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Wells Fargo 10-Q 2011
e10vq
Table of Contents

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.

5


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                  
                                       
 
                                               
 

6


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