Edgar Filing: WELLS FARGO & CO/MN

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Quarterly Report on Form 10-Q

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 September 30, 2011

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.

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

October 31, 2011

Common stock, $1-2/3 par value

5,273,525,555

FORM 10-Q

CROSS-REFERENCE INDEX


PART I	Financial Information
Item 1.	Financial Statements	Page
	Consolidated Statement of Income	62
	Consolidated Balance Sheet	63
	Consolidated Statement of Changes in Equity and Comprehensive Income	64
	Consolidated Statement of Cash Flows	66
	Notes to Financial Statements
	1 - Summary of Significant Accounting Policies	67
	2 - Business Combinations	69
	3 - Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments	69
	4 - Securities Available for Sale	70
	5 - Loans and Allowance for Credit Losses	79
	6 - Other Assets	97
	7 - Securitizations and Variable Interest Entities	98
	8 - Mortgage Banking Activities	109
	9 - Intangible Assets	112
	10 - Guarantees, Pledged Assets and Collateral	113
	11 - Legal Actions	115
	12 - Derivatives	116
	13 - Fair Values of Assets and Liabilities	123
	14 - Preferred Stock	139
	15 - Employee Benefits	142
	16 - Earnings Per Common Share	143
	17 - Operating Segments	144
	18 - Condensed Consolidating Financial Statements	146
	19 - Regulatory and Agency Capital Requirements	150

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
	Summary Financial Data	2
	Overview	3
	Earnings Performance	6
	Balance Sheet Analysis	14
	Off-Balance Sheet Arrangements	19
	Risk Management	20
	Capital Management	53
	Critical Accounting Policies	56
	Current Accounting Developments	57
	Forward-Looking Statements	58
	Risk Factors	60
	Glossary of Acronyms	151

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	61

PART II	Other Information
Item 1.	Legal Proceedings	152

Item 1A.	Risk Factors	152

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	152

Item 6.	Exhibits	153

Signature		153

Exhibit Index		154

PART I - FINANCIAL INFORMATION

FINANCIAL REVIEW

Summary Financial Data


	Quarter ended							% Change Sept. 30, 2011 from						Nine months ended
($ in millions, except per share amounts)	Sept. 30, 2011			June 30, 2011		Sept. 30, 2010		June 30, 2011			Sept. 30, 2010			Sept. 30, 2011		Sept. 30, 2010		% Change

For the Period
Wells Fargo net income	$	4,055			3,948		3,339		3	%		21			11,762		8,948		31	%
Wells Fargo net income applicable to common stock		3,839			3,728		3,150		3			22			11,137		8,400		33
Diluted earnings per common share		0.72			0.70		0.60		3			20			2.09		1.60		31
Profitability ratios (annualized):
Wells Fargo net income to average assets (ROA)		1.26	%		1.27		1.09		(1	)		15			1.25		0.98		28
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE)		11.86			11.92		10.90		-			9			11.92		10.11		18
Efficiency ratio (1)		59.5			61.2		58.7		(3	)		1			61.1		58.3		5
Total revenue	$	19,628			20,386		20,874		(4	)		(6	)		60,343		63,716		(5	)
Pre-tax pre-provision profit (PTPP) (2)		7,951			7,911		8,621		1			(8	)		23,458		26,600		(12	)
Dividends declared per common share		0.12			0.12		0.05		-			140			0.36		0.15		140
Average common shares outstanding		5,275.5			5,286.5		5,240.1		-			1			5,280.2		5,216.9		1
Diluted average common shares outstanding		5,319.2			5,331.7		5,273.2		-			1			5,325.6		5,252.9		1
Average loans	$	754,544			751,253		759,483		-			(1	)		753,293		776,305		(3	)
Average assets		1,281,369			1,250,945		1,220,368		2			5			1,257,977		1,223,535		3
Average core deposits (3)		836,845			807,483		771,957		4			8			813,865		764,345		6
Average retail core deposits (4)		599,227			592,974		571,062		1			5			592,156		572,567		3
Net interest margin		3.84	%		4.01		4.25		(4	)		(10	)		3.96		4.30		(8	)
At Period End
Securities available for sale	$	207,176			186,298		176,875		11			17			207,176		176,875		17
Loans		760,106			751,921		753,664		1			1			760,106		753,664		1
Allowance for loan losses		20,039			20,893		23,939		(4	)		(16	)		20,039		23,939		(16	)
Goodwill		25,038			24,776		24,831		1			1			25,038		24,831		1
Assets		1,304,945			1,259,734		1,220,784		4			7			1,304,945		1,220,784		7
Core deposits (3)		849,632			808,970		771,792		5			10			849,632		771,792		10
Wells Fargo stockholders’ equity		137,768			136,401		123,658		1			11			137,768		123,658		11
Total equity		139,244			137,916		125,165		1			11			139,244		125,165		11
Tier 1 capital (5)		110,749			113,466		105,609		(2	)		5			110,749		105,609		5
Total capital (5)		146,147			149,538		144,094		(2	)		1			146,147		144,094		1
Capital ratios:
Total equity to assets		10.67	%		10.95		10.25		(3	)		4			10.67		10.25		4
Risk-based capital (5):
Tier 1 capital		11.26			11.69		10.90		(4	)		3			11.26		10.90		3
Total capital		14.86			15.41		14.88		(4	)		-			14.86		14.88		-
Tier 1 leverage (5)		8.97			9.43		9.01		(5	)		-			8.97		9.01		-
Tier 1 common equity (6)		9.34			9.15		8.01		2			17			9.34		8.01		17
Common shares outstanding		5,272.2			5,278.2		5,244.4		-			1			5,272.2		5,244.4		1
Book value per common share	$	24.13			23.84		22.04		1			9			24.13		22.04		9
Common stock price:
High		29.63			32.63		28.77		(9	)		3			34.25		34.25		-
Low		22.58			25.26		23.02		(11	)		(2	)		22.58		23.02		(2	)
Period end		24.12			28.06		25.12		(14	)		(4	)		24.12		25.12		(4	)
Team members (active, full-time equivalent)		263,800			266,600		266,900		(1	)		(1	)		263,800		266,900		(1	)

(1)	The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).

(2)	Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.

(3)	Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).

(4)	Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.

(5)	See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

(6)	See the “Capital Management” section in this Report for additional information.

This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the “Forward-Looking Statements” and “Risk Factors” sections, as well as in the “Risk Factors” section of our Quarterly Report on Form 10-Q for the period ended June 30, 2011 (2011 Second Quarter Form 10-Q), and the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).

When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia). See the Glossary of Acronyms at the end of this Report for terms used throughout this Report.

Financial Review

Overview

Wells Fargo & Company is a diversified financial services company with $1.3 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage services and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, the internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia (D.C.) and in other countries. With approximately 264,000 active full-time equivalent team members, we serve one in three households in America and ranked No. 23 on Fortune’s 2011 rankings of America’s largest corporations. We ranked fourth in assets and first in the market value of our common stock among our large bank peers at September 30, 2011.

Our Vision and Strategy

Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to offer them all of the financial products that fulfill their needs. Our cross-sell strategy, diversified business model and the breadth of our geographic reach facilitate growth in both strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us, gain new customers in our extended markets, and increase market share in many businesses.

Our retail bank household cross-sell was 5.91 products per household in third quarter 2011, up from 5.68 a year ago. We believe there is more opportunity for cross-sell as we continue to earn more business from our customers. Our goal is eight products per customer, which is approximately half of our estimate of potential demand for an average U.S. household. One of every four of our retail banking households has eight or more products. Business banking cross-sell offers another potential opportunity for growth, with cross-sell of 4.21 products in our Western footprint in third quarter 2011 (including legacy Wells

Fargo and converted Wachovia customers), up from 3.97 a year ago.

Our pursuit of growth and earnings performance is influenced by our belief that it is important to maintain a well controlled operating environment as we complete the integration of the Wachovia businesses and grow the combined company. We manage our credit risk by establishing what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within established ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to facilitate future growth.

Expense management is important to us, but we approach this in a manner intended to help ensure our revenue is not adversely affected. Our current company-wide expense management initiative, project Compass, is focused on removing unnecessary complexity and eliminating duplication as a way to improve the customer experience and the work process of our team members. With this initiative and the completion of merger-related activities, we are targeting quarterly noninterest expense of approximately $11 billion by fourth quarter 2012. The target reflects expense savings initiatives that will be executed over the upcoming quarters. Quarterly expense trends may vary due to cyclical or seasonal factors, particularly in the first quarter of each year when higher incentive compensation and employee benefit expenses typically occur. In addition, we will continue to invest in our businesses and add team members where appropriate.

Financial Performance

Our third quarter 2011 results were strong despite continued economic volatility during the period, with solid growth in loans, deposits, investment securities and capital, along with improved credit quality and lower expenses. Wells Fargo net income was a record $4.1 billion in third quarter 2011, up 21% from a year ago, and diluted earnings per common share were $0.72, up 20%. Our net income growth from a year ago was primarily driven by a lower provision for credit losses and lower noninterest

Overview (continued)

expenses, which more than offset lower revenues. Net income growth from a year ago included contributions from each of our three business segments: Community Banking (up 20%); Wholesale Banking (up 20%); and Wealth, Brokerage and Retirement (up 14%). Return on average assets was 1.26% for third quarter 2011 compared with 1.09% a year ago. Our return on equity was 11.86% this quarter, up from 10.90% a year ago.

On a year-over-year basis, revenue was down 6% in third quarter 2011, reflecting decreased interest income on securities available for sale and loans due to lower yields as market rates declined, a decline in mortgage banking income and lower trading revenue. Noninterest expense was down 5% from a year ago reflecting the benefit of reduced personnel costs, reduced core deposit amortization, reduced integration costs and lower operating losses.

We believe strong loan and deposit growth are positioning us for continued financial performance improvement. Total loans were $760.1 billion at September 30, 2011, up from $757.3 billion at December 31, 2010. The net growth in loans from December 31, 2010, includes a $16.8 billion decrease in our non-strategic and liquidating portfolios. Our average core deposits grew 8% from a year ago to $836.8 billion at September 30, 2011. Average core deposits were 111% of total average loans in third quarter 2011, up from 102% a year ago. We continued to attract high quality core deposits in the form of checking and savings deposits, which on average totaled $769.2 billion, up 12% from a year ago as we added new customers and deepened our relationships with existing customers.

Credit Quality

We continued to experience improvement in our credit portfolio with lower net charge-offs, lower nonperforming assets (NPAs) and stable delinquency trends from second quarter 2011. The rate of improvement moderated in some portfolios in the quarter, consistent with our expectations at this point in the credit cycle. The improvement in our credit portfolio was due in part to the continued decline in balances in our non-strategic and liquidating loan portfolios (primarily from the Wachovia acquisition), which decreased $5.2 billion from second quarter 2011, and $74.3 billion in total since the beginning of 2009, to $116.5 billion at September 30, 2011.

Reflecting the continued improved performance in our loan portfolios, the $1.8 billion provision for credit losses for third quarter 2011 was $1.6 billion less than a year ago. The provision for credit losses was $800 million less than net charge-offs in third quarter 2011 and $650 million less than net charge-offs in the third quarter a year ago. Absent significant deterioration in the economy, we expect future allowance releases. Third quarter 2011 marked the seventh consecutive quarter of decline in net charge-offs and the fourth consecutive quarter of reduced NPAs. Net charge-offs decreased to $2.6 billion in third quarter 2011 from $2.8 billion in second quarter 2011 and $4.1 billion a year ago. NPAs decreased to $26.8 billion at September 30, 2011, from $27.9 billion at June 30, 2011, and $34.4 billion a year ago. Loans 90 days or more past due and still accruing (excluding government insured/guaranteed loans) increased slightly to $1.9 billion at September 30, 2011, from $1.8 billion at June 30, 2011, but decreased from $3.2 billion a year ago. In

addition, the portfolio of purchased credit-impaired (PCI) loans acquired in the Wachovia merger continued to perform better than expected at the time of the merger.

Capital

We continued to build capital in third quarter 2011, with total equity up $11.4 billion to $139.2 billion from December 31, 2010. In third quarter 2011, our Tier 1 common equity ratio grew 19 basis points to 9.34% of risk-weighted assets under Basel I, reflecting strong internal capital generation. Under current Basel III capital proposals, we estimate that our Tier 1 common equity ratio was 7.41% at the end of third quarter 2011. Our other regulatory capital ratios remained strong with a Tier 1 capital ratio of 11.26% and Tier 1 leverage ratio of 8.97% at September 30, 2011. Additional capital requirements applicable to certain systemically important global financial institutions, including Wells Fargo, are under consideration by the Basel Committee. See the “Capital Management” section in this Report for more information regarding our capital, including Tier 1 common equity.

In third quarter 2011 we called for redemption $5.8 billion of trust preferred securities that were redeemed in October 2011, repurchased 22 million shares of our common stock and entered into a $150 million private forward repurchase transaction that will settle in fourth quarter 2011 for an estimated 6 million shares of common stock. We also paid a common stock dividend of $0.12 per share.

Wachovia Merger Integration

On December 31, 2008, Wells Fargo acquired Wachovia, one of the nation’s largest diversified financial services companies. Our integration progress continued to be on track, and business and revenue synergies have exceeded our expectations since the merger was announced. To date we have converted 3,083 Wachovia retail banking stores and over 38 million customer accounts, including mortgage, deposit, trust, brokerage and credit card accounts. With the North Carolina retail bank store conversions completed in October 2011, all our retail bank store conversions are complete. Our remaining integration activities are expected to be completed in first quarter 2012, including certain deposit, brokerage and Wholesale Banking conversion events.

As a result of PCI accounting for loans acquired in the Wachovia merger, the Company’s ratios, including the growth rate in NPAs since December 31, 2008, may not be directly comparable with periods prior to the merger or with credit-related ratios of other financial institutions. In particular:

•

Wachovia’s high risk loans were written down pursuant to PCI accounting at the time of merger. Therefore, the allowance for credit losses is lower than otherwise would have been required without PCI loan accounting; and

•

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

Helping Our Customers and the Economy

While the economic recovery remains uneven, we have not wavered from our commitment to do all we can to help our customers and the overall economy. We remain committed to helping homeowners stay in their homes. Since 2009, we have participated in more than 600 home preservation workshops, opened 27 home preservation centers, and arranged over 716,000 active trial or completed mortgage modifications. Within our Pick-a-Pay portfolio alone we have forgiven $4 billion of principal since we acquired this portfolio from Wachovia and modified approximately one-third of our total Pick-a-Pay loans as we strive to give customers an affordable, sustainable payment. As the number one small business lender for nine consecutive years (Community Reinvestment Act government data, 2010), we are committed to helping small businesses succeed by actively lending. We made over $10 billion in new loan commitments to our small business customers in the first nine months of 2011, up 8% from the same period a year ago. We are also the number one lender to mid-sized companies and we have had 14 consecutive months of loan growth to middle market commercial customers.

In addition to serving the financial needs of our business and individual customers, we also help our communities in many other ways. We employ one in every 500 working Americans and last year we contributed $219 million to 19,000 nonprofits across the United States and The Chronicle of Philanthropy named us “America’s Third Most Generous Cash Donor” for 2011. Our team members throughout the country are active volunteers in the communities where they live and work, volunteering over 900,000 hours during the first nine months of 2011.

So, while we are operating in a difficult environment with significant economic and regulatory challenges, we remain focused on helping our customers succeed financially and supporting our communities.

Earnings Performance

Wells Fargo net income for third quarter 2011 was $4.1 billion ($0.72 diluted per common share) compared with $3.3 billion ($0.60 diluted per common share) for third quarter 2010. Net income for the first nine months of 2011 was $11.8 billion, up 31% from the same period a year ago. Our September 30, 2011, quarterly and year-to-date earnings, compared with the same periods a year ago, reflected strong execution of our business strategy in a difficult economic environment with a diversified loan portfolio, balanced net interest and fee income, diversified sources of fee income, increased loans and deposits, lower operating costs, improved credit quality and generally higher capital levels.

Revenue, the sum of net interest income and noninterest income, was $19.6 billion in third quarter 2011 compared with $20.9 billion in third quarter 2010. Revenue for the first nine months of 2011 was $60.3 billion, down 5% from the same period a year ago. The decline in revenue in the third quarter and first nine months of 2011 was predominantly due to lower net interest income, mortgage banking and trading revenue. However, many businesses generated double-digit year-over-year quarterly revenue growth, including government and institutional banking, asset-backed finance, commercial real estate, international, debit card, global remittance, asset management, capital finance and real estate capital markets. Net interest income of $10.5 billion in third quarter 2011 declined 5% from a year ago and reflected a 41 basis point decline in the net interest margin and a 1% decline in average loans. The decline in average loans from third quarter 2010 reflected expected reductions in the non-strategic/liquidating portfolios. Continued success in generating low-cost deposits enabled the Company to grow assets by funding loan and securities growth while reducing long-term debt.

Noninterest expense was $11.7 billion (59% of revenue) in third quarter 2011, compared with $12.3 billion (59% of revenue) a year ago. Noninterest expense was $36.9 billion for the first nine months of 2011 compared with $37.1 billion for the same period a year ago. The third quarter and first nine months of 2011 included $376 million and $1.3 billion, respectively, of merger integration costs (down from $476 million in third quarter 2010 and $1.4 billion in the first nine months of 2010), and $780 million and $3.3 billion, respectively, of employee benefits expense (down from $1.1 billion in third quarter 2010 and $3.5 billion in the first nine months of 2010).

Net Interest Income

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.

Net interest income and the net interest margin are significantly influenced by the mix and overall size of our earning asset portfolio and the cost of funding those assets. In addition, some sources of interest income, such as loan prepayment fees and collection of interest on nonaccrual loans, can vary from period to period. Net interest income on a taxable-equivalent basis was $10.7 billion and $32.4 billion in the third quarter and the first nine months of 2011, compared with $11.3 billion and $34.2 billion, respectively, for the same periods a year ago. The net interest margin was 3.84% and 3.96% in the third quarter and first nine months of 2011, respectively, down from 4.25% and 4.30% for the same periods a year ago. The decline in net interest income and the net interest margin was largely due to repricing of the balance sheet as higher-yielding loan and security runoff was partially offset by investment portfolio purchases and growth in short-term investments. The decline in earning asset income was mitigated by a reduction in funding costs resulting from disciplined deposit pricing, debt maturities, and calls of higher yielding trust preferred securities.

Compared to second quarter 2011, net interest income on a taxable-equivalent basis was down $137 million due to the repricing of the balance sheet. About half of the decline in interest income for securities available for sale was due to runoff offset by new purchases at lower yields. The remainder of the decline was from other sources, including a decline in interest income relating to certain asset-backed securities for which the expected cash flows and resulting yields are adjusted periodically. Within the commercial and industrial loan portfolio more than half of the decline in interest income was from lower variable sources, including prepayment fees and interest recoveries, with the remainder due to repricing of the portfolio offset by the benefit of growth. The majority of the decline in the net interest margin in third quarter 2011 was due to robust deposit growth from June 30, 2011. Much of this growth in deposits was invested in short-term assets, which had the effect of diluting the net interest margin.

Soft consumer loan demand and the impact of liquidating certain loan portfolios reduced average loans in third quarter 2011 to 67% (69% in the first nine months of 2011) of average earning assets from 71% in third quarter 2010 (73% in the first nine months of 2010). Average short-term investments and trading account assets were 12% of earning assets in both the third quarter and first nine months of 2011, up from 9% and 8%, respectively, for the same periods a year ago.

Core deposits are an important low-cost source of funding and thus impact both net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $836.8 billion in third quarter 2011 ($813.9 billion in the first nine months of 2011) from $772.0 billion in third quarter 2010 ($764.3 billion in the first nine months of 2010) and represented funding for average loans of 111% in the third quarter and 108% for the first nine months of 2011 (102% and 98% for the same periods of 2010.) Average core deposits increased to 75% and 74% of

average earning assets in the third quarter and first nine months of 2011, respectively compared with 72% for each respective period a year ago. The cost of these deposits declined significantly as the mix shifted from higher cost certificates of deposit to checking and savings products, which were also at lower yields relative to the third quarter and first nine months of 2010. About 92% of our average core deposits are in checking and savings deposits, one of the highest percentages in the industry.

In third quarter 2011, we called for redemption $5.8 billion of trust preferred securities with an average coupon rate of 8.45% that were redeemed in October 2011. Net interest income in fourth quarter 2011 is expected to benefit from the redemption of this high cost funding source.

Earnings Performance (continued)

Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)


	Quarter ended September 30,
	2011							2010
(in millions)	Average balance		Yields/ rates			Interest income/ expense		Average balance		Yields/ rates			Interest income/ expense

Earning assets
Federal funds sold, securities purchased under resale agreements and other short-term investments	$	98,909		0.42	%	$	105		70,839		0.38	%	$	67
Trading assets		37,939		3.67			348		29,080		3.77			275
Securities available for sale (3):
Securities of U.S. Treasury and federal agencies		9,635		1.02			24		1,673		2.79			11
Securities of U.S. states and political subdivisions		25,827		4.93			315		17,220		5.89			249
Mortgage-backed securities:
Federal agencies		77,309		4.41			804		70,486		5.35			885
Residential and commercial		34,242		7.46			609		33,425		12.53			987

Total mortgage-backed securities		111,551		5.36			1,413		103,911		7.67			1,872
Other debt and equity securities		40,720		4.69			457		35,533		6.02			503

Total securities available for sale		187,733		4.92			2,209		158,337		7.05			2,635
Mortgages held for sale (4)		34,634		4.49			389		38,073		4.72			449
Loans held for sale (4)		968		5.21			13		3,223		2.71			22
Loans:
Commercial:
Commercial and industrial		159,625		4.22			1,697		146,139		4.57			1,679
Real estate mortgage		102,428		3.93			1,015		99,082		4.15			1,036
Real estate construction		20,537		6.12			317		29,469		3.31			246
Lease financing		12,964		7.21			234		13,156		9.07			298
Foreign		38,175		2.42			233		30,276		3.15			240

Total commercial		333,729		4.16			3,496		318,122		4.37			3,499

Consumer:
Real estate 1-4 family first mortgage		223,765		4.83			2,704		231,172		5.16			2,987
Real estate 1-4 family junior lien mortgage		89,065		4.37			980		100,257		4.41			1,114
Credit card		21,452		12.96			695		22,048		13.57			748
Other revolving credit and installment		86,533		6.25			1,364		87,884		6.50			1,441

Total consumer		420,815		5.44			5,743		441,361		5.68			6,290

Total loans (4)		754,544		4.87			9,239		759,483		5.13			9,789
Other		4,831		4.18			50		5,912		3.53			53

Total earning assets	$	1,119,558		4.43	%	$	12,353		1,064,947		5.01	%	$	13,290

Funding sources
Deposits:
Interest-bearing checking	$	43,986		0.07	%	$	8		59,677		0.10	%	$	15
Market rate and other savings		473,409		0.17			198		419,996		0.25			269
Savings certificates		67,633		1.47			251		85,044		1.50			322
Other time deposits		12,809		2.02			65		14,400		2.33			83
Deposits in foreign offices		63,548		0.23			37		52,061		0.24			32

Total interest-bearing deposits		661,385		0.34			559		631,178		0.45			721
Short-term borrowings		50,373		0.18			23		46,468		0.26			31
Long-term debt		139,542		2.81			980		177,077		2.76			1,226
Other liabilities		11,170		2.75			77		6,764		3.39			58

Total interest-bearing liabilities		862,470		0.76			1,639		861,487		0.94			2,036
Portion of noninterest-bearing funding sources		257,088		-			-		203,460		-			-

Total funding sources	$	1,119,558		0.59			1,639		1,064,947		0.76			2,036

Net interest margin and net interest income on a taxable-equivalent basis (5)				3.84	%	$	10,714				4.25	%	$	11,254

Noninterest-earning assets
Cash and due from banks	$	17,101							17,000
Goodwill		25,008							24,829
Other		119,702							113,592

Total noninterest-earning assets	$	161,811							155,421

Noninterest-bearing funding sources
Deposits	$	221,182							184,837
Other liabilities		57,464							50,013
Total equity		140,253							124,031
Noninterest-bearing funding sources used to fund earning assets		(257,08)							(203,460)

Net noninterest-bearing funding sources	$	161,811							155,421

Total assets	$	1,281,369							1,220,368

(1)

Our average prime rate was 3.25% for the quarters ended September 30, 2011 and 2010 and 3.25% for the first nine months of both 2011 and 2010. The average three-month London Interbank Offered Rate (LIBOR) was 0.30% and 0.39% for the quarters ended September 30, 2011 and 2010, respectively, and 0.29% and 0.36%, respectively, for the first nine months of 2011 and 2010.

(2)	Yield/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.

(3)

Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts include the effects of any unrealized gain or loss marks but those marks carried in other comprehensive income are not included in yield determination of affected earning assets. Thus yields are based on amortized cost balances computed on a settlement date basis.

(4)	Nonaccrual loans and related income are included in their respective loan categories.

(5)

Includes taxable-equivalent adjustments of $172 million and $156 million for the quarters ended September 30, 2011 and 2010, respectively, and $505 million and $468 million for the first nine months of 2011 and 2010, respectively, primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.


	Nine months ended September 30,
	2011							2010
(in millions)	Average balance		Yields/ rates			Interest income/ expense		Average balance		Yields/ rates			Interest income/ expense

Earning assets
Federal funds sold, securities purchased under resale agreements and other short-term investments	$	93,661		0.37	%	$	257		59,905		0.35	%	$	156
Trading assets		37,788		3.73			1,056		28,588		3.82			819
Securities available for sale (3):
Securities of U.S. Treasury and federal agencies		4,463		1.43			47		2,013		3.36			49
Securities of U.S. states and political subdivisions		22,692		5.21			887		15,716		6.29			725
Mortgage-backed securities:
Federal agencies		75,073		4.63			2,480		74,330		5.38			2,838
Residential and commercial		33,242		8.64			2,005		33,133		10.58			2,546

Total mortgage-backed securities		108,315		5.84			4,485		107,463		7.01			5,384
Other debt and equity securities		37,910		5.32			1,423		33,727		6.56			1,557

Total securities available for sale		173,380		5.52			6,842		158,919		6.80			7,715
Mortgages held for sale (4)		34,668		4.57			1,188		33,903		4.88			1,241
Loans held for sale (4)		1,100		5.05			42		4,660		2.46			86
Loans:
Commercial:
Commercial and industrial		154,469		4.48			5,181		150,153		4.83			5,431
Real estate mortgage		101,230		4.00			3,033		98,264		3.91			2,875
Real estate construction		22,255		4.96			826		32,770		3.27			801
Lease financing		12,961		7.59			737		13,592		9.28			946
Foreign		36,103		2.62			708		29,302		3.46			758

Total commercial		327,018		4.28			10,485		324,081		4.46			10,811

Consumer:
Real estate 1-4 family first mortgage		226,048		4.93			8,363		237,848		5.22			9,305
Real estate 1-4 family junior lien mortgage		91,881		4.32			2,973		102,839		4.47			3,444
Credit card		21,305		13.04			2,084		22,539		13.32			2,251
Other revolving credit and installment		87,041		6.31			4,107		88,998		6.49			4,320

Total consumer		426,275		5.49			17,527		452,224		5.70			19,320

Total loans (4)		753,293		4.97			28,012		776,305		5.18			30,131
Other		5,017		4.06			153		6,021		3.45			156

Total earning assets	$	1,098,907		4.59	%	$	37,550		1,068,301		5.07	%	$	40,304

Funding sources
Deposits:
Interest-bearing checking	$	51,891		0.09	%	$	34		60,961		0.13	%	$	57
Market rate and other savings		457,483		0.19			661		412,060		0.27			822
Savings certificates		71,343		1.43			762		89,824		1.43			962
Other time deposits		13,212		2.10			208		15,066		2.08			235
Deposits in foreign offices		59,662		0.23			103		54,973		0.23			94

Total interest-bearing deposits		653,591		0.36			1,768		632,884		0.46			2,170
Short-term borrowings		52,805		0.19			77		45,549		0.22			75
Long-term debt		145,000		2.85			3,093		193,724		2.57			3,735
Other liabilities		10,547		2.99			236		6,393		3.38			162

Total interest-bearing liabilities		861,943		0.80			5,174		878,550		0.93			6,142
Portion of noninterest-bearing funding sources		236,964		-			-		189,751		-			-

Total funding sources	$	1,098,907		0.63			5,174		1,068,301		0.77			6,142

Net interest margin and net interest income on a taxable-equivalent basis (5)				3.96	%	$	32,376				4.30	%	$	34,162

Noninterest-earning assets
Cash and due from banks	$	17,277							17,484
Goodwill		24,853							24,822
Other		116,940							112,928

Total noninterest-earning assets	$	159,070							155,234

Noninterest-bearing funding sources
Deposits	$	204,643							177,975
Other liabilities		55,324							46,174
Total equity		136,067							120,836
Noninterest-bearing funding sources used to fund earning assets		(236,964)							(189,751)

Net noninterest-bearing funding sources	$	159,070							155,234

Total assets	$	1,257,977							1,223,535

Earnings Performance (continued)

Noninterest Income

Table 2: Noninterest Income


								Nine months
	Quarter ended Sept. 30,				%			ended Sept. 30,				%
(in millions)	2011		2010		Change			2011		2010		Change

Service charges on deposit accounts	$	1,103		1,132		(3)	%	$	3,189		3,881		(18)	%
Trust and investment fees:
Trust, investment and IRA fees		1,019		924		10			3,099		3,008		3
Commissions and all other fees		1,767		1,640		8			5,547		4,968		12

Total trust and investment fees		2,786		2,564		9			8,646		7,976		8

Card fees		1,013		935		8			2,973		2,711		10
Other fees:
Cash network fees		105		73		44			280		186		51
Charges and fees on loans		438		424		3			1,239		1,244		-
Processing and all other fees		542		507		7			1,578		1,497		5

Total other fees		1,085		1,004		8			3,097		2,927		6

Mortgage banking:
Servicing income, net		1,030		516		100			2,773		3,100		(11)
Net gains on mortgage loan origination/sales activities		803		1,983		(60)			2,695		3,880		(31)

Total mortgage banking		1,833		2,499		(27)			5,468		6,980		(22)

Insurance		423		397		7			1,494		1,562		(4)
Net gains (losses) from trading activities		(442)		470		NM			584		1,116		(48)
Net gains (losses) on debt securities available for sale		300		(114)		NM			6		(56)		NM
Net gains from equity investments		344		131		163			1,421		462		208
Operating leases		284		222		28			464		736		(37)
All other		357		536		(33)			1,130		1,727		(35)


Total	$	9,086		9,776		(7)		$	28,472		30,022		(5)

NM - Not meaningful

Noninterest income was $9.1 billion and $9.8 billion for third quarter 2011 and 2010, respectively, and $28.5 billion and $30.0 billion for the first nine months of 2011 and 2010, respectively. Noninterest income represented 46% of revenue for the quarter and 47% for the nine months ended September 30, 2011. The decrease in total noninterest income in the third quarter and first nine months of 2011 from the same periods a year ago was due largely to lower net gains on mortgage loan origination/sales activities and net losses/lower net gains from trading activities.

Our service charges on deposit accounts decreased 3% in the third quarter and 18% in the first nine months of 2011 from the same periods a year ago, primarily due to changes mandated by Regulation E and related overdraft policy changes.

We earn trust, investment and IRA (Individual Retirement Account) fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At September 30, 2011, these assets totaled $2.1 trillion, up 5% from $2.0 trillion at September 30, 2010. Trust, investment and IRA fees are largely based on a tiered scale relative to the market value of the assets under management or administration. These fees increased to $1.0 billion in third quarter 2011 from $924 million a year ago and increased to $3.1 billion for the first nine months of 2011 from $3.0 billion a year ago.

We receive commissions and other fees for providing services to full-service and discount brokerage customers as well as from

investment banking activities including equity and bond underwriting. These fees increased to $1.8 billion in third quarter 2011 from $1.6 billion a year ago and increased to $5.5 billion for the first nine months of 2011 from $5.0 billion a year ago. These fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, and asset-based fees, which are based on the market value of the customer’s assets. Brokerage client assets totaled $1.1 trillion at September 30, 2011 and 2010.

Card fees increased to $1.0 billion in third quarter 2011, from $935 million in third quarter 2010. For the first nine months of 2011, these fees increased to $3.0 billion from $2.7 billion a year ago. The increase was mainly due to growth in purchase volume and new accounts growth. Based on the final FRB rules regarding debit card interchange fees, we currently estimate a quarterly reduction in earnings of approximately $250 million (after tax), before the impact of any mitigating actions, starting in fourth quarter 2011. We currently expect future volume, product or account changes may mitigate at least half of this earnings reduction over time.

Mortgage banking noninterest income, consisting of net servicing income and net gains on loan origination/sales activities, totaled $1.8 billion in third quarter 2011, compared with $2.5 billion a year ago and totaled $5.5 billion for the first nine months of 2011 compared with $7.0 billion for the same period a year ago. The reduction year over year in mortgage banking noninterest income was primarily driven by a decline in

net gains on mortgage loan origination/sales activities as explained below.

Net mortgage loan 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 third quarter 2011 included a $607 million net MSR valuation gain ($2.64 billion decrease in the fair value of the MSRs offset by a $3.25 billion hedge gain) and for third quarter 2010 included a $56 million net MSR valuation gain ($1.1 billion decrease in the fair value of MSRs offset by a $1.2 billion hedge gain). For the first nine months of 2011, it included a $1.4 billion net MSR valuation gain ($3.22 billion decrease in the fair value of MSRs offset by a $4.58 billion hedge gain) and for the same period of 2010, included a $1.7 billion net MSR valuation gain ($4.57 billion decrease in the fair value of MSRs offset by a $6.24 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. The valuation of our MSRs at the end of third quarter 2011 reflected our assessment of expected future levels in servicing and foreclosure costs, including the estimated impact from regulatory consent orders. See the “Risk Management – Credit Risk Management – Risks Relating to Servicing Activities” section in this Report for information on the regulatory consent orders. Our portfolio of loans serviced for others was $1.86 trillion at September 30, 2011, and $1.84 trillion at December 31, 2010. At September 30, 2011, the ratio of MSRs to related loans serviced for others was 0.74%, compared with 0.86% at December 31, 2010.

Income from loan origination/sale activities was $803 million and $2.7 billion in the third quarter and first nine months of 2011, respectively, down from $2.0 billion and $3.9 billion for the same periods a year ago. The year over year decreases were driven by lower loan origination volume and margins. Residential real estate originations were $89 billion in third quarter 2011 compared with $101 billion a year ago and mortgage applications were $169 billion in third quarter 2011 compared with $194 billion a year ago. The 1-4 family first mortgage unclosed pipeline was $84 billion at September 30, 2011, and $101 billion a year ago. For additional information, see the “Risk Management – Mortgage Banking Interest Rate and Market Risk” section and Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.

Net gains on mortgage loan origination/sales activities include the cost of any additions to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties, and early payment default clauses in mortgage sale contracts. Additions to the mortgage repurchase liability that were charged against net gains on mortgage loan origination/sales activities during third quarter 2011 totaled $390 million (compared with $370 million for third quarter 2010), of which $371 million ($341 million for third quarter 2010) was for subsequent increases in estimated losses on prior period loan sales. Additions to the mortgage repurchase liability for the nine months ended September 30, 2011, and 2010 were $881 million and $1.2 billion, respectively,

of which $807 million and $1.0 billion, respectively, were for subsequent increases in estimated losses on prior period loan sales. For additional information about mortgage loan repurchases, see the “Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses” section in this Report.

Net gains (losses) from trading activities, which reflect unrealized and realized changes in fair value of our trading positions, were net losses of $442 million and net gains of $584 million in the third quarter and first nine months of 2011, respectively, compared with net gains of $470 million and $1.1 billion for the same periods a year ago. The year-over-year decreases for the third quarter and first nine months of 2011 were driven by weaker trading results as consistent negative economic data, sovereign debt concerns and the U.S. debt downgrade pressured credit spreads and reduced prices on financial assets, significantly curtailing new issue origination and trading opportunities. Also included in third quarter 2011 was a $377 million loss associated with a legacy Wachovia position that settled in October 2011. This loss was primarily due to widening in credit spreads. Trading activities during third quarter 2011 also included an unrealized loss on deferred compensation plan investments of $234 million, which corresponded with a reduction in employee benefits expense. Net gains (losses) from trading activities do not include interest income and other fees earned from related activities. Those amounts are reported within interest income from trading assets and other fees within noninterest income line items of the income statement. Net gains (losses) from trading activities are primarily from trading performed on behalf of or driven by the needs of our customers (customer accommodation trading) and also include the results of certain economic hedging and proprietary trading activity. Net losses from proprietary trading totaled $9 million and $18 million in the third quarter and first nine months of 2011, respectively, compared with $45 million and $32 million for the same periods a year ago. These net proprietary trading losses were offset by interest and fees reported in their corresponding income statement line items. Proprietary trading activities are not significant to our client-focused business model. Our trading activities and what we consider to be customer accommodation, economic hedging and proprietary trading are further discussed in the “Asset/Liability Management – Market Risk – Trading Activities” section in this Report.

Net gains on debt and equity securities totaled $644 million for third quarter 2011 and $17 million for third quarter 2010, after other-than-temporary impairment (OTTI) write-downs of $144 million and $179 million for the same periods, respectively. Included in net gains on debt securities during third quarter 2011 was a $271 million gain related to a legacy Wachovia position, due to redemption of our interest in an investment fund.

Earnings Performance (continued)

Noninterest Expense

Table 3: Noninterest Expense


								Nine months
	Quarter ended Sept. 30,				%			ended Sept. 30,				%
(in millions)	2011		2010		Change			2011		2010		Change

Salaries	$	3,718		3,478		7	%	$	10,756		10,356		4	%
Commission and incentive compensation		2,088		2,280		(8	)		6,606		6,497		2
Employee benefits		780		1,074		(27	)		3,336		3,459		(4	)
Equipment		516		557		(7	)		1,676		1,823		(8	)
Net occupancy		751		742		1			2,252		2,280		(1	)
Core deposit and other intangibles		466		548		(15	)		1,413		1,650		(14	)
FDIC and other deposit assessments		332		300		11			952		896		6
Outside professional services		640		533		20			1,879		1,589		18
Contract services		341		430		(21	)		1,051		1,161		(9	)
Foreclosed assets		271		366		(26	)		984		1,085		(9	)
Operating losses		198		230		(14	)		1,098		1,065		3
Outside data processing		226		263		(14	)		678		811		(16	)
Postage, stationery and supplies		240		233		3			711		705		1
Travel and entertainment		198		195		2			609		562		8
Advertising and promotion		159		170		(6	)		441		438		1
Telecommunications		128		146		(12	)		394		445		(11	)
Insurance		94		62		52			428		374		14
Operating leases		29		21		38			84		85		(1	)
All other		502		625		(20	)		1,537		1,835		(16	)

Total	$	11,677		12,253		(5	)	$	36,885		37,116		(1	)

Noninterest expense was $11.7 billion in third quarter 2011, down 5% from $12.3 billion a year ago, driven by lower total personnel expense ($6.6 billion, down from $6.8 billion in third quarter 2010), lower merger costs ($376 million, down from $476 million a year ago) and lower operating losses ($198 million, down from $230 million in third quarter 2010). For the first nine months of 2011, noninterest expense was essentially flat compared with the same period a year ago.

Personnel expenses were down 4% for third quarter 2011 compared with the same quarter last year. Included in personnel expenses was a $294 million decline in employee benefits due primarily to lower deferred compensation expense which was offset entirely with an unrealized loss on deferred compensation plan investments included in income from trading activities. Personnel expenses were up 2%, however, for the first nine months of 2011 compared with the same period of 2010, primarily due to higher variable compensation paid in first quarter 2011 by businesses with revenue-based compensation, including brokerage.

Outside professional services included increased investments by our businesses this year in their service delivery systems.

Operating losses of $198 million in third quarter 2011 were down from $230 million in third quarter 2010, which was elevated predominantly due to additional accruals for litigation matters.

Merger integration costs totaled $376 million and $476 million in third quarter 2011 and 2010, respectively, and $1.3 billion and $1.4 billion for the first nine months of 2011 and 2010, respectively. The integration of Wachovia remained on track, and with the successful North Carolina conversion in October 2011, all retail banking store conversions are complete.

Remaining integration activities are expected to be concluded by first quarter 2012.

We are pleased with our positive operating leverage and the progress we’ve made on our Compass expense management initiative. Future quarterly expenses are expected to fluctuate as our Compass initiative proceeds toward our target of $11 billion of noninterest expense for fourth quarter 2012. The target reflects expense savings initiatives that will be executed over the next five quarters. Quarterly expense trends may vary due to cyclical or seasonal factors, particularly in the first quarter of each year when higher incentive compensation and employee benefit expenses typically occur. We currently expect fourth quarter 2011 expenses to be higher than third quarter driven by costs associated with the strong mortgage pipeline, higher merger integration expenses and seasonally higher expenses at year end.

Income Tax Expense

Our effective tax rate was 33.0% and 34.4% in third quarter 2011 and 2010, respectively, and 32.1% and 34.3 % for the first nine months of 2011 and 2010, respectively. The lower effective tax rate in third quarter 2011 is primarily related to a decrease in tax expense associated with leveraged leases. In addition to the item affecting the tax rate for third quarter 2011, the decrease in the effective tax rate for the first nine months of 2011 included tax benefits from the realization for tax purposes of a previously written down investment, as well as tax benefits related to charitable donations of appreciated securities.

Operating Segment Results

We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative guidance equivalent to generally accepted accounting principles (GAAP) for financial accounting. In fourth quarter 2010, we aligned certain lending businesses into Wholesale Banking from Community Banking to

reflect our previously announced restructuring of Wells Fargo Financial. In first quarter 2011, we realigned a private equity business into Wholesale Banking from Community Banking. Prior periods have been revised to reflect these changes. Table 4 and the following discussion present our results by operating segment. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 17 (Operating Segments) to Financial Statements in this Report.

Table 4: Operating Segment Results – Highlights


									Wealth, Brokerage
	Community Banking				Wholesale Banking				and Retirement
(in billions)	2011		2010		2011		2010		2011		2010
Quarter ended September 30,
Revenue	$	12.5		13.4		5.2		5.4		2.9		2.9
Net income		2.3		1.9		1.8		1.5		0.3		0.3
Average loans		491.0		522.2		253.4		227.3		43.1		42.6
Average core deposits		556.3		537.1		209.3		170.8		133.4		120.7
Nine months ended September 30,
Revenue	$	37.7		41.0		16.2		16.6		9.1		8.7
Net income		6.6		5.1		5.4		4.2		1.0		0.8
Average loans		499.6		535.5		243.8		230.8		43.1		43.0
Average core deposits		552.2		533.7		195.0		164.9		128.3		121.1

Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. through its Regional Banking and Wells Fargo Home Mortgage business units.

Community Banking reported net income of $2.3 billion and revenue of $12.5 billion in third quarter 2011 and $6.6 billion and $37.7 billion, respectively, for the first nine months of 2011. Revenue decreased $951 million, or 7%, from third quarter 2010 largely due to lower mortgage banking income, as well as expected reductions in the liquidating loan portfolios and lower yielding investment security purchases, partially offset by long-term debt runoff, lower deposit costs, equity gains and debit card transaction growth. Revenue for the first nine months of 2011 decreased $3.3 billion, or 8%, compared with the same period a year ago and also reflects lower deposit servicing income as a result of the 2010 implementation of Regulation E. Net interest income decreased $554 million, or 7%, from third quarter 2010 and decreased $2.0 billion, or 8%, for the first nine months of 2011 compared with the same period a year ago, mostly due to lower average loans (down $31.2 billion for the third quarter and $35.9 billion year-to-date) as a result of planned run-off (including Home Equity and Pick-A-Pay) combined with softer loan demand, and a shift in the mix of earning assets towards lower-yielding investment securities portfolios. This decline in interest income was mitigated by continued low funding costs. Average core deposits increased $19.2 billion, or 4%, from third quarter 2010, and $18.5 billion, or 3%, for the first nine months of 2011 compared with the same period a year ago, as growth in liquid deposits more than offset

planned run-off of higher-priced certificates of deposit. We generated strong growth in the number of consumer checking accounts (up a net 5.6% from third quarter 2010).

Noninterest expense decreased $432 million, or 6%, from third quarter 2010 and $292 million, or 1%, for the first nine months of 2011 compared with the same period a year ago, due to reduced expenses across most categories, led by personnel costs including FTE reductions. The provision for credit losses decreased $1.2 billion from third quarter 2010 and $5.1 billion for the first nine months of 2011 compared with the same period a year ago, as credit quality indicators in most of our consumer and business loan portfolios continued to improve. Charge-offs decreased $1.1 billion from third quarter 2010 and $3.8 billion for the first nine months of 2011 compared with the same periods a year ago, showing improvement primarily in the home equity, credit card, and small business lending portfolios. Additionally, we released $450 million of the allowance in third quarter 2011 and $2.0 billion during the first nine months of 2011, compared with $400 million and $789 million, respectively, released during the same periods a year ago.

Wholesale Banking provides financial solutions across the U.S. and globally to middle market and large corporate customers with annual revenue generally in excess of $20 million. Products and businesses include commercial banking, investment banking and capital markets, securities investment, government and institutional banking, corporate banking, commercial real estate, treasury management, capital finance, international, insurance, real estate capital markets, commercial mortgage servicing, corporate trust, equipment finance, asset backed finance, and asset management.

Earnings Performance (continued)

Wholesale Banking reported net income of $1.8 billion in third quarter 2011, up $301 million, or 20%, from third quarter 2010. Net income increased to $5.4 billion for the first nine months of 2011 from $4.2 billion a year ago. The year over year increases in net income for the third quarter and first nine months were the result of decreases in the provision for credit losses and noninterest expenses more than offsetting decreases in revenue. Revenue in third quarter 2011 decreased $238 million, or 4%, from third quarter 2010 as broad-based growth among many businesses, including strong loan and deposit growth was offset by lower PCI resolutions, a trading loss associated with a legacy Wachovia position, and weakness in fixed income sales and trading and investment banking. Revenue decreased $344 million, or 2%, for the first nine months of 2011 compared with the same period a year ago, as broad-based growth among many businesses, including strong loan and deposit growth, was offset by lower PCI resolutions, crop insurance underwriting income and trading portfolio income. Average loans of $253.4 billion in third quarter 2011 increased 11% from third quarter 2010 driven by increases across most lending areas. Average core deposits of $209.3 billion in third quarter 2011 increased 23% from third quarter 2010, reflecting continued strong customer liquidity. Noninterest expense in third quarter 2011 decreased $30 million, or 1%, from third quarter 2010 primarily related to lower personnel expenses. Noninterest expense decreased $22 million for the first nine months of 2011 compared with the same period a year ago as lower operating losses and foreclosed asset expenses were partially offset by higher personnel expense. The provision for credit losses in third quarter 2011 declined $458 million from third quarter 2010, and included a $350 million allowance release compared with a $250 million release a year ago along with a $358 million improvement in net credit losses. The provision for credit losses declined $1.9 billion for the first nine months of 2011 compared with the same period a year ago, and included an $800 million allowance release compared with a $361 million release a year ago along with a $1.4 billion improvement in net credit losses.

Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients using a planning approach to meet each client’s needs. Wealth Management provides affluent and high net worth clients with a complete range of wealth management solutions including financial planning, private banking, credit, investment management and trust. Family Wealth meets the unique needs of the ultra high net

worth customers. Brokerage serves customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the United States. Retirement is a national leader in providing institutional retirement and trust services (including 401(k) and pension plan record keeping) for businesses, retail retirement solutions for individuals, and reinsurance services for the life insurance industry.

Wealth, Brokerage and Retirement reported net income of $291 million in third quarter 2011, up $35 million, or 14%, from third quarter 2010. Net income increased to $963 million for the first nine months of 2011 from $808 million a year ago. Revenue of $2.9 billion was down 1% for third quarter 2011 compared with the same quarter a year ago and predominantly consisted of brokerage commissions, asset-based fees and net interest income. Revenue increased $434 million, or 5%, for the first nine months of 2011 compared with the same period a year ago, as higher asset-based fees were partially offset by losses on deferred compensation plan investments (offset in expense) and lower brokerage transaction revenue. Net interest income increased $31 million, or 5%, in third quarter 2011 and $70 million, or 3%, for the first nine months of 2011 compared with the same periods a year ago due to higher investment income and the impact of deposit balance growth. Average core deposits of $133.4 billion in third quarter 2011 increased 11% from third quarter 2010. Noninterest income decreased $56 million, or 3%, from third quarter 2010 due to losses on deferred compensation plan investments (offset in expense), as well as lower securities gains in the brokerage business and reduced brokerage transaction revenue. Noninterest income increased $364 million, or 5%, for the first nine months of 2011 compared with the same period a year ago, as higher asset-based fees exceeded losses on deferred compensation plan investments (offset in expense) and lower brokerage transaction revenue. Noninterest expense decreased $52 million, or 2%, from third quarter 2010 primarily due to lower deferred compensation, partially offset by growth in personnel cost largely due to increased broker commissions, driven by higher production levels, and increased non-personnel costs. Noninterest expense increased $254 million, or 4%, for the first nine months of 2011 compared with the same period a year ago, primarily due to growth in personnel cost driven by higher broker commissions offset by lower deferred compensation. The provision for credit losses decreased $29 million, or 38%, in third quarter 2011 and $71 million, or 32%, in the first nine months of 2011 compared with the same periods a year ago due to lower loan net charge-offs.

Balance Sheet Analysis

At September 30, 2011, our total loans and core deposits were up from December 31, 2010. At September 30, 2011, core deposits funded 112% of the loan portfolio, and we have significant capacity to add higher yielding earning assets to generate future revenue and earnings growth. The strength of our business model produced record earnings and high rates of internal capital generation as reflected in our improved capital ratios. Tier 1 capital increased to 11.26% as a percentage of total risk-weighted assets, and Tier 1 common equity to 9.34% at

September 30, 2011, up from 11.16% and 8.30%, respectively, at December 31, 2010. Total capital was 14.86% and Tier 1 leverage was 8.97%, compared with 15.01% and 9.19%, respectively, at December 31, 2010.

The following discussion provides additional information about the major components of our balance sheet. Information about changes in our asset mix and about our capital is included in the “Earnings Performance – Net Interest Income” and “Capital Management” sections of this Report.

Securities Available for Sale

Table 5: Securities Available for Sale – Summary

September 30, 2011

December 31, 2010

(in millions)

Cost

Net
unrealized
gain

Fair
value

Cost

Net
unrealized
gain

Fair
value

Debt securities available for sale

197,183

6,400

203,583

160,071

7,394

167,465

Marketable equity securities

3,158

435

3,593

4,258

931

5,189

Total securities available for sale

200,341

6,835

207,176

164,329

8,325

172,654

Table 5 presents a summary of our securities available-for-sale portfolio. Securities available for sale consist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily of very liquid, high quality federal agency debt and privately issued MBS. The total net unrealized gains on securities available for sale were $6.8 billion at September 30, 2011, down from net unrealized gains of $8.3 billion at December 31, 2010, primarily due to widening credit spreads.

We analyze securities for OTTI quarterly or more often if a potential loss-triggering event occurs. Of the $470 million OTTI write-downs recognized in the first nine months of 2011, $365 million related to debt securities. There were $16 million in OTTI write-downs for marketable equity securities and there were $89 million in OTTI write-downs related to nonmarketable equity securities. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies – Securities) in our 2010 Form 10-K and Note 4 (Securities Available for Sale) to Financial Statements in this Report.

At September 30, 2011, debt securities available for sale included $27 billion of municipal bonds, of which 81% were rated “A-” or better based on external and, in some cases, internal ratings. Additionally, some of these bonds are guaranteed against loss by bond insurers. These bonds are predominantly investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in making the investment decision. These municipal bonds will continue to be monitored as part of our ongoing impairment analysis of our securities available for sale.

The weighted-average expected maturity of debt securities available for sale was 4.9 years at September 30, 2011. Because 59% of this portfolio is MBS, the expected remaining maturity may differ from contractual maturity because borrowers generally have the right to prepay obligations before the underlying mortgages mature. The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the MBS available for sale are shown in Table 6.

Table 6: Mortgage-Backed Securities


(in billions)	Fair value		Net unrealized gain (loss)			Expected remaining maturity (in years)
At September 30, 2011	$	119.9		5.6			3.9
At September 30, 2011, assuming a 200 basis point:
Increase in interest rates		110.3		(4.0	)		5.2
Decrease in interest rates		124.4		10.1			3.2

See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.

Balance Sheet Analysis (continued)

Loan Portfolio

Total loans were $760.1 billion at September 30, 2011, up $2.8 billion from December 31, 2010. Increased balances in many commercial loan portfolios predominantly offset the continued reduction in the non-strategic and liquidating portfolios, which have declined $16.8 billion since December 31, 2010. Included in the growth of loans from year

end 2010 was the purchase of $1.1 billion of loans from Bank of Ireland, which were all U.S.-based and largely commercial real estate. Additional information on the non-strategic and liquidating portfolios is included in Table 11 in the “Credit Risk Management” section of this Report.

Table 7: Loan Portfolios

September 30, 2011

December 31, 2010

(in millions)

Core

Liquidating

Total

Core

Liquidating

Total

Commercial

333,513

6,321

339,834

314,123

7,935

322,058

Consumer

310,084

110,188

420,272

309,840

125,369

435,209

Total loans

643,597

116,509

760,106

623,963

133,304

757,267

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

Deposits

Deposits totaled $895.4 billion at September 30, 2011, compared with $847.9 billion at December 31, 2010, reflecting flight to quality activity during third quarter 2011 and new account growth. Table 8 provides additional information regarding deposits. Comparative detail of average deposit

balances is provided in Table 1 under “Earnings Performance – Net Interest Income” earlier in this Report. Total core deposits were $849.6 billion at September 30, 2011, up $51.4 billion from $798.2 billion at December 31, 2010.

Table 8: Deposits


(in millions)	Sept. 30, 2011		% of total deposits			Dec. 31, 2010		% of total deposits			% Change

Noninterest-bearing	$	229,845		26	%	$	191,231		23	%		20
Interest-bearing checking		42,269		5			63,440		7			(33	)
Market rate and other savings		470,568		52			431,883		51			9
Savings certificates		65,869		7			77,292		9			(15	)
Foreign deposits (1)		41,081		5			34,346		4			20

Core deposits		849,632		95			798,192		94			6
Other time and savings deposits		19,510		2			19,412		2			1
Other foreign deposits		26,286		3			30,338		4			(13	)

Total deposits	$	895,428		10	0 %	$	847,942		100	%		6

(1)	Reflects Eurodollar sweep balances included in core deposits.

Balance Sheet Analysis (continued)

Fair Valuation of Financial Instruments

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. See our 2010 Form 10-K for a description of our critical accounting policy related to fair valuation of financial instruments.

We may use independent pricing services and brokers to obtain fair values based on quoted prices. We determine the most appropriate and relevant pricing service for each security class and generally obtain one quoted price for each security. For certain securities, we may use internal traders to obtain estimated fair values, which are subject to our internal price verification procedures. We validate prices received using a variety of methods, including, but not limited to, comparison to pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by Company personnel familiar with market liquidity and other market-related conditions.

Table 9 presents the summary of the fair value of financial instruments recorded at fair value on a recurring basis, and the amounts measured using significant Level 3 inputs (before derivative netting adjustments). The fair value of the remaining assets and liabilities were measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.

Table 9: Fair Value Level 3 Summary


	September 30, 2011					December 31, 2010
($ in billions)	Total balance			Level 3 (1)		Total balance		Level 3 (1)

Assets carried at fair value	$	324.9			49.8		293.1		47.9
As a percentage of total assets		25	%		4		23		4

Liabilities carried at fair value	$	27.0			5.1		21.2		6.4
As a percentage of total liabilities		2	%		*		2		1

*	Less than 1%.

(1)	Before derivative netting adjustments.

See Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional information regarding our use of fair valuation of financial instruments, our related measurement techniques and the impact to our financial statements.

Off-Balance Sheet Arrangements

In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital.

Off-Balance Sheet Transactions with Unconsolidated Entities

We routinely enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. Historically, the majority of SPEs were formed in connection with securitization transactions. For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.

Risk Management

All financial institutions must manage and control a variety of business risks that can significantly affect their financial performance. Key among those are credit, asset/liability and market risk.

For more information about how we manage these risks, see the “Risk Management” section in our 2010 Form 10-K. The discussion that follows is intended to provide an update on these risks.

Credit Risk Management

Table 10: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable


(in millions)	Sept. 30, 2011		Dec. 31, 2010

Commercial:
Commercial and industrial	$	164,510		151,284
Real estate mortgage		104,363		99,435
Real estate construction		19,719		25,333
Lease financing		12,852		13,094
Foreign (1)		38,390		32,912

Total commercial		339,834		322,058

Consumer:
Real estate 1-4 family first mortgage		223,758		230,235
Real estate 1-4 family junior lien mortgage		88,264		96,149
Credit card		21,650		22,260
Other revolving credit and installment		86,600		86,565

Total consumer		420,272		435,209

Total loans	$	760,106		757,267

(1)	Substantially all of our foreign loan portfolio is commercial loans. Loans are classified as foreign if the borrower’s primary address is outside of the United States.

We employ various credit risk management and monitoring activities to mitigate risks associated with multiple risk factors affecting loans we hold or could acquire or originate including:

•

Loan concentrations and related credit quality

•

Counterparty credit risk

•

Economic and market conditions

•

Legislative or regulatory mandates

•

Changes in interest rates

•

Merger and acquisition activities

•

Reputation risk

Our credit risk management process is governed centrally, but provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, disciplined credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. The Credit Committee of our Board of Directors (Board) receives reports from management, including our Chief Risk Officer and Chief Credit Officer, and its responsibilities include oversight of the administration and

effectiveness of, and compliance with, our credit policies and the adequacy of the allowance for credit losses.

A key to our credit risk management is adhering to a well controlled underwriting process, which we believe is appropriate for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans.

Non-Strategic and Liquidating Portfolios We continually evaluate and modify our credit policies to address appropriate levels of risk. Accordingly, from time to time, we designate certain portfolios and loan products as non-strategic or liquidating to cease their continued origination as we actively work to limit losses and reduce our exposures.

Table 11 identifies our non-strategic and liquidating loan portfolios. They consist primarily of the Pick-a-Pay mortgage portfolio and other PCI loans acquired from Wachovia as well

as some portfolios from legacy Wells Fargo Home Equity and Wells Fargo Financial. Effective first quarter 2011, we added our education finance government guaranteed loan portfolio to the non-strategic and liquidating portfolios as there is no longer a U.S. Government guaranteed student loan program available to private financial institutions pursuant to legislation in 2010. The non-strategic and liquidating loan portfolios have decreased 39% since the merger with Wachovia at December 31, 2008, and decreased 13% from the end of 2010.

Table 11: Non-Strategic and Liquidating Loan Portfolios


	Outstanding balance

(in millions)	Sept. 30, 2011		Dec. 31, 2010		Dec. 31, 2009		Dec. 31, 2008

Commercial:
Legacy Wachovia commercial and industrial, CRE and foreign PCI loans (1)	$	6,321		7,935		12,988		18,704

Total commercial		6,321		7,935		12,988		18,704

Consumer:
Pick-a-Pay mortgage (1)		67,361		74,815		85,238		95,315
Liquidating home equity		5,982		6,904		8,429		10,309
Legacy Wells Fargo Financial indirect auto		3,101		6,002		11,253		18,221
Legacy Wells Fargo Financial debt consolidation		17,186		19,020		22,364		25,299
Education Finance - government guaranteed (2)		15,611		17,510		21,150		20,465
Legacy Wachovia other PCI loans (1)		947		1,118		1,688		2,478

Total consumer		110,188		125,369		150,122		172,087

Total non-strategic and liquidating loan portfolios	$	116,509		133,304		163,110		190,791

(1)	Net of purchase accounting adjustments related to PCI loans.

(2)

Effective first quarter 2011, we included our education finance government guaranteed loan portfolio as there is no longer a U.S. Government guaranteed student loan program available to private financial institutions, pursuant to legislation in 2010. Prior periods have been adjusted to reflect this change.

The Wells Fargo Financial debt consolidation portfolio included $1.1 billion of loans at September 30, 2011, that were considered prime based on secondary market standards, compared with $1.2 billion at December 31, 2010. The remainder is non-prime but was originated with standards to reduce credit risk. Wells Fargo Financial ceased originating loans and leases through its indirect auto business channel by the end of 2008.

The home equity liquidating portfolio was designated in fourth quarter 2007 from loans generated through third party channels. This portfolio is discussed in more detail below in the “Credit Risk Management – Home Equity Portfolios” section of this Report.

Information about the liquidating PCI and Pick-a-Pay loan portfolios is provided in the discussion of loan portfolios that follows.

Risk Management – Credit Risk Management (continued)

PURCHASED CREDIT-IMPAIRED (PCI) LOANS Loans acquired with evidence of credit deterioration since their origination and where it is probable that we will not collect all contractually required principal and interest payments are accounted for using the measurement provisions for PCI loans. PCI loans are recorded at fair value at the date of acquisition, and the historical allowance for credit losses related to these loans is not carried over. Such loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments. Substantially all of our PCI loans were acquired in the Wachovia acquisition on December 31, 2008.

A nonaccretable difference is established for PCI loans to absorb losses expected on those loans at the date of acquisition. Amounts absorbed by the nonaccretable difference do not affect the income statement or the allowance for credit losses.

Substantially all commercial and industrial, CRE and foreign PCI loans are accounted for as individual loans. Conversely, Pick-a-Pay and other consumer PCI loans have been aggregated into several pools based on common risk characteristics. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Resolutions of loans may include sales to third parties, receipt of payments in settlement with the borrower, or foreclosure of the collateral. Our policy is to remove an individual PCI loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference. This removal method assumes that the amount received from resolution approximates pool performance expectations. The accretable yield percentage is unaffected by the resolution and any changes in the effective yield for the remaining loans in the pool are addressed by our quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan. Modified PCI loans are not removed from a pool even if those loans would otherwise be deemed troubled debt restructurings (TDRs). Modified PCI loans that are accounted for individually are TDRs, and removed from PCI accounting, if there has been a concession granted in excess of the original nonaccretable difference. We include these TDRs in our impaired loans.

In the first nine months of 2011, we recognized in income $184 million released from nonaccretable difference related to commercial PCI loans due to payoffs and other resolutions. We also transferred $318 million from the nonaccretable difference to the accretable yield for PCI loans with improving credit-related cash flows and absorbed $1.6 billion of losses from loan resolutions and write-downs with the nonaccretable difference. Table 12 provides an analysis of changes in the nonaccretable difference.

Table 12: Changes in Nonaccretable Difference for PCI Loans


							Other
(in millions)	Commercial			Pick-a-Pay			consumer			Total
Balance at December 31, 2008	$	10,410			26,485			4,069			40,964
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)		(330	)		-			-			(330	)
Loans resolved by sales to third parties (2)		(86	)		-			(85	)		(171	)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)		(138	)		(27	)		(276	)		(441	)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)		(4,853	)		(10,218	)		(2,086	)		(17,157	)


Balance at December 31, 2009		5,003			16,240			1,622			22,865
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)		(817	)		-			-			(817	)
Loans resolved by sales to third parties (2)		(172	)		-			-			(172	)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)		(726	)		(2,356	)		(317	)		(3,399	)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)		(1,698	)		(2,959	)		(391	)		(5,048	)


Balance at December 31, 2010		1,590			10,925			914			13,429
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)		(154	)		-			-			(154	)
Loans resolved by sales to third parties (2)		(30	)		-			-			(30	)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)		(297	)		-			(21	)		(318	)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)		(151	)		(1,282	)		(207	)		(1,640	)


Balance at September 30, 2011	$	958			9,643			686			11,287




Balance at June 30, 2011	$	1,192			10,136			733			12,061
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)		(65	)		-			-			(65	)
Loans resolved by sales to third parties (2)		(5	)		-			-			(5	)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)		(108	)		-			-			(108	)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)		(56	)		(493	)		(47	)		(596	)


Balance at September 30, 2011	$	958			9,643			686			11,287

(1)

Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approximates the pool performance expectations.

(2)	Release of the nonaccretable difference as a result of sales to third parties increases other noninterest income in the period of the sale.

(3)	Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.

(4)	Write-downs to net realizable value of PCI loans are absorbed by the nonaccretable difference when severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

Risk Management – Credit Risk Management (continued)

Since December 31, 2008, we have released $5.8 billion of nonaccretable difference, including $4.1 billion transferred from the nonaccretable difference to the accretable yield and $1.7 billion released to income through loan resolutions. We have provided $1.8 billion in the allowance for credit losses for PCI loans or pools of PCI loans that have had credit-related decreases to cash flows expected to be collected. The net result is a $4.0 billion reduction from December 31, 2008, through September 30, 2011, in our initial expected losses on all PCI loans.

At September 30, 2011, the allowance for credit losses on certain PCI loans was $302 million. The allowance is necessary to absorb credit-related decreases since acquisition in cash flows expected to be collected and primarily relates to individual PCI loans. Table 13 analyzes the actual and projected loss results on PCI loans since acquisition through September 30, 2011.

Table 13: Actual and Projected Loss Results on PCI Loans


							Other
(in millions)	Commercial			Pick-a-Pay			consumer			Total

Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)	$	(1,301	)		-			-			(1,301	)
Loans resolved by sales to third parties (2)		(288	)		-			(85	)		(373	)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)		(1,161	)		(2,383	)		(614	)		(4,158	)

Total releases of nonaccretable difference due to better than expected losses		(2,750	)		(2,383	)		(699	)		(5,832	)
Provision for losses due to credit deterioration (4)		1,694			-			106			1,800


Actual and projected losses on PCI loans less than originally expected	$	(1,056	)		(2,383	)		(593	)		(4,032	)

(1)

(2)	Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.

(3)	Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.

(4)	Provision for additional losses is recorded as a charge to income when it is estimated that the cash flows expected to be collected for a PCI loan or pool of loans may not support full realization of the carrying value.

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

Significant Credit Concentrations and Portfolio Reviews Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, FICO scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an adequate allowance for credit losses. The following analysis reviews the relevant concentrations and certain credit metrics of our significant portfolios. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.

COMMERCIAL REAL ESTATE (CRE) The CRE portfolio consists of both CRE mortgage loans and CRE construction loans. The combined CRE loans outstanding at September 30, 2011, was $124.1 billion, or 16% of total loans. CRE construction loans totaled $19.7 billion at September 30, 2011, and CRE mortgage loans totaled $104.4 billion, of which 35% was to owner-occupants. Table 14 summarizes CRE loans by state and property type with the related nonaccrual totals. CRE nonaccrual loans totaled 5% of the non-PCI CRE outstanding balance at September 30, 2011, a decline of 7% from the prior quarter. The portfolio is diversified both geographically and by property type. The largest geographic concentrations of combined CRE loans are in California and Florida, which represented 25% and 10% of the total CRE portfolio, respectively. By property type, the largest concentrations are office buildings at 25% and industrial/warehouse at 11% of the portfolio. The quarter ended with $22.4 billion of criticized non-PCI CRE mortgage loans, a decrease of 14% from December 31, 2010, and $7.6 billion of criticized non-PCI construction loans, a decrease of 32% from December 31, 2010. Total criticized non-PCI CRE loans remained relatively high as a result of the continued challenging conditions in the real estate market. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further detail on criticized loans.

The underwriting of CRE loans primarily focuses on cash flows inherent in the creditworthiness of the customer, in addition to collateral valuations. To identify and manage newly emerging problem CRE loans, we employ a high level of monitoring and regular customer interaction to understand and manage the risks associated with these loans, including regular loan reviews and appraisal updates. Management is engaged to identify issues and dedicated workout groups are in place to manage problem loans. At September 30, 2011, the recorded investment in PCI CRE loans totaled $4.7 billion, down from $12.3 billion at December 31, 2008, reflecting the reduction resulting from loan resolutions and write-downs.

Risk Management – Credit Risk Management (continued)

Table 14: CRE Loans by State and Property Type


	September 30, 2011
	Real estate mortgage					Real estate construction				Total					% of total loans
(in millions)	Nonaccrual loans		Outstanding balance (1)			Nonaccrual loans		Outstanding balance (1)		Nonaccrual loans		Outstanding balance (1)			% of total loans

By state:
PCI loans (1):
California	$	-		587			-		139		-		726			*	%
Florida		-		428			-		259		-		687			*
New York		-		402			-		195		-		597			*
Virginia		-		205			-		148		-		353			*
North Carolina		-		78			-		247		-		325			*
Other		-		1,108			-		854		-		1,962	(2)		*


Total PCI loans	$	-		2,808			-		1,842		-		4,650			*	%


All other loans:
California	$	1,147		27,489			372		3,270		1,519		30,759			4	%
Florida		669		9,384			293		1,719		962		11,103			2
Texas		313		7,202			106		1,554		419		8,756			1
New York		27		4,303			4		1,096		31		5,399			*
North Carolina		320		4,358			167		1,017		487		5,375			*
Virginia		91		3,568			17		1,281		108		4,849			*
Arizona		230		3,819			53		645		283		4,464			*
Georgia		261		3,700			173		614		434		4,314			*
Colorado		103		3,081			41		490		144		3,571			*
Washington		62		2,959			24		495		86		3,454			*
Other		1,206		31,692			665		5,696		1,871		37,388	(3)		5


Total all other loans	$	4,429		101,555			1,915		17,877		6,344		119,432			16	%


Total	$	4,429		104,363			1,915		19,719		6,344		124,082			16	%


By property:
PCI loans (1):
Apartments	$	-		702			-		375		-		1,077			*	%
Office buildings		-		904			-		152		-		1,056			*
1-4 family land		-		161			-		306		-		467			*
Land (excluding 1-4 family)		-		28			-		371		-		399			*
Retail (excluding shopping center)		-		271			-		98		-		369			*
Other		-		742			-		540		-		1,282			*


Total PCI loans	$	-		2,808			-		1,842		-		4,650			*	%


All other loans:
Office buildings	$	1,082		28,766			52		1,724		1,134		30,490			4	%
Industrial/warehouse		547		13,081			43		537		590		13,618			2
Apartments		299		9,832			155		2,550		454		12,382			2
Retail (excluding shopping center)		640		11,530			60		740		700		12,270			2
Shopping center		298		8,286			113		1,328		411		9,614			1
Real estate-other		355		9,126			15		263		370		9,389			1
Hotel/motel		284		7,003			23		741		307		7,744			1
Land (excluding 1-4 family)		70		429			587		6,086		657		6,515			*
Institutional		103		2,865			4		252		107		3,117			*
Agriculture		174		2,612			2		24		176		2,636			*
Other		577		8,025			861		3,632		1,438		11,657			2


Total all other loans	$	4,429		101,555			1,915		17,877		6,344		119,432			16	%


Total	$	4,429		104,363	(4)		1,915		19,719		6,344		124,082			16	%

*	Less than 1%.

(1)	For PCI loans, amounts represent carrying value. PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.

(2)	Includes 34 states; no state had loans in excess of $323 million.

(3)	Includes 40 states; no state had loans in excess of $3.0 billion.

(4)	Includes $36.5 billion of loans to owner-occupants where 51% or more of the property is used in the conduct of their business.

COMMERCIAL AND INDUSTRIAL LOANS AND LEASE FINANCING For purposes of portfolio risk management, we aggregate commercial and industrial loans and lease financing according to market segmentation and standard industry codes. Table 15 summarizes commercial and industrial loans and lease financing by industry with the related nonaccrual totals. Across our non-PCI commercial loans and leases, the commercial and industrial loans and lease financing portfolio generally experienced better credit improvement than our CRE portfolios in third quarter 2011. Of the total commercial and industrial loans and lease financing non-PCI portfolio, 0.06% was 90 days or more past due and still accruing, 1.24% was nonaccruing and 13.3% was criticized. In comparison, of the total non-PCI CRE portfolio, 0.22% was 90 days or more past due and still accruing, 5.31% was nonaccruing and 25.1% was criticized. Also, the annualized net-charge off rate for both portfolios declined from third quarter 2010. We believe the commercial and industrial loans and lease financing portfolio is well underwritten and is diverse in its risk with relatively even concentrations across several industries. Our credit risk management process for this portfolio primarily focuses on a customer’s ability to repay the loan through their cash flow.

A majority of our commercial and industrial loans and lease financing portfolio is secured by short-term liquid assets, such as accounts receivable, inventory and securities, as well as long-lived assets, such as equipment and other business assets. Generally, the collateral securing this portfolio represents a secondary source of repayment. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.

Table 15: Commercial and Industrial Loans and Lease Financing by Industry



	September 30, 2011
(in millions)	Nonaccrual loans		Outstanding balance(1)			% of total loans

PCI loans (1):
Technology	$	-		146			*	%
Healthcare		-		49			*
Aerospace and defense		-		38			*
Residential construction		-		35			*
Investors		-		26			*
Media		-		23			*
Other		-		166	(2)		*

Total PCI loans	$	-		483			*	%


All other loans:
Financial institutions	$	121		13,958			2	%
Cyclical retailers		46		10,468			1
Food and beverage		42		9,631			1
Oil and gas		113		9,242			1
Healthcare		73		8,835			1
Investors		1		7,559			*
Industrial equipment		46		7,558			*
Real estate		93		7,430			*
Transportation		27		6,679			*
Business services		42		6,083			*
Technology		68		6,079			*
Public administration		39		5,702			*
Other		1,488		77,655	(3)		10


Total all other loans	$	2,199		176,879			23	%


Total	$	2,199		177,362			23	%

*	Less than 1%.

(1)	For PCI loans, amounts represent carrying value. PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.

(2)	No other single category had loans in excess of $22.4 million.

(3)	No other single category had loans in excess of $5.2 billion. The next largest categories included utilities, hotel/restaurant, securities firms, non-residential construction and leisure.

Risk Management – Credit Risk Management (continued)

During the current credit cycle, we have experienced an increase in loans requiring risk mitigation activities including the restructuring of loan terms and requests for extensions of commercial and industrial and CRE loans. All actions are based on a re-underwriting of the loan and our assessment of the borrower’s ability to perform under the agreed-upon terms. For loans that are granted an extension, borrowers are generally performing in accordance with the contractual loan terms. Extension terms generally range from six to thirty-six months and may require that the borrower provide additional economic support in the form of partial repayment, or additional collateral or guarantees. In cases where the value of collateral or financial condition of the borrower is insufficient to repay our loan, we may rely upon the support of an outside repayment guarantee in providing the extension.

Our ability to seek performance under a guarantee is directly related to the guarantor’s creditworthiness, capacity and willingness to perform, which is evaluated on an annual basis, or more frequently as warranted. Our evaluation is based on the most current financial information available and is focused on various key financial metrics, including net worth, leverage, and current and future liquidity. We consider the guarantor’s reputation, creditworthiness, and willingness to work with us based on our analysis as well as other lenders’ experience with the guarantor. Our assessment of the guarantor’s credit strength is reflected in our loan risk ratings for such loans. The loan risk rating and accruing status are important factors in our allowance methodology for commercial and industrial and CRE loans.

In considering the accrual status of the loan, we evaluate the collateral and future cash flows as well as the anticipated support of any repayment guarantor. In many cases the strength of the guarantor provides sufficient assurance that full repayment of the loan is expected. When full and timely collection of the loan becomes uncertain, including the performance of the guarantor, we place the loan on nonaccrual status and we charge-off all or a portion of the loan based on the fair value of the collateral securing the loan, if any.

At the time of restructuring, we evaluate if the loan should be classified as a TDR, and account for it accordingly. For more information on TDRs, see “Troubled Debt Restructurings” later in this section and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

FOREIGN LOANS At September 30, 2011, foreign loans represented approximately 5% of our total consolidated loans outstanding and approximately 3% of our total assets. The only individual foreign country with cross-border outstandings, defined to include loans, acceptances, interest-bearing deposits with other banks, other interest bearing investments and any other monetary assets, that exceeded 0.75% of our consolidated assets at September 30, 2011, was the United Kingdom. The United Kingdom cross-border outstandings amounted to approximately $12.8 billion, or 0.98% of our consolidated assets, and included $2.2 billion of sovereign claims.

At September 30, 2011, our gross outside exposure to Greece, Ireland, Italy, Portugal and Spain, including cross-border claims on an ultimate risk basis, and foreign exchange and derivative products, aggregated approximately $3.1 billion, and we held no sovereign claims against these countries. On the same basis, our exposure to the Eurozone (the seventeen European Union member states that have adopted the euro as their common currency and sole legal tender) was $14.0 billion, including $256 million in sovereign claims against Eurozone countries. At September 30, 2011, we did not have any sovereign credit default swaps that we have written or received associated with Greece, Ireland, Italy, Portugal and Spain, nor did we have any sovereign credit default swaps written or received associated with the Eurozone.

Our foreign country risk monitoring process incorporates frequent dialogue with our foreign financial institution customers, counterparties and regulatory agencies, enhanced by centralized monitoring of macroeconomic and capital markets conditions. We establish exposure limits for each country via a centralized oversight process based on the needs of our customers, and in consideration of relevant economic, political, social, legal, and transfer risks. We monitor exposures closely and adjust our limits in response to changing conditions.

Risk Management – Credit Risk Management (continued)

REAL ESTATE 1-4 FAMILY MORTGAGE LOANS Our real estate 1-4 family mortgage loans primarily include loans we have made to customers and retained as part of our asset liability management strategy. These loans also include the Pick-a-Pay Portfolio acquired from Wachovia and the Home Equity Portfolio, which are discussed below. In addition, these loans include other purchased loans and loans included on our balance sheet due to the adoption of consolidation accounting guidance related to VIEs.

Our underwriting and periodic review of loans collateralized by residential real property includes appraisals or estimates from automated valuation models (AVMs) to support property values. AVMs are computer-based tools used to estimate the market value of homes. AVMs are a lower-cost alternative to appraisals and support valuations of large numbers of properties in a short period of time using market comparables and price trends for local market areas. The primary risk associated with the use of AVMs is that the value of an individual property may vary significantly from the average for the market area. We have processes to periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. AVMs are generally used in underwriting to support property values on loan originations only where the loan amount is under $250,000. We generally require property visitation appraisals by a qualified independent appraiser for larger residential property loans.

Some of our real estate 1-4 family first and junior lien mortgage loans include an interest-only feature as part of the loan terms. These interest-only loans were approximately 22% of total loans at September 30, 2011 and 25% at December 31, 2010. Substantially all of these interest-only loans at origination were considered to be prime or near prime.

We believe we have manageable adjustable-rate mortgage (ARM) reset risk across our owned mortgage loan portfolios. We do not offer option ARM products, nor do we offer variable-rate mortgage products with fixed payment amounts, commonly referred to within the financial services industry as negative amortizing mortgage loans. Our liquidating option ARM portfolio was acquired from Wachovia.

We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers in the current difficult economic cycle. Loans are underwritten at the time of the modification in accordance with underwriting guidelines established for governmental and proprietary loan modification programs. As a participant in the U.S. Treasury’s Making Home Affordable (MHA) programs, we are focused on helping customers stay in their homes. The MHA programs create a standardization of modification terms including incentives paid to borrowers, servicers, and investors. MHA includes the Home Affordable Modification Program (HAMP) for first lien loans and the Second Lien Modification Program (2MP) for junior lien loans. Under both our proprietary programs and the MHA programs, we may provide concessions such as interest rate reductions, forbearance of principal, and in some cases, principal forgiveness. These programs generally include trial payment periods of three to four months, and after successful completion and compliance with terms during this period, the loan is modified and accounted for as a troubled debt restructured loan. See Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for discussion on how we determine the allowance attributable to our modified residential real estate portfolios.

The concentrations of real estate 1-4 family first and junior lien mortgage loans by state are presented in Table 16. Our real estate 1-4 family mortgage loans to borrowers in California represented approximately 13% of total loans (3% of this amount were PCI loans from Wachovia) at September 30, 2011, mostly within the larger metropolitan areas, with no single California metropolitan area consisting of more than 3% of total loans. We continuously monitor changes in real estate values and underlying economic or market conditions for all geographic areas of our real estate 1-4 family mortgage portfolio as part of our credit risk management process.

Part of our credit monitoring includes tracking delinquency, FICO scores and collateral values (LTV/CLTV) on the entire real estate 1-4 family mortgage loan portfolio. The delinquency metric has held stable and the other two risk metrics have shown improvement during 2011, on the non-PCI mortgage portfolio. Loans 30 days or more delinquent at September 30, 2011, totaled $18.5 billion, or 7%, of total non-PCI mortgages, down 9% from December 31, 2010. Loans with FICO scores lower than 640 totaled $44.7 billion at September 30, 2011 or 16% of all non-PCI mortgages, a decline of 12% from year-end 2010. Mortgages with a LTV/CLTV greater than 100% totaled $74.0 billion at September 30, 2011 or 26% of total non-PCI mortgages, a 13% decline from year-end 2010. Information regarding credit risk trends can be found in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Table 16: Real Estate 1-4 Family Mortgage Loans by State


	September 30, 2011
	Real estate		Real estate		Total real
	1-4 family		1-4 family		estate 1-4		% of
	first		junior lien		family		total
(in millions)	mortgage		mortgage		mortgage		loans

PCI loans:
California	$	19,793		43		19,836		3	%
Florida		2,792		41		2,833		*
New Jersey		1,290		25		1,315		*
Other (1)		6,571		107		6,678		*


Total PCI loans	$	30,446		216		30,662		4	%


All other loans:
California	$	54,731		24,511		79,242		10	%
Florida		16,278		7,903		24,181		3
New Jersey		9,208		6,389		15,597		2
New York		8,899		3,655		12,554		2
Virginia		6,071		4,515		10,586		1
Pennsylvania		6,169		4,004		10,173		1
North Carolina		5,824		3,608		9,432		1
Georgia		4,709		3,436		8,145		1
Texas		6,589		1,377		7,966		1
Other (2)		74,834		28,650		103,484		15

Total all other loans	$	193,312		88,048		281,360		37	%

Total	$	223,758		88,264		312,022		41	%

*	Less than 1%.

(1)	Consists of 46 states; no state had loans in excess of $726 million.

(2)	Consists of 41 states; no state had loans in excess of $6.6 billion. Includes $17.7 billion in loans that are insured by the Federal Housing Authority (FHA) or guaranteed by the Department of Veterans Affairs (VA).

Risk Management – Credit Risk Management (continued)

PICK-A-PAY PORTFOLIO The Pick-a-Pay portfolio was one of the consumer residential first mortgage portfolios we acquired from Wachovia and a majority of the portfolio was identified as PCI loans. The Pick-a-Pay portfolio is a liquidating portfolio, as Wachovia ceased originating new Pick-a-Pay loans in 2008.

The Pick-a-Pay portfolio includes loans that offer payment options (Pick-a-Pay option payment loans), and also includes loans that were originated without the option payment feature, loans that no longer offer the option feature as a result of our modification efforts since the acquisition, and loans where the

customer voluntarily converted to a fixed-rate product. The Pick-a-Pay portfolio is included in the consumer real estate 1-4 family first mortgage class of loans throughout this Report. Real estate 1-4 family junior lien mortgages and lines of credit associated with Pick-a-Pay loans are reported in the Home Equity portfolio. Table 17 provides balances over time related to the types of loans included in the portfolio since acquisition.

Table 17: Pick-a-Pay Portfolio - Balances Over Time


						December 31,
	September 30, 2011					2010					2008
	Adjusted					Adjusted					Adjusted
	unpaid					unpaid					unpaid
	principal		% of			principal		% of			principal		% of
(in millions)	balance (1)		total			balance (1)		total			balance (1)		total

Option payment loans	$	41,335		55	%	$	49,958		59	%	$	99,937		86	%
Non-option payment adjustable-rate and fixed-rate loans		10,231		13			11,070		13			15,763		14
Full-term loan modifications		23,990		32			23,132		28			-		-


Total adjusted unpaid principal balance	$	75,556		100	%	$	84,160		100	%	$	115,700		100	%


Total carrying value	$	67,361					74,815					95,315

(1)	Adjusted unpaid principal includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.

PCI loans in the Pick-a-Pay portfolio had an adjusted unpaid principal balance of $38.1 billion and a carrying value of $29.7 billion at September 30, 2011. The carrying value of the PCI loans is net of remaining purchase accounting write-downs, which reflected their fair value at acquisition. At acquisition, we recorded a $22.4 billion write-down in purchase accounting on Pick-a-Pay loans that were impaired.

Pick-a-Pay option payment loans may be adjustable or fixed rate. They are home mortgages on which the customer has the option each month to select from among four payment options: (1) a minimum payment as described below, (2) an interest-only payment, (3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment.

The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The new minimum monthly payment amount usually cannot increase by more than 7.5% of the then-existing principal and interest payment amount. The minimum payment may not be sufficient to pay the monthly interest due and in those situations a loan on which the customer has made a minimum payment is subject to “negative amortization,” where unpaid interest is added to the principal balance of the loan. The amount of interest that has been added to a loan balance is referred to as “deferred interest.” Total deferred interest of $2.1 billion at September 30, 2011, down from $2.7 billion at December 31, 2010, was due to loan modification efforts as well as falling interest rates resulting in the minimum payment option covering interest and some principal on many loans. Approximately 82% of the Pick-a-Pay customers making a minimum payment in September 2011 did not defer interest.

Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to or below 85% have a cap of 125% of the original loan balance, and these loans represent substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its principal cap, or the 10-year anniversary of the loan. For a small population of Pick-a-Pay loans, the recast occurs at the five-year anniversary. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.

Due to the terms of the Pick-a-Pay portfolio, there is little recast risk in the near term. Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balances of loans to recast based on reaching the principal cap: $2 million for the remainder of 2011, $3 million in 2012, and $24 million in 2013. In third quarter 2011, $0.4 million was recast based on reaching the principal cap. In addition, in a flat rate environment, we would expect the following balances of loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change at the recast date greater than the annual 7.5% reset: $2 million for the remainder of 2011, $61 million in 2012, and

$255 million in 2013. In third quarter 2011, the amount of loans reaching their recast anniversary date and also having a payment change over the annual 7.5% reset was $5 million.

Table 18 reflects the geographic distribution of the Pick-a-Pay portfolio broken out between PCI loans and all other loans. In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is a useful metric in predicting future real estate 1-4 family first mortgage loan

performance, including potential charge-offs. Because PCI loans were initially recorded at fair value, including write-downs for expected credit losses, the ratio of the carrying value to the current collateral value will be lower compared with the LTV based on the adjusted unpaid principal balance. For informational purposes, we have included both ratios for PCI loans in the following table.

Table 18: Pick-a-Pay Portfolio (1)


	September 30, 2011
	PCI loans										All other loans
								Ratio of					Ratio of
	Adjusted							carrying					carrying
	unpaid		Current					value to					value to
	principal		LTV			Carrying		current			Carrying		current
(in millions)	balance (2)		ratio (3)			value (4)		value (5)			value (4)		value (5)

California	$	25,833		119	%	$	19,721		90	%	$	18,372		84	%
Florida		3,461		122			2,651		89			3,871		101

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