062       47       3,362       (3,326 )     3,145  
Less: Net income from noncontrolling interests
    -       -       83       -       83  
 
Parent, WFFI, Other and Wells Fargo net income (loss)
  $ 3,062       47       3,279       (3,326 )     3,062  
 

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Condensed Consolidating Statements of Income
                                         
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
 
Six months ended June 30, 2011
                                       
Dividends from subsidiaries:
                                       
Bank
  $ 4,695       -       -       (4,695 )     -  
Nonbank
    88       -       -       (88 )     -  
Interest income from loans
    -       1,129       17,818       (199 )     18,748  
Interest income from subsidiaries
    543       -       -       (543 )     -  
Other interest income
    105       57       5,946       -       6,108  
 
Total interest income
    5,431       1,186       23,764       (5,525 )     24,856  
 
Deposits
    -       -       1,209       -       1,209  
Short-term borrowings
    165       31       311       (461 )     46  
Long-term debt
    1,333       309       752       (281 )     2,113  
Other interest expense
    3       -       156       -       159  
 
Total interest expense
    1,501       340       2,428       (742 )     3,527  
 
Net interest income
    3,930       846       21,336       (4,783 )     21,329  
Provision for credit losses
    -       427       3,621       -       4,048  
 
Net interest income after provision for credit losses
    3,930       419       17,715       (4,783 )     17,281  
 
Noninterest income
                                       
Fee income — nonaffiliates
    -       52       11,866       -       11,918  
Other
    84       50       7,648       (314 )     7,468  
 
Total noninterest income
    84       102       19,514       (314 )     19,386  
 
Noninterest expense
                                       
Salaries and benefits
    25       50       14,037       -       14,112  
Other
    (65 )     300       11,175       (314 )     11,096  
 
Total noninterest expense
    (40 )     350       25,212       (314 )     25,208  
 
Income (loss) before income tax expense (benefit) and
                                       
equity in undistributed income of subsidiaries
    4,054       171       12,017       (4,783 )     11,459  
Income tax expense (benefit)
    (464 )     41       3,996       -       3,573  
Equity in undistributed income of subsidiaries
    3,189       -       -       (3,189 )     -  
 
Net income (loss) before noncontrolling interests
    7,707       130       8,021       (7,972 )     7,886  
Less: Net income from noncontrolling interests
    -       -       179       -       179  
 
Parent, WFFI, Other and Wells Fargo net income (loss)
  $ 7,707       130       7,842       (7,972 )     7,707  
 
 
                                       
Six months ended June 30, 2010
                                       
Dividends from subsidiaries:
                                       
Bank
  $ 5,975       -       -       (5,975 )     -  
Nonbank
    21       -       -       (21 )     -  
Interest income from loans
    -       1,419       18,972       (76 )     20,315  
Interest income from subsidiaries
    650       -       9       (659 )     -  
Other interest income
    164       60       6,158       -       6,382  
 
Total interest income
    6,810       1,479       25,139       (6,731 )     26,697  
 
Deposits
    -       -       1,449       -       1,449  
Short-term borrowings
    44       20       187       (212 )     39  
Long-term debt
    1,447       547       1,038       (523 )     2,509  
Other interest expense
    1       -       103       -       104  
 
Total interest expense
    1,492       567       2,777       (735 )     4,101  
 
Net interest income
    5,318       912       22,362       (5,996 )     22,596  
Provision for credit losses
    -       519       8,800       -       9,319  
 
Net interest income after provision for credit losses
    5,318       393       13,562       (5,996 )     13,277  
 
Noninterest income
                                       
Fee income — nonaffiliates
    -       54       11,806       -       11,860  
Other
    382       76       8,267       (339 )     8,386  
 
Total noninterest income
    382       130       20,073       (339 )     20,246  
 
Noninterest expense
                                       
Salaries and benefits
    (50 )     96       13,434       -       13,480  
Other
    465       357       10,900       (339 )     11,383  
 
Total noninterest expense
    415       453       24,334       (339 )     24,863  
 
Income (loss) before income tax expense (benefit) and
                                       
equity in undistributed income of subsidiaries
    5,285       70       9,301       (5,996 )     8,660  
Income tax expense (benefit)
    (208 )     25       3,098       -       2,915  
Equity in undistributed income of subsidiaries
    116       -       -       (116 )     -  
 
Net income (loss) before noncontrolling interests
    5,609       45       6,203       (6,112 )     5,745  
Less: Net income from noncontrolling interests
    -       -       136       -       136  
 
Parent, WFFI, Other and Wells Fargo net income (loss)
  $ 5,609       45       6,067       (6,112 )     5,609  
 

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Note 18: Condensed Consolidated Financial Statements (continued)
Condensed Consolidating Balance Sheets
 
                                         
                    Other                
                    consolidating             Consolidated  
(in millions)   Parent     WFFI     subsidiaries     Eliminations     Company  
 
 
                                       
June 30, 2011
                                       
Assets
                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 28,337       182       -       (28,519 )     -  
Nonaffiliates
    15       220       112,230       -       112,465  
Securities available for sale
    11,309       2,835       172,154       -       186,298  
Mortgages and loans held for sale
    -       -       32,766       -       32,766  
 
                                       
Loans
    7       28,217       740,790       (17,093 )     751,921  
Loans to subsidiaries:
                                       
Bank
    3,885       -       -       (3,885 )     -  
Nonbank
    51,764       -       -       (51,764 )     -  
Allowance for loan losses
    -       (1,565 )     (19,328 )     -       (20,893 )
 
 
                                       
Net loans
    55,656       26,652       721,462       (72,742 )     731,028  
 
 
                                       
Investments in subsidiaries:
                                       
Bank
    136,657       -       -       (136,657 )     -  
Nonbank
    15,864       -       -       (15,864 )     -  
Other assets
    7,512       1,051       190,082       (1,468 )     197,177  
 
 
                                       
Total assets
  $ 255,350       30,940       1,228,694       (255,250 )     1,259,734  
 
 
                                       
Liabilities and equity
                                       
Deposits
  $ -       -       882,154       (28,519 )     853,635  
Short-term borrowings
    872       15,988       85,350       (48,329 )     53,881  
Accrued expenses and other liabilities
    11,995       1,492       59,411       (1,468 )     71,430  
Long-term debt
    93,189       11,689       49,514       (11,520 )     142,872  
Indebtedness to subsidiaries
    12,893       -       -       (12,893 )     -  
 
 
                                       
Total liabilities
    118,949       29,169       1,076,429       (102,729 )     1,121,818  
 
 
                                       
Parent, WFFI, Other and Wells Fargo stockholders’ equity
    136,401       1,771       150,750       (152,521 )     136,401  
Noncontrolling interests
    -       -       1,515       -       1,515  
 
 
                                       
Total equity
    136,401       1,771       152,265       (152,521 )     137,916  
 
 
                                       
Total liabilities and equity
  $ 255,350       30,940       1,228,694       (255,250 )     1,259,734  
 
 
                                       
December 31, 2010
                                       
Assets
                                       
Cash and cash equivalents due from:
                                       
Subsidiary banks
  $ 30,240       154       -       (30,394 )     -  
Nonaffiliates
    9       212       96,460       -       96,681  
Securities available for sale
    2,368       2,742       167,544       -       172,654  
Mortgages and loans held for sale
    -       -       53,053       -       53,053  
 
                                       
Loans
    7       30,329       742,807       (15,876 )     757,267  
Loans to subsidiaries:
                                       
Bank
    3,885       -       -       (3,885 )     -  
Nonbank
    53,382       -       -       (53,382 )     -  
Allowance for loan losses
    -       (1,709 )     (21,313 )     -       (23,022 )
 
 
                                       
Net loans
    57,274       28,620       721,494       (73,143 )     734,245  
 
 
                                       
Investments in subsidiaries:
                                       
Bank
    133,867       -       -       (133,867 )     -  
Nonbank
    14,904       -       -       (14,904 )     -  
Other assets
    8,363       1,316       192,821       (1,005 )     201,495  
 
 
                                       
Total assets
  $ 247,025       33,044       1,231,372       (253,313 )     1,258,128  
 
 
                                       
Liabilities and equity
                                       
Deposits
  $ -       -       878,336       (30,394 )     847,942  
Short-term borrowings
    2,412       14,490       86,523       (48,024 )     55,401  
Accrued expenses and other liabilities
    6,819       1,685       62,414       (1,005 )     69,913  
Long-term debt
    99,745       15,240       55,476       (13,478 )     156,983  
Indebtedness to subsidiaries
    11,641       -       -       (11,641 )     -  
 
 
                                       
Total liabilities
    120,617       31,415       1,082,749       (104,542 )     1,130,239  
 
 
                                       
Parent, WFFI, Other and Wells Fargo stockholders’ equity
    126,408       1,618       147,153       (148,771 )     126,408  
Noncontrolling interests
    -       11       1,470       -       1,481  
 
 
                                       
Total equity
    126,408       1,629       148,623       (148,771 )     127,889  
 
 
                                       
Total liabilities and equity
  $ 247,025       33,044       1,231,372       (253,313 )     1,258,128  
 

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Condensed Consolidating Statements of Cash Flows
 
                                                                 
    Six months ended June 30,  
    2011     2010  
                    Other                             Other        
                    consolidating                             consolidating        
                    subsidiaries/     Consolidated                     subsidiaries/     Consolidated  
(in millions)   Parent     WFFI     eliminations     Company     Parent     WFFI     eliminations     Company  
     
 
                                                               
Cash flows from operating activities:
                                                               
Net cash provided by operating activities
  $ 7,742       805       20,014       28,561       7,924       1,001       7,929       16,854  
     
 
                                                               
Cash flows from investing activities:
                                                               
Securities available for sale:
                                                               
Sales proceeds
    257       542       18,002       18,801       370       462       3,149       3,981  
Prepayments and maturities
    -       85       20,994       21,079       -       108       22,633       22,741  
Purchases
    (4,118 )     (686 )     (40,321 )     (45,125 )     (113 )     (564 )     (10,418 )     (11,095 )
Loans:
                                                               
Loans originated by banking subsidiaries, net of principal collected
    -       (10 )     (5,793 )     (5,803 )     -       95       20,809       20,904  
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries
    -       -       3,492       3,492       -       -       3,556       3,556  
Purchases (including participations) of loans by banking subsidiaries
    -       -       (2,277 )     (2,277 )     -       -       (1,201 )     (1,201 )
Principal collected on nonbank entities’ loans
    -       5,455       88       5,543       -       5,574       2,432       8,006  
Loans originated by nonbank entities
    -       (3,988 )     -       (3,988 )     -       (3,071 )     (2,238 )     (5,309 )
Net repayments from (advances to) subsidiaries
    (186 )     25       161       -       (2,004 )     (621 )     2,625       -  
Capital notes and term loans made to subsidiaries
    (1,340 )     -       1,340       -       -       -       -       -  
Principal collected on notes/loans made to subsidiaries
    3,178       -       (3,178 )     -       7,046       -       (7,046 )     -  
Net decrease (increase) in investment in subsidiaries
    (117 )     -       117       -       1,359       -       (1,359 )     -  
Other, net
    14       37       (2,036 )     (1,985 )     2       (12 )     (29,853 )     (29,863 )
     
 
                                                               
Net cash provided (used) by investing activities
    (2,312 )     1,460       (9,411 )     (10,263 )     6,660       1,971       3,089       11,720  
     
 
                                                               
Cash flows from financing activities:
                                                               
Net change in:
                                                               
Deposits
    -       -       5,693       5,693       -       -       (8,395 )     (8,395 )
Short-term borrowings
    (432 )     1,497       (2,506 )     (1,441 )     (10 )     2,114       (1,010 )     1,094  
Long-term debt:
                                                               
Proceeds from issuance
    3,847       513       2,342       6,702       1,577       -       588       2,165  
Repayment
    (11,363 )     (4,228 )     (6,100 )     (21,691 )     (13,282 )     (5,126 )     (13,517 )     (31,925 )
Preferred stock:
                                                               
Proceeds from issuance
    2,501       -       -       2,501       -       -       -       -  
Cash dividends paid
    (404 )     -       -       (404 )     (369 )     -       -       (369 )
Common stock warrants repurchased
    -       -       -       -       (540 )     -       -       (540 )
Common stock:
                                                               
Proceeds from issuance
    801       -       -       801       865       -       -       865  
Repurchased
    (1,072 )     -       -       (1,072 )     (68 )     -       -       (68 )
Cash dividends paid
    (1,269 )     -       -       (1,269 )     (520 )     -       -       (520 )
Excess tax benefits related to stock option payments
    64       -       -       64       75       -       -       75  
Net change in noncontrolling interests
    -       (11 )     (156 )     (167 )     -       -       (465 )     (465 )
     
 
                                                               
Net cash used by financing activities
    (7,327 )     (2,229 )     (727 )     (10,283 )     (12,272 )     (3,012 )     (22,799 )     (38,083 )
     
 
                                                               
Net change in cash and due from banks
    (1,897 )     36       9,876       8,015       2,312       (40 )     (11,781 )     (9,509 )
Cash and due from banks at beginning of period
    30,249       366       (14,571 )     16,044       27,314       454       (688 )     27,080  
     
 
                                                               
Cash and due from banks at end of period
  $ 28,352       402       (4,695 )     24,059       29,626       414       (12,469 )     17,571  
 

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Note 19: Regulatory and Agency Capital Requirements

The Company and each of its subsidiary banks are subject to regulatory capital adequacy requirements promulgated by federal regulatory agencies. The Federal Reserve establishes capital requirements, including well capitalized standards, for the consolidated financial holding company, and the OCC has similar requirements for the Company’s national banks, including Wells Fargo Bank, N.A.
      We do not consolidate our wholly-owned trusts (the Trusts) formed solely to issue trust preferred and preferred purchase securities (the Securities). Securities issued by the Trusts includable in Tier 1 capital were $13.3 billion at June 30, 2011. Since December 31, 2010, we have called $3.4 billion of trust preferred securities, and also issued $2.5 billion in Series I Preferred Stock, replacing certain preferred purchase securities reflected in the amount of Securities issued by the Trusts includable in Tier 1 capital at December 31, 2010. The Series I
Preferred Stock was included in preferred stock (Note 14), as a separate component of Tier 1 capital. The junior subordinated debentures held by the Trusts were included in the Company’s long-term debt.
      Certain subsidiaries of the Company are approved seller/servicers, and are therefore required to maintain minimum levels of shareholders’ equity, as specified by various agencies, including the United States Department of Housing and Urban Development, GNMA, FHLMC and FNMA. At June 30, 2011, each seller/servicer met these requirements. Certain broker-dealer subsidiaries of the Company are subject to SEC Rule 15c3-1 (the Net Capital Rule), which requires that we maintain minimum levels of net capital, as defined. At June 30, 2011, each of these subsidiaries met these requirements.
      The following table presents regulatory capital information for Wells Fargo & Company and Wells Fargo Bank, N.A.


 
                                                 
    Wells Fargo & Company     Wells Fargo Bank, N.A.     Well-     Minimum  
    June 30,     Dec. 31,     June 30,     Dec. 31,     capitalized     capital  
(in billions, except ratios)   2011     2010     2011     2010     ratios (1)     ratios (1)  
 
 
                                               
Regulatory capital:
                                               
Tier 1
  $ 113.5       109.4       92.1       90.2                  
Total
    149.5       147.1       117.6       117.1                  
 
                                               
Assets:
                                               
Risk-weighted
  $ 970.2       980.0       893.5       895.2                  
Adjusted average (2)
    1,203.8       1,189.5       1,066.0       1,057.7                  
 
                                               
Capital ratios:
                                               
Tier 1 capital
    11.69 %     11.16       10.31       10.07       6.00       4.00  
Total capital
    15.41       15.01       13.16       13.09       10.00       8.00  
Tier 1 leverage (2)
    9.43       9.19       8.64       8.52       5.00       4.00  
 
                                               
 
(1)   As defined by the regulations issued by the Federal Reserve, OCC and FDIC.
 
(2)   The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations.

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Glossary of Acronyms
 

     
ACL
  Allowance for credit losses
 
   
ALCO
  Asset/Liability Management Committee
 
   
ARS
  Auction rate security
 
   
ASC
  Accounting Standards Codification
 
   
ASU
  Accounting Standards Update
 
   
ARM
  Adjustable-rate mortgage
 
   
AVM
  Automated valuation model
 
   
CD
  Certificate of deposit
 
   
CDO
  Collateralized debt obligation
 
   
CLO
  Collateralized loan obligation
 
   
CLTV
  Combined loan-to-value
 
   
CPP
  Capital Purchase Program
 
   
CPR
  Constant prepayment rate
 
   
CRE
  Commercial real estate
 
   
DPD
  Days past due
 
   
ESOP
  Employee Stock Ownership Plan
 
   
FAS
  Statement of Financial Accounting Standards
 
   
FASB
  Financial Accounting Standards Board
 
   
FDIC
  Federal Deposit Insurance Corporation
 
   
FFELP
  Federal Family Education Loan Program
 
   
FHA
  Federal Housing Administration
 
   
FHLB
  Federal Home Loan Bank
 
   
FHLMC
  Federal Home Loan Mortgage Company
 
   
FICO
  Fair Isaac Corporation (credit rating)
 
   
FNMA
  Federal National Mortgage Association
 
   
FRB
  Board of Governors of the Federal Reserve System
 
   
GAAP
  Generally accepted accounting principles
 
   
GNMA
  Government National Mortgage Association
 
   
GSE
  Government-sponsored entity
 
   
HAMP
  Home Affordability Modification Program
 
   
HPI
  Home Price Index
 
   
HUD
  Department of Housing and Urban Development
 
   
LHFS
  Loans held for sale
 
   
LIBOR
  London Interbank Offered Rate
 
   
LOCOM
  Lower of cost or market value
 
   
LTV
  Loan-to-value
 
   
MBS
  Mortgage-backed security
 
   
MHFS
  Mortgages held for sale
 
   
MSR
  Mortgage servicing right
 
   
MTN
  Medium-term note
 
   
NAV
  Net asset value
     
NPA
  Nonperforming asset
 
   
OCC
  Office of the Comptroller of the Currency
 
   
OCI
  Other comprehensive income
 
   
OTC
  Over-the-counter
 
   
OTTI
  Other-than-temporary impairment
 
   
PCI Loans
  Purchased credit-impaired loans
 
   
PTPP
  Pre-tax pre-provision profit
 
   
RBC
  Risk-based capital
 
   
ROA
  Wells Fargo net income to average total assets
 
   
ROE
  Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity
 
   
SEC
  Securities and Exchange Commission
 
   
S&P
  Standard & Poor’s
 
   
SPE
  Special purpose entity
 
   
TARP
  Troubled Asset Relief Program
 
   
TDR
  Troubled debt restructuring
 
   
VA
  Department of Veterans Affairs
 
   
VaR
  Value-at-risk
 
   
VIE
  Variable interest entity
 
   
WFFCC
  Wells Fargo Financial Canada Corporation
 
   
WFFI
  Wells Fargo Financial, Inc. and its wholly-owned subsidiaries


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PART II – OTHER INFORMATION
     
Item 1.
  Legal Proceedings
 
 
  Information in response to this item can be found in Note 11 (Legal Actions) to Financial Statements in this Report which information is incorporated by reference into this item.
 
Item 1A.
  Risk Factors
 
 
  Information in response to this item can be found under the “Financial Review – Risk Factors” section in this Report which information is incorporated by reference into this item. The risk factors set forth in the “Financial Review – Risk Factors” section in this Report amend and restate in their entirety the risk factors set forth in the “Risk Factors” section on pages 92 through 101 of our 2010 Form 10-K.
 
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows Company repurchases of its common stock for each calendar month in the quarter ended June 30, 2011.
                         
 
 
                    Maximum number of  
    Total number             shares that may yet  
    of shares     Weighted-average     be purchased under  
Calendar month   repurchased (1)     price paid per share     the authorizations  
 
April
    15,299,568     $ 29.22       186,085,315  
May
    18,053,932       28.49       168,031,383  
June
    2,049,862       26.60       165,981,521  
                 
Total
    35,403,362                  
                 
 
     
(1)   All shares were repurchased under two separate authorizations covering up to 25 million and 200 million shares of common stock approved by the Board of Directors and publicly announced by the Company on September 23, 2008, and March 18, 2011, respectively. During second quarter 2011, the September 23, 2008, program of 25 million shares was completed; future repurchases will be made under the March 18, 2011, program of 200 million shares only. Unless modified or revoked by the Board, this authorization does not expire.
The following table shows Company repurchases of the warrants for each calendar month in the quarter ended June 30, 2011.
                         
 
 
    Total number             Maximum dollar value  
    of warrants     Average price     of warrants that  
Calendar month   repurchased (1)     paid per warrant     may yet be purchased  
 
April
    -     $ -       454,692,072  
May
    -       -       454,692,072  
June
    -       -       454,692,072  
                 
Total
    -                  
                 
 
(1)   No warrants were purchased in second quarter 2011. Warrants are purchased under the authorization covering up to $1 billion in warrants approved by the Board of Directors (ratified and approved on June 22, 2010). Unless modified or revoked by the Board, authorization does not expire.

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Item 6.
  Exhibits
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.
The Company’s SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
Dated: August 5, 2011  WELLS FARGO & COMPANY
 
 
  By:   /s/ RICHARD D. LEVY    
    Richard D. Levy   
    Executive Vice President and Controller (Principal Accounting Officer)   
 

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EXHIBIT INDEX
         
Exhibit        
Number   Description   Location
 
       
3(a)
  Restated Certificate of Incorporation, as amended and in effect on the date hereof.   Incorporated by reference to Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.
 
       
3(b)
  By-Laws.   Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 28, 2011.
 
       
4(a)
  See Exhibits 3(a) and 3(b).    
 
       
4(b)
  The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.    
 
       
10(a)
  Amendment to the Wells Fargo & Company Deferred Compensation Plan.   Filed herewith.
 
       
12(a)
  Computation of Ratios of Earnings to Fixed Charges:   Filed herewith.
                 
                    Six months  
    Quarter ended     ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
Including interest on deposits
    4.31       3.15       4.04       2.97  
 
               
Excluding interest on deposits
    5.94       4.23       5.51       3.96  
 
         
12(b)
  Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends:   Filed herewith.
 
 
       
                 
                    Six months  
    Quarter ended     ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
Including interest on deposits
    3.64       2.79       3.48       2.64  
 
               
Excluding interest on deposits
    4.66       3.54       4.44       3.33  
 

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Exhibit        
Number   Description   Location
 
       
31(a)
  Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith.
 
       
31(b)
  Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith.
 
       
32(a)
  Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.   Furnished herewith.
 
       
32(b)
  Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.   Furnished herewith.
 
       
99(a)
  Consent Order dated effective April 13, 2011, between the Company and the Board of Governors of the Federal Reserve System.   Filed herewith.
 
       
99(b)
  Consent Order dated effective April 13, 2011, between Wells Fargo Bank, N.A. and the Comptroller of the Currency.   Filed herewith.
 
       
101*
  Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, is formatted in XBRL interactive data files: (i) Consolidated Statement of Income for the six months ended June 30, 2011, and 2010; (ii) Consolidated Balance Sheet at June 30, 2011, and December 31, 2010; (iii) Consolidated Statement of Changes in Equity and Comprehensive Income for the six months ended June 30, 2011 and 2010; (iv) Consolidated Statement of Cash Flows for the six months ended June 30, 2011 and 2010; and (v) Notes to Financial Statements.   Furnished herewith.
 
 
*As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

162