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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware   No. 41-0449260
(State of incorporation)   (I.R.S. Employer Identification No.)
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 1-866-249-3302
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     
Yes þ
  No ¨
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 ¨
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 ¨    
 
Non-accelerated filer
  ¨ (Do not check if a smaller reporting company)   Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     
Yes ¨
  No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
    Shares Outstanding
    April 30, 2010
Common stock, $1-2/3 par value
    5,210,152,080  


 

FORM 10-Q
CROSS-REFERENCE INDEX
             
   
PART I          
Item 1.  
Financial Statements
  Page  
        54  
        55  
        56  
        58  
           
        59  
        62  
        62  
        63  
        72  
        76  
        77  
        89  
        91  
        93  
        97  
        105  
        117  
        119  
        119  
        120  
        123  
        129  
             
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
       
        2  
        3  
        5  
        13  
        17  
        21  
        45  
        48  
        49  
        50  
        52  
        130  
             
Item 3.       42  
             
Item 4.       53  
             
PART II          
             
Item 1.       132  
             
Item 1A.       132  
             
Item 2.       132  
             
Item 6.       132  
             
Signature     132  
             
Exhibit Index     133  
   
 EX-3.A
 EX-3.B
 EX-12.A
 EX-12.B
 EX-31.A
 EX-31.B
 EX-32.A
 EX-32.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

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PART I – FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
                                         
   
                            % Change  
    Quarter ended     Mar. 31, 2010 from  
    Mar. 31 ,    Dec. 31   Mar. 31   Dec. 31   Mar. 31
($ in millions, except per share amounts)   2010     2009     2009     2009     2009  
   
For the Quarter
                                       
Wells Fargo net income
  $ 2,547       2,823       3,045       (10 )%     (16 )
Wells Fargo net income applicable to common stock
    2,372       394       2,384       502       (1 )
Diluted earnings per common share
    0.45       0.08       0.56       463       (20 )
Profitability ratios (annualized):
                                       
Wells Fargo net income to average assets (ROA)
    0.84 %     0.90       0.96       (7 )     (13 )
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)
    8.96       1.66       14.49       440       (38 )
Efficiency ratio (1)
    56.5       56.5       56.2             1  
Total revenue
  $ 21,448       22,696       21,017       (5 )     2  
Pre-tax pre-provision profit (PTPP) (2)
    9,331       9,875       9,199       (6 )     1  
Dividends declared per common share
    0.05       0.05       0.34             (85 )
Average common shares outstanding
    5,190.4       4,764.8       4,247.4       9       22  
Diluted average common shares outstanding
    5,225.2       4,796.1       4,249.3       9       23  
Average loans
  $ 797,389       792,440       855,591       1       (7 )
Average assets
    1,226,120       1,239,456       1,289,716       (1 )     (5 )
Average core deposits (3)
    759,169       770,750       753,928       (2 )     1  
Average retail core deposits (4)
    573,653       580,873       590,502       (1 )     (3 )
Net interest margin
    4.27 %     4.31       4.16       (1 )     3  
At Quarter End
                                       
Securities available for sale
  $ 162,487       172,710       178,468       (6 )     (9 )
Loans
    781,430       782,770       843,579             (7 )
Allowance for loan losses
    25,123       24,516       22,281       2       13  
Goodwill
    24,819       24,812       23,825             4  
Assets
    1,223,630       1,243,646       1,285,891       (2 )     (5 )
Core deposits (3)
    756,050       780,737       756,183       (3 )      
Wells Fargo stockholders’ equity
    116,142       111,786       100,295       4       16  
Total equity
    118,154       114,359       107,057       3       10  
Tier 1 capital (5)
    98,329       93,795       88,977       5       11  
Total capital (5)
    137,600       134,397       131,820       2       4  
Capital ratios:
                                       
Total equity to assets
    9.66 %     9.20       8.33       5       16  
Risk-based capital (5)
                                       
Tier 1 capital
    9.93       9.25       8.30       7       20  
Total capital
    13.90       13.26       12.30       5       13  
Tier 1 leverage (5)
    8.34       7.87       7.09       6       18  
Tier 1 common equity (6)
    7.09       6.46       3.12       10       127  
Book value per common share
  $ 20.76       20.03       16.28       4       28  
Team members (active, full-time equivalent)
    267,400       267,300       272,800             (2 )
Common stock price:
                                       
High
  $ 31.99       31.53       30.47       1       5  
Low
    26.37       25.00       7.80       5       238  
Period end
    31.12       26.99       14.24       15       119  
   
(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 18 (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 Report on Form 10-Q for the quarter ended March 31, 2010, 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. Some of these factors are described in the Financial Review and in the Financial Statements and related Notes. For a discussion of other factors, refer to the “Forward-Looking Statements” and “Risk Factors” sections in this Report and to the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SEC’s website at www.sec.gov. See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Review, and Financial Statements and related Notes of this Report.
FINANCIAL REVIEW
OVERVIEW
Wells Fargo & Company is a $1.2 trillion diversified financial services company providing banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores, 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. We ranked fourth in assets and third in the market value of our common stock among our peers at March 31, 2010. 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), which was acquired by Wells Fargo on December 31, 2008.
Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to give them all of the financial products that fulfill their needs. Our cross-sell strategy, 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. All of our business segments contributed to the strong earnings results in first quarter 2010.
Our company earned $2.5 billion in first quarter 2010, or $0.45 diluted earnings per common share. This earnings performance is an example of how our business model is capable of producing solid results in different stages of the economic cycle. While loan demand remained soft in first quarter 2010, businesses as diverse as asset-based lending, debit card, insurance, merchant services, student lending and retirement services all showed solid revenue gains. Credit metrics in many portfolios — including loss rates and early loss indicators — performed better than our previous expectations for first quarter 2010. Based on results for the last few quarters and current loss projections, we believe that credit at Wells Fargo has turned the corner with provision expense having peaked in third quarter 2009 and net charge-offs having peaked in fourth quarter 2009.
Our cross-sell at legacy Wells Fargo set a record in first quarter 2010 with 6.0 Wells Fargo products for retail banking households. Our goal is eight products per customer, which is approximately half of our estimate of potential demand. One of every four of our legacy Wells Fargo retail banking households has eight or more products and our average middle-market commercial banking customer has almost eight products. Wachovia retail bank households had an average of 4.85 Wachovia products. We believe there

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is potentially significant opportunity for growth as we increase the cross-sell to Wachovia retail bank households. For legacy Wells Fargo, our average middle-market commercial banking customer reached an average of 7.7 products and an average of 6.4 products for Wholesale Banking customers. Business banking cross-sell offers another potential opportunity for growth, with a record cross-sell of 3.79 products at legacy Wells Fargo.
Wells Fargo remained one of the largest providers of credit to the U.S. economy in first quarter 2010. We continued to lend to credit-worthy customers and, during first quarter 2010, made $128 billion in new loan commitments to consumer, small business and commercial customers, including $76 billion of residential mortgage originations. We are an industry leader in loan modifications for homeowners, with over half a million active and completed trial modifications between January 2009 and March 31, 2010, 144,932 Home Affordability Modification Program (HAMP) active trial and completed modifications, including 30,014 permanent HAMP modifications and nearly 380,000 proprietary trial and completed modifications. On March 17, 2010, we announced our participation in the government’s Second-Lien Modification Program under HAMP to help struggling homeowners with a reduction in their home equity loan payments.
As we have stated in the past, to consistently grow over the long term, successful companies must invest in their core businesses and maintain strong balance sheets. In first quarter 2010, we opened 11 retail banking stores for a retail network total of 6,590 stores. We converted Wachovia banking stores in Arizona, Illinois and Nevada in March 2010 and Wachovia’s credit card business and California banking store conversions took place in April 2010.
We continued taking actions to build capital and further strengthen our balance sheet, including reducing previously identified non-strategic and liquidating loan portfolios by $4.3 billion in first quarter 2010 and $23.2 billion cumulatively since the Wachovia acquisition. We reduced the value of our debt and equity investment portfolios through $197 million of other-than-temporary impairment (OTTI) write-downs in first quarter 2010. We significantly built capital in first quarter 2010 and in the last 18 months since announcing our merger with Wachovia, driven by record retained earnings and other sources of internal capital generation, as well as three common stock offerings totaling over $33 billion. Our capital ratios at March 31, 2010, were higher than they were prior to the Wachovia acquisition. Tier 1 common equity increased to $70.2 billion, 7.09% of risk-weighted assets. The Tier 1 capital ratio increased to 9.93% and Tier 1 leverage ratio increased to 8.34%. See the “Capital Management” section in this Report for more information regarding Tier 1 common equity.
We believe 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 setting what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within established ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to facilitate future growth.
We continued to see signs of stability in our credit portfolio, as credit losses were modestly lower on a linked-quarter basis. Credit losses in first quarter 2010 of $5.3 billion were down from $5.4 billion in fourth quarter 2009, even after $123 million of charge-offs recorded in first quarter 2010 upon adoption of new consolidation accounting guidance and $145 million due to newly issued regulatory guidance requiring us to charge-off certain collateral-dependent residential real estate loans that have been modified. The costs related to this charge had previously been reserved. Our credit picture has improved earlier than we had anticipated. In the consumer portfolio, lower early stage delinquencies, better delinquency roll rates, and improved values for residential real estate and autos were evident in the first

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quarter. In the commercial portfolio (including commercial real estate) losses declined $356 million from fourth quarter 2009 and may indicate stabilization and an earlier-than-expected loss peak.
This improvement in credit quality can be partly attributed to actions we took as early as 2007, including significant investment in collections, loss mitigation and workout teams; a refined consumer credit policy that reduced maximum loan-to-value requirements and virtually eliminated stated income as an acceptable element of loan applications; and the establishment of a number of run-off/liquidating portfolios. These actions have produced high quality subsequent vintages, and allowed us to focus our loss remediation efforts in an efficient fashion.
Nonperforming assets (NPAs) continued to increase in first quarter 2010, although at a slower rate than in the past three quarters, with over $900 million of the increase related to assets brought on the balance sheet upon adoption of new consolidation accounting guidance. All of the first quarter 2010 increase came from consumer real estate loans and commercial real estate (CRE) loans. We expect NPAs to continue to increase gradually and peak before year end. The peak in NPAs should lag the credit loss peak, reflecting an environment where retaining these assets is our most viable economic option and the best way to help borrowers recover financially.
Our provision for credit losses in first quarter 2010 equaled net charge-offs. Our loan loss reserve increase from year end 2009 was fully attributable to assets brought on balance sheet due to the adoption of new consolidation accounting guidance. While losses remained elevated as expected, a more favorable economic outlook and improved credit statistics in several portfolios further increase our confidence that the credit cycle is turning, provided economic conditions do not deteriorate. In the commercial portfolios, we saw some signs that credit quality may be improving, as the pace of commercial and CRE nonaccrual growth slowed toward the end of 2009, in part reflecting our historically strong underwriting and the purchase accounting adjustments taken on the Wachovia portfolio at the time of the merger.
EARNINGS PERFORMANCE
Revenue in first quarter 2010 was $21.4 billion, up 2% from $21.0 billion in first quarter 2009, despite a 7% decline in average loans. Although average loans declined $58 billion from a year ago, revenue grew 2% over the same period, reflecting the diversity of our revenue sources. Revenue growth from first quarter 2009 was driven by 20% growth in trust and investment fees, 7% growth in insurance fees, 14% growth in processing and other fees, and an 11 basis point increase in the net interest margin. Mortgage banking revenues were flat from the prior year. Net interest income of $11.1 billion declined only 2% from a year ago despite the 7% decline in average loans.
There were four primary reasons why revenue increased from a year ago. First, the net interest margin was 4.27%, up 11 basis points from a year ago, largely due to substantial growth in core consumer and business checking and savings accounts. Second, we are already realizing revenue synergies from the Wachovia merger. Third, the breadth of our business model continued to contribute to our overall revenue as the decline in net interest income from a year ago was more than offset by higher fee income. Fourth, our revenue continued to benefit from our cross-sell efforts, with legacy Wells Fargo record cross-sell reaching over 6 products per retail banking household in first quarter 2010.
Noninterest expense of $12.1 billion in first quarter 2010 was up 3% from a year ago. First quarter 2010 expenses included $380 million of merger integration costs, compared with $205 million a year ago. Credit resolution costs, including expenses associated with foreclosed assets, loan modifications and other home preservation activities, were approximately $250 million higher than a year ago. In addition to merger integration and credit resolution expenses, we continued to invest for long-term growth, adding people in regional and commercial banking as we apply the Wells Fargo business model throughout

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legacy Wachovia markets, and investing in technology to improve service across the franchise. As of first quarter 2010, we have also already realized over 70% of our targeted projected run-rate savings from the Wachovia merger. The efficiency ratio was 56.5% in first quarter 2010, compared with 56.2% a year ago.
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 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
Net interest income on a taxable-equivalent basis was $11.3 billion in first quarter 2010 and $11.5 billion in first quarter 2009, reflecting a decline in average loans. Average earning assets were $1.1 trillion in first quarter 2010, flat compared with first quarter 2009. Average loans decreased to $797.4 billion in first quarter 2010 from $855.6 billion a year ago. We continued to supply significant amounts of credit to consumers and businesses in first quarter 2010, although loan demand remained soft. We continued to reduce high-risk/non-strategic consumer loans, which were down $18.8 billion in first quarter 2010 from a year ago. Average mortgages held for sale (MHFS) of $31.4 billion in first quarter 2010 were essentially flat compared with $31.1 billion a year ago. Average debt securities available for sale was $160.8 billion in first quarter 2010, also essentially flat compared with $160.4 billion a year ago.
Core deposits are a low-cost source of funding and thus an important contributor to 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 $759.2 billion in first quarter 2010 from $753.9 billion in first quarter 2009, and funded 95% and 88% of average loans in the same periods, respectively. Average checking and savings deposits, typically the lowest cost deposits, represented about 88% of our average core deposits, one of the highest percentages in the industry. Of average core deposits, $664.4 billion represent transaction accounts or low-cost savings accounts from consumer and commercial customers, which increased 14% from $583.8 billion in first quarter 2009. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, decreased to $573.7 billion for first quarter 2010 from $590.5 billion a year ago. Average mortgage escrow deposits were $24.6 billion in first quarter 2010, compared with $24.7 billion a year ago. Average certificates of deposits decreased to $94.8 billion in first quarter 2010 from $170.1 billion a year ago and average checking and savings deposits increased to $664.4 billion from $583.8 billion a year ago. Total average interest-bearing deposits decreased to $632.0 billion in first quarter 2010 from $635.4 billion a year ago.
The following table presents the individual components of net interest income and the net interest margin.

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AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2)
                                                 
   
    Quarter ended March 31
    2010     2009  
                    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
  $ 40,833       0.33 %   $ 33       24,074       0.84 %   $ 50  
Trading assets
    27,911       3.91       272       22,203       4.97       275  
Debt securities available for sale (3):
                                               
Securities of U.S. Treasury and federal agencies
    2,278       3.62       20       2,899       0.93       7  
Securities of U.S. states and political subdivisions
    13,696       6.60       221       12,213       6.43       213  
Mortgage-backed securities:
                                               
Federal agencies
    79,730       5.39       1,023       76,545       5.71       1,068  
Residential and commercial
    32,768       9.67       790       38,690       8.57       1,017  
                                     
Total mortgage-backed securities
    112,498       6.67       1,813       115,235       6.82       2,085  
Other debt securities (4)
    32,346       6.51       492       30,080       6.81       551  
                                     
Total debt securities available for sale (4)
    160,818       6.59       2,546       160,427       6.69       2,856  
Mortgages held for sale (5)
    31,368       4.93       387       31,058       5.34       415  
Loans held for sale (5)
    6,406       2.15       34       7,949       3.40       67  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    156,466       4.51       1,743       196,923       3.87       1,884  
Real estate mortgage
    104,971       3.61       936       104,271       3.47       894  
Real estate construction
    28,848       3.16       225       34,493       3.03       258  
Lease financing
    14,008       9.22       323       15,810       8.77       347  
                                     
Total commercial and commercial real estate
    304,293       4.29       3,227       351,497       3.89       3,383  
                                     
Consumer:
                                               
Real estate 1-4 family first mortgage
    245,024       5.26       3,210       245,494       5.64       3,444  
Real estate 1-4 family junior lien mortgage
    105,640       4.47       1,168       110,128       5.05       1,375  
Credit card
    23,345       13.15       767       23,295       12.10       704  
Other revolving credit and installment
    90,526       6.40       1,427       92,820       6.68       1,527  
                                     
Total consumer
    464,535       5.70       6,572       471,737       6.03       7,050  
                                     
Foreign
    28,561       3.62       256       32,357       4.36       349  
                                     
Total loans (5)
    797,389       5.09       10,055       855,591       5.09       10,782  
Other
    6,069       3.36       50       6,140       2.87       43  
                                     
Total earning assets
  $ 1,070,794       5.06 %   $ 13,377       1,107,442       5.22 %   $ 14,488  
                                     
Funding sources
                                               
Deposits:
                                               
Interest-bearing checking
  $ 62,021       0.15 %   $ 23       80,393       0.15 %   $ 30  
Market rate and other savings
    403,945       0.29       286       313,445       0.54       419  
Savings certificates
    94,763       1.36       317       170,122       0.92       387  
Other time deposits
    15,878       2.03       80       25,555       1.97       124  
Deposits in foreign offices
    55,434       0.21       29       45,896       0.35       39  
                                     
Total interest-bearing deposits
    632,041       0.47       735       635,411       0.64       999  
Short-term borrowings
    45,081       0.18       19       76,068       0.66       123  
Long-term debt
    209,008       2.45       1,276       258,957       2.77       1,783  
Other liabilities
    5,664       3.43       49       3,778       3.88       36  
                                     
Total interest-bearing liabilities
    891,794       0.94       2,079       974,214       1.22       2,941  
Portion of noninterest-bearing funding sources
    179,000                   133,228              
                                     
Total funding sources
  $ 1,070,794       0.79       2,079       1,107,442       1.06       2,941  
                                     
Net interest margin and net interest income on a taxable-equivalent basis (6)
            4.27 %   $ 11,298               4.16 %   $ 11,547  
                             
Noninterest-earning assets
                                               
Cash and due from banks
  $ 18,049                       20,255                  
Goodwill
    24,816                       23,183                  
Other
    112,461                       138,836                  
                                         
Total noninterest-earning assets
  $ 155,326                       182,274                  
                                         
Noninterest-bearing funding sources
                                               
Deposits
  $ 172,039                       160,308                  
Other liabilities
    44,739                       50,566                  
Total equity
    117,548                       104,628                  
Noninterest-bearing funding sources used to fund earning assets
    (179,000 )                     (133,228 )                
                                     
Net noninterest-bearing funding sources
  $ 155,326                       182,274                  
                                     
Total assets
  $ 1,226,120                       1,289,716                  
                                     
   
(1)   Our average prime rate was 3.25% for the quarters ended March 31, 2010 and 2009. The average three-month London Interbank Offered Rate (LIBOR) was 0.26% and 1.24% for the same quarters, respectively.
(2)   Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(3)   Yields 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)   Includes certain preferred securities.
(5)   Nonaccrual loans and related income are included in their respective loan categories.
(6)   Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.

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NONINTEREST INCOME
                         
   
    Quarter ended March 31   %  
(in millions)   2010     2009     Change  
   
Service charges on deposit accounts
  $ 1,332       1,394       (4 )%
Trust and investment fees:
                       
Trust, investment and IRA fees
    1,049       722       45  
Commissions and all other fees
    1,620       1,493       9  
           
Total trust and investment fees
    2,669       2,215       20  
           
Card fees
    865       853       1  
Other fees:
                       
Cash network fees
    55       58       (5 )
Charges and fees on loans
    419       433       (3 )
Processing and all other fees
    467       410       14  
           
Total other fees
    941       901       4  
           
Mortgage banking:
                       
Servicing income, net
    1,366       906       51  
Net gains on mortgage loan origination/sales activities
    1,104       1,598       (31 )
           
Total mortgage banking
    2,470       2,504       (1 )
           
Insurance
    621       581       7  
Net gains from trading activities
    537       787       (32 )
Net gains (losses) on debt securities available for sale
    28       (119 )     NM  
Net gains (losses) from equity investments
    43       (157 )     NM  
Operating leases
    185       130       42  
All other
    610       552       11  
           
Total
  $ 10,301       9,641       7  
   
   
NM — Not meaningful
Noninterest income represented 48% of total revenues for first quarter 2010, compared with 46% for first quarter 2009. Noninterest income was up 7% year over year, largely due to increases in trust and investment fees, and insurance revenues.
The Federal Reserve Board (FRB) announced regulatory changes to debit card and ATM overdraft practices in fourth quarter 2009. In third quarter 2009, we also announced policy changes that should help customers limit overdraft and returned item fees. We currently estimate that the combination of these changes is expected to reduce our 2010 fee revenue by approximately $500 million (after tax). The actual impact could vary due to a variety of factors, including changes in customer behavior.
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 March 31, 2010, these assets totaled $2.0 trillion, up 33% from $1.5 trillion a year ago, reflecting a 46% increase in the S&P 500 over the same period. Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of the assets under management or administration. These fees increased to $1.0 billion in first quarter 2010 from $722 million a year ago.
We received commissions and other fees for providing services to full-service and discount brokerage customers of $1.6 billion in first quarter 2010 and $1.5 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. Client assets totaled $1.1 trillion at March 31, 2010, up from $930 billion a year ago. Commissions and other fees also include fees from investment banking activities including equity and bond underwriting.

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Card fees were $865 million in first quarter 2010 compared with $853 million a year ago. Recent legislative and regulatory changes limit our ability to increase interest rates and assess certain fees on card accounts. The anticipated net impact in 2010 related to these changes are estimated to be between $75 million and $100 million (after tax) before accounting for potential offsets in performance, the economy and other factors. The actual impact could vary due to a variety of factors.
Mortgage banking noninterest income was $2.5 billion in first quarter 2010, flat compared with $2.5 billion a year ago. In addition to servicing fees, 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 first quarter 2010 included a $989 million net MSRs valuation gain ($777 million decrease in the fair value of the MSRs offsetting a $1.8 billion hedge gain) and for first quarter 2009 included a $875 million net MSRs valuation gain ($2.8 billion decrease in the fair value of MSRs partially offsetting a $3.7 billion hedge gain). See the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section of this Report for additional information regarding our MSRs risks and hedging approach. Our portfolio of loans serviced for others was $1.87 trillion at March 31, 2010, down from $1.88 trillion at December 31, 2009. At March 31, 2010, the ratio of MSRs to related loans serviced for others was 0.89% compared with 0.91% at December 31, 2009.
Net gains on mortgage loan origination/sales activities of $1.1 billion for first quarter 2010 were down from $1.6 billion a year ago, primarily due to lower origination volumes (25% decline in originations) and a net increase in the mortgage loan repurchase reserve. Residential real estate originations were $76 billion in first quarter 2010, compared with $101 billion a year ago. The 1-4 family first mortgage unclosed pipeline was $59 billion at March 31, 2010, and $57 billion at December 31, 2009. For additional detail, see the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section; and Note 1 (Summary of Significant Accounting Policies), Note 8 (Mortgage Banking Activities) and Note 12 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities include the cost of any additions to the mortgage repurchase reserve as well as adjustments of loans in the warehouse/pipeline for changes in market conditions that affect their value. Mortgage loans are repurchased based on standard representations and warranties and early payment default clauses in mortgage sale contracts. Additions to the mortgage repurchase reserve that were charged against net gains on mortgage loan origination/sales activities during first quarter 2010 totaled $402 million. For additional information about mortgage loan repurchases, see the “Risk Management — Credit Risk Management Process — Reserve for Mortgage Loan Repurchase Losses” section and Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.
Insurance revenue was $621 million in first quarter 2010, up 7% from a year ago, due to higher crop insurance revenues.
Income from trading activities was $537 million in first quarter 2010, down from $787 million a year ago. This decrease was driven by lower investment activity and higher credit-valuation adjustment charges, partially offset by higher customer-related revenues.
Aggregate net gains on debt securities available for sale and equity securities totaled $71 million in first quarter 2010, compared with net losses of $276 million a year ago. The year-over-year improvement was due to lower impairment write-downs of $197 million in first quarter 2010, down $319 million from $516 million a year ago. For additional detail, see the “Balance Sheet Analysis — Securities Available for Sale” section and Note 4 (Securities Available for Sale) to Financial Statements in this Report.

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NONINTEREST EXPENSE
                         
   
    Quarter ended March 31   %  
(in millions)   2010     2009     Change  
   
Salaries
  $ 3,314       3,386       (2 )%
Commission and incentive compensation
    1,992       1,824       9  
Employee benefits
    1,322       1,284       3  
Equipment
    678       687       (1 )
Net occupancy
    796       796        
Core deposit and other intangibles
    549       647       (15 )
FDIC and other deposit assessments
    301       338       (11 )
Outside professional services
    484       410       18  
Contract services
    347       216       61  
Foreclosed assets
    386       248       56  
Outside data processing
    272       212       28  
Postage, stationery and supplies
    242       250       (3 )
Operating losses
    208       172       21  
Insurance
    148       267       (45 )
Telecommunications
    143       158       (9 )
Travel and entertainment
    171       105       63  
Advertising and promotion
    112       125       (10 )
Operating leases
    37       70       (47 )
All other
    615       623       (1 )
           
Total
  $ 12,117       11,818       3  
   
   
Noninterest expense was $12.1 billion in first quarter 2010 compared with $11.8 billion in first quarter 2009, and included $380 million and $205 million of merger integration costs for the same periods, respectively. The $131 million increase in contract services from a year ago was primarily merger related. First quarter 2010 credit resolution costs, including expenses associated with foreclosed assets, loan modifications and other home preservation activities, were approximately $250 million higher than a year ago. Of our approximately $5 billion of estimated total integration costs, we expect to incur approximately $2 billion in 2010, as we convert banking stores and lines of business, and continue to build infrastructure. In addition to merger integration, we continued to invest for long-term growth throughout the Company, adding people in regional banking and commercial banking as we apply Wells Fargo’s model to the eastern markets, and investing in technology to improve service across our franchise.
INCOME TAX EXPENSE
Our effective income tax rate was 35.5% in first quarter 2010, up from 33.8% in first quarter 2009. The increase was attributable in part to $53 million in tax expense related to the new health care legislation impacting the deductibility of future health care expenses.
The Patient Protection and Affordable Care Act that was signed into law on March 23, 2010, combined with the Health Care and Education Reconciliation Act of 2010 (enacted March 30, 2010), changed the tax treatment related to our health care expenses for retirees. Under this new legislation, our tax deduction for retiree health care expenses will be reduced by future reimbursements received under the Medicare Part D retiree drug subsidy program. The change in law results in a reduction of the deferred tax asset associated with the retiree health care liabilities that is recognized as a one-time non-cash charge in the period of legislative enactment.

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OPERATING SEGMENT RESULTS
We have three lines of business for management reporting: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. We define our operating segments by product and customer. Our management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with similar information for other financial services companies. In first quarter 2010, we conformed certain funding and allocation methodologies of legacy Wachovia to those of Wells Fargo; in addition integration expense related to mergers other than the Wachovia merger are now included in segment results. Prior periods have been revised to reflect both changes.
The table below 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 16 (Operating Segments) to Financial Statements in this Report.
OPERATING SEGMENT RESULTS — HIGHLIGHTS
                                                 
   
                                    Wealth, Brokerage  
    Community Banking     Wholesale Banking     and Retirement  
(in billions)   2010     2009     2010     2009     2010     2009  
   
Quarter ended March 31,
                                               
Revenue
  $ 14.1       14.4       5.3       4.9       2.9       2.5  
Net income
    1.5       1.9       1.2       1.2       0.3       0.2  
   
Average loans
    555.2       567.8       232.2       278.2       43.8       46.6  
Average core deposits
    532.2       555.0       160.9       139.6       121.1       102.8  
   
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.
Community Banking’s net income decreased 25% to $1.5 billion in first quarter 2010 from $1.9 billion a year ago. Revenue decreased 2% to $14.1 billion from $14.4 billion a year ago. Net interest income decreased $360 million, or 4%, due to loan run-off portfolios and lower securities yields and balances. Average loans decreased $12.6 billion, or 2%, due to run-off portfolios and low demand. Average core deposits decreased $22.8 billion, or 4%, primarily due to Wachovia high yield certificates of deposit maturing. Noninterest income was $5.8 billion in first quarter 2010, almost flat compared with $5.7 billion a year ago. In first quarter 2010, the provision for credit losses of $4.5 billion, which equaled net charge-offs, was up from $4.0 billion a year ago, which included a $1 billion credit reserve build. Noninterest expense decreased $180 million, or 2%, due to lower Federal Deposit Insurance Corporation (FDIC) assessments and Wachovia merger-related cost saves.

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Wholesale Banking provides financial solutions to businesses across the United States with annual sales generally in excess of $10 million and financial institutions globally. Products include middle market banking, corporate banking, commercial real estate, treasury management, asset-based lending, insurance brokerage, foreign exchange, correspondent banking, trade services, specialized lending, equipment finance, corporate trust, investment banking, capital markets, and asset management.
Wholesale Banking’s net income of $1.2 billion in first quarter 2010 was flat compared with first quarter 2009. Net interest income of $2.5 billion in first quarter 2010 increased 7% from $2.3 billion a year ago. Average loans of $232.2 billion declined 17% from first quarter 2009 driven by declines across most lending areas. Core deposits of $160.9 billion in first quarter 2010 increased 15% from $139.6 billion a year ago driven by growth in both interest-bearing and non-interest bearing deposits primarily in global financial institutions, government and institutional banking and commercial banking. In first quarter 2010, total provision for credit losses was $799 million. First quarter 2009 provision included a credit reserve build of $277 million. Noninterest income of $2.8 billion in first quarter 2010 increased 11% from $2.6 billion a year ago. Noninterest expense of $2.7 billion in first quarter 2010 increased 5% from $2.5 billion a year ago due primarily to expenses associated with foreclosed assets as well as higher operating 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. Retail brokerage’s financial advisors serve customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the U.S. 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’s net income increased 60% to $282 million in first quarter 2010 from $176 million a year ago reflecting the strong equity market performance and growth in deposit balances. Revenue was up 16% to $2.9 billion in first quarter 2010 from $2.5 billion a year ago. Net interest income increased 4% to $664 million from $641 million a year ago as growth in average deposits was offset by the continued negative impact of low short-term interest rates. Noninterest income increased 20% to $2.2 billion from $1.9 billion a year ago driven by the strong equity market environment and improved investor confidence leading to greater client transaction activity. Average loans decreased 6% to $43.8 billion in first quarter 2010 from $46.6 billion a year ago. The provision for credit losses increased to $63 million in first quarter 2010 from $23 million a year ago, primarily due to higher loan charge-offs. Noninterest expense increased to $2.4 billion (7%) in first quarter 2010 from $2.2 billion a year ago.

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BALANCE SHEET ANALYSIS
During first quarter 2010, our total assets, loans and core deposits each decreased slightly from December 31, 2009, but we continued to grow capital. Loan demand remained soft during the quarter and we continued to hold excess cash in more liquid lower-yielding assets to guard against the expected rise in interest rates that would cause a decline in market value in interest-sensitive asset-backed securities. Overall, we believe our balance sheet has strengthened with the continued strong liquidity, increased reserves and timely charge-offs for losses and our improving capital.
See the following sections for more discussion and details about the major components of our balance sheet. Capital is discussed in the “Capital Management” section of this Report.
SECURITIES AVAILABLE FOR SALE
                                                 
   
    March 31, 2010     December 31, 2009  
            Net                     Net        
            unrealized     Fair             unrealized     Fair  
(in billions)   Cost     gain     value     Cost     gain     value  
   
Debt securities available for sale
  $ 150.2       6.6       156.8       162.3       4.8       167.1  
Marketable equity securities
    4.9       0.8       5.7       4.8       0.8       5.6  
   
Total securities available for sale
  $ 155.1       7.4       162.5       167.1       5.6       172.7  
   
   
Securities available for sale consist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily of very liquid, high-quality federal agency debt and privately issued mortgage-backed securities (MBS). The total net unrealized gains on securities available for sale of $7.4 billion at March 31, 2010, were up from $5.6 billion at December 31, 2009, due to general decline in long-term yields and narrowing of credit spreads.
Comparative detail of average balances of securities available for sale is provided in the table under “Earnings Performance — Net Interest Income” earlier in this Report.
We analyze securities for OTTI on a quarterly basis, or more often if a potential loss-triggering event occurs. The initial indication of OTTI for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions within its industry, and whether it is more likely than not that we will be required to sell the security before a recovery in value.
At March 31, 2010, we had approximately $6 billion of investments in securities, primarily municipal bonds, which are guaranteed against loss by bond insurers. These securities are almost exclusively investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of our on-going impairment analysis of our securities available for sale, but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers.
The weighted-average expected maturity of debt securities available for sale was 5.8 years at March 31, 2010. Since 71% 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

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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 the following table.
MORTGAGE-BACKED SECURITIES
                         
   
                    Expected  
                    remaining  
    Fair     Net unrealized     maturity  
(in billions)   value     gains (losses)     (in years)  
   
At March 31, 2010
  $ 111.1       4.2       4.5  

At March 31, 2010, assuming a 200 basis point:

                       
Increase in interest rates
    101.3       (5.6 )     6.1  
Decrease in interest rates
    117.8       10.9       3.1  
   
See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.
LOAN PORTFOLIO
                                                 
   
    March 31, 2010     December 31, 2009  
            All                     All        
    PCI     other             PCI     other        
(in millions)   loans     loans     Total     loans     loans     Total  
   
Commercial and commercial real estate:
                                               
Commercial
  $ 1,431       149,156       150,587       1,911       156,441       158,352  
Real estate mortgage
    5,252       99,262       104,514       5,631       99,167       104,798  
Real estate construction
    3,538       24,299       27,837       3,713       25,994       29,707  
Lease financing
          13,887       13,887             14,210       14,210  
   
Total commercial and commercial real estate
    10,221       286,604       296,825       11,255       295,812       307,067  
   
Consumer:
                                               
Real estate 1-4 family first mortgage
    37,378       203,150       240,528       38,386       191,150       229,536  
Real estate 1-4 family junior lien mortgage
    315       103,485       103,800       331       103,377       103,708  
Credit card
          22,525       22,525             24,003       24,003  
Other revolving credit and installment
          89,463       89,463             89,058       89,058  
   
Total consumer
    37,693       418,623       456,316       38,717       407,588       446,305  
   
Foreign
    1,593       26,696       28,289       1,733       27,665       29,398  
   
Total loans
  $ 49,507       731,923       781,430       51,705       731,065       782,770  
   
   
A discussion of average loan balances and a comparative detail of average loan balances is included in “Earnings Performance — Net Interest Income” earlier 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.
As of December 31, 2008, certain of the loans acquired from Wachovia had evidence of credit deterioration since 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 using the measurement provisions for purchased credit-impaired (PCI) loans. PCI loans were recorded at fair value at the date of acquisition, and any related allowance for loan losses was not permitted to be carried over.

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PCI loans were written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual, even though they may be contractually past due, because we expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). PCI loans are also not included in the disclosure of loans 90 days or more past due and still accruing interest even though a portion of them are 90 days or more contractually past due.
The 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. The following table provides an analysis of changes in the nonaccretable difference related to principal that is not expected to be collected.
CHANGES IN NONACCRETABLE DIFFERENCE FOR PCI LOANS
                                 
   
    Commercial,                      
    CRE and             Other        
(in millions)   foreign     Pick-a-Pay     consumer     Total  
   
Balance, December 31, 2008
  $ (10,410 )     (26,485 )     (4,069 )     (40,964 )

Release of nonaccretable difference due to:

                               
Loans resolved by payment in full (1)
    330                   330  
Loans resolved by sales to third parties (2)
    86             85       171  
Loans with improving cash flows reclassified to accretable yield (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, December 31, 2009
    (5,003 )     (16,240 )     (1,622 )     (22,865 )
Release of nonaccretable difference due to:
                               
Loans resolved by payment in full (1)
    146                   146  
Loans resolved by sales to third parties (2)
    36                   36  
Loans with improving cash flows reclassified to accretable yield (3)
    92       549       27       668  
Use of nonaccretable difference due to:
                               
Losses from loan resolutions and write-downs (4)
    728       1,177       183       2,088  
   
Balance, March 31, 2010
  $ (4,001 )     (14,514 )     (1,412 )     (19,927 )
   
   
(1)   Release of the nonaccretable difference for payments in full increases interest income in the period of payment. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans.
(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 for increased cash flow estimates to the accretable yield will result in increasing income and thus the rate of return realized. Amounts reclassified to accretable yield are expected to be probable of realization over the estimated remaining life of the loan.
(4)   Write-downs to net realizable value of PCI loans are charged to 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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Since the Wachovia acquisition, we have released $1.8 billion in nonaccretable difference, including $1.1 billion transferred from the nonaccretable difference to the accretable yield and $683 million released through loan resolutions. We provided $1.0 billion in the allowance for credit losses in excess of the initial expected levels on certain PCI loans; the net result is a $774 million improvement in our initial projected losses on PCI loans. The following table analyzes the actual and projected loss results since the acquisition of Wachovia on December 31, 2008, through March 31, 2010.
                                 
   
    Commercial ,                    
    CRE and             Other        
(in millions)   foreign     Pick-a-Pay     consumer     Total  
   
Release of unneeded nonaccretable difference due to:
                               
Loans resolved by payment in full (1)
  $ 476                   476  
Loans resolved by sales to third parties (2)
    122             85       207  
Reclassification to accretable yield for loans with improving cash flow (3)
    230       576       303       1,109  
   
Total releases of nonaccretable difference due to better than expected losses
    828       576       388       1,792  
Provision for worse than originally expected losses on PCI loans (4)
    (1,002 )           (16 )     (1,018 )
   
Actual and projected losses better (worse) than originally expected
  $ (174 )     576       372       774  
   
(1)   Release of the nonaccretable difference for payments in full increases interest income in the period of payment. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans.
(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 for increased cash flow estimates to the accretable yield will result in increasing income and thus the rate of return realized. Amounts reclassified to accretable yield are expected to be probable of realization over the estimated remaining life of the loan.
(4)   Provision for additional losses recorded as a charge to income, when it is estimated that the expected cash flows for a PCI loan or pool of loans have decreased subsequent to the acquisition.
For further detail on PCI loans, see Note 1 (Summary of Significant Accounting Policies — Loans) to Financial Statements in the 2009 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
DEPOSITS
Deposits totaled $804.9 billion at March 31, 2010, compared with $824.0 billion at December 31, 2009. Comparative detail of average deposit balances is provided in the table under “Earnings Performance — Net Interest Income” earlier in this Report. Total core deposits were $756.1 billion at March 31, 2010, down $24.7 billion from December 31, 2009.
                         
   
    March 31 ,   Dec. 31 ,      
(in millions)   2010     2009     % Change  
   
Noninterest-bearing
  $ 170,518       181,356       (6 )%
Interest-bearing checking
    64,521       63,225       2  
Market rate and other savings
    401,950       402,448        
Savings certificates
    91,560       100,857       (9 )
Foreign deposits (1)
    27,501       32,851       (16 )
   
Core deposits
    756,050       780,737       (3 )
Other time and savings deposits
    20,355       16,142       26  
Other foreign deposits
    28,488       27,139       5  
   
Total deposits
  $ 804,893       824,018       (2 )
   
   
(1)   Reflects Eurodollar sweep balances included in core deposits.

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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. These are described below as off-balance sheet transactions with unconsolidated entities, and guarantees and certain contingent arrangements. Beginning in 2010, the accounting rules for off-balance sheet transactions with unconsolidated entities changed. We adopted changes in consolidation accounting effective January 1, 2010, and, accordingly, consolidated certain variable interest entities (VIEs) that were not included in our consolidated financial statements at December 31, 2009. We discuss the impact of those changes in this section and in Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.
OFF-BALANCE SHEET TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. 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.
In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:
  underwriting securities issued by SPEs and subsequently making markets in those securities;
  providing liquidity to support short-term obligations of SPEs issued to third party investors;
  providing credit enhancement to securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps;
  entering into other derivative contracts with SPEs;
  holding senior or subordinated interests in SPEs;
  acting as servicer or investment manager for SPEs; and
  providing administrative or trustee services to SPEs.
SPEs are generally considered to be VIEs. A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. We consolidate a VIE when, under the new consolidation accounting guidance, we have both the power to direct the activities that most significantly impact the VIE and a variable interest that could potentially be significant to the VIE. A variable interest is a contractual, ownership or other interest that changes with fluctuations in the fair value of the VIE’s net assets. To determine whether or not a variable interest we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE.

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The following table presents our unconsolidated VIEs with which we have significant continuing involvement, but do not meet both the power and significant variable interest indicators required for consolidation.
UNCONSOLIDATED VIEs
                                                 
   
    March 31, 2010     December 31, 2009  
    Total             Maximum     Total             Maximum  
    entity     Carrying     exposure     entity     Carrying     exposure  
(in millions)   assets     value     to loss     assets     value     to loss  
   
Residential mortgage loan securitizations (1):
                                               
Conforming
  $ 1,052,147       17,117       21,920       1,150,515       18,926       24,362  
Other/nonconforming
    92,535       3,884       3,898       251,850       13,222       13,469  
Commercial mortgage securitizations
    205,353       6,094       6,360       345,561       4,945       5,222  
Collateralized debt obligations:
                                               
Debt securities
    20,577       2,644       4,773       45,684       4,770       6,643  
Loans (2)
    10,081       9,833       9,833       10,215       9,964       9,964  
Multi-seller commercial paper conduit (3)
                      5,160             5,263  
Asset-based finance structures
    13,639       8,002       9,655       17,467       9,867       11,227  
Tax credit structures
    20,390       2,628       3,277       27,537       4,006       4,663  
Collateralized loan obligations
    14,700       2,932       3,409       23,830       3,666       4,239  
Investment funds
    16,678       1,420       1,420       84,642       1,702       2,920  
Other (4)
    19,703       5,002       6,297       23,538       4,398       7,268  
 
Total unconsolidated VIEs
  $ 1,465,803       59,556       70,842       1,985,999       75,466       95,240  
   
   
(1)   Conforming residential mortgage loan securitizations are those that are guaranteed by government-sponsored entities (GSEs), including Government National Mortgage Association (GNMA). We have concluded that conforming mortgages are not subject to consolidation under the new consolidation accounting guidance. Total entity assets at December 31, 2009 includes $20.9 billion of nonconforming residential mortgage securitizations that were consolidated in first quarter 2010.
(2)   Represents senior loans to trusts that are collateralized by asset-backed securities. The trusts invest in senior tranches from a diversified pool of primarily U.S. asset securitizations, of which all are current, and over 95% were rated as investment grade by the primary rating agencies at March 31, 2010. These senior loans were acquired in the Wachovia business combination and are accounted for at amortized cost as initially determined under purchase accounting and are subject to the Company’s allowance and credit charge-off policies.
(3)   The multi-seller commercial paper conduit was consolidated in first quarter 2010.
(4)   Includes student loan securitizations, auto loan securitizations and credit-linked note structures. Also contains investments in auction rate securities (ARS) issued by VIEs that we do not sponsor and, accordingly, are unable to obtain the total assets of the entity.
The balances presented for March 31, 2010, represent our unconsolidated VIEs for which we consider our involvement to be significant. The balances presented for December 31, 2009, include unconsolidated VIEs with which we have continuing involvement that we no longer consider significant. Accordingly, we have excluded these transactions from the balances presented for March 31, 2010. We have refined our definition of significant continuing involvement in accordance with new consolidation accounting guidance to exclude unconsolidated VIEs when our continuing involvement relates to third-party sponsored VIEs for which we were not the transferor, and unconsolidated VIEs for which we were the sponsor but do not have any other significant continuing involvement.
Significant continuing involvement includes transactions where we were the sponsor or transferor and have other significant forms of involvement. Sponsorship includes transactions with unconsolidated VIEs where we solely or materially participated in the initial design or structuring of the entity or marketing of the transaction to investors. When we transfer assets to a VIE and account for the transfer as a sale, we are considered the transferor. We consider investments in securities held outside of trading, loans, guarantees, liquidity agreements, written options and servicing of collateral to be other forms of involvement that may be significant. We have excluded certain transactions with unconsolidated VIEs from the March 31, 2010, balances presented in the table above where we have determined that our continuing involvement is not significant due to the temporary nature and size of our variable interests because we were not the transferor or because we were not involved in the design or operations of the unconsolidated VIEs.

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In the previous table, “Total entity assets” represents the total assets of unconsolidated VIEs. “Carrying value” is the amount in our consolidated balance sheet related to our involvement with the unconsolidated VIEs. “Maximum exposure to loss” from our involvement with off-balance sheet entities, which is a required disclosure under generally accepted accounting principles (GAAP), is determined as the carrying value of our involvement with off-balance sheet (unconsolidated) VIEs plus the remaining undrawn liquidity and lending commitments, the notional amount of net written derivative contracts, and generally the notional amount of, or stressed loss estimate for, other commitments and guarantees. It represents estimated loss that would be incurred under severe, hypothetical circumstances, for which we believe the possibility is extremely remote, such as where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.
NEWLY CONSOLIDATED VIE ASSETS AND LIABILITIES
Effective January 1, 2010, we adopted new consolidation accounting guidance and, accordingly, consolidated certain VIEs that were not included in our consolidated financial statements at December 31, 2009. On January 1, 2010, we recorded the assets and liabilities of the newly consolidated VIEs and derecognized our existing interests in those VIEs. We also recorded a $183 million increase to beginning retained earnings as a cumulative effect adjustment and recorded a $173 million increase to other comprehensive income (OCI).
The following table presents the net incremental assets recorded on our balance sheet by structure type upon adoption of new consolidation accounting guidance.
         
   
    Incremental  
(in millions)   assets  
   
Structure type:
       
Residential mortgage loans — nonconforming (1)
  $ 11,479  
Commercial paper conduit
    5,088  
Other
    2,002  
   
Total
  $ 18,569  
   
   
(1)   Represents certain of our residential mortgage loans that are not guaranteed by GSEs (“nonconforming”).

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The following table presents the net incremental assets and liabilities recorded upon adoption of new consolidation accounting guidance.
                         
   
    January 1, 2010  
    Total VIE     Derecognition     Net  
    assets and     of existing VIE     increase  
(in millions)   liabilities (1)     interests (2)     (decrease)  
   
Assets
                       
Cash and due from banks
  $ 154             154  
Trading assets
    18       137       155  
Securities available for sale
    1,178       (8,768 )     (7,590 )
Loans, net of $693 allowance for credit losses
    25,657             25,657  
Other assets
    164       29       193  
   
Total assets
  $ 27,171       (8,602 )     18,569  
   
Liabilities
                       
Short-term borrowings (3)
  $ 5,161       (34 )     5,127  
Accrued expenses and other liabilities
    38       (70 )     (32 )
Long-term debt
    13,134             13,134  
   
Total liabilities
  $ 18,333       (104 )     18,229  
   
   
(1)   Excludes VIE assets and liabilities that are eliminated in the consolidated financial statements of Wells Fargo.
(2)   Includes derecognition of existing interests in newly consolidated VIEs and net impacts of deconsolidating certain VIEs.
(3)   Includes commercial paper liabilities of our multi-seller asset-based commercial paper conduit with recourse to the general credit of Wells Fargo.
In accordance with the transition provisions of the new consolidation accounting guidance, we initially recorded newly consolidated VIE assets and liabilities at their carrying amounts, except for those VIEs for which the fair value option was elected. The carrying amount for loans approximate the outstanding unpaid principal balance, adjusted for allowance for loan losses, short-term borrowings and long-term debt approximate the outstanding par amount due to creditors.
Upon adoption of new consolidation accounting guidance on January 1, 2010, we elected fair value option accounting for certain nonconforming residential mortgage loan securitization VIEs. This election requires us to recognize the VIE’s eligible assets and liabilities on the balance sheet at fair value with changes in fair value recognized in earnings. Such eligible assets and liabilities consisted primarily of loans and long-term debt, respectively. The fair value option was elected for those newly consolidated VIEs for which our interests, prior to January 1, 2010, were predominantly carried at fair value with changes in fair value recorded to earnings. Accordingly, the fair value option was elected to effectively continue fair value accounting through earnings for those interests. Conversely, fair value option was not elected for those newly consolidated VIEs that did not share these characteristics. At January 1, 2010, the fair value of loans and long-term debt for which the fair value option was elected was $1.0 billion and $1.0 billion, respectively. The incremental impact of electing fair value option (compared to not electing) on the cumulative effect adjustment to retained earnings was an increase of $15 million.

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CHANGES IN VIE ASSETS AND LIABILITIES
Consolidated VIEs include VIEs consolidated prior to the adoption of the new consolidation accounting guidance as well as VIEs newly consolidated upon adoption. This guidance requires that companies continually reassess whether they are the primary beneficiary of a VIE. As a result of events that occurred during the quarter, we deconsolidated certain VIEs. The following table presents the detail of changes in the assets and liabilities of all consolidated VIEs from January 1, 2010, through March 31, 2010.
                                                 
   
             
January 1, 2010
             
March 31, 2010
 
    Newly     Previously                            
    consolidated     consolidated             Reconsider-     VIE        
(in millions)   VIEs (1)     VIEs (1)(2)     Total     ations (3)     activity (1)     Total  
   
Assets
                                               
Cash and due from banks
  $ 154       267       421       (11 )     (51 )     359  
Trading assets
    18       77       95       (15 )           80  
Securities available for sale
    1,178       980       2,158             (325 )     1,833  
Loans, net
    25,657       561       26,218       (1,551 )     (1,278 )     23,389  
Other assets
    164       2,432       2,596       (431 )     104       2,269  
   
Total assets
  $ 27,171       4,317       31,488       (2,008 )     (1,550 )     27,930  
   
Liabilities
                                               
Short-term borrowings (4)
  $ 5,161       317       5,478             (331 )     5,147  
Accrued expenses and other liabilities (4)
    38       689       727       (137 )     105       695  
Long-term debt (4)
    13,134       1,396       14,530       (1,942 )     (1,293 )     11,295  
   
Total liabilities
  $ 18,333       2,402       20,735       (2,079 )     (1,519 )     17,137  
   
   
(1)   Excludes VIE assets and liabilities that are eliminated in the consolidated financial statements of Wells Fargo.
(2)   Reflects the impact of deconsolidation of certain VIEs upon adoption of new consolidation accounting guidance.
(3)   Due to events that occurred during first quarter 2010, we deconsolidated certain residential mortgage-backed securitizations and other VIEs.
(4)   Includes the following VIE liabilities at March 31, 2010, with recourse to the general credit of Wells Fargo: Short-term borrowings, $4.8 billion; Accrued expenses and other liabilities, $104 million; and Long-term debt, $175 million.
RISK MANAGEMENT
All financial institutions must manage and control a variety of business risks that can significantly affect their financial performance. Key among these are credit, asset/liability and market risk.
For further discussion about how we manage these risks, see pages 54–71 of our 2009 Form 10-K. The discussion that follows is intended to provide an update on these risks.
CREDIT RISK MANAGEMENT
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, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes. For more information on our credit risk management process, please refer to page 54 in our 2009 Form 10-K.

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Credit Quality Overview
We are encouraged by signs of improvement in the credit cycle and believe that credit at Wells Fargo has turned the corner.
  Credit losses in first quarter 2010 of $5.3 billion were down from $5.4 billion in fourth quarter 2009, even after $123 million charge-offs recorded in first quarter 2010 upon adoption of new consolidation accounting guidance and $145 million due to newly issued regulatory guidance requiring us to charge-off certain collateral-dependent residential real estate loans that have been modified. The costs related to this charge had previously been reserved. All other credit losses were $5.1 billion, down from $5.4 billion in fourth quarter 2009.
  In the consumer portfolio, lower early stage delinquencies, better delinquency roll rates, and improved values for residential real estate and autos were evident in the first quarter. This improvement in credit quality can be partly attributed to actions we took as early as 2007, including significant investment in collections, loss mitigation and workout teams; a refined consumer credit policy that reduced maximum loan-to-value requirements and virtually eliminated stated income as an acceptable element of loan applications; and the establishment of a number of run-off/liquidating portfolios. These actions have produced high quality subsequent vintages, and allowed us to focus our loss remediation efforts in an efficient fashion.
  Losses in the commercial portfolio (including commercial real estate) declined $356 million from fourth quarter 2009 as these portfolios showed stabilizing credit metrics.
  NPAs continued to increase in first quarter 2010, although at a slower rate than in the past three quarters, with all of the first quarter increase coming from consumer real estate loans and commercial real estate loans, in part due to the addition of nonaccrual loans related to loans brought on the balance sheet upon adoption of new consolidation accounting guidance. We believe that the loss content of NPAs is materially reduced by previous write-downs, as well as significant collateral support.
Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of risk to loss. Our credit risk monitoring process is designed to enable early identification of developing risk to loss and to support our determination of an adequate allowance for loan losses. During the current economic cycle our monitoring and resolution efforts have focused on loan portfolios exhibiting the highest levels of risk including mortgage loans supported by real estate (both consumer and commercial), junior lien, commercial, credit card and subprime portfolios. The following sections include additional information regarding each of these loan portfolios and their relevant concentrations and credit quality performance metrics.
The following table identifies our non-strategic and liquidating consumer portfolios as of March 31, 2010, and December 31, 2009.
NON-STRATEGIC AND LIQUIDATING CONSUMER PORTFOLIOS
                 
   
    Outstanding balances  
    March 31 ,    Dec. 31
(in billions)   2010     2009  
   
Pick-a-Pay mortgage
  $ 82.9       85.2  
Liquidating home equity
    8.0       8.4  
Legacy Wells Fargo Financial indirect auto
    9.7       11.3  
   
Total non-strategic and liquidating consumer portfolios
  $ 100.6       104.9  
   
   

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Commercial Real Estate (CRE)
The CRE portfolio consists of both commercial real estate mortgages and construction loans. The combined CRE loans outstanding totaled $132.4 billion at March 31, 2010, which represented 17% of total loans. Construction loans totaled $27.8 billion at March 31, 2010, or 4% of total loans. Permanent CRE loans totaled $104.5 billion at March 31, 2010, or 13% of total loans. The portfolio is diversified both geographically and by product type. The largest geographic concentrations are found in California and Florida, which represented 21% and 11% of the total CRE portfolio, respectively. By product type, the largest concentrations are office buildings and industrial/warehouse, which represented 23% and 11% of the portfolio, respectively.
At legacy Wells Fargo our underwriting of CRE loans has been focused primarily on cash flows and creditworthiness, not solely collateral valuations. Our legacy Wells Fargo management team is overseeing and managing the CRE loans acquired from Wachovia. At merger closing, $19.3 billion of Wachovia CRE loans were accounted for as PCI loans and we recorded an impairment write-down of $7.0 billion in our purchase accounting, which represented a 37% write-down of the PCI loans included in the Wachovia CRE loan portfolio. 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 assets, including regular loan reviews and appraisal updates. As issues are identified, management is engaged and dedicated workout groups are in place to manage problem assets. At March 31, 2010, the remaining balance of PCI CRE loans totaled $8.8 billion. This balance reflects the refinement of the impairment analysis and reduction from loan resolutions and write-downs.
The following table summarizes CRE loans by state and product type with the related nonaccrual totals. At March 31, 2010, the highest concentration of non-PCI CRE loans by state was $27.2 billion in California, about double the next largest state concentration, and the related nonaccrual loans totaled about $1.7 billion, or 6.4% of CRE loans in California. Office buildings, at $28.6 billion of non-PCI loans, were the largest property type concentration, nearly double the next largest, and the related nonaccrual loans totaled $1.3 billion, or 4.4% of CRE loans for office buildings. Of CRE mortgage loans (excluding construction loans), 43% related to owner-occupied properties at March 31, 2010. In aggregate, nonaccrual loans totaled 6.2% of the non-PCI outstanding balance at March 31, 2010.

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CRE LOANS BY STATE AND PROPERTY TYPE
                                                         
   
    March 31, 2010  
    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:
                                                       
Florida
  $       1,008             679             1,687       * %
California
          1,055             150             1,205       *  
North Carolina
          250             501             751       *  
Georgia
          375             328             703       *  
Virginia
          421             256             677       *  
Other
          2,143             1,624             3,767 (2)     *  
   
Total PCI loans
          5,252             3,538             8,790       1  
   

All other loans:

                                                       
California
    1,093       23,118       655       4,118       1,748       27,236       3  
Florida
    908       10,946       342       2,016       1,250       12,962       2  
Texas
    279       6,998       262       2,468       541       9,466       1  
North Carolina
    246       5,290       163       1,412       409       6,702       *  
Georgia
    310       4,223       79       826       389       5,049       *  
Virginia
    84       3,477       107       1,529       191       5,006       *  
Arizona
    205       3,923       220       982       425       4,905       *  
New York
    56       3,811       31       1,086       87       4,897       *  
New Jersey
    114       2,935       14       623       128       3,558       *  
Colorado
    96       2,297       105       898       201       3,195       *  
Other
    1,366       32,244       937       8,341       2,303       40,585 (3)     5  
   
Total all other loans
    4,757       99,262       2,915       24,299       7,672       123,561       16  
   
Total
  $ 4,757       104,514       2,915       27,837       7,672       132,351       17 %
   

By property:

                                                       
PCI loans:
                                                       
Apartments
  $       919             923             1,842       * %
Office buildings
          1,591             190             1,781       *  
1-4 family land
          513             742             1,255       *  
1-4 family structure
          128             574             702       *  
Land (excluding 1-4 family)
          525             159             684       *  
Other
          1,576             950             2,526       *  
   
Total PCI loans
          5,252             3,538             8,790       1  
   

All other loans:

                                                       
Office buildings
    1,055       25,697       206       2,931       1,261       28,628       4  
Industrial/warehouse
    644       13,926       28       890       672       14,816       2  
Real estate — other
    602       13,564       82       760       684       14,324       2  
Apartments
    264       7,950       236       4,253       500       12,203       2  
Retail (excluding shopping center)
    726       10,727       116       1,008       842       11,735       2  
Land (excluding 1-4 family)
    227       2,602       537       6,052       764       8,654       1  
Shopping center
    248       6,294       220       2,075       468       8,369       1  
Hotel/motel
    357       5,430       119       1,064       476       6,494       *  
1-4 family land
    179       747       674       2,488       853       3,235       *  
Institutional
    75       2,798       36       220       111       3,018       *  
Other
    380       9,527       661       2,558       1,041       12,085       2  
   
Total all other loans
    4,757       99,262       2,915       24,299       7,672       123,561 (4)     16  
   
Total
  $ 4,757       104,514       2,915       27,837       7,672       132,351       17 %
   
   
*   Less than 1%
(1)   For PCI loans amounts represent carrying value.
(2)   Includes 39 states; no state had loans in excess of $560 million.
(3)   Includes 40 states; no state had loans in excess of $3.1 billion.
(4)   Includes $45.5 billion of loans to owner-occupants where 51% or more of the property is used in the conduct of their business.
(continued on following page)

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(continued from previous page)
                                                         
   
    December 31, 2009  
    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:
                                                       
Florida
  $       1,022             722             1,744       * %
California
          1,116             150             1,266       *  
North Carolina
          283             485             768       *  
Georgia
          385             364             749       *  
Virginia
          396             303             699       *  
Other
          2,429             1,689             4,118 (5)     *  
   
Total PCI loans
          5,631             3,713             9,344       1  
   

All other loans:

                                                       
California
    1,141       23,214       865       4,549       2,006       27,763       4  
Florida
    626       10,999       311       2,127       937       13,126       2  
Texas
    231       6,643       250       2,509       481       9,152       1  
North Carolina
    205       5,468       135       1,594       340       7,062       *  
Georgia
    225       4,364       109       952       334       5,316       *  
Virginia
    65       3,499       105       1,555       170       5,054       *  
New York
    54       3,860       48       1,187       102       5,047       *  
Arizona
    187       3,958       171       1,045       358       5,003       *  
New Jersey
    66       3,028       23       644       89       3,672       *  
Colorado
    78       2,248       110       879       188       3,127       *  
Other
    1,106       31,886       898       8,953       2,004       40,839 (6)     5  
   
Total all other loans
    3,984       99,167       3,025       25,994       7,009       125,161       16  
   
Total
  $ 3,984       104,798       3,025       29,707       7,009       134,505       17 %
   

By property:

                                                       
PCI loans:
                                                       
Apartments
  $       1,141             969             2,110       * %
Office buildings
          1,650             192             1,842       *  
1-4 family land
          531             815             1,346       *  
1-4 family structure
          154             635             789       *  
Land (excluding 1-4 family)
          553             206             759       *  
Other
          1,602             896             2,498       *  
   
Total PCI loans
          5,631             3,713             9,344       1  
   

All other loans:

                                                       
Office buildings
    904       25,542       171       3,151       1,075       28,693       4  
Industrial/warehouse
    527       13,925       17       999       544       14,924       2  
Real estate — other
    564       13,791       88       877       652       14,668       2  
Apartments
    259       7,670       262       4,570       521       12,240       2  
Retail (excluding shopping center)
    620       10,788       85       996       705       11,784       2  
Land (excluding 1-4 family)
    148       2,941       639       6,264       787       9,205       1  
Shopping center
    172       6,070       242       2,240       414       8,310       1  
Hotel/motel
    208       5,214       123       1,162       331       6,376       *  
1-4 family land
    164       718       677       2,670       841       3,388       *  
1-4 family structure
    90       1,191       659       2,073       749       3,264       *  
Other
    328       11,317       62       992       390       12,309       2  
   
Total all other loans
    3,984       99,167       3,025       25,994       7,009       125,161 (7)     16  
   
Total
  $ 3,984       104,798       3,025       29,707       7,009       134,505       17 %
   
   
(5)   Includes 38 states; no state had loans in excess of $605 million.
(6)   Includes 40 states; no state had loans in excess of $3.0 billion.
(7)   Includes $46.6 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 Loans and Lease Financing
For purposes of portfolio risk management, we aggregate commercial loans and lease financing according to market segmentation and standard industry codes. The following table summarizes commercial loans and lease financing by industry with the related nonaccrual totals. This portfolio has experienced less credit deterioration than our CRE portfolio as evidenced by its lower nonaccrual rate of 2.7% compared with 5.8% for the CRE portfolios. We believe this portfolio is well underwritten and is diverse in its risk with relatively even concentrations across several industries. A majority of our commercial 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. Our credit risk management process for this portfolio primarily focuses on a customer’s ability to repay the loan through their cash flow. Generally, collateral securing this portfolio represents a secondary source of repayment.
COMMERCIAL LOANS AND LEASE FINANCING BY INDUSTRY
                                                 
   
    March 31, 2010     December 31, 2009  
                    % of                     % of  
    Nonaccrual     Outstanding     total     Nonaccrual     Outstanding     total  
(in millions)   loans     balance (1)     loans     loans     balance (1)     loans  
   

PCI loans:

                                               

Media

  $       276       * %   $       314       * %
Real estate investment trust
          179       *             351       *  
Insurance
          125       *             118       *  
Investors
          114       *             140       *  
Airlines
          79       *             87       *  
Leisure
          74       *             110       *  
Other
          584 (2)     *             791 (2)     *  
   
Total PCI loans
          1,431       *             1,911       *  
   

All other loans:

                                               
Financial institutions
    355       12,736       2       496       11,111       1  
Cyclical retailers
    52       8,420       1       71       8,188       1  
Healthcare
    86       8,141       1       88       8,397       1  
Food and beverage
    80       8,036       1       77       8,316       1  
Oil and gas
    214       7,878       1       202       8,464       1  
Industrial equipment
    119       7,224       *       119       7,524       *  
Business services
    91       6,366       *       99       6,722       *  
Transportation
    40       6,073       *       31       6,469       *  
Utilities
    10       6,007       *       15       5,752       *  
Real estate other
    163       5,864       *       167       6,570       *  
Technology
    36       5,008       *       72       5,489       *  
Hotel/restaurant
    181       4,939       *       195       5,050       *  
Other
    3,031       76,351 (3)     10       2,936       82,599 (3)     11  
   
Total all other loans
    4,458       163,043       21       4,568       170,651       22  
   
Total
  $ 4,458       164,474       21 %   $ 4,568       172,562       22 %
   
   
*   Less than 1%
(1)   For PCI loans amounts represent carrying value.
(2)   No other single category had loans in excess of $71 million at March 31, 2010, or $87 million at December 31, 2009.
(3)   No other single category had loans in excess of $4.5 billion at March 31, 2010, or $5.8 billion (public administration) at December 31, 2009. The next largest categories included investors, public administration, media, leisure, non-residential construction, securities firms, trucking, dairy, gaming and contractors.
During the recent credit cycle, we have experienced an increase in requests for extensions of construction and commercial loans which have repayment guarantees. All extensions are granted based on a re-underwriting of the loan and our assessment of the borrower’s ability to perform under the agreed upon terms. At the time of 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, amortization 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 extensions. In considering the impairment status of the loan, we evaluate the collateral, future cash flow as well as the anticipated support of any repayment guarantor. When performance under a loan is not reasonably assured, including the performance of the guarantor, we charge-off all or a portion of a loan based on the fair value of the collateral securing the loan.
Our ability to seek performance under the guarantee is directly related to the guarantor’s creditworthiness, capacity and willingness to perform. We evaluate a guarantor’s capacity and willingness to perform 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 is an important factor in our allowance methodology for commercial and commercial real estate loans.

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Real Estate 1-4 Family Mortgage Loans
As part of the Wachovia acquisition, we acquired residential first mortgage and home equity loans that are very similar to the Wells Fargo core originated portfolio. We also acquired the Pick-a-Pay portfolio, which is composed primarily of option payment adjustable-rate mortgage (ARM) and fixed-rate mortgage products. Under purchase accounting for the Wachovia acquisition, we made purchase accounting adjustments to the Pick-a-Pay loans considered to be impaired under accounting guidance for PCI loans.
Pick-a-Pay Portfolio
Our Pick-a-Pay portfolio, which describes one of the consumer mortgage portfolios that we acquired in the Wachovia merger, had an unpaid principal balance of $100.8 billion and a carrying value of $82.9 billion at March 31, 2010. The Pick-a-Pay portfolio is a liquidating portfolio, as Wachovia ceased originating new Pick-a-Pay loans in 2008. Equity lines of credit and closed-end second liens associated with Pick-a-Pay loans are reported in the Home Equity core portfolio. The Pick-a-Pay portfolio includes loans that offer payment options (Pick-a-Pay option payment loans), 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 following table provides balances over time related to the types of loans included in the portfolio.
                                                 
   
    March 31, 2010     December 31, 2009     December 31, 2008  
(in millions)   Outstandings     % of total     Outstandings     % of total     Outstandings     % of total  
   
Option payment loans
  $ 69,161       69 %   $ 73,060       70 %   $ 101,297       86 %
Non-option payment ARMs and fixed-rate loans
    13,674       13       14,178       14       15,978       14  
Loan modifications - Pick-a-Pay
    17,943       18       16,420       16              
   
Total unpaid principal balance
  $ 100,778       100 %   $ 103,658       100 %   $ 117,275       100 %
   
Total carrying value
  $ 82,938             $ 85,238             $ 95,315          
   
PCI loans in the Pick-a-Pay portfolio had an unpaid principal balance of $53.3 billion and a carrying value of $36.2 billion at March 31, 2010. The carrying value of the PCI loans is net of purchase accounting write-downs to reflect their fair value at acquisition. Upon acquisition, we recorded a $22.4 billion write-down in purchase accounting on Pick-a-Pay loans that were impaired. Losses to date on this portfolio are in line with management’s expectations at the time of the Wachovia acquisition. Our most recent quarterly cash flow assessment, which includes life-of-loan expectations, shows an improvement driven in part by extensive and currently successful modification efforts as well as improving delinquency roll rate trends and further stabilization in the housing market.
Pick-a-Pay option payment loans may be adjustable or fixed rate. They are home mortgages on which the customer has the option each month to select from among four payment options: (1) a minimum payment as described below, (2) an interest-only payment, (3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment.

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The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The new minimum monthly payment amount generally increases by no more than 7.5% of the then-existing principal and interest payment amount. The minimum payment may not be sufficient to pay the monthly interest due and in those situations a loan on which the customer has made a minimum payment is subject to “negative amortization,” where unpaid interest is added to the principal balance of the loan. The amount of interest that has been added to a loan balance is referred to as “deferred interest.” Total deferred interest was $3.5 billion at March 31, 2010, down from $3.7 billion at December 31, 2009, due to loan modification efforts as well as falling interest rates resulting in the minimum payment option covering the interest and some principal on many loans. At March 31, 2010, approximately 63% of customers choosing the minimum payment option did not defer interest. In situations where the minimum payment is greater than the interest only option, the customer has only three payment options available: (1) a minimum required payment, (2) a fully amortizing 15-year payment, or (3) a fully amortizing 30-year payment.
Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to or below 85% have a cap of 125% of the original loan balance, and these loans represent substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its principal cap, or the 10-year anniversary of the loan. There exists a small population of Pick-a-Pay loans for which recast occurs at the five-year anniversary. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.
Due to the terms of this Pick-a-Pay portfolio, we believe there is minimal recast risk over the next three years. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balances of loans to recast based on reaching the principal cap: $2 million in the remaining nine months of 2010, $1 million in 2011 and $3 million in 2012. In first quarter 2010, the amount of loans recast based on reaching the principal cap was insignificant. In addition, we would expect the following balances of loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change at the recast date greater than the annual 7.5% reset: $22 million in the remaining nine months of 2010, $36 million in 2011 and $45 million in 2012. In first quarter 2010, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $9 million.
The following table reflects the geographic distribution of the Pick-a-Pay portfolio broken out between PCI loans and all other loans. In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is a useful metric in predicting future real estate 1-4 family first mortgage loan performance, including potential charge-offs. Because PCI loans were initially recorded at fair value written down for expected credit losses, the ratio of the carrying value to the current collateral value for acquired loans with credit impairment will be lower as compared with the LTV based on the unpaid principal. For informational purposes, we have included both ratios in the following table.

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PICK-A-PAY PORTFOLIO
                                                         
   
    PCI loans     All other loans  
                            Ratio of                    
                            carrying                    
    Unpaid     Current             value to     Unpaid     Current        
    principal     LTV     Carrying     current     principal     LTV     Carrying  
(in millions)   balance     ratio (2)     value (3)     value     balance     ratio (2)     value (3)  
   
March 31, 2010
                                                       
California
  $ 36,113       135 %   $ 24,447       91 %   $ 23,285       88 %   $ 22,953  
Florida
    5,594       142       3,169       80       4,942       106       4,776  
New Jersey
    1,621       99       1,249       76       2,829       81       2,818  
Texas
    428       82       379       72       1,908       66       1,913  
Washington
    618       102       531       87       1,409       84       1,398  
Other states
    8,967       115       6,398       81       13,064       87       12,907  
                                             
Total Pick-a-Pay loans
  $ 53,341             $ 36,173             $ 47,437             $ 46,765  
                                             
   

December 31, 2009

                                                       
California
  $ 37,341       141 %   $ 25,022       94 %   $ 23,795       93 %   $ 23,626  
Florida
    5,751       139       3,199       77       5,046       104       4,942  
New Jersey
    1,646       101       1,269       77       2,914       82       2,912  
Texas
    442       82       399       74       1,967       66       1,973  
Washington
    633       103       543       88       1,439       84       1,435  
Other states
    9,283       116       6,597       82       13,401       87       13,321  
                                             
Total Pick-a-Pay loans
  $ 55,096             $ 37,029             $ 48,562             $ 48,209  
                                             
   
(1)   The individual states shown in this table represent the top five states based on the total net carrying value of the Pick-a-Pay loans at the beginning of 2010. The December 31, 2009 table has been revised to conform to the 2010 presentation of top five states.
(2)   The current LTV ratio is calculated as the unpaid principal balance plus the unpaid principal balance of any equity lines of credit that share common collateral divided by the collateral value. Collateral values are generally determined using automated valuation models (AVM) and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas.
(3)   Carrying value, which does not reflect the allowance for loan losses, includes purchase accounting adjustments, which, for PCI loans are the nonaccretable difference and the accretable yield, and for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent charge-offs.
To maximize return and allow flexibility for customers to avoid foreclosure, we have in place several loss mitigation strategies for our Pick-a-Pay loan portfolio. We contact customers who are experiencing difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.
We also have taken steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we offer combinations of term extensions of up to 40 years (from 30 years), interest rate reductions, to charge no interest on a portion of the principal for some period of time and, in geographies with substantial property value declines, we will even offer permanent principal reductions. In first quarter 2010, we completed 4,800 Pick-a-Pay loan modifications and have completed over 57,000 modifications since acquisition. The majority of the loan modifications were concentrated in our PCI Pick-a-Pay loan portfolio. Nearly 25,000 modification offers were proactively sent to customers in first quarter 2010. As part of the modification process, the loans are re-underwritten, income is documented and the negative amortization feature is eliminated. Most of the modifications result in material payment reduction to the customer. In fourth quarter 2009, the U.S. Treasury Department’s HAMP was rolled out to the customers in this portfolio. As of March 31, 2010, over 22,000 HAMP applications were being reviewed by our loan servicing department and an additional 6,200 loans have been approved for the HAMP trial modification. We believe a key factor to successful loss mitigation is tailoring the revised loan payment to the customer’s sustainable income. We continually reassess our loss mitigation strategies and may adopt additional or different strategies in the future.

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Because of the write-down of the PCI loans in purchase accounting, which have been aggregated in pools, our post merger modifications to PCI Pick-a-Pay loans have not resulted in any modification-related provision for credit losses. To the extent we modify loans not in the PCI Pick-a-Pay portfolio, we establish an impairment reserve in accordance with the applicable accounting requirements for loan restructurings.
Home Equity Portfolios
The disproportionate deterioration in specific segments of the legacy Wells Fargo Home Equity portfolios required a targeted approach to managing these assets. In fourth quarter 2007, a liquidating portfolio was identified, consisting of home equity loans generated through the wholesale channel not behind a Wells Fargo first mortgage, and home equity loans acquired through correspondents. The liquidating portion of the Home Equity portfolio was $8.0 billion at March 31, 2010, compared with $8.4 billion at December 31, 2009. The loans in this liquidating portfolio represent about 1% of total loans outstanding at March 31, 2010, and contain some of the highest risk in our $125.5 billion Home Equity portfolio, with a loss rate of 12.43% compared with 4.34% for the core portfolio. The loans in the liquidating portfolio are largely concentrated in geographic markets that have experienced the most abrupt and steepest declines in housing prices. The core portfolio was $117.4 billion at March 31, 2010, of which 97% was originated through the retail channel and approximately 18% of the outstanding balance was in a first lien position. The following table includes the credit attributes of these two portfolios. California loans represent the largest state concentration in each of these portfolios and have experienced among the highest early-term delinquency and loss rates.
HOME EQUITY PORTFOLIOS (1)
                                                 
   
                    % of loans     Loss rate  
                    two payments     (annualized)  
    Outstanding balances     or more past due     Quarter ended  
    March 31 ,    Dec. 31   March 31 ,    Dec. 31   March 31 ,    Dec. 31
(in millions)   2010     2009     2010     2009     2010     2009  
   

Core portfolio (2)

                                               
California
  $ 29,335       30,264       3.88 %     4.12       6.56       6.12  
Florida
    12,923       12,038       5.11       5.48       7.14       6.98  
New Jersey
    9,033       8,379       2.53       2.50       2.31       1.51  
Virginia
    6,023       5,855       2.10       1.91       2.34       1.13  
Pennsylvania
    5,629       5,051       1.90       2.03       1.34       1.81  
Other
    54,491       53,811       2.76       2.85       3.34       3.04  
                                   
Total
    117,434       115,398       3.21       3.35       4.34       3.90  
                                   

Liquidating portfolio

                                               
California
    3,022       3,205       8.12       8.78       17.18       17.94  
Florida
    386       408       9.22       9.45       17.10       19.53  
Arizona
    180       193       9.70       10.46       21.33       19.29  
Texas
    148       154       1.96       1.94       2.98       2.40  
Minnesota
    104       108       4.44       4.15       9.36       7.53  
Other
    4,179       4,361       4.65       5.06       8.55       7.33  
                                   
Total
    8,019       8,429       6.24       6.74       12.43       12.16  
                                   
Total core and liquidating portfolios
  $ 125,453       123,827       3.40       3.58       4.86       4.48  
                                   
   
(1)   Consists of real estate 1-4 family junior lien mortgages and lines of credit secured by real estate from all groups, excluding PCI loans.
(2)   Includes equity lines of credit and closed-end second liens associated with the Pick-a-Pay portfolio totaling $1.8 billion at March 31, 2010, and December 31, 2009.

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Credit Cards
Our credit card portfolio, a portion of which is included in the Wells Fargo Financial discussion below, totaled $22.5 billion at March 31, 2010, which represented only 3% of our total outstanding loans and was smaller than the credit card portfolios of each of our large bank peers. Delinquencies of 30 days or more were 5.6% of credit card outstandings at March 31, 2010, up from 5.5% at December 31, 2009. Net charge-offs were 11.17% (annualized) for first quarter 2010, up from 10.61% (annualized) in fourth quarter 2009, reflecting high bankruptcy filings and the current economic environment. Enhanced underwriting criteria and line management initiatives instituted in previous quarters continued to have positive effects on loss performance.
Wells Fargo Financial
Wells Fargo Financial’s portfolio consists of real estate loans, substantially all of which are secured debt consolidation loans, and both prime and non-prime auto secured loans, unsecured loans and credit cards.
Wells Fargo Financial had $24.7 billion and $25.8 billion in real estate secured loans at March 31, 2010 and December 31, 2009, respectively. Of this portfolio, $1.5 billion and $1.6 billion, respectively, was considered prime based on secondary market standards and has been priced to the customer accordingly. The remaining portfolio is non-prime but has been originated with standards to reduce credit risk. These loans were originated through our retail channel with documented income, LTV limits based on credit quality and property characteristics, and risk-based pricing. In addition, the loans were originated without teaser rates, interest-only or negative amortization features. Credit losses in the portfolio have increased in the current economic environment compared with historical levels, but performance remained similar to prime portfolios in the industry with overall loss rates of 4.62% in first quarter 2010 on the entire portfolio. At March 31, 2010, $8.1 billion of the portfolio was originated with customer FICO scores below 620, but these loans have further restrictions on LTV and debt-to-income ratios intended to limit the credit risk.
Wells Fargo Financial also had $14.7 billion and $16.5 billion in auto secured loans and leases at March 31, 2010 and December 31, 2009, respectively, of which $4.0 billion and $4.4 billion, respectively, were originated with customer FICO scores below 620. Loss rates in this portfolio in first quarter 2010 were 4.31% for FICO scores of 620 and above, and 5.80% for FICO scores below 620. These loans were priced based on relative risk. Of this portfolio, $9.7 billion represented loans and leases originated through its indirect auto business, a channel Wells Fargo Financial ceased using near the end of 2008.
Wells Fargo Financial had $7.6 billion and $8.1 billion in unsecured loans and credit card receivables at March 31, 2010 and December 31, 2009, respectively, of which $1.0 billion and $1.0 billion, respectively, was originated with customer FICO scores below 620. Net loss rates in this portfolio were 12.77% in first quarter 2010 for FICO scores of 620 and above, and 17.62% for FICO scores below 620. Wells Fargo Financial has tightened credit policies and managed credit lines to reduce exposure during the recent economic environment.

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Nonaccrual Loans and Other Nonperforming Assets
The following table shows the comparative data for nonaccrual loans and other NPAs. We generally place loans on nonaccrual status when:
  the full and timely collection of interest or principal becomes uncertain;
  they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages and auto loans) past due for interest or principal (unless both well-secured and in the process of collection); or
  part of the principal balance has been charged off and no restructuring has occurred.
Note 1 (Summary of Significant Accounting Policies — Loans) to Financial Statements in our 2009 Form 10-K describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
                                 
   
    March 31 ,    Dec. 31
    2010     2009 (1)  
    Consolidated     All     Total     Total  
(in millions)   VIEs (2)     other     balances     balances  
   
Nonaccrual loans:
                               
Commercial and commercial real estate:
                               
Commercial (3)
  $       4,273       4,273       4,397  
Real estate mortgage
    7       4,750       4,757       3,984  
Real estate construction (4)
          2,915       2,915       3,025  
Lease financing
          185       185       171  
   
Total commercial and commercial real estate
    7       12,123       12,130       11,577  
   
Consumer:
                               
Real estate 1-4 family first mortgage (5)
    821       11,526       12,347       10,100  
Real estate 1-4 family junior lien mortgage
    79       2,276       2,355       2,263  
Other revolving credit and installment
    2       332       334       332  
   
Total consumer
    902       14,134       15,036       12,695  
   
Foreign
          135       135       146  
   
Total nonaccrual loans (6)
    909       26,392       27,301       24,418  
   
As a percentage of total loans
                    3.49 %     3.12  

Foreclosed assets:

                               
GNMA loans (7)
          1,111       1,111       960  
Other
    95       2,875       2,970       2,199  
Real estate and other nonaccrual investments (8)
          118       118       62  
   
Total nonaccrual loans and other nonperforming assets
  $ 1,004       30,496       31,500       27,639  
   
As a percentage of total loans
                    4.03 %     3.53  
   
(1)   The Company consolidated certain VIEs prior to the adoption of new consolidation accounting guidance on January 1, 2010. At December 31, 2009, consolidated VIE loans totaled $561 million, of which there were no loans on nonaccrual status.
(2)   The majority of losses associated with consolidated VIE loans on nonaccrual status will ultimately be borne by third party security holders in future periods.
(3)   Includes no loans held for sale at March 31, 2010, and $19 million at December 31, 2009.
(4)   Includes $7 million of loans held for sale at March 31, 2010, and $8 million at December 31, 2009.
(5)   Includes $412 million of mortgages held for sale at March 31, 2010, and $339 million at December 31, 2009.
(6)   Includes $9.9 billion and $9.5 billion at March 31, 2010, and December 31, 2009, respectively, of loans classified as impaired. See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2009 Form 10-K for further information on impaired loans.
(7)   Consistent with regulatory reporting requirements, foreclosed real estate securing GNMA loans is classified as nonperforming. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).
(8)   Includes real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if these assets were recorded as loans, and nonaccrual debt securities.

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Total NPAs were $31.5 billion (4.03% of total loans) at March 31, 2010, and included $27.3 billion of nonaccrual loans and $4.2 billion of foreclosed assets, real estate, and other nonaccrual investments. Growth in nonaccrual loans slowed in first quarter 2010, increasing from fourth quarter 2009 by $2.9 billion, including $909 million related to assets brought on the balance sheet upon adoption of new consolidation accounting guidance. In first quarter 2010, substantially all of the change in nonaccrual loans related to consumer and commercial real estate loans, and inflows of new nonaccruals declined on a linked-quarter basis, including declines in consumer real estate inflows not related to newly consolidated VIEs and total commercial and commercial real estate inflows, with a 27% decline in commercial real estate inflows.
Typically, changes to nonaccrual loans period-over-period represent inflows for loans that reach a specified past due status, offset by reductions for loans that are charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual because they return to accrual status. During 2009, because of purchase accounting, the rate of growth in nonaccrual loans was higher than it would have been without PCI loan accounting. The impact of purchase accounting on our credit data will diminish over time. In addition, we have also increased loan modifications and restructurings to assist homeowners and other borrowers in the current difficult economic cycle. This increase is expected to result in elevated nonaccrual loan levels for longer periods because consumer nonaccrual loans that have been modified remain in nonaccrual status until a borrower has made six consecutive contractual payments, inclusive of consecutive payments made prior to the modification. Loans are re-underwritten at the time of the modification in accordance with underwriting guidelines established for governmental and proprietary loan modification programs. For an accruing loan that has been modified, if the borrower has demonstrated performance under the previous terms and shows the capacity to continue to perform under the restructured terms, the loan will remain in accruing status. Otherwise, the loan will be placed in a nonaccrual status until the borrower has made six consecutive contractual payments.
Loss expectations for nonaccrual loans are driven by delinquency rates, default probabilities and severities. While nonaccrual loans are not free of loss content, we believe that the estimated loss exposure remaining in these balances is significantly mitigated by four factors. First, 91% of nonaccrual loans are secured. Second, losses have already been recognized on 37% of the consumer nonaccruals and 29% of commercial nonaccruals and, when a residential nonaccrual loan reaches 180 days past due, it is our policy to write these loans down to net realizable value. Third, as of March 31, 2010, 45% of commercial nonaccrual loans were current on interest. Fourth, there are certain nonaccruals for which there are loan level reserves in the allowance, while others are covered by pool level reserves.
Commercial and CRE nonaccrual loans, net of write-downs, amounted to $12.1 billion at March 31, 2010, up $553 million, or 5%, from $11.6 billion at December 31, 2009. On a linked-quarter basis, both the dollar amount of the increase and the rate of growth have slowed. The related reserves and write-downs for commercial and CRE nonaccrual loans at March 31, 2010, were as follows:
  Reserves
    $7.6 billion have $1.0 billion in life-of-loan loss impairment reserves in addition to any charge-offs; and
    the remaining $4.5 billion have reserves as part of the allowance for loan losses.
  Write-downs
    $4.1 billion are net of write-downs of $2.1 billion; and
    the remaining $8.0 billion have not been written down.

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Of the $12.1 billion of commercial and CRE nonaccrual loans, $11.0 billion (91%) are secured, of which $7.7 billion (63%) are secured by real estate, and the remainder secured by other assets such as receivables, inventory and equipment. Over 45% of these nonaccrual loans are paying interest that is being applied to principal.
Consumer nonaccrual loans (including nonaccrual troubled debt restructurings (TDRs)) amounted to $15.0 billion at March 31, 2010, compared with $12.7 billion at December 31, 2009. The $2.3 billion increase in nonaccrual consumer loans from December 31, 2009, represented an increase of $2.2 billion in 1-4 family first mortgage loans and an increase of $92 million in 1-4 family junior liens. Residential mortgage nonaccrual loans increased largely due to slower disposition, not increased quarterly inflow. In addition, the increase in nonaccrual loans included $902 million related to assets brought on the balance sheet upon consolidation of VIEs. Federal government programs, such as HAMP, and Wells Fargo proprietary programs, such as the Company’s Pick-a-Pay Mortgage Assistance program, require customers to provide updated documentation and complete trial repayment periods before the loan can be removed from nonaccrual status. In addition, for loans in foreclosure, many states, including California and Florida where Wells Fargo has significant exposures, have enacted legislation that significantly increases the time frames to complete the foreclosure process, meaning that loans will remain in nonaccrual status for longer periods. At the conclusion of the foreclosure process, we continue to sell real estate owned in a very timely fashion.
When a consumer real estate loan is 120 days past due, we move it to nonaccrual status and when the loan reaches 180 days past due it is our policy to write these loans down to net realizable value. Thereafter, we revalue each loan in nonaccrual status regularly and recognize additional charges if needed. Our quarterly market classification process, employed since late 2007, indicates as of March 31, 2010, that home values in most metropolitan statistical areas have stabilized and we anticipate manageable additional write-downs while properties work through the foreclosure process.
Of the $15.0 billion of consumer nonaccrual loans:
  99% are secured, substantially all by real estate; and
  21% have a combined LTV ratio of 80% or below.
In addition to the $15.0 billion of consumer nonaccrual loans, there were also accruing consumer TDRs of $7.5 billion at March 31, 2010. In total, there were $22.5 billion of consumer nonaccrual loans and accruing TDRs at March 31, 2010. The related reserves and write-downs for consumer nonaccrual loans at March 31, 2010, were as follows:
  Write-downs
    $9.8 billion have $2.1 billion in life-of-loan TDR loss impairment reserves in addition to any charge-offs; and
    the remaining $12.7 billion have reserves as part of the allowance for loan losses;
  Reserves
    $6.7 billion are net of write-downs of $3.0 billion; consumer loans secured by real estate are charged-off to the appraised value, less cost to sell, of the underlying collateral when these loans reach 180 days delinquent; and
    the remaining $15.8 billion have not been written down.
NPAs at March 31, 2010, included $1.1 billion of loans that are FHA insured or VA guaranteed, which have little to no loss content, and $3.0 billion of foreclosed assets, which have been written down to the value of the underlying collateral. Foreclosed assets included $446 million that resulted from PCI loans.

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Foreclosed assets increased 29% in first quarter 2010. The majority of the inherent loss content in these assets has already been accounted for, and increases to this population of assets should have minimal additional impact to expected loss levels.
Given our real estate-secured loan concentrations and current economic conditions, we anticipate continuing to hold a high level of NPAs on our balance sheet. We expect the rate of growth in NPAs to continue to decline, but expect balances to continue increasing modestly near term. We believe the loss content in the nonaccrual loans has either already been realized or provided for in the allowance for credit losses at March 31, 2010. We remain focused on proactively identifying problem credits, moving them to nonperforming status and recording the loss content in a timely manner. We’ve increased staffing in our workout and collection organizations to ensure these troubled borrowers receive the attention and help they need. See the “Risk Management — Allowance for Credit Losses” section in this Report for additional discussion. The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors affecting a particular borrower.

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Troubled Debt Restructurings (TDRs)
The following table provides the detail of the recorded investment in loans modified in TDRs.
                 
 
    March 31,     Dec. 31,  
(in millions)   2010     2009  
 
Consumer TDRs:
               
Real estate 1-4 family first mortgage
  $ 7,972       6,685  
Real estate 1-4 family junior lien mortgage
    1,563       1,566  
Other revolving credit and installment
    310       17  
 
Total consumer TDRs
    9,845       8,268  
 
Commercial and commercial real estate TDRs
    386       265  
 
Total TDRs
  $ 10,231       8,533  
 
 
               
TDRs on nonaccrual status
  $ 2,738       2,289  
TDRs on accrual status
    7,493       6,244  
 
Total TDRs
  $ 10,231       8,533  
 
 
We establish an impairment reserve when a loan is restructured in a TDR. The impairment reserve for TDRs was $2.2 billion at March 31, 2010, and $1.8 billion at December 31, 2010.
Total charge-offs related to loans modified in a TDR that were still held in the balance sheet at period end were $322 million and $36 million for first quarter 2010 and 2009, respectively. The TDR charge-offs for first quarter 2010 included $145 million due to newly issued regulatory guidance requiring charge-off of certain collateral-dependent residential real estate loans that have been modified.
Our nonaccrual policies are generally the same for all loan types when a restructuring is involved. We underwrite loans at the time of restructuring to determine if the borrower has the capacity to continue to perform under the restructured terms. If the borrower has demonstrated performance under the previous terms and the underwriting process shows capacity to continue to perform under the restructured terms, the loan will remain in accruing status. Otherwise, the loan will be placed in nonaccrual status until the borrower demonstrates a sustained period of performance which we believe to be six consecutive monthly payments. Loans will also be placed on nonaccrual, and a corresponding charge-off recorded to the loan balance, if we believe that principal and interest contractually due under the modified agreement will not be collectible.
We do not forgive principal for a majority of our TDRs. In those situations where principal is forgiven, the performance on the remaining balance will generally improve, which may justify continued accrual or returning the loan to accrual after the borrower demonstrates a sustained period of performance.

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Loans 90 Days or More Past Due and Still Accruing
Loans included in this category are 90 days or more past due as to interest or principal and still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family first mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual. PCI loans are excluded from the disclosure of loans 90 days or more past due and still accruing interest. Even though certain of them are 90 days or more contractually past due, they are considered to be accruing because the interest income on these loans relates to the establishment of an accretable yield under the accounting for PCI loans and not to contractual interest payments.
Loans 90 days or more past due and still accruing totaled $21.8 billion at March 31, 2010, and $22.2 billion at December 31, 2009. The totals included $15.9 billion and $15.3 billion for the same dates, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools and similar loans whose repayments are insured by the FHA or guaranteed by the VA. At March 31, 2010, loans 90 days or more past due and still accruing included $107 million associated with consolidated VIE loans.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING (EXCLUDING INSURED/GUARANTEED GNMA AND SIMILAR LOANS)
                                 
   
    March 31 ,    Dec. 31
    2010     2009(1)  
    Consolidated     All     Total     Total  
(in millions)   VIEs (2)     other     balances     balances  
   
Commercial and commercial real estate:
                               
Commercial
  $       561       561       590  
Real estate mortgage
          1,129       1,129       1,183  
Real estate construction
          605       605       740  
   
Total commercial and commercial real estate
          2,295       2,295       2,513  
   
Consumer:
                               
Real estate 1-4 family first mortgage (3)
    94       1,187       1,281       1,623  
Real estate 1-4 family junior lien mortgage
    10       404       414       515  
Credit card
          719       719       795  
Other revolving credit and installment
    3       1,216       1,219       1,333  
   
Total consumer
    107       3,526       3,633       4,266  
   
Foreign
          29       29       73  
   
Total
  $ 107       5,850       5,957       6,852  
   
   
(1)   We consolidated certain VIEs prior to the adoption of new consolidation accounting guidance on January 1, 2010. At December 31, 2009, consolidated VIE loans totaled $561 million, of which there were no loans 90 days or more past due and still accruing.
(2)   The majority of losses associated with consolidated VIE loans that are 90 days or more past due and still accruing will ultimately be borne by third party security holders in future periods.
(3)   Includes mortgage loans held for sale 90 days or more past due and still accruing.

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Net Charge-offs
NET CHARGE-OFFS
                                                         
   
    Quarter ended March 31
    2010     2009  
            Collateral-             Total     As a             As a  
            dependent             net loan     %of     Net loan     % of  
    Consolidated     modified     All     charge-     average     charge-     average  
(in millions)   VIEs (1)     loans (2)     other     offs     loans (3)     offs     loans (3)  
   

Commercial and commercial real estate:

                                                       
Commercial
  $             650       650       1.68 %   $ 556       1.15 %
Real estate mortgage
                327       327       1.27       21       0.08  
Real estate construction
                338       338       4.74       103       1.21  
Lease financing
                29       29       0.85       17       0.43  
                         
Total commercial and commercial real estate
                1,344       1,344       1.79       697       0.80  

Consumer:

                                                       
Real estate 1-4 family first mortgage
    97       46       1,168       1,311       2.17       391       0.65  
Real estate 1-4 family junior lien mortgage
    15       99       1,335       1,449       5.56       847       3.12  
Credit card
                643       643       11.17       582       10.13  
Other revolving credit and installment
    11             536       547       2.45       696       3.05  
                         
Total consumer
    123       145       3,682       3,950       3.45       2,516       2.16  

Foreign

                36       36       0.52       45       0.56  
                         

Total

  $ 123       145       5,062       5,330       2.71 %   $ 3,258       1.54 %
                         
   
(1)   The majority of losses associated with consolidated VIE loans on nonaccrual status will ultimately be borne by third party security holders in future periods.
(2)   Comptroller of the Currency CNBE Policy Guidance 2010-11, Policy Interpretation — Supervisory Memorandum 2009-7, Guidance for the Treatment of Residential Real Estate Loan Modifications.
(3)   Quarterly net charge-offs as a percentage of average loans are annualized.
Net charge-offs in first quarter 2010 were $5.3 billion (2.71% of average total loans outstanding, annualized) compared with $5.4 billion (2.71%) in fourth quarter 2009, and $3.3 billion (1.54%) a year ago. Based on results for the last few quarters and current loss projections, we believe quarterly total credit losses have peaked. Total credit losses included $1.3 billion of commercial and commercial real estate loans (1.79%) and $4.0 billion of consumer loans (3.45%) in first quarter 2010 as shown in the table above. First quarter charge-offs included $123 million in losses associated with assets brought onto the balance sheet upon adoption of new consolidation accounting guidance and $145 million in losses associated with newly issued regulatory charge-off guidance applicable to collateral-dependent real estate loan modifications. The costs related to these charge-offs had previously been reserved. Our credit view has improved earlier than we had anticipated. In the consumer portfolio, lower early stage delinquencies, better delinquency roll rates, and improved values for residential real estate and autos were evident in the first quarter. In the commercial portfolio (including CRE) losses declined $356 million from fourth quarter 2009 and may indicate stabilization and an earlier-than-expected loss peak.

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Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date and excludes loans carried at fair value. The detail of the changes in the allowance for credit losses, including charge-offs and recoveries by loan category, is in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
We employ a disciplined process and methodology to establish our allowance for loan losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade specific loss factors. The process involves difficult, subjective, and complex judgments. In addition, we review several credit ratio trends, such as the ratio of the allowance for loan losses to nonaccrual loans and the ratio of the allowance for loan losses to net charge-offs. These trends are not determinative of the adequacy of the allowance as we use several analytical tools in determining the adequacy of the allowance.
For individually graded (typically commercial) portfolios, we generally use loan-level credit quality ratings, which are based on borrower information and strength of collateral, combined with historically based grade specific loss factors. The allowance for individually rated nonaccruing commercial loans with an outstanding exposure of $5 million or greater is determined through an individual impairment analysis. For statistically evaluated portfolios (typically consumer), we generally leverage models which use credit-related characteristics such as credit rating scores, delinquency migration rates, vintages, and portfolio concentrations to estimate loss content. Additionally, the allowance for TDRs is based on the risk characteristics of the modified loans and the resultant estimated cash flows discounted at the pre-modification effective yield of the loan. While the allowance is determined using product and business segment estimates, it is available to absorb losses in the entire loan portfolio.
At March 31, 2010, the allowance for loan losses totaled $25.1 billion (3.22% of total loans), compared with $24.5 billion (3.13%), at December 31, 2009. The allowance for credit losses was $25.7 billion (3.28% of total loans) at March 31, 2010, and $25.0 billion (3.20%) at December 31, 2009. The allowance for credit losses included $247 million at March 31, 2010, and $333 million at December 31, 2009, related to PCI loans acquired from Wachovia. Loans acquired from Wachovia are included in total loans net of related purchase accounting write-downs. The reserve for unfunded credit commitments was $533 million at March 31, 2010, and $515 million at December 31, 2009. In addition to the allowance for credit losses there was $19.9 billion of nonaccretable difference at March 31, 2010, and $22.9 billion at December 31, 2009, to absorb losses for PCI loans.
The ratio of the allowance for credit losses to total nonaccrual loans was 94% at March 31, 2010, and 103% at December 31, 2009. In general, this ratio may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, borrower credit strength and the value and marketability of collateral. Over half of nonaccrual loans were home mortgages, auto and other consumer loans at March 31, 2010.
Total provision expense in first quarter 2010 was $5.3 billion compared with $4.6 billion a year ago. The provision for credit losses in first quarter 2010 equaled charge-offs, compared with a net build to the allowance for credit losses of $1.3 billion for first quarter 2009. Our loan loss reserve increase from year end 2009 is fully attributable to assets brought on balance sheet due to the adoption of new consolidation accounting guidance.

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We believe the allowance for credit losses of $25.7 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2010. The allowance for credit losses is subject to change and we consider existing factors at the time, including economic and market conditions and ongoing internal and external examination processes. Due to the sensitivity of the allowance for credit losses to changes in the economic environment, it is possible that unanticipated economic deterioration would create incremental credit losses not anticipated as of the balance sheet date. Our process for determining the adequacy of the allowance for credit losses is discussed in the “Financial Review — Critical Accounting Policies — Allowance for Credit Losses” section and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in our 2009 Form 10-K.
Reserve for Mortgage Loan Repurchase Losses
We sell mortgage loans to various parties, including GSEs, under contractual provisions that include various representations and warranties which typically cover ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing the loan, and similar matters. We may be required to repurchase the mortgage loans with identified defects, indemnify the investor or insurer, or reimburse the investor for credit loss incurred on the loan (collectively “repurchase”) in the event of a material breach of such contractual representations or warranties. On occasion, we may negotiate global settlements in order to resolve a pipeline of demands in lieu of repurchasing the loans. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
We establish mortgage repurchase reserves related to various representations and warranties that reflect management’s estimate of losses based on a combination of factors. Such factors incorporate estimated levels of defects based on internal quality assurance sampling, default expectations, historical investor repurchase demand and appeals success rates (where the investor rescinds the demand based on a cure of the defect or acknowledges that the loan satisfies the investor’s applicable representations and warranties), reimbursement by correspondent and other third party originators, and projected loss severity. We establish a reserve at the time loans are sold and continually update our reserve estimate during their life. Although investors may demand repurchase at any time, the majority of repurchase demands occurs in the first 24 to 36 months following origination of the mortgage loan and can vary by investor. Currently, repurchase demands primarily relate to 2006 through 2008 vintages.
During first quarter 2010, we continued to experience elevated levels of repurchase activity measured by number of loans, investor repurchase demands and our level of repurchases. We repurchased or otherwise settled mortgage loans with balances of $600 million and incurred net losses on repurchase activity of $172 million. Our reserve for repurchases, included in “Accrued expenses and other liabilities” in our consolidated financial statements, was $1.3 billion at March 31, 2010, and $1.0 billion at December 31, 2009. In first quarter 2010, a $402 million addition to the reserve was included in gains on mortgage loan origination/sales. To the extent that repurchased loans are nonperforming, the loans are classified as nonaccrual. Nonperforming loans included $390 million of repurchased loans at March 31, 2010, and $308 million at December 31, 2009.

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The following table summarizes the changes in our reserve for mortgage loan repurchase losses.
                 
   
    Quarter ended     Year ended  
    Mar. 31 ,    Dec. 31
(in millions)   2010     2009  
   
Balance, beginning of period
  $ 1,033       620 (1)
Additions:
               
Loan sales
    44       302  
Change in estimate — primarily due to credit deterioration
    358       625  
   
Total additions
    402       927  
Net losses
    (172 )     (514 )
   
Balance, end of period
  $ 1,263       1,033  
   
   
(1)   Reflects purchase accounting refinements.
The reserve for mortgage loan repurchase losses of $1.3 billion at March 31, 2010, represents our best estimate of the probable loss that we may incur for various representations and warranties in the contractual provisions of our sales of mortgage loans. There may be a range of reasonably possible losses in excess of the estimated liability that cannot be estimated. The factors that influence our reserve for mortgage loan repurchase losses are dependent on economic, investor demand strategies, and other external conditions that may change over the life of the underlying loans, are difficult to estimate and require considerable management judgment. We maintain regular contact with the GSEs and other significant investors to monitor and address their repurchase demand practices and concerns.
A majority of our repurchases were government agency conforming loans from Freddie Mac and Fannie Mae. Our repurchase and settlement activity during first quarter 2010 was elevated primarily related to weaker economic conditions as investors, predominantly GSEs, made increased demands associated with higher levels of defaulted loans.
To the extent that economic conditions and the housing market do not recover or future investor repurchase demand and appeals success rates differ from past experience, we could continue to have increased demands and increased loss severity on repurchases, causing future additions to the repurchase reserve. However, some of the underwriting standards that were permitted by the GSEs for conforming loans in the 2006 through 2008 vintages, which significantly contributed to recent levels of repurchase demands, were tightened starting in mid to late 2008. Accordingly, we do not expect a similar rate of repurchase requests from the 2009 and prospective vintages, absent deterioration in economic conditions or changes in investor behavior.

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ASSET/LIABILITY MANAGEMENT
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee (Corporate ALCO) — which oversees these risks and reports periodically to the Finance Committee of the Board of Directors — consists of senior financial and business executives. Each of our principal business groups has its own asset/liability management committee and process linked to the Corporate ALCO process.
Interest Rate Risk
Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We assess interest rate risk by comparing our most likely earnings plan with various earnings simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, as of March 31, 2010, our most recent simulation indicated estimated earnings at risk of less than 1% of our most likely earnings plan over the next 12 months using a scenario in which the federal funds rate rises to 3.75% and the 10-year Constant Maturity Treasury bond yield rises to 5.10%. Simulation estimates depend on, and will change with, the size and mix of our actual and projected balance sheet at the time of each simulation. Due to timing differences between the quarterly valuation of MSRs and the eventual impact of interest rates on mortgage banking volumes, earnings at risk in any particular quarter could be higher than the average earnings at risk over the 12-month simulation period, depending on the path of interest rates and on our hedging strategies for MSRs. See the “Risk Management — Mortgage Banking Interest Rate and Market Risk” section in this Report for more information.
We use exchange-traded and over-the-counter (OTC) interest rate derivatives to hedge our interest rate exposures. The notional or contractual amount, credit risk amount and estimated net fair value of these derivatives as of March 31, 2010, and December 31, 2009, are presented in Note 11 (Derivatives) to Financial Statements in this Report.
For additional information regarding interest rate risk, see pages 66-67 of our 2009 Form 10-K.
Mortgage Banking Interest Rate and Market Risk
We originate, fund and service mortgage loans, which subject us to various risks, including credit, liquidity and interest rate risks. For a discussion of mortgage banking interest rate and market risk, see pages 67-69 of our 2009 Form 10-K.
In first quarter 2010, a $777 million decrease in the fair value of our MSRs and $1.8 billion gain on free-standing derivatives used to hedge the MSRs resulted in a net gain of $1.0 billion. This net gain was largely due to hedge-carry income which reflected the low short-term interest rate environment. The net gain on the MSR of $1.0 billion was down from $1.9 billion in fourth quarter 2009 due to a change in the composition of the hedge toward more interest rate swaps and lower coupon mortgage forwards designed to maintain ongoing hedge effectiveness.
While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in the value of ARMs production held for sale from changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR index-based financial instruments used as economic hedges for such ARMs. Additionally, the hedge-carry income we earn on our economic hedges for the MSRs may not continue if the spread between short-term and long-term rates decreases, we shift

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the composition of the hedge to more interest rate swaps, or there are other changes in the market for mortgage forwards that impact the implied carry.
For additional information regarding other risk factors related to the mortgage business, see pages 67-69 of our 2009 Form 10-K.
The total carrying value of our residential and commercial MSRs was $16.6 billion at March 31, 2010, and $17.1 billion at December 31, 2009. The weighted-average note rate on our portfolio of loans serviced for others was 5.59% at March 31, 2010, and 5.66% at December 31, 2009. Our total MSRs were 0.89% of mortgage loans serviced for others at March 31, 2010, compared with 0.91% at December 31, 2009.
Market Risk — Trading Activities
From a market risk perspective, our net income is exposed to changes in interest rates, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The credit risk amount and estimated net fair value of all customer accommodation derivatives are included in Note 11 (Derivatives) to Financial Statements in this Report. Open, “at risk” positions for all trading businesses are monitored by Corporate ALCO.
The standardized approach for monitoring and reporting market risk for the trading activities consists of value-at-risk (VaR) metrics complemented with factor analysis and stress testing. VaR measures the worst expected loss over a given time interval and within a given confidence interval. We measure and report daily VaR at a 99% confidence interval based on actual changes in rates and prices over the past 250 trading days. The analysis captures all financial instruments that are considered trading positions. The average one-day VaR throughout first quarter 2010 was $38 million, with a lower bound of $23 million and an upper bound of $52 million. For additional information regarding market risk related to trading activities, see page 69 of our 2009 Form 10-K.
Market Risk — Equity Markets
We are directly and indirectly affected by changes in the equity markets. For additional information regarding market risk related to equity markets, see page 69 of our 2009 Form 10-K.
The following table provides information regarding our marketable and nonmarketable equity investments.
                 
   
    March 31 ,    Dec. 31
(in billions)   2010     2009  
   
Private equity investments:
               
Cost method
  $ 3.8       3.8  
Equity method
    6.4       5.1  

Principal investments

    0.4       1.4  

Marketable equity securities:

               
Cost
    4.9       4.7  
Fair value
    5.7       5.6  
   

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Liquidity and Funding
The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Corporate ALCO establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. We set these guidelines for both the consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.
Debt securities in the securities available-for-sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks and federal funds sold, securities purchased under resale agreements and other short-term investments. Asset liquidity is further enhanced by our ability to sell or securitize loans in secondary markets and to pledge loans to access secured borrowing facilities through the Federal Home Loan Banks, the FRB, or the U.S. Treasury.
Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. Additional funding is provided by long-term debt (including trust preferred securities), other foreign deposits and short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).
Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding through issuances of registered debt securities, private placements and asset-backed secured funding. Investors in the long-term capital markets generally will consider, among other factors, a company’s debt rating in making investment decisions. Wells Fargo Bank, N.A. is rated “Aa2,” by Moody’s Investors Service, and “AA,” by Standard & Poor’s (S&P) Rating Services. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, the level and quality of earnings, and rating agency assumptions regarding the probability and extent of Federal financial assistance or support for certain large financial institutions. Material changes in these factors, including the enactment of proposed legislation that may lessen the probability of future Federal assistance or support for large financial institutions, could result in a different debt rating; however, a change in debt rating would not cause us to violate any of our debt covenants. See the “Risk Factors” section of this Report for additional information regarding recent legislative proposals and our credit ratings.
Parent. Under SEC rules, the Parent is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. “Well-known seasoned issuers” generally include those companies with a public float of common equity of at least $700 million or those companies that have issued at least $1 billion in aggregate principal amount of non-convertible securities, other than common equity, in the last three years. In June 2009, the Parent filed a registration statement with the SEC for the issuance of senior and subordinated notes, preferred stock and other securities. The Parent’s ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. The Parent is currently authorized by the Board to issue $60 billion in outstanding short-term debt and $170 billion in outstanding long-term debt.
At March 31, 2010, the Parent had outstanding short-term and long-term debt under these authorities of $9.9 billion and $112.6 billion, respectively. During first quarter 2010, the Parent issued a total of $1.3 billion in non-guaranteed registered senior notes. Effective August 2009, the Parent established an SEC registered $25 billion medium-term note program (MTN), under which it may issue senior and subordinated debt securities. Also, effective April 2010, the Parent established an SEC registered $25 billion MTN, under which it may issue senior debt securities linked to one or more market indices. In December 2009, the Parent established a $25 billion European medium-term note programme (EMTN), under which it may issue senior and subordinated debt securities. In March 2010, the Parent increased its Australian medium-term note programme (AMTN) from A$5 billion to A$10 billion, under which it may

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issue senior and subordinated debt securities. The EMTN and AMTN securities are not registered with the SEC and may not be offered in the United States without applicable exemptions from registration. The Parent has $21.8 billion, $25.0 billion and A$6.8 billion available for issuance under the MTN, EMTN and AMTN, respectively. The proceeds from securities issued in first quarter 2010 were used for general corporate purposes, and we expect that the proceeds from securities issued in the future will also be used for general corporate purposes. The Parent also issues commercial paper from time to time, subject to its short-term debt limit.
Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is authorized by its board of directors to issue $100 billion in outstanding short-term debt and $125 billion in outstanding long-term debt. In December 2007, Wells Fargo Bank, N.A. established a $100 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $50 billion in outstanding short-term senior notes and $50 billion in long-term senior or subordinated notes. At March 31, 2010, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $50 billion in short-term senior notes and $50 billion in long-term senior or subordinated notes. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations. Effective March 20, 2010, Wachovia Bank, N.A. merged with and into Wells Fargo Bank, N.A.
Wells Fargo Financial. In January 2010, Wells Fargo Financial Canada Corporation (WFFCC), an indirect wholly-owned Canadian subsidiary of the Parent, qualified with the Canadian provincial securities commissions CAD$7.0 billion in medium-term notes for distribution from time to time in Canada. At March 31, 2010, CAD$7.0 billion remained available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.
Federal Home Loan Bank Membership
We are a member of the Federal Home Loan Banks based in Dallas, Des Moines and San Francisco (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.
CAPITAL MANAGEMENT
We have an active program for managing stockholders’ equity and regulatory capital and we maintain a comprehensive process for assessing the Company’s overall capital adequacy. We generate capital internally primarily through the retention of earnings net of dividends, and through the issuance of common stock to certain benefit plans. Our objective is to maintain capital levels at the Company and its bank subsidiaries above the regulatory “well-capitalized” thresholds by an amount commensurate with our risk profile. Our potential sources of stockholders’ equity include retained earnings and issuances of common and preferred stock. Retained earnings increased $2.1 billion from December 31, 2009, predominantly from Wells Fargo net income of $2.5 billion, less common and preferred dividends of $444 million. During first quarter 2010, we issued approximately 28 million shares of common stock, with net proceeds of $464 million, including 7 million shares from time to time during the period under various employee benefit (including our employee stock option plan) and director plans, as well as under our dividend reinvestment and direct stock purchase programs.

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On April 29, 2010, following stockholder approval, the Company amended its certificate of incorporation to provide for an increase in the number of shares of the Company’s common stock authorized for issuance from 6 billion to 9 billion.
In connection with our participation in the Troubled Asset Relief Program Capital Purchase Program, we issued to the U.S. Treasury Department a warrant to purchase 110,261,688 shares of our common stock with an exercise price of $34.01 per share. The Treasury Department has announced plans to hold an auction to sell the warrant. We will not receive any of the proceeds from the sale of the warrant. We will be allowed to bid in the auction process. If we bid, we will not receive any preferential treatment, and will participate in the auction process on the same basis as all other bidders except that we will be required to submit any final bid earlier than other participants.
From time to time the Board authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for acquisitions and employee benefit plans, market conditions (including the trading price of our stock), and regulatory and legal considerations. The FRB published clarifying supervisory guidance in first quarter 2009, SR 09-4 Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies, pertaining to the FRB’s criteria, assessment and approval process for reductions in capital. As with all 19 participants in the FRB’s SCAP, under this supervisory letter, before repurchasing our common shares, we must consult with the Federal Reserve staff and demonstrate that the proposed actions are consistent with the existing supervisory guidance, including demonstrating that our internal capital assessment process is consistent with the complexity of our activities and risk profile. In 2008, the Board authorized the repurchase of up to 25 million additional shares of our outstanding common stock. During first quarter 2010, we repurchased 1 million shares of our common stock, all from our employee benefit plans. At March 31, 2010, the total remaining common stock repurchase authority was approximately 5 million shares.
Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities Exchange Act of 1934 including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.
The Company and each of our subsidiary banks are subject to various regulatory capital adequacy requirements administered by the FRB and the OCC. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. At March 31, 2010, the Company and each of our subsidiary banks were “well capitalized” under applicable regulatory capital adequacy guidelines. See Note 18 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
Current regulatory RBC rules are based primarily on broad credit-risk considerations and limited market related risks, but do not take into account other types of risk a financial company may be exposed to. Our capital adequacy assessment process contemplates a wide range of risks that the Company is exposed to and also takes into consideration our performance under a variety of economic conditions, as well as

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regulatory expectations and guidance, rating agency viewpoints and the view of capital market participants.
At March 31, 2010, stockholders’ equity and Tier 1 common equity levels were higher than the quarter ending prior to the Wachovia acquisition. During 2009, as regulators and the market focused on the composition of regulatory capital, the Tier 1 common equity ratio gained significant prominence as a metric of capital strength. There is no mandated minimum or “well capitalized” standard for Tier 1 common equity; instead the RBC rules state voting common stockholders’ equity should be the dominant element within Tier 1 common equity. Tier 1 common equity was $70.2 billion at March 31, 2010, or 7.09% of risk-weighted assets, an increase of $4.7 billion from December 31, 2009. The following table provides the details of the Tier 1 common equity calculation. The implementation of new consolidation accounting guidance did not significantly impact capital ratios; the addition of $6 billion of risk-adjusted assets reduced the Tier 1 common ratio by less than 1 basis point.
TIER 1 COMMON EQUITY (1)
                         
   
            March 31 ,    Dec. 31
(in billions)       2010     2009  
   
Total equity       $ 118.1       114.4  
Less:  
Noncontrolling interests
        (2.0 )     (2.6 )
   
Total Wells Fargo stockholders’ equity
        116.1       111.8  
   
Less:  
Preferred equity
        (8.1 )     (8.1 )
   
Goodwill and intangible assets (other than MSRs)
        (37.2 )     (37.7 )
   
Applicable deferred assets
        5.2       5.3  
   
Deferred tax asset limitation
              (1.0 )
   
MSRs over specified limitations
        (1.5 )     (1.6 )
   
Cumulative other comprehensive income
        (4.0 )     (3.0 )
   
Other
        (0.3 )     (0.2 )
   
   
Tier 1 common equity
  (A)   $ 70.2       65.5  
   
Total risk-weighted assets (2)   (B)   $ 990.1       1,013.6  
   
Tier 1 common equity to total risk-weighted assets   (A)/(B)     7.09 %     6.46  
   
   
(1)   Tier 1 common equity is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies, to assess the capital position of financial services companies. Tier 1 common equity includes total Wells Fargo stockholders’ equity, less preferred equity, goodwill and intangible assets (excluding MSRs), net of related deferred taxes, adjusted for specified Tier 1 regulatory capital limitations covering deferred taxes, MSRs, and cumulative other comprehensive income. Management reviews Tier 1 common equity along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.
(2)   Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

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CRITICAL ACCOUNTING POLICIES
Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report) are fundamental to understanding our results of operations and financial condition, because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Six of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:
  the allowance for credit losses;
  purchased credit-impaired (PCI) loans;
  the valuation of residential mortgage servicing rights (MSRs);
  the fair valuation of financial instruments;
  pension accounting; and
  income taxes.
Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee of the Company’s Board. These policies are described in the “Financial Review — Critical Accounting Policies” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2009 Form 10-K.
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 2009 Form 10-K for the complete critical accounting policy related to fair valuation of financial instruments.
For the securities available-for-sale portfolio, we typically use independent pricing services and brokers to obtain fair value of based upon 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 securities in our trading portfolio, we typically use prices developed internally by our traders to measure the security at fair value. Internal traders base their prices upon their knowledge of current market information for the particular security class being valued. Current market information includes recent transaction prices for the same or similar securities, liquidity conditions, relevant benchmark indices and other market data. For both trading and available-for-sale securities, we validate prices 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, for securities valued using external pricing services or brokers, review of pricing by Company personnel familiar with market liquidity and other market-related conditions. We believe the determination of fair value for our securities is consistent with the accounting guidance on fair value measurements.

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The table below 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.
                                 
   
    March 31, 2010     December 31, 2009  
    Total             Total        
($ in billions)   balance     Level 3 (1)     balance     Level 3 (1)  
   

Assets carried at fair value

  $ 262.3       49.3       277.4       52.0  
As a percentage of total assets
    21 %     4       22       4  

Liabilities carried at fair value

  $ 18.4       8.4       22.8       7.9  
As a percentage of total liabilities
    2 %     1       2       1  
   
(1)   Before derivative netting adjustments.
See Note 12 (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 its impact to our financial statements.
Current Accounting Developments
The following accounting pronouncement was issued by the Financial Accounting Standards Board, but is not yet effective:
  Accounting Standards Update (ASU) 2010-11, Scope Exception Related to Embedded Credit Derivatives.
ASU 2010-11 addresses when entities should evaluate embedded credit derivative features in financial instruments. The Update clarifies that bifurcation and separate accounting is not required for embedded credit derivative features that are only related to the transfer of credit risk that occurs when one financial instrument is subordinate to another. Embedded derivatives related to other types of credit risk must be analyzed to determine the appropriate accounting treatment. The guidance also allows companies to elect fair value option upon adoption for retained and purchased interests in securitized financial assets. By making this election, companies would not be required to evaluate whether embedded credit derivative features exist for those interests. This guidance is effective for us in third quarter 2010. We are evaluating the impact these accounting changes may have on our consolidated financial statements.

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FORWARD-LOOKING STATEMENTS
This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. Examples of forward-looking statements in this Report include, but are not limited to, statements we make about: (i) future results of the Company; (ii) future credit quality and expectations regarding future loan losses in our loan portfolios and life-of-loan estimates, including our belief that quarterly provision expense and quarterly total credit losses have peaked and are expected to decline; the level and loss content of nonperforming assets and nonaccrual loans, including our expectation that nonperforming assets will continue to increase gradually and peak before year end; the sufficiency of our credit loss allowance to cover future credit losses; and the reduction or mitigation of risk in our loan portfolios and the effects of loan modification programs; (iii) the merger integration of the Company and Wachovia, including expense savings, merger costs and revenue synergies; (iv) the expected outcome and impact of legal, regulatory and legislative developments; and (v) the Company’s plans, objectives and strategies.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
  current and future economic and market conditions, including the effects of further declines in housing prices and high unemployment rates;
  the terms of capital investments or other financial assistance provided by the U.S. government;
  our capital requirements and the ability to raise capital on favorable terms;
  legislative and regulatory financial services reform;
  legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;
  legislative and regulatory developments relating to overdraft fees, credit cards, and other bank services, as well as changes to our overdraft practices, which could have a negative effect on our revenue and other financial results;
  the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications or changes in such requirements or guidance;
  our ability to successfully integrate the Wachovia merger and realize the expected cost savings and other benefits and the effects of any delays or disruptions in systems conversions relating to the Wachovia integration;
  our ability to realize the efficiency initiatives to lower expenses when and in the amount expected;
  recognition of OTTI on securities held in our available-for-sale portfolio;
  the effect of changes in interest rates on our net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
  hedging gains or losses;
  disruptions in the capital markets and reduced investor demand for mortgage loans;
  our ability to sell more products to our customers;
  the effect of the economic recession on the demand for our products and services;

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  the effect of the fall in stock market prices on our investment banking business and our fee income from our brokerage, asset and wealth management businesses;
  our election to provide support to our mutual funds for structured credit products they may hold;
  changes in the value of our venture capital investments;
  changes in our accounting policies or in accounting standards or in how accounting standards are to be applied or interpreted;
  mergers, acquisitions and divestitures;
  changes in the Company’s credit ratings and changes in the credit quality of the Company’s customers or counterparties;
  the impact of current, pending and future legislation and regulation;
  reputational damage from negative publicity, fines, penalties and other negative consequences from regulatory violations and legal actions;
  the loss of checking and saving account deposits to other investments such as the stock market, and the resulting increase in our funding costs and impact on our net interest margin;
  fiscal and monetary policies of the Federal Reserve Board; and
  the other risk factors and uncertainties described under “Risk Factors” in our 2009 Form 10-K and under “Risk Factors” in this Report.
In addition to the above factors, we also caution that there is no assurance that our allowance for credit losses will be adequate to cover future credit losses, especially if credit markets, housing prices and unemployment do not continue to stabilize or improve. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially adversely affect our financial results and condition.
Any forward-looking statement made by us in this Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

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RISK FACTORS
An investment in the Company involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. We discuss above under “Forward-Looking Statements” and elsewhere in this Report, as well as in other documents we file with the SEC, risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in the Company. We refer you to the Financial Review section and Financial Statements (and related Notes) in this Report for more information about credit, interest rate, market and litigation risks and to the “Risk Factors” and “Regulation and Supervision” sections in our 2009 Form 10-K for a detailed discussion of risk factors.
The following risk factor supplements and restates the risk factor captioned “Legislative and regulatory proposals may restrict or limit our ability to engage in our current businesses or in businesses that we desire to enter into” set forth on page 81 of our 2009 Form 10-K and should be read in conjunction with the other risk factors in our 2009 Form 10-K and in this Report.
Legislative and regulatory proposals may restrict or limit our ability to engage in our current businesses or in businesses that we desire to enter into and may have a material adverse effect on our business operations, income, and/or competitive position.
Many legislative and regulatory proposals directed at the financial services industry are being proposed or are pending in the U.S. Congress to address perceived weaknesses in the financial system and regulatory oversight thereof that may have contributed to the financial disruption over the last two years and to provide additional protection for consumers and investors. These proposals, if adopted, may restrict our ability to compete in our current businesses or restrict our ability to enter into new businesses that we otherwise may desire to enter into. In addition, the proposals may limit our revenues in businesses, impose fees or taxes on us, restrict compensation we may pay to key employees, restrict acquisition opportunities, and/or intensify the regulatory supervision of us and the financial services industry. These proposals, if adopted, may have a material adverse effect on our business operations, income, and/or competitive position and may have other negative consequences. For example, certain rating agencies have indicated that enactment of recent legislative proposals relating to financial services reform could result in lower credit ratings for certain financial institutions, including the Company, if the legislation reduces the probability of future Federal financial assistance or support for those financial institutions currently assumed by the rating agencies in their credit ratings. Other factors may also affect credit ratings, including the potential benefits and costs to financial institutions that may result from the proposed legislation, if enacted. A reduction in one or more of our credit ratings could adversely affect our ability to borrow funds and raise the costs of our borrowings substantially. In addition, changes in our credit ratings could cause creditors and business counterparties to raise collateral requirements or take other actions, which could adversely affect our ability to raise capital. Similarly, changes in the credit ratings of our customers and business counterparties also could have an adverse effect on our business operations.
Any factor described in this Report or in our 2009 Form 10-K could by itself, or together with other factors, adversely affect our financial results and condition. There are factors not discussed above or elsewhere in this Report that could adversely affect our financial results and condition.

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CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As required by SEC rules, the Company’s management evaluated the effectiveness, as of March 31, 2010, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2010.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:
  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;
  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during first quarter in 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
                 
   
    Quarter ended March 31 ,
(in millions, except per share amounts)   2010     2009  
   
Interest income
               
Trading assets
  $ 267        266  
Securities available for sale
    2,415       2,709  
Mortgages held for sale
     387        415  
Loans held for sale
    34       67  
Loans
    10,038       10,765  
Other interest income
    84       91  
   
Total interest income
    13,225       14,313  
   
Interest expense
               
Deposits
     735        999  
Short-term borrowings
    18        123  
Long-term debt
    1,276       1,779  
Other interest expense
    49       36  
   
Total interest expense
    2,078       2,937  
   
Net interest income
    11,147       11,376  
Provision for credit losses
    5,330       4,558  
   
Net interest income after provision for credit losses
    5,817       6,818  
   
Noninterest income
               
Service charges on deposit accounts
    1,332       1,394  
Trust and investment fees
    2,669       2,215  
Card fees
     865        853  
Other fees
     941        901  
Mortgage banking
    2,470       2,504  
Insurance
     621        581  
Net gains from trading activities
     537        787  
Net gains (losses) on debt securities available for sale (1)
    28       (119 )
Net gains (losses) from equity investments (2)
    43       (157 )
Operating leases
     185        130  
Other
     610        552  
   
Total noninterest income
    10,301       9,641  
   
Noninterest expense
               
Salaries
    3,314       3,386  
Commission and incentive compensation
    1,992       1,824  
Employee benefits
    1,322       1,284  
Equipment
     678        687  
Net occupancy
     796        796  
Core deposit and other intangibles
     549        647  
FDIC and other deposit assessments
     301        338  
Other
    3,165       2,856  
   
Total noninterest expense
    12,117       11,818  
   
Income before income tax expense
    4,001       4,641  
Income tax expense
    1,401       1,552  
   
Net income before noncontrolling interests
    2,600       3,089  
Less: Net income from noncontrolling interests
    53       44  
   
Wells Fargo net income
  $ 2,547       3,045  
   
Wells Fargo net income applicable to common stock
  $ 2,372       2,384  
   
Per share information
               
Earnings per common share
  $ 0.46       0.56  
Diluted earnings per common share
    0.45       0.56  
Dividends declared per common share
    0.05       0.34  
Average common shares outstanding
    5,190.4       4,247.4  
Diluted average common shares outstanding
    5,225.2       4,249.3  
   
(1)   Includes impairment losses of $92 million and $269 million, consisting of $154 million and $603 million of total other-than-temporary impairment losses, net of $62 million and $334 million recognized in other comprehensive income, for the quarters ended March 31, 2010 and 2009, respectively.
(2)   Includes impairment losses of $105 million and $247 million for the quarters ended March 31, 2010 and 2009, respectively.
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
                 
   
    March 31 ,   Dec. 31 ,
(in millions, except shares)   2010     2009  
   
Assets
               
Cash and due from banks
  $ 16,301       27,080  
Federal funds sold, securities purchased under resale agreements and other short-term investments
    54,192       40,885  
Trading assets
    47,028       43,039  
Securities available for sale
    162,487       172,710  
Mortgages held for sale (includes $31,931 and $36,962 carried at fair value)
    34,737       39,094  
Loans held for sale (includes $297 and $149 carried at fair value)
    5,140       5,733  
Loans (includes $371 carried at fair value at March 31, 2010)
    781,430       782,770  
Allowance for loan losses
    (25,123 )     (24,516 )
   
Net loans
    756,307       758,254  
   
Mortgage servicing rights:
               
Measured at fair value (residential MSRs)
    15,544       16,004  
Amortized
    1,069       1,119  
Premises and equipment, net
    10,405       10,736  
Goodwill
    24,819       24,812  
Other assets
    95,601       104,180  
   
Total assets (1)
  $ 1,223,630       1,243,646  
   
Liabilities
               
Noninterest-bearing deposits
  $ 170,518       181,356  
Interest-bearing deposits
    634,375       642,662  
   
Total deposits
    804,893       824,018  
Short-term borrowings
    46,333       38,966  
Accrued expenses and other liabilities
    54,371       62,442  
Long-term debt (includes $367 carried at fair value at March 31, 2010)
    199,879       203,861  
   
Total liabilities (2)
    1,105,476       1,129,287  
   
Equity
               
Wells Fargo stockholders’ equity:
               
Preferred stock
    9,276       8,485  
Common stock — $1-2/3 par value, authorized 9,000,000,000 shares; issued 5,245,971,422 shares and 5,245,971,422 shares
    8,743       8,743  
Additional paid-in capital
    53,156       52,878  
Retained earnings
    43,636       41,563  
Cumulative other comprehensive income
    4,087       3,009  
Treasury stock — 40,260,165 shares and 67,346,829 shares
    (1,460 )     (2,450 )
Unearned ESOP shares
    (1,296 )     (442 )
   
Total Wells Fargo stockholders’ equity
    116,142       111,786  
Noncontrolling interests
    2,012       2,573  
   
Total equity
    118,154       114,359  
   
Total liabilities and equity
  $ 1,223,630       1,243,646  
   
 
(1)   Our consolidated assets at March 31, 2010, include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash and due from banks, $359 million; Trading assets, $80 million; Securities available for sale, $1.8 billion; Net loans, $23.4 billion; Other assets, $2.3 billion, and Total assets, $27.9 billion.
(2)   Our consolidated liabilities at March 31, 2010, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Short-term borrowings, $316 million; Accrued expenses and other liabilities, $591 million; Long-term debt, $11.1 billion; and Total liabilities, $12.0 billion.
The accompanying notes are an integral part of these statements.

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
                                 
   
       
     
 
Preferred stock
    Common stock  
(in millions, except shares)   Shares     Amount     Shares     Amount  
   
Balance, December 31, 2008
    10,111,821     $ 31,332       4,228,630,889     $ 7,273  
   
Cumulative effect from change in accounting for other-than-temporary impairment on debt securities
                               
Effect of change in accounting for noncontrolling interests
                               
   
Balance, January 1, 2009
    10,111,821       31,332       4,228,630,889       7,273  
   
Comprehensive income:
                               
Net income
                               
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
Securities available for sale:
                               
Unrealized losses related to factors other than credit
                               
All other net unrealized gains, net of reclassification of $48 million of net losses included in net income
                               
Net unrealized losses on derivatives and hedging activities, net of reclassification of $84 million of net gains on cash flow hedges included in net income
                               
Unamortized gains under defined benefit plans, net of amortization
                               
   
Total comprehensive income
                               
Noncontrolling interests
                               
Common stock issued
                    33,346,822          
Common stock repurchased
                    (2,294,746 )        
Preferred stock discount accretion
            98                  
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (18,830 )     (19 )     1,714,287          
Common stock dividends
                               
Preferred stock dividends and accretion
                               
Stock option compensation expense
                               
Net change in deferred compensation and related plans
                               
   
Net change
    (18,830 )     79       32,766,363        
   

Balance, March 31, 2009

    10,092,991     $ 31,411       4,261,397,252     $ 7,273  
   

Balance, January 1, 2010

    9,980,940     $ 8,485       5,178,624,593     $ 8,743  
   
Cumulative effect from change in accounting for VIEs
                               
Comprehensive income:
                               
Net income
                               
Other comprehensive income, net of tax:
                               
Translation adjustments
                               
Securities available for sale:
                               
Unrealized losses related to factors other than credit
                               
All other net unrealized gains, net of reclassification of $40 million of net gains included in net income
                               
Net unrealized gains on derivatives and hedging activities, net of reclassification of $88 million of net gains on cash flow hedges included in net income
                               
Unamortized gains under defined benefit plans, net of amortization
                               
   
Total comprehensive income
                               
Noncontrolling interests
                               
Common stock issued
                    21,683,461          
Common stock repurchased
                    (1,312,992 )        
Preferred stock issued to ESOP
    1,000,000       1,000                  
Preferred stock released to ESOP
                               
Preferred stock converted to common shares
    (209,008 )     (209 )     6,716,195          
Common stock dividends
                               
Preferred stock dividends
                               
Tax benefit upon exercise of stock options
                               
Stock option compensation expense
                               
Net change in deferred compensation and related plans
                               
   
Net change
    790,992       791       27,086,664        
   

Balance, March 31, 2010

    10,771,932     $ 9,276       5,205,711,257     $ 8,743  
   
   
The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
                                                                 
   
Wells Fargo stockholders’ equity              
                    Cumulative                     Total              
    Additional             other             Unearned     Wells Fargo              
    paid-in     Retained     comprehensive     Treasury     ESOP     stockholders’     Noncontrolling     Total  
    capital     earnings     income     stock     shares     equity     interests     equity  
   
 
    36,026       36,543       (6,869 )     (4,666 )     (555 )     99,084       3,232     $ 102,316  
   
 
 
            53       (53 )                                    
 
    (3,716 )                                     (3,716 )     3,716        
   
 
    32,310       36,596       (6,922 )     (4,666 )     (555 )     95,368       6,948       102,316  
   
   
 
            3,045                               3,045       44       3,089  
   
 
                    (18 )                     (18 )     (5 )     (23 )
   
 
                    (210 )                     (210 )             (210 )
 
 
                    3,473                       3,473       12       3,485  
 
 
                    (16 )                     (16 )             (16 )
 
                    69                       69               69  
   
 
                                            6,343       51       6,394  
 
                                                  (237 )     (237 )
 
    35       (588 )             1,077               524               524  
 
                            (54 )             (54 )             (54 )
 
                                            98               98  
 
    (1 )                             20       19               19  
 
    (36 )                     55                              
 
            (1,443 )                             (1,443 )             (1,443 )
 
            (661 )                             (661 )             (661 )
 
    95                                       95               95  
 
    11                       (5 )             6               6  
   
 
    104       353       3,298       1,073       20       4,927       (186 )     4,741  
   
 
    32,414       36,949       (3,624 )     (3,593 )     (535 )     100,295       6,762     $ 107,057  
   
 
   

52,878

      41,563       3,009       (2,450 )     (442 )     111,786       2,573     $ 114,359  
   
 
            183                               183               183  
   
 
            2,547                               2,547       53       2,600  
   
 
                    5                       5               5  
   
 
                    (39 )                     (39 )             (39 )
 
 
                    1,023                       1,023       1       1,024  
 
 
 
                    73                       73               73  
 
                    16                       16               16  
   
 
                                            3,625       54       3,679  
 
    16                                       16       (615 )     (599 )
 
    (13 )     (213 )             690               464               464  
 
                            (38 )             (38 )             (38 )
 
    80                               (1,080 )                    
 
    (17 )                             226       209               209  
 
    (4 )                     213                              
 
            (260 )                             (260 )             (260 )
 
            (184 )                             (184 )             (184 )
 
    51                                       51               51  
 
    33                                       33               33  
 
    132                       125               257               257  
   
 
    278       2,073       1,078       990       (854 )     4,356       (561 )     3,795  
   
 
    53,156       43,636       4,087       (1,460 )     (1,296 )     116,142       2,012     $ 118,154  
   
   

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WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
                 
   
    Quarter ended March 31 ,
(in millions)   2010     2009  
   

Cash flows from operating activities:

               
Net income before noncontrolling interests
  $ 2,600       3,089  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    5,330       4,558  
Changes in fair value of MSRs (residential), MHFS and LHFS carried at fair value
    (80 )     2,141  
Changes in fair value related to adoption of new consolidation accounting guidance
    (7 )      
Depreciation and amortization
     713        981  
Other net losses (gains)
     326       (383 )
Preferred shares released to ESOP
     209       19  
Stock option compensation expense
    33       95  
Excess tax benefits related to stock option payments
    (51 )      
Originations of MHFS
    (74,290 )     (98,613 )
Proceeds from sales of and principal collected on mortgages originated for sale
    81,466       83,262  
Originations of LHFS
    (3,155 )     (1,494 )
Proceeds from sales of and principal collected on LHFS
    6,036       1,705  
Purchases of LHFS
    (2,407 )     (1,640 )
Net change in:
               
Trading assets
    (3,834 )     7,821  
Deferred income taxes
    1,199       2,373  
Accrued interest receivable
     690        674  
Accrued interest payable
    (142 )     (767 )
Other assets, net
    3,431       6,240  
Other accrued expenses and liabilities, net
    (9,186 )     5,818  
   
Net cash provided by operating activities
    8,881       15,879  
   

Cash flows from investing activities:

               
Net change in:
               
Federal funds sold, securities purchased under resale agreements and other short-term investments
    (13,307 )     30,808  
Securities available for sale:
               
Sales proceeds
    1,795       10,760  
Prepayments and maturities
    9,295       7,343  
Purchases
    (4,191 )     (39,173 )
Loans:
               
Decrease in banking subsidiaries’ loan originations, net of collections
    15,532       10,908  
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries
    1,341        419  
Purchases (including participations) of loans by banking subsidiaries
    (566 )     (301 )
Principal collected on nonbank entities’ loans
    4,286       3,175  
Loans originated by nonbank entities
    (2,861 )     (1,995 )
Net cash paid for acquisitions
          (123 )
Proceeds from sales of foreclosed assets
    1,109       1,001  
Changes in MSRs from purchases and sales
    (8 )     (4 )
Other, net
     270       (4,117 )
   
Net cash provided by investing activities
    12,695       18,701  
   

Cash flows from financing activities:

               
Net change in:
               
Deposits
    (19,125 )     15,725  
Short-term borrowings
    2,240       (35,990 )
Long-term debt:
               
Proceeds from issuance
    1,415       3,811  
Repayment
    (16,508 )     (17,877 )
Preferred stock:
               
Cash dividends paid
    (251 )     (623 )
Common stock:
               
Proceeds from issuance
     464        524  
Repurchased
    (38 )     (54 )
Cash dividends paid
    (260 )     (1,443 )
Excess tax benefits related to stock option payments
    51        
Net change in noncontrolling interests
    (343 )     (230 )
   
Net cash used by financing activities
    (32,355 )     (36,157 )
   
Net change in cash and due from banks
    (10,779 )     (1,577 )
Cash and due from banks at beginning of period
    27,080       23,763  
   
Cash and due from banks at end of period
  $ 16,301       22,186  
   

Supplemental cash flow disclosures:

               
Cash paid for interest
  $ 2,220       3,704  
Cash paid for income taxes
     325        249  
   
The accompanying notes are an integral part of these statements. See Note 1 for noncash activities.

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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Statements and related Notes of this Form 10-Q.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Fargo & Company is a diversified financial services company. We provide banking, insurance, investments, mortgage banking, investment banking, retail banking, brokerage, and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia, and in other countries. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Form 10-Q, we mean Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company. We also hold a majority interest in a real estate investment trust, which has publicly traded preferred stock outstanding.
Our accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2010 actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates in several areas, including the evaluation of other-than-temporary impairment (OTTI) on investment securities (Note 4), allowance for credit losses and purchased credit-impaired (PCI) loans (Note 5), valuing residential mortgage servicing rights (MSRs) (Notes 7 and 8) and financial instruments (Note 12), pension accounting (Note 14) and income taxes. Actual results could differ from those estimates. Among other effects, such changes could result in future impairments of investment securities, increases to the allowance for loan losses, as well as increased future pension expense.
The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K). Certain amounts in the financial statements for prior years have been revised to conform with current financial statement presentation.

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Accounting Developments
In first quarter 2010, we adopted the following accounting updates to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC or Codification):
  Accounting Standards Update (ASU or Update) 2010-6, Improving Disclosures about Fair Value Measurements;
  ASU 2009-16, Accounting for Transfers of Financial Assets (Statement of Financial Accounting Standards (FAS) 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140);
  ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FAS 167, Amendments to FASB Interpretation No. 46(R)); and
  ASU 2010-10, Amendments for Certain Investment Funds.
Information about these accounting updates is further described in more detail below.
ASU 2010-6 amends the disclosure requirements for fair value measurements. Companies are now required to disclose significant transfers in and out of Levels 1 and 2 of the fair value hierarchy, whereas the previous rules only required the disclosure of transfers in and out of Level 3. Additionally, in the rollforward of Level 3 activity, companies must present information on purchases, sales, issuances, and settlements on a gross basis rather than on a net basis. The Update also clarifies that fair value measurement disclosures should be presented for each class of assets and liabilities. A class is typically a subset of a line item in the statement of financial position. Companies should also provide information about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring instruments classified as either Level 2 or Level 3. We adopted this guidance in first quarter 2010 with prospective application, except for the new requirement related to the Level 3 rollforward. Gross presentation in the Level 3 rollforward is effective for us in first quarter 2011 with prospective application. Our adoption of the Update did not affect our consolidated financial results since it amends only the disclosure requirements for fair value measurements.
ASU 2009-16 (FAS 166) modifies certain guidance contained in ASC 860, Transfers and Servicing. This pronouncement eliminates the concept of qualifying special purpose entities (QSPEs) and provides additional criteria transferors must use to evaluate transfers of financial assets. The Update also requires that any assets or liabilities retained from a transfer accounted for as a sale must be initially recognized at fair value. We adopted this guidance in first quarter 2010 with prospective application for transfers that occurred on and after January 1, 2010.
ASU 2009-17 (FAS 167) amends several key consolidation provisions related to variable interest entities (VIEs), which are included in ASC 810, Consolidation. The scope of the new guidance includes entities that were previously designated as QSPEs. The Update also changes the approach companies must use to identify VIEs for which they are deemed to be the primary beneficiary and are required to consolidate. Under the new guidance, a VIE’s primary beneficiary is the entity that has the power to direct the VIE’s significant activities, and has an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The Update also requires companies to continually reassess whether they are the primary beneficiary of a VIE, whereas the previous rules only required reconsideration upon the occurrence of certain triggering events. We adopted this guidance in first quarter 2010, which resulted in the consolidation of $18.6 billion of incremental assets onto our consolidated balance sheet and a $183 million increase to beginning retained earnings as a cumulative effect adjustment.

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We also elected the fair value option for those newly consolidated VIEs for which our interests, prior to January 1, 2010, were predominantly carried at fair value with changes in fair value recorded to earnings. Accordingly, the fair value option was elected to effectively continue fair value accounting through earnings for those interests. Conversely, we did not elect the fair value option for those newly consolidated VIEs that did not share these characteristics. At January 1, 2010, the fair value of loans and long-term debt for which we elected the fair value option was $1.0 billion and $1.0 billion, respectively. The incremental impact of electing the fair value option (compared to not electing) on the cumulative effect adjustment to retained earnings was an increase of $15 million. See Notes 7 and 12 in this Report for additional information.
ASU 2010-10 amends consolidation accounting guidance to defer indefinitely the application of ASU 2009-17 to certain investment funds. The amendment was effective for us in first quarter 2010. As a result, we did not consolidate any investment funds upon adoption of ASU 2009-17.
Supplemental Cash Flow Information
Noncash activities are presented below, including information on transfers affecting mortgages held for sale (MHFS), loans held for sale (LHFS), and MSRs.
                 
   
    Quarter ended March 31 ,
(in millions)   2010     2009  
   

Transfers from trading assets to securities available for sale

  $       786  
Transfers from MHFS to trading assets
          220  
Transfers from MHFS to MSRs
    1,065       1,451  
Transfers from MHFS to foreclosed assets
    51       33  
Net transfers from LHFS to loans
    149        
Transfers from loans to securities available for sale
    2,057        
Transfers from (to) loans (from) to MHFS
    46       (32 )
Transfers from loans to foreclosed assets
    2,697       1,479  
Decrease in noncontrolling interests due to deconsolidation of subsidiaries
    239        
Adoption of new consolidation accounting guidance:
               
Trading assets
    155        
Securities available for sale
    (7,590 )      
Loans
    25,657        
Other assets
    193        
Short-term borrowings
    5,127        
Long-term debt
    13,134        
Accrued expenses and other liabilities
    (32 )      
   
Subsequent Events
We have evaluated the effects of subsequent events that have occurred subsequent to period end March 31, 2010. There have been no material events that would require recognition in our first quarter 2010 consolidated financial statements or disclosure in the Notes to the financial statements.
On April 29, 2010, following stockholder approval, the Company amended its certificate of incorporation to provide for an increase in the number of shares of the Company’s common stock authorized for issuance from 6 billion to 9 billion.

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2. BUSINESS COMBINATIONS
We regularly explore opportunities to acquire financial services companies and businesses. Generally, we do not make a public announcement about an acquisition opportunity until a definitive agreement has been signed. For information on additional consideration related to acquisitions, which is considered to be a guarantee, see Note 10 in this Report.
We did not complete any acquisitions in the first quarter 2010. At March 31, 2010, we had one pending business combination with total assets of approximately $198 million. We expect to complete this transaction during second quarter 2010.
On December 31, 2008, Wells Fargo acquired Wachovia Corporation (Wachovia). The purchase accounting for the Wachovia acquisition was finalized as of December 31, 2009. Costs associated with involuntary employee termination, contract terminations and closing duplicate facilities were recorded throughout 2009 and allocated to the purchase price. The following table summarizes the first quarter 2010 usage of the exit reserves associated with the Wachovia acquisition.
                                 
   
    Employee     Contract     Facilities        
(in millions)   termination     termination     related     Total  
   

Balance, December 31, 2009

  $ 355       58       344       757  
Cash payments / utilization
    (49 )     (13 )     (13 )     (75 )
   
Balance, March 31, 2010
  $ 306       45       331       682  
   
   
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS
The following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
                 
   
    March 31 ,   Dec. 31 ,
(in millions)   2010     2009  
   
Federal funds sold and securities purchased under resale agreements
  $ 11,283       8,042  
Interest-earning deposits
    41,229       31,668  
Other short-term investments
    1,680       1,175  
   
Total
  $ 54,192       40,885  
   
   
We pledge certain financial instruments that we own to collateralize repurchase agreements and other securities financings. The types of collateral we pledge include securities issued by federal agencies, government-sponsored entities (GSEs), and domestic and foreign companies. We pledged $18.6 billion at March 31, 2010, and $14.8 billion at December 31, 2009, under agreements that permit the secured parties to sell or repledge the collateral. Pledged collateral where the secured party cannot sell or repledge was $771 million at March 31, 2010, and $434 million at December 31, 2009.
We receive collateral from other entities under resale agreements and securities borrowings. We received $32.6 billion at March 31, 2010, and $31.4 billion at December 31, 2009, for which we have the right to sell or repledge the collateral. These amounts include securities we have sold or repledged to others with a fair value of $31.2 billion at March 31, 2010, and $29.7 billion at December 31, 2009.
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4. SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major categories of securities available for sale carried at fair value. The net unrealized gains (losses) are reported on an after-tax basis as a component of cumulative other comprehensive income (OCI). There were no securities classified as held to maturity as of the periods presented.
                                 
   
            Gross     Gross        
            unrealized     unrealized     Fair  
(in millions)   Cost     gains     losses     value  
   
March 31, 2010
                               
Securities of U.S. Treasury and federal agencies
  $ 2,324       36       (10 )     2,350  
Securities of U.S. states and political subdivisions
    15,413       776       (375 )     15,814  
Mortgage-backed securities:
                               
Federal agencies
    74,411       3,492       (13 )     77,890  
Residential
    20,155       2,203       (1,031 )     21,327  
Commercial
    12,316       875       (1,320 )     11,871  
   
Total mortgage-backed securities
    106,882       6,570       (2,364 )     111,088  
   
Corporate debt securities
    8,412       1,365       (57 )     9,720  
Collateralized debt obligations
    3,725       438       (312 )     3,851  
Other (1)
    13,470       849       (335 )     13,984  
   
Total debt securities
    150,226       10,034       (3,453 )     156,807  
   
Marketable equity securities:
                               
Perpetual preferred securities
    4,331       333       (78 )     4,586  
Other marketable equity securities
    528       567       (1 )     1,094  
   
Total marketable equity securities
    4,859       900       (79 )     5,680  
   
Total
  $ 155,085       10,934       (3,532 )     162,487  
   
December 31, 2009
                               
Securities of U.S. Treasury and federal agencies
  $ 2,256       38       (14 )     2,280  
Securities of U.S. states and political subdivisions
    13,212       683       (365 )     13,530  
Mortgage-backed securities:
                               
Federal agencies
    79,542       3,285       (9 )     82,818  
Residential
    28,153       2,480       (2,043 )     28,590  
Commercial
    12,221       602       (1,862 )     10,961  
   
Total mortgage-backed securities
    119,916       6,367       (3,914 )     122,369  
   
Corporate debt securities
    8,245       1,167       (77 )     9,335  
Collateralized debt obligations
    3,660       432       (367 )     3,725  
Other (1)
    15,025       1,099       (245 )     15,879  
   
Total debt securities
    162,314       9,786       (4,982 )     167,118  
   
Marketable equity securities:
                               
Perpetual preferred securities
    3,677       263       (65 )     3,875  
Other marketable equity securities
    1,072       654       (9 )     1,717  
   
Total marketable equity securities
    4,749       917       (74 )     5,592  
   
Total
  $ 167,063       10,703       (5,056 )     172,710  
   
   
(1)   Included in the “Other” category are asset-backed securities collateralized by auto leases or loans and cash reserves with a cost basis and fair value of $7.3 billion and $7.5 billion, respectively, at March 31, 2010, and $8.2 billion and $8.5 billion, respectively, at December 31, 2009. Also included in the “Other” category are asset-backed securities collateralized by home equity loans with a cost basis and fair value of $1.1 billion and $1.2 billion, respectively, at March 31, 2010, and $2.3 billion and $2.5 billion, respectively, at December 31, 2009. The remaining balances primarily include asset-backed securities collateralized by credit cards and student loans.
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As part of our liquidity management strategy, we pledge securities to secure borrowings from the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank. We also pledge securities to secure trust and public deposits and for other purposes as required or permitted by law. Securities pledged where the secured party does not have the right to sell or repledge totaled $91.1 billion at March 31, 2010, and $98.9 billion at December 31, 2009. We did not pledge any securities where the secured party has the right to sell or repledge the collateral as of the same periods, respectively.
Gross Unrealized Losses and Fair Value
 
The following table shows the gross unrealized losses and fair value of securities in the securities available-for-sale portfolio by length of time that individual securities in each category had been in a continuous loss position. Debt securities on which we have taken only credit-related OTTI write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.
                                                 
   
    Less than 12 months     12 months or more     Total  
    Gross             Gross             Gross        
    unrealized     Fair     unrealized     Fair     unrealized     Fair  
(in millions)   losses     value     losses     value     losses     value  
   

March 31, 2010

                                               

Securities of U.S. Treasury and federal agencies

  $ (4 )     547       (6 )     112       (10 )     659  
Securities of U.S. states and political subdivisions
    (73 )     1,458       (302 )     2,733       (375 )     4,191  
Mortgage-backed securities:
                                               
Federal agencies
    (13 )     1,568                   (13 )     1,568  
Residential
    (53 )     1,492       (978 )     5,334       (1,031 )     6,826  
Commercial
    (5 )     77       (1,315 )     5,835       (1,320 )     5,912  
   
Total mortgage-backed securities
    (71 )     3,137       (2,293 )     11,169       (2,364 )     14,306  
   
Corporate debt securities
    (10 )     277       (47 )     354       (57 )     631  
Collateralized debt obligations
    (12 )     462       (300 )     544       (312 )     1,006  
Other
    (35 )     701       (300 )     774       (335 )     1,475  
   
Total debt securities
    (205 )     6,582       (3,248 )     15,686       (3,453 )     22,268  
   
Marketable equity securities:
                                               
Perpetual preferred securities
    (40 )     504       (38 )     414       (78 )     918  
Other marketable equity securities
    (1 )     32                   (1 )     32  
   
Total marketable equity securities
    (41 )     536       (38 )     414       (79 )     950  
   
Total
  $ (246 )     7,118       (3,286 )     16,100       (3,532 )     23,218  
   

December 31, 2009

                                               

Securities of U.S. Treasury and federal agencies

  $ (14 )     530                   (14 )     530  
Securities of U.S. states and political subdivisions
    (55 )     1,120       (310 )     2,826       (365 )     3,946  
Mortgage-backed securities:
                                               
Federal agencies
    (9 )     767                   (9 )     767  
Residential
    (243 )     2,991       (1,800 )     9,697       (2,043 )     12,688  
Commercial
    (37 )     816       (1,825 )     6,370       (1,862 )     7,186  
   
Total mortgage-backed securities
    (289 )     4,574       (3,625 )     16,067       (3,914 )     20,641  
   
Corporate debt securities
    (7 )     281       (70 )     442       (77 )     723  
Collateralized debt obligations
    (55 )     398       (312 )     512       (367 )     910  
Other
    (73 )     746       (172 )     286       (245 )     1,032  
   
Total debt securities
    (493 )     7,649       (4,489 )     20,133       (4,982 )     27,782  
   
Marketable equity securities:
                                               
Perpetual preferred securities
    (1 )     93       (64 )     527       (65 )     620  
Other marketable equity securities
    (9 )     175                   (9 )     175  
   
Total marketable equity securities
    (10 )     268       (64 )     527       (74 )     795  
   
Total
  $ (503 )     7,917       (4,553 )     20,660       (5,056 )     28,577  
   
   

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We do not have the intent to sell any securities included in the table above. For debt securities included in the table above, we have concluded it is more likely than not that we will not be required to sell prior to recovery of the amortized cost basis. We have assessed each security for credit impairment. For debt securities, we evaluate, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities amortized cost basis. For equity securities, we consider numerous factors in determining whether impairment exists, including our intent and ability to hold the securities for a period of time sufficient to recover the cost basis of the securities.
For complete descriptions of the factors we consider when analyzing debt securities for impairment, see Note 5 of the 2009 10-K. There have been no material changes to our methodologies for assessing impairment in first quarter 2010.
Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data.
Securities of U.S. Treasury and federal agencies
The unrealized losses associated with U.S. Treasury and federal agency securities do not have any credit losses due to the guarantees provided by the United States government.
Securities of U.S. states and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and not due to the credit quality of the securities. The fair value of these investments is almost exclusively investment grade. The securities were generally underwritten in accordance with our own investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These investments will continue to be monitored as part of our ongoing impairment analysis, but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. As a result, we expect to recover the entire amortized cost basis of these securities.
Federal Agency Mortgage-Backed Securities (MBS)
The unrealized losses associated with federal agency MBS are primarily driven by changes in interest rates and not due to credit losses. These securities are issued by U.S. government or GSEs and do not have any credit losses given the explicit or implicit government guarantee.
Residential Mortgage-Backed Securities
The unrealized losses associated with private residential MBS are primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. We estimate losses to a security by forecasting the underlying mortgage loans in each transaction. The forecasted loan performance is used to project cash flows to the various tranches in the structure. Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement, we expect to recover the entire amortized cost basis of these securities.

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Commercial Mortgage-Backed Securities
The unrealized losses associated with commercial MBS are primarily driven by higher projected collateral losses and wider credit spreads. These investments are predominantly investment grade. We assess for credit impairment using a cash flow model. The key assumptions include default rates and severities. We estimate losses to a security by forecasting the underlying loans in each transaction. The forecasted loan performance is used to project cash flows to the various tranches in the structure. Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Corporate Debt Securities
The unrealized losses associated with corporate debt securities are primarily related to securities backed by commercial loans and individual issuer companies. For securities with commercial loans as the underlying collateral, we have evaluated the expected credit losses in the security and concluded that we have sufficient credit enhancement when compared with our estimate of credit losses for the individual security. For individual issuers, we evaluate the financial performance of the issuer on a quarterly basis to determine that the issuer can make all contractual principal and interest payments. Based upon this assessment, we expect to recover the entire cost basis of these securities.
Collateralized Debt Obligations (CDOs)
The unrealized losses associated with CDOs relate to securities primarily backed by commercial, residential or other consumer collateral. The losses are primarily driven by higher projected collateral losses and wider credit spreads. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Other Debt Securities
The unrealized losses associated with other debt securities primarily relate to other asset-backed securities, which are primarily backed by auto, home equity and student loans. The losses are primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Marketable Equity Securities
Our marketable equity securities include investments in perpetual preferred securities, which provide very attractive tax-equivalent yields. We evaluated these hybrid financial instruments with investment-grade ratings for impairment using an evaluation methodology similar to that used for debt securities. Perpetual preferred securities were not other-than-temporarily impaired at March 31, 2010, if there was no evidence of credit deterioration or investment rating downgrades of any issuers to below investment grade, and we expected to continue to receive full contractual payments. We will continue to evaluate the prospects for these securities for recovery in their market value in accordance with our policy for estimating OTTI. We have recorded impairment write-downs on perpetual preferred securities where there was evidence of credit deterioration.

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The fair values of our investment securities could decline in the future if the underlying performance of the collateral for the residential and commercial MBS or other securities deteriorate and our credit enhancement levels do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that significant OTTI may occur in the future given the current economic environment.
The following table shows the gross unrealized losses and fair value of debt and perpetual preferred securities available for sale by those rated investment grade and those rated less than investment grade, according to their lowest credit rating by Standard & Poor’s Rating Services (S&P) or Moody’s Investors Service (Moody’s). Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by S&P or Baa3 or higher by Moody’s, are generally considered by the rating agencies and market participants to be low credit risk. Conversely, securities rated below investment grade, labeled as “speculative grade” by the rating agencies, are considered to be distinctively higher credit risk than investment grade securities. We have also included securities not rated by S&P or Moody’s in the table below based on the internal credit grade of the securities (used for credit risk management purposes) equivalent to the credit rating assigned by major credit agencies. There were no unrated securities included in investment grade in a loss position as of March 31, 2010, or December 31, 2009. If an internal credit grade was not assigned, we categorized the security as non-investment grade.
                                 
   
    Investment grade     Non-investment grade  
    Gross             Gross          
    unrealized     Fair     unrealized     Fair  
(in millions)   losses     value     losses     value  
   

March 31, 2010

                               

Securities of U.S. Treasury and federal agencies

  $ (10 )     659              
Securities of U.S. states and political subdivisions
    (267 )     3,497       (108 )     694  
Mortgage-backed securities:
                               
Federal agencies
    (13 )     1,568              
Residential
    (78 )     1,431       (953 )     5,395  
Commercial
    (723 )     5,207       (597 )     705  
   
Total mortgage-backed securities
    (814 )     8,206       (1,550 )     6,100  
   
Corporate debt securities
    (29 )     181       (28 )     450  
Collateralized debt obligations
    (80 )     589       (232 )     417  
Other
    (66 )     725       (269 )     750  
   
Total debt securities
    (1,266 )     13,857       (2,187 )     8,411  
Perpetual preferred securities
    (78 )     918              
   
Total
  $ (1,344 )     14,775       (2,187 )     8,411  
   

December 31, 2009

                               

Securities of U.S. Treasury and federal agencies

  $ (14 )     530              
Securities of U.S. states and political subdivisions
    (275 )     3,621       (90 )     325  
Mortgage-backed securities:
                               
Federal agencies
    (9 )     767              
Residential
    (480 )     5,661       (1,563 )     7,027  
Commercial
    (1,247 )     6,543       (615 )     643  
   
Total mortgage-backed securities
    (1,736 )     12,971       (2,178 )     7,670  
   
Corporate debt securities
    (31 )     260       (46 )     463  
Collateralized debt obligations
    (104 )     471       (263 )     439  
Other
    (85 )     644       (160 )     388  
   
Total debt securities
    (2,245 )     18,497       (2,737 )     9,285  
Perpetual preferred securities
    (65 )     620              
   
Total
  $ (2,310 )     19,117       (2,737 )     9,285  
   
   

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

March 31, 2010

                                                                               

Securities of U.S. Treasury and federal agencies

  $ 2,350       2.80 %   $ 342       0.83 %   $ 766       2.14 %   $ 1,236       3.74 %   $ 6       4.04 %
Securities of U.S. states and political subdivisions
    15,814       6.26       733       3.05       1,219       5.39       1,431       6.14       12,431       6.54  
Mortgage-backed securities:
                                                                               
Federal agencies
    77,890       5.51       9       4.73       48       6.18       235       5.62       77,598       5.50  
Residential
    21,327       5.32                   114       0.46       259       5.67       20,954       5.34  
Commercial
    11,871       5.33       88       0.69       73       5.57       225       5.20       11,485       5.37  
                                                                 
Total mortgage-backed securities
    111,088       5.45       97       1.06       235       3.21       719       5.51       110,037       5.46  
                                                                 
Corporate debt securities
    9,720       5.61       704       4.03       3,827       5.83       4,258       5.76       931       5.16  
Collateralized debt obligations
    3,851       1.54                   544       4.05       1,954       1.38       1,353       0.76  
Other
    13,984       4.23       3,265       5.05       6,249       5.48       833       2.48       3,637       1.76  
                                                                 
Total debt securities at fair value (1)
  $ 156,807       5.30 %   $ 5,141       4.27 %   $ 12,840       5.27 %   $ 10,431       4.47 %   $ 128,395       5.41 %
   

December 31, 2009

                                                                               

Securities of U.S. Treasury and federal agencies

  $ 2,280       2.80 %   $ 413       0.79 %   $ 669       2.14 %   $ 1,192       3.87 %   $ 6       4.03 %
Securities of U.S. states and political subdivisions
    13,530       6.75       77       7.48       703       6.88       1,055       6.56       11,695       6.76  
Mortgage-backed securities:
                                                                               
Federal agencies
    82,818       5.50       12       4.68       50       5.91       271       5.56       82,485       5.50  
Residential
    28,590       5.40       51       4.80       115       0.45       283       5.69       28,141       5.41  
Commercial
    10,961       5.29       85       0.68       71       5.55       169       5.66       10,636       5.32  
                                                                 
Total mortgage-backed securities
    122,369       5.46       148       2.44       236       3.14       723       5.63       121,262       5.46  
                                                                 
Corporate debt securities
    9,335       5.53       684       4.00       3,937       5.68       3,959       5.68       755       5.32  
Collateralized debt obligations
    3,725       1.70       2       5.53       492       4.48       1,837       1.56       1,394       0.90  
Other
    15,879       4.22       2,128       5.62       7,762       5.96       697       2.46       5,292       1.33  
                                                                 
Total debt securities at fair value (1)
  $ 167,118       5.33 %   $ 3,452       4.63 %   $ 13,799       5.64 %   $ 9,463       4.51 %   $ 140,404       5.37 %
   
   
(1)   The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security.

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Realized Gains and Losses
 
The following table shows the gross realized gains and losses on sales from the securities available-for-sale portfolio, including marketable equity securities. Realized losses include OTTI write-downs.
                 
   
    Quarter ended March 31 ,
(in millions)   2010     2009  
   
Gross realized gains
  $ 184       294  
Gross realized losses
    (121 )     (370 )
   
Net realized gains (losses)
  $ 63       (76 )
   
   
Other-Than-Temporary Impairment
The following table shows the detail of OTTI write-downs included in earnings for debt securities and marketable and nonmarketable equity securities.
                 
   
    Quarter ended March 31 ,
(in millions)   2010     2009  
   

OTTI write-downs included in earnings

               
Debt securities:
               
U.S. states and political subdivisions
  $ 5        
Residential mortgage-backed securities
    39       178  
Commercial mortgage-backed securities
    13       10  
Corporate debt securities
    1       31  
Collateralized debt obligations
    6       50  
Other debt securities
    28        
   
Total debt securities
    92       269  
   

Equity securities:

               
Marketable equity securities:
               
Perpetual preferred securities
    14       27  
Other marketable equity securities
          16  
   
Total marketable equity securities
    14       43  
   
Nonmarketable equity securities
    91       204  
   
Total equity securities
    105       247  
   
Total OTTI write-downs included in earnings
  $ 197       516  
   
   

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The following table shows the detail of OTTI write-downs on debt securities available for sale included in earnings and the changes in OCI.
                 
   
    Quarter ended March 31 ,
(in millions)   2010     2009  
   

OTTI on debt securities

               
Recorded as part of gross realized losses:
               
Credit-related OTTI
  $ 89       263  
Securities we intend to sell
    3       6  
   
Total recorded as part of gross realized losses
    92       269  
   

Recorded directly to OCI for non-credit-related impairment:

               
U.S. states and political subdivisions
    (4 )      
Residential mortgage-backed securities
    26       314  
Commercial mortgage-backed securities
    (2 )     7  
Collateralized debt obligations
    59       13  
Other debt securities
    (17 )      
   
Total recorded directly to OCI for non-credit-related impairment (1)
    62       334  
   
Total OTTI on debt securities
  $ 154       603  
   
   
(1)   Represents amounts recorded to OCI on debt securities in periods OTTI write-downs have occurred. Changes in fair value in subsequent periods on such securities, to the extent not subsequently impaired in those periods, are not reflected in this balance.
Securities that were determined to be credit impaired during the current quarter as opposed to prior quarters, in general have experienced further degradation in expected cash flows primarily due to higher loss forecasts.
Other-Than-Temporarily Impaired Debt Securities
 
We recognize OTTI for debt securities classified as available for sale in accordance with FASB ASC 320, Investments — Debt and Equity Securities, which requires that we assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as losses in the income statement, but is recognized in OCI. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in OCI.
The following table presents a roll-forward of the credit loss component recognized in earnings (referred to as “credit-impaired” debt securities). The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance for 2009 represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2009. OTTI recognized in earnings for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive or expect to receive cash flows in excess of what we previously expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down.

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Changes in the credit loss component of credit-impaired debt securities were:
                 
   
    Quarter ended March 31 ,
(in millions)   2010     2009  

Balance, beginning of quarter

  $ 1,187       471  
Additions (1):
               
Initial credit impairments
    20       197  
Subsequent credit impairments
    69       66  
Reductions:
               
For securities sold
    (25 )     (7 )
For securities derecognized resulting from adoption of new consolidation accounting guidance
    (242 )      
For increases in expected cash flows
    (7 )      
   
Balance, end of quarter
  $ 1,002       727  
   
   
(1)   Excludes $3 million and $6 million for the quarters ended March 31, 2010 and 2009, respectively, of OTTI on debt securities we intend to sell.
For asset-backed securities (e.g., residential MBS), we estimated expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordinated interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which consider current delinquencies and nonperforming assets, future expected default rates and collateral value by vintage and geographic region) and prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. Total credit impairment losses were $39 million for the quarter ended March 31, 2010, all of which were recorded on non-investment grade securities, and $174 million for the quarter ended March 31, 2009, of which $167 million were recorded on non-investment grade securities. This does not include OTTI recorded on those securities that we intend to sell. The table below presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings for residential MBS.
                 
   
    Non-agency residential MBS – non-investment grade  
    Quarter ended March 31 ,
    2010     2009  
   

Expected remaining life of loan losses (1):

               
Range (2)
    2 - 36 %     0 - 34  
Credit impairment distribution (3):
               
0 - 10% range
    53       72  
10 - 20% range
    20       27  
20 - 30% range
    22        
Greater than 30%
    5       1  
Weighted average (4)
    10       12  

Current subordination levels (5):

               
Range (2)
    0 - 22       0 - 20  
Weighted average (4)
    7       7  

Prepayment speed (annual CPR (6)):

               
Range (2)
    3 - 13       7 - 25  
Weighted average (4)
    8       16  
   
(1)   Represents future expected credit losses on underlying pool of loans expressed as a percentage of total current outstanding loan balance.
(2)   Represents the range of inputs/assumptions based upon the individual securities within each category.
(3)   Represents distribution of credit impairment losses recognized in earnings categorized based on range of expected remaining life of loan losses. For example, 53% of credit impairment losses recognized in earnings for the quarter ended March 31, 2010, had expected remaining life of loan loss assumptions of 0 to 10%.
(4)   Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
(5)   Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance.
(6)   Constant prepayment rate.

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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table presents the major categories of loans outstanding including those subject to accounting guidance for PCI loans. Certain loans acquired in the Wachovia acquisition are accounted for as PCI loans and are included below, net of any remaining purchase accounting adjustments. Outstanding balances of all other loans are presented net of unearned income, net deferred loan fees, and unamortized discount and premium totaling $13.8 billion at March 31, 2010, and $14.6 billion, at December 31, 2009.
                                                 
   
    March 31, 2010     Dec. 31, 2009  
            All                     All        
    PCI     other             PCI     other        
(in millions)   loans     loans     Total     loans     loans     Total  
   
Commercial and commercial real estate:
                                               
Commercial
  $ 1,431       149,156       150,587       1,911       156,441       158,352  
Real estate mortgage
    5,252       99,262       104,514       5,631       99,167       104,798  
Real estate construction
    3,538       24,299       27,837       3,713       25,994       29,707  
Lease financing
          13,887       13,887             14,210       14,210  
   
Total commercial and commercial real estate
    10,221       286,604       296,825       11,255       295,812       307,067  
   
Consumer:
                                               
Real estate 1-4 family first mortgage
    37,378       203,150       240,528       38,386       191,150       229,536  
Real estate 1-4 family junior lien mortgage
    315       103,485       103,800       331       103,377       103,708  
Credit card
          22,525       22,525             24,003       24,003  
Other revolving credit and installment
          89,463       89,463             89,058       89,058  
   
Total consumer
    37,693       418,623       456,316       38,717       407,588       446,305  
   
Foreign
    1,593       26,696       28,289       1,733       27,665       29,398  
   
Total loans
  $ 49,507       731,923       781,430       51,705       731,065       782,770  
   
   
We pledge loans to secure borrowings from the FHLB and the Federal Reserve Bank as part of our liquidity management strategy. Loans pledged where the secured party does not have the right to sell or repledge totaled $318.3 billion at March 31, 2010, and $312.6 billion at December 31, 2009. We did not have any pledged loans where the secured party has the right to sell or repledge for the same respective periods.
The total allowance reflects management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. We consider the allowance for credit losses of $25.7 billion adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2010.

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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded credit commitments. Changes in the allowance for credit losses were:
                 
   
    Quarter ended March 31 ,
(in millions)   2010     2009  
   
Balance, beginning of quarter
  $ 25,031       21,711  
Provision for credit losses
    5,330       4,558  
Adjustment for passage of time on certain impaired loans (1)
    (74 )      
Loan charge-offs:
               
Commercial and commercial real estate:
               
Commercial
    (767 )     (596 )
Real estate mortgage
    (337 )     (31 )
Real estate construction
    (349 )     (105 )
Lease financing
    (34 )     (20 )
   
Total commercial and commercial real estate
    (1,487 )     (752 )
   
Consumer:
               
Real estate 1-4 family first mortgage
    (1,397 )     (424 )
Real estate 1-4 family junior lien mortgage
    (1,496 )     (873 )
Credit card
    (696 )     (622 )
Other revolving credit and installment
    (750 )     (900 )
   
Total consumer
    (4,339 )     (2,819 )
   
Foreign
    (47 )     (54 )
   
Total loan charge-offs
    (5,873 )     (3,625 )
   
Loan recoveries:
               
Commercial and commercial real estate:
               
Commercial
    117       40  
Real estate mortgage
    10       10  
Real estate construction
    11       2  
Lease financing
    5       3  
   
Total commercial and commercial real estate
    143       55  
   
Consumer:
               
Real estate 1-4 family first mortgage
    86       33  
Real estate 1-4 family junior lien mortgage
    47       26  
Credit card
    53       40  
Other revolving credit and installment
    203       204  
   
Total consumer
    389       303  
   
Foreign
    11       9  
   
Total loan recoveries
    543       367  
   
Net loan charge-offs (2)
    (5,330 )     (3,258 )
   
Allowances related to business combinations/other (3)
    699       (165 )
   
Balance, end of quarter
  $ 25,656       22,846  
   
Components:
               
Allowance for loan losses
  $ 25,123       22,281  
Reserve for unfunded credit commitments
    533       565  
   
Allowance for credit losses
  $ 25,656       22,846  
   
Net loan charge-offs (annualized) as a percentage of average total loans (2)
    2.71 %     1.54  
Allowance for loan losses as a percentage of total loans (4)
    3.22       2.64  
Allowance for credit losses as a percentage of total loans (4)
    3.28       2.71  
 
(1)   Certain impaired loans have a valuation allowance determined by discounting expected cash flows at the respective loan’s effective interest rate. Accordingly, the valuation allowance for these impaired loans reduces with the passage of time and that reduction is recognized as interest income.
(2)   For PCI loans, charge-offs are only recorded to the extent that losses exceed the purchase accounting estimates.
(3)   Includes $693 million related to the adoption of new consolidation accounting guidance on January 1, 2010.
(4)   The allowance for credit losses include $247 million at March 31, 2010, and none at March 31, 2009, related to PCI loans acquired from Wachovia. Loans acquired from Wachovia are included in total loans net of related purchase accounting net write-downs.

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We consider a loan to be impaired under the accounting guidance for loan impairment provisions when, based on current information and events, we determine that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. We assess and account for as impaired certain nonaccrual commercial, commercial real estate (CRE) and foreign loan exposures that are over $5 million and certain consumer, commercial, CRE and foreign loans whose terms have been modified in a troubled debt restructuring (TDR). The recorded investment in impaired loans and the methodology used to measure impairment was:
                 
   
    March 31 ,   Dec. 31 ,
(in millions)   2010     2009  
   

Impairment measurement based on:

               
Collateral value method
  $ 537       561  
Discounted cash flow method (1)
    16,905       15,217  
   
Total (2)
  $ 17,442       15,778  
   
   
(1)   Includes $617 million at March 31, 2010, and $501 million at December 31, 2009, of Government National Mortgage Association (GNMA) loans that are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Although both principal and interest are insured, the insured interest rate may be different than the original contractual interest rate prior to modification, resulting in interest impairment under a discounted cash flow methodology.
(2)   Includes $16.2 billion and $15.0 billion of impaired loans with a related allowance of $3.2 billion and $2.8 billion at March 31, 2010, and December 31, 2009, respectively. The remaining impaired loans do not have a specific impaired allowance associated with them.
The average recorded investment in these impaired loans was $17.1 billion in first quarter 2010 and $14.7 billion in fourth quarter 2009.

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Purchased Credit-Impaired Loans
PCI loans had an unpaid principal balance of $79.6 billion at March 31, 2010, and $83.6 billion at December 31, 2009, and a carrying value, before the deduction of the allowance for loan losses, of $49.5 billion and $51.7 billion, respectively.
The excess of cash flows expected to be collected over the initial fair value of PCI loans is referred to as the accretable yield and is accreted into interest income over the estimated life of the PCI loans using the effective yield method. The accretable yield will change due to:
  estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;
  estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and
  indices for PCI loans with variable rates of interest.
For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time. The change in the accretable yield related to PCI loans is presented in the following table.
                 
   
    Quarter ended     Year ended