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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2008                     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: 1-866-878-5865
Securities registered pursuant to Section 12(b) of the Act:
     
    Name of Each Exchange
Title of Each Class
 
on Which Registered
Common Stock, par value $1-2/3
  New York Stock Exchange (“NYSE”)
Depositary Shares, each representing a 1/40th interest in a shares of 8.00% Non-
Cumulative Perpetual Class A Preferred Stock, Series J
  NYSE
7.5% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L
  NYSE
See list of additional securities listed on the NYSE and the NYSE Alternext U.S. on the page directly following this cover page.
Securities registered pursuant to Section 12(g) of the Act:
Dividend Equalization Preferred Shares, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      Yes   Ö     No         
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes          No   Ö    
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, and (2) has been subject to such filing requirements for the past 90 days.            Yes   Ö     No         
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.           o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
       
Large accelerated filer þ
  Accelerated filer o
Non-accelerated filer o
  Smaller reporting company o
(Do not check if a smaller reporting company)  
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act).
Yes          No   Ö          
At June 30, 2008, the aggregate market value of common stock held by non-affiliates was approximately $77.5 billion, based on a closing price of $23.75. At January 31, 2009, 4,237,777,218 shares of common stock were outstanding.
Documents Incorporated by Reference in Form 10-K
     
Incorporated Documents
 
Where incorporated in Form 10-K
 
   
1. Portions of the Company’s Annual Report to Stockholders for the year ended December 31, 2008 (“2008 Annual Report to Stockholders”)
  Part I – Items 1, 1A, 2 and 3; Part II – Items 5, 6, 7, 7A, 8 and 9A; and Part IV– Item 15.
 
   
2. Portions of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held April 29, 2009 (“2009 Proxy Statement”)
  Part III – Items 10, 11, 12, 13 and 14

 


TABLE OF CONTENTS

ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
EX-10.(Q)
EX-10.(W)
EX-10.(X)
EX-10.(Y)
EX-12.(A)
EX-12.(B)
EX-13
EX-21
EX-23
EX-24
EX-31.(A)
EX-31.(B)
EX-32.(A)
EX-32.(B)


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Additional securities registered pursuant to Section 12(b) of the Exchange Act:
     
    Name of Each Exchange
Title of Each Class
 
on Which Registered
 
   
Basket Linked Notes due April 15, 2009
  NYSE Alternext U.S.
 
   
Callable Notes Linked to the S&P 500® Index due August 25, 2009
  NYSE Alternext U.S.
 
   
Notes Linked to the Dow Jones Industrial AverageSM due May 5, 2010
  NYSE Alternext U.S.
 
   
Participating Index Notes (PINS) TEES Targeted Efficient Equity Securities Linked to the S&P 500® Index due August 19, 2009
  NYSE Alternext U.S.
 
   
ASTROS (ASseT Return Obligation Securities) Linked to the Nikkei 225(R) Index Due March 2, 2010
  NYSE Alternext U.S.
 
   
ASTROS (ASseT Return Obligation Securities) Linked to a Global Basket of Indices due February 2, 2010
  NYSE Alternext U.S.
 
   
ASTROS (ASseT Return Obligation Securities) Linked to the Dow Jones Global Titans 50 Index due March 3, 2010
  NYSE Alternext U.S.
 
   
ASTROS (ASseT Return Obligation Securities) Linked to the Global Equity Basket (Series 2005-2) due May 5, 2010
  NYSE Alternext U.S.
 
   
Exchangeable Notes Linked to the Common Stock of Three Oil Industry Companies due December 15, 2010
  NYSE Alternext U.S.
 
   
ASTROS (ASseT Return Obligation Securities) Linked to the Metals – China Basket due January 28, 2009
  NYSE Alternext U.S.
 
   
Guarantee of 7.0% Capital Securities of Wells Fargo Capital IV
  NYSE
 
   
Guarantee of 5.85% Trust Preferred Securities (TRUPS®) of Wells Fargo Capital VII
  NYSE
 
   
Guarantee of 5.625% Trust Preferred Securities of Wells Fargo Capital VIII
  NYSE
 
   
Guarantee of 5.625% Trust Originated Preferred Securities (TOPrSSM) of Wells Fargo Capital IX
  NYSE
 
   
Guarantee of 6.25% Enhanced Trust Preferred Securities (Enhanced TruPS®) of Wells Fargo Capital XI
  NYSE
 
   
Guarantee of 7.875% Enhanced Trust Preferred Securities (Enhanced TruPS®) of Wells Fargo Capital XII
  NYSE
 
   
Guarantee of 7.70% Fixed-to-Floating Rate Normal Preferred Purchase Securities of Wells Fargo Capital XIII
  NYSE
 
   
Remarketable 7.50% Junior Subordinated Notes due 2044
  NYSE
 
   
Guarantee of 8.625% Enhanced Trust Preferred Securities (Enhanced TruPS®) of Wells Fargo Capital XIV
  NYSE
 
   
Guarantee of 9.75% Fixed-to-Floating Rate Normal Preferred Purchase Securities of Wells Fargo Capital XV
  NYSE
 
   
Remarketable 9.25% Junior Subordinated Notes due 2044
  NYSE
 
   
Guarantee of 5.80% Fixed-to-Floating Rate Normal Wachovia Income Trust Securities of Wachovia Capital Trust III
  NYSE
 
   
Guarantee of 6.375% Trust Preferred Securities of Wachovia Capital Trust IV
  NYSE
 
   
Guarantee of 6.375% Trust Preferred Securities of Wachovia Capital Trust IX
  NYSE
 
   
Guarantee of 7.85% Trust Preferred Securities of Wachovia Capital Trust X
  NYSE

 


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ITEM 1.      BUSINESS
Wells Fargo & Company is a corporation organized under the laws of Delaware and a financial holding company and a bank holding company registered under the Bank Holding Company Act of 1956, as amended (BHC Act). Its principal business is to act as a holding company for its subsidiaries. References in this report to “the Parent” mean the holding company. References to “we,” “our,” “us” or “the Company” mean the holding company and its subsidiaries that are consolidated for financial reporting purposes.
We are the product of the merger of Norwest Corporation and the former Wells Fargo & Company, completed on November 2, 1998. On completion of the merger, Norwest Corporation changed its name to Wells Fargo & Company. On December 31, 2008, we acquired Wachovia Corporation (Wachovia) in a transaction valued at $12.5 billion to Wachovia shareholders. Wachovia, based in Charlotte, North Carolina, was one of the nation’s largest diversified financial services companies, providing a broad range of retail banking and brokerage, asset and wealth management, and corporate and investment banking products and services to customers through 3,300 financial centers in 21 states from Connecticut to Florida and west to Texas and California, and nationwide retail brokerage, mortgage lending and auto finance businesses.
We expand our business, in part, by acquiring banking institutions and other companies engaged in activities that are financial in nature. We continue to explore opportunities to acquire banking institutions and other financial services companies, and discussions related to possible acquisitions may occur at any time. We cannot predict whether, or on what terms, discussions will result in further acquisitions. As a matter of policy, we generally do not comment on any discussions or possible acquisitions until a definitive acquisition agreement has been signed.
At December 31, 2008, we had assets of $1.3 trillion, loans of $865 billion, deposits of $781 billion and stockholders’ equity of $99 billion. Based on assets, we were the fourth largest bank holding company in the United States. At December 31, 2008, Wells Fargo Bank, N.A. was the Company’s principal subsidiary with assets of $539 billion, or 41% of the Company’s assets. As part of our acquisition with Wachovia, we also held the assets of Wachovia Bank, N.A., which totaled $635 billion at December 31, 2008.
At December 31, 2008, we had 158,900 active, full-time equivalent team members. With the acquisition of Wachovia, we now have more than 281,000 active team members.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available free at www.wellsfargo.com (select “About Us,” then “Investor Relations – More,” then “SEC Filings”) as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC). They are also available free on the SEC’s website at www.sec.gov.

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DESCRIPTION OF BUSINESS
General
We are a diversified financial services company. We provide retail, commercial and corporate banking services through banking stores located in 39 states and the District of Columbia: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin and Wyoming. We provide other financial services through subsidiaries engaged in various businesses, principally: wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency and brokerage services, computer and data processing services, trust services, investment advisory services, mortgage-backed securities servicing and venture capital investment.
We have three operating segments for management reporting purposes: Community Banking, Wholesale Banking and Wells Fargo Financial. The 2008 Annual Report to Stockholders includes financial information and descriptions of these operating segments.
Competition
The financial services industry is highly competitive. Our subsidiaries compete with financial services providers, such as banks, savings and loan associations, credit unions, finance companies, mortgage banking companies, insurance companies, and mutual fund companies. They also face increased competition from nonbank institutions such as brokerage houses, as well as from financial services subsidiaries of commercial and manufacturing companies. Many of these competitors enjoy fewer regulatory constraints and some may have lower cost structures.
Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. Combinations of this type could significantly change the competitive environment in which we conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.
REGULATION AND SUPERVISION
We describe below, and in Notes 3 (Cash, Loan and Dividend Restrictions) and 26 (Regulatory and Agency Capital Requirements) to Financial Statements included in the 2008 Annual Report to Stockholders, the material elements of the regulatory framework applicable to us. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Banking statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies, and a change in them, including changes in how they are interpreted or implemented, could have a material effect on our business. The regulatory framework applicable to bank holding companies is

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intended to protect depositors, federal deposit insurance funds, consumers and the banking system as a whole, not investors in bank holding companies such as the Company.
Statutes, regulations and policies could restrict our ability to diversify into other areas of financial services, acquire depository institutions, and pay dividends on our capital stock. They may also require us to provide financial support to one or more of our subsidiary banks, maintain capital balances in excess of those desired by management, and pay higher deposit insurance premiums as a result of a general deterioration in the financial condition of depository institutions.
General
Parent Bank Holding Company. As a bank holding company, the Parent is subject to regulation under the BHC Act and to inspection, examination and supervision by its primary regulator, the Board of Governors of the Federal Reserve System (Federal Reserve Board or FRB). The Parent is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC. As a listed company on the New York Stock Exchange (NYSE), the Parent is subject to the rules of the NYSE for listed companies.
Subsidiary Banks. Our subsidiary national banks are subject to regulation and examination primarily by the Office of the Comptroller of the Currency (OCC) and secondarily by the Federal Deposit Insurance Corporation (FDIC) and the FRB. Our subsidiary federal savings banks are subject to primary regulation and examination by the Office of Thrift Supervision (OTS) and secondarily by the FDIC and the FRB. Our state-chartered banks are subject to primary federal regulation and examination by the FDIC and, in addition, are regulated and examined by their respective state banking departments.
Nonbank Subsidiaries. Many of our nonbank subsidiaries are also subject to regulation by the FRB and other applicable federal and state agencies. Our insurance subsidiaries are subject to regulation by applicable state insurance regulatory agencies, as well as the FRB. Our brokerage subsidiaries are regulated by the SEC, the Financial Industry Regulatory Authority (FINRA) and, in some cases, the Municipal Securities Rulemaking Board, and state securities regulators. FINRA was formed in July 2007 through a consolidation of the National Association of Securities Dealers, Inc. (NASD) and the member regulation, enforcement and arbitration functions of the NYSE. FINRA is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is responsible for rule writing, firm examination, enforcement, arbitration and mediation functions previously overseen by the NASD. Our other nonbank subsidiaries may be subject to the laws and regulations of the federal government and/or the various states as well as foreign countries in which they conduct business.
Parent Bank Holding Company Activities
“Financial in Nature” Requirement. As a bank holding company that has elected to become a financial holding company pursuant to the BHC Act, we may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. “Financial in nature” activities include securities underwriting, dealing and market making, sponsoring mutual funds and investment

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companies, insurance underwriting and agency, merchant banking, and activities that the FRB, in consultation with the Secretary of the U.S. Treasury, determines from time to time to be financial in nature or incidental to such financial activity. “Complimentary activities” are activities that the FRB determines upon application to be complementary to a financial activity and do not pose a safety and soundness risk.
FRB approval is not required for us to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. Prior FRB approval is required before we may acquire the beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association. Because we are a financial holding company, if any of our subsidiary banks receives a rating under the Community Reinvestment Act of 1977, as amended (CRA), of less than satisfactory, we will be prohibited, until the rating is raised to satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations, except that we could engage in new activities, or acquire companies engaged in activities, that are closely related to banking under the BHC Act. In addition, if the FRB finds that any of our subsidiary banks is not well capitalized or well managed, we would be required to enter into an agreement with the FRB to comply with all applicable capital and management requirements and which may contain additional limitations or conditions. Until corrected, we could be prohibited from engaging in any new activity or acquiring companies engaged in activities that are not closely related to banking under the BHC Act without prior FRB approval. If we fail to correct any such condition within a prescribed period, the FRB could order us to divest our banking subsidiaries or, in the alternative, to cease engaging in activities other than those closely related to banking under the BHC Act. 
We became a financial holding company effective March 13, 2000. We continue to maintain our status as a bank holding company for purposes of other FRB regulations.
Interstate Banking. Under the Riegle-Neal Interstate Banking and Branching Act (Riegle-Neal Act), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state).
The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. Banks are also permitted to acquire and to establish new branches in other states where authorized under the laws of those states.
Regulatory Approval. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition, and future prospects including current and projected capital ratios and levels, the competence, experience, and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the

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acquiring institution’s record of compliance under the CRA, and the effectiveness of the acquiring institution in combating money laundering activities.
Dividend Restrictions
The Parent is a legal entity separate and distinct from its subsidiary banks and other subsidiaries. A significant source of funds to pay dividends on its common and preferred stock and principal and interest on its debt is dividends from its subsidiaries. Various federal and state statutory provisions and regulations limit the amount of dividends the Parent’s subsidiary banks and certain other subsidiaries may pay without regulatory approval. For information about the restrictions applicable to the Parent’s subsidiary banks, see Note 3 (Cash, Loan and Dividend Restrictions) to Financial Statements included in the 2008 Annual Report to Stockholders. Federal bank regulatory agencies have the authority to prohibit the Parent’s subsidiary banks from engaging in unsafe or unsound practices in conducting their businesses. The payment of dividends, depending on the financial condition of the bank in question, could be deemed an unsafe or unsound practice. The ability of the Parent’s subsidiary banks to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines.
Holding Company Structure
Transfer of Funds from Subsidiary Banks. The Parent’s subsidiary banks are subject to restrictions under federal law that limit the transfer of funds or other items of value from such subsidiaries to the Parent and its nonbank subsidiaries (including affiliates) in so-called “covered transactions.” In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a subsidiary bank with a single affiliate are limited to 10% of the subsidiary bank’s capital and surplus and, with respect to all covered transactions with affiliates in the aggregate, to 20% of the subsidiary bank’s capital and surplus. Also, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. A bank’s transactions with its nonbank affiliates are also generally required to be on arm’s length terms.
Source of Strength. The FRB has a policy that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be required at times when the bank holding company may not have the resources to provide the support.
The OCC may order an assessment of the Parent if the capital of one of its national bank subsidiaries were to become impaired. If the Parent failed to pay the assessment within three months, the OCC could order the sale of the Parent’s stock in the national bank to cover the deficiency.
Capital loans by the Parent to any of its subsidiary banks are subordinate in right of payment to deposits and certain other indebtedness of the subsidiary bank. In addition, in the event of the Parent’s bankruptcy, any commitment by the Parent to a federal bank regulatory agency to

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maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Depositor Preference. The Federal Deposit Insurance Act (FDI Act) provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including the Parent, with respect to any extensions of credit they have made to such insured depository institution.
Liability of Commonly Controlled Institutions. All of the Company’s subsidiary banks are insured by the FDIC. FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank holding company, and for any assistance provided by the FDIC to an FDIC-insured depository institution that is in danger of default and that is controlled by the same bank holding company. “Default” means generally the appointment of a conservator or receiver. “In danger of default” means generally the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.
Capital Requirements
We are subject to regulatory capital requirements and guidelines imposed by the FRB, which are substantially similar to those imposed by the OCC and the FDIC on depository institutions within their jurisdictions. Under these guidelines, a depository institution’s or a holding company’s assets and certain specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified into one of three tiers. Tier 1 capital includes common equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock at the holding company level, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other deductions. Tier 2 capital includes, among other things, perpetual preferred stock not qualified as Tier 1 capital, subordinated debt, and allowances for loan and lease losses, subject to certain limitations. Tier 3 capital includes qualifying unsecured subordinated debt. At least one-half of a bank’s total capital must qualify as Tier 1 capital.
National banks and bank holding companies currently are required to maintain Tier 1 capital and the sum of Tier 1 and Tier 2 capital equal to at least 4% and 8%, respectively, of their total risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit). The federal bank regulatory agencies may, however, set higher capital requirements for an individual bank or when a bank’s particular circumstances warrant. The FRB may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Also, the FRB considers a “tangible Tier 1 leverage ratio” (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or engaging in new activities.

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Effective April 1, 2002, the FRB, OCC and FDIC issued new rules that establish minimum capital requirements for equity investments in nonfinancial companies. These rules impose a capital charge that increases incrementally as the level of nonfinancial equity investments increases relative to Tier 1 capital. These capital charges range from Tier 1 capital charges of 8% to 25% of the adjusted carrying value of the nonfinancial equity investments.
The FRB, OCC and FDIC rules also require us to incorporate market and interest rate risk components into our regulatory capital computations. Under the market risk requirements, capital is allocated to support the amount of market risk related to a financial institution’s ongoing trading activities.
In June 2004, the Basel Committee on Bank Supervision published new international guidelines for determining regulatory capital that are designed to be more risk sensitive than the existing framework and to promote enhanced risk management practices among large, internationally active banking organizations. The United States federal bank regulatory agencies each approved a final rule similar to the international guidelines in November 2007. This new advance capital adequacy framework is known as “Basel II,” and is intended to more closely align regulatory capital requirements with actual risks. Basel II incorporates three pillars that address (a) capital adequacy, (b) supervisory review, which relates to the computation of capital and internal assessment processes, and (c) market discipline, through increased disclosure requirements. Embodied within these pillars are aspects of risk strategy, measurement and management that relate to credit risk, market risk, and operational risk. Banking organizations are required to enhance the measurement and management of those risks through the use of advanced approaches for calculating risk-based capital requirements. Under the final rule, banks subject to the rule must develop an implementation plan within six months of the rule’s effective date with the transitional period for capital calculation to begin within 36 months of the effective date of the final rule. Basel II includes safeguards that include a requirement that banking organizations conduct a parallel run over a period of four consecutive calendar quarters for measuring regulatory capital under the new regulatory capital rules and the existing general risk-based capital rules before solely operating under the Basel II framework; a requirement that an institution satisfactorily complete a series of transitional periods before operating under Basel II without floors; and a commitment by the federal bank regulatory agencies to conduct ongoing analysis of the framework to ensure Basel II is working as intended. The first possible year for a bank to begin its parallel run is 2008. Following a successful parallel run period, a banking organization would have to progress through three transitional periods (each lasting at least one year), during which there would be floors on potential declines in risk-based capital requirements as calculated under the current rules. Those transitional floors provide for maximum cumulative reductions of required risk-based capital of 5% during the first year of implementation, 10% in the second year and 15% in the third year. 2009 is the first possible year a bank may begin its first of the three transitional floor periods. A banking organization will need approval from its primary Federal regulator to move into each of the transitional floor periods, and at the end of the third transitional floor period to move to full implementation. We continue to analyze the Basel II capital standards and have established a project management infrastructure to address and meet the new regulations.
In addition, the federal bank regulatory agencies have established minimum leverage (Tier 1 capital to adjusted average total assets) guidelines for banks within their regulatory jurisdiction. These guidelines provide for a minimum leverage ratio of 3% for banks that meet certain

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specified criteria, including excellent asset quality, high liquidity, low interest rate exposure and the highest regulatory rating. Institutions not meeting these criteria are required to maintain a leverage ratio of 4%. Our Tier 1 and total risk-based capital ratios and leverage ratio as of December 31, 2008 are included in Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements included in the 2008 Annual Report to Stockholders.
From time to time, the FRB and the Federal Financial Institutions Examination Council (FFIEC) propose changes and amendments to, and issue interpretations of, risk-based capital guidelines and related reporting instructions. Such proposals or interpretations could, if implemented in the future, affect our reported capital ratios and net risk-adjusted assets.
As an additional means to identify problems in the financial management of depository institutions, the FDI Act requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.
The FDI Act requires federal bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution’s treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels compare to various capital measures and certain other factors, as established by regulation.
Deposit Insurance Assessments
Our bank subsidiaries, including Wells Fargo Bank, N.A. and Wachovia Bank, N.A., are members of the Deposit Insurance Fund (DIF) maintained by the FDIC. Through the DIF, the FDIC insures the deposits of our banks up to prescribed limits for each depositor. The DIF was formed March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005. The Act established a range of 1.15% to 1.50% within which the FDIC Board of Directors may set the Designated Reserve Ratio (DRR). The current target DRR is 1.25%. However, the Act has eliminated the restrictions on premium rates based on the DRR and grants the FDIC Board the discretion to price deposit insurance according to risk for all insured institutions regardless of the level of the reserve ratio.
To maintain the DIF, member institutions are assessed an insurance premium based on their deposits and their institutional risk category. The FDIC determines an institution’s risk category by combining its supervisory ratings with its financial ratios and other risk measures. For large institutions (assets of $10 billion or more), the FDIC generally determines risk by combining supervisory ratings with the institution’s long-term debt issuer ratings. Recent failures have resulted in a decline in the reserve ratio to below 1.15%. Under the Act the FDIC is required to establish and implement a restoration plan to restore the reserve ratio to 1.15% within five years of the establishment of the plan. The FDIC adopted a final rule effective January 1, 2009, raising current rates uniformly by 7 cents per $100 of domestic deposits for the first quarter of 2009 only. Rates for first quarter 2009 will range from a minimum of 12 cents per $100 of domestic deposits for well-managed, well-capitalized banks with the highest credit ratings, to 50 cents for

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institutions posing the most risk to the DIF. Proposed rates beginning April 1, 2009, range from a minimum initial assessment rate of 10 cents per $100 of domestic deposits to a maximum of 45 cents per $100 of domestic deposits. Risk-based adjustments to the initial assessment rate may lower or raise a depository institution’s rate to 8 cents per $100 of domestic deposits for well-managed, well-capitalized banks with the highest credit ratings to 77.5 cents for institutions posing the most risk to the DIF. The final rule is expected early in 2009.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit insurance for one or more of our bank subsidiaries could have a material adverse effect on our earnings, depending on the collective size of the particular banks involved.
All FDIC-insured depository institutions must also pay an annual assessment to interest payments on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (commonly referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-insured depository institutions paid approximately 1.10 to 1.14 cents per $100 of assessable deposits in 2008. The FDIC established the FICO assessment rate effective for the first quarter of 2009 at approximately 1.14 cents annually per $100 of assessable deposits.
Additionally, under the FDIC’s Temporary Liquidity Guarantee Program, in 2009 participating depository institutions will pay a premium of 10 cents per $100 to fully insure domestic noninterest-bearing transaction accounts. This additional assessment is paid on account balances in excess of the insurance limits.
Federal Home Loan Bank Membership
We are a member of the Federal Home Loan Bank of Atlanta, the Federal Home Loan Bank of Dallas, the Federal Home Loan Bank of Des Moines, and the Federal Home Loan Bank of San Francisco (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The Board of Directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.
Fiscal and Monetary Policies
Our business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in United States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository institutions’ deposits, and (d) imposing or

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changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on our business, results of operations and financial condition.
Privacy Provisions of the Gramm-Leach-Bliley Act and Restrictions on Cross-Selling
Federal banking regulators, as required under the Gramm-Leach-Bliley Act (the GLB Act), have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.
Federal financial regulators have issued regulations under the Fair and Accurate Credit Transactions Act (the FACT Act) which have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new customers, before information can be shared among different Wells Fargo companies for the purpose of cross-selling Wells Fargo’s products and services. This may result in certain cross-sell programs being less effective than they have been in the past. Wells Fargo has complied with these regulations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) implemented a broad range of corporate governance and accounting measures to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. We are subject to Sarbanes-Oxley because we are required to file periodic reports with the SEC under the Securities and Exchange Act of 1934. Among other things, Sarbanes-Oxley and/or its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between us and our outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our chief executive officer and chief financial officer, expanded the disclosure requirements for our corporate insiders, required our management to evaluate our disclosure controls and procedures and our internal control over financial reporting, and required our auditors to issue a report on our internal control over financial reporting. The NYSE has imposed a number of new corporate governance requirements as well.
Patriot Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Patriot Act) is intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to work together to combat terrorism on a variety of fronts. The Patriot Act has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act requires us to implement new or revised policies and procedures relating to anti-money laundering,

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compliance, suspicious activities, and currency transaction reporting and due diligence on customers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.
U.S. Treasury’s TARP Capital Purchase Program
On October 28, 2008, Wells Fargo issued preferred stock and a warrant to purchase its common stock to the U.S. Treasury as a participant in the TARP Capital Purchase Program. Prior to October 28, 2011, unless we have redeemed all of this preferred stock or the U.S. Treasury has transferred all of this preferred stock to a third party, the consent of the U.S. Treasury will be required for us to, among other things, increase our common stock dividend above the current quarterly cash dividend of $0.34 per share or repurchase our common stock or outstanding preferred stock except in limited circumstances. Further, as long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to our common stock are prohibited until all accrued and unpaid dividends are paid on that preferred stock, subject to certain exceptions. In addition, until the U.S. Treasury ceases to own any of our securities sold under the TARP Capital Purchase Program, the compensation arrangements for our senior executive officers must comply with the U.S. Emergency Economic Stabilization Act of 2008 (EESA) and the rules and regulations thereunder. EESA requires the following provisions with respect to our Chief Executive Officer, Chief Financial Officer and our next three most highly compensated officers (senior executive officers): limits on compensation to exclude incentives to take unnecessary and excessive risks; a clawback with respect to incentive compensation based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; and a prohibition on golden parachute payments. EESA also limits the deductibility of compensation earned by our senior executive officers to $500,000 per year.
The American Recovery and Reinvestment Act of 2009 (Stimulus Act), which was signed into law on February 17, 2009, imposes extensive new restrictions on participants in the TARP Capital Purchase Program. The new restrictions include additional limits on executive compensation such as prohibiting the payment or accrual of any bonus, retention award or incentive compensation to our senior executive officers and the next 20 most highly compensated employees except for the payment of long-term restricted stock; prohibiting any compensation plan that would encourage the manipulation of earnings; and extending the clawback required by EESA to the top 20 most highly compensated employees. The Stimulus Act also requires compliance with new corporate governance standards including an annual “say on pay” shareholder vote, the adoption of policies regarding excessive or luxury expenditures, and a certification by our Chief Executive Officer and Chief Financial Officer that we have complied with the standards in the Stimulus Act. The full impact of the Stimulus Act is not yet certain because it calls for additional regulatory action. The Company will continue to monitor the effect of the Stimulus Act and the anticipated regulations.
FDIC Temporary Liquidity Guarantee Program
Wells Fargo and certain of its subsidiary national banks, including Wells Fargo Bank, N.A. and Wachovia Bank, N.A., are participating in the FDIC’s Temporary Liquidity Guarantee Program (TLGP), which applies to U.S. depository institutions insured by the FDIC and U.S. bank

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holding companies, unless they have opted out of the TLGP or the FDIC has terminated their participation. Under the TLGP, the FDIC guarantees certain of our senior unsecured debt, as well as certain noninterest-bearing deposits at our banks. Under the debt-guarantee component of the TLGP, the FDIC will pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the failure of the participating entity to make a timely payment of principal or interest in accordance with the terms of the instrument. Under the deposit account guarantee component of the TLGP, all noninterest-bearing transaction accounts maintained at our banks are insured in full by the FDIC until December 31, 2009, regardless of the existing deposit insurance limit of $250,000. In return for these guarantees, we will pay the FDIC a 10 basis point fee on any deposit amounts exceeding the existing deposit insurance limit and a fee that fluctuates based on the amount and maturity of the guaranteed debt.
Future Legislation
In light of current conditions in the U.S. and global financial markets and the U.S. and global economy, regulators have increased their focus on the regulation of the financial services industry. Proposals that could substantially intensify the regulation of the financial services industry are expected to be introduced in the U.S. Congress, in state legislatures and from applicable regulatory authorities. These proposals may change banking statutes and regulation and our operating environment in substantial and unpredictable ways. If enacted, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of these proposals will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our business, results of operations or financial condition.
ADDITIONAL INFORMATION
Additional information in response to this Item 1 can be found in the 2008 Annual Report to Stockholders under “Financial Review” on pages 34-83 and under “Financial Statements” on pages 86-164. That information is incorporated into this report by reference.
ITEM 1A.      RISK FACTORS
Information in response to this Item 1A can be found in this report on pages 2-12 and in the 2008 Annual Report to Stockholders under “Financial Review – Risk Factors” on pages 76-83. That information is incorporated into this report by reference.
ITEM 1B.      UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.         PROPERTIES
We own our corporate headquarters building in San Francisco, California. We also own administrative facilities in Anchorage, Alaska; Chandler, Phoenix, and Tempe, Arizona; El Monte and San Francisco, California; Minneapolis and Shoreview, Minnesota; Billings, Montana; Omaha, Nebraska; Albuquerque, New Mexico; Portland, Oregon; Sioux Falls, South

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Dakota; and Salt Lake City, Utah. In addition, we lease office space for various administrative departments in major locations in Arizona, California, Colorado, Minnesota, Nevada, Oregon, Texas and Utah.
As of December 31, 2008, we provided banking, insurance, investments, mortgage and consumer finance from 11,000 stores under various types of ownership and leasehold agreements. We own the Wells Fargo Home Mortgage (Home Mortgage) headquarters in West Des Moines, Iowa and operations/servicing centers in Springfield, Illinois; West Des Moines, Iowa; and Minneapolis, Minnesota. We lease administrative space for Home Mortgage in Tempe, Arizona; San Bernardino, California; Des Moines, Iowa; Frederick, Maryland; Minneapolis, Minnesota; St. Louis, Missouri; Fort Mill, South Carolina; and all mortgage production offices nationwide. We own the Wells Fargo Financial, Inc. (WFFI) headquarters and four administrative buildings in Des Moines, Iowa, and an operations center in Sioux Falls, South Dakota. We lease administrative space for WFFI in Tempe, Arizona; Lake Mary, Florida; Des Moines, Iowa; Kansas City, Kansas; Minneapolis, Minnesota; Mississauga, Ontario; Philadelphia, Pennsylvania; San Juan, Puerto Rico; Aberdeen, South Dakota; Vancouver, Washington; and all store locations.
We are also a joint venture partner in an office building in downtown Minneapolis, Minnesota.
As a result of the acquisition of Wachovia, effective December 31, 2008, we now own a multi-building office complex in Charlotte, North Carolina. Additional administrative offices we own as a result of the acquisition are located in Oakland, California; Boston, Massachusetts; Winston-Salem, North Carolina; St. Louis, Missouri; and New York, New York.
ADDITIONAL INFORMATION
Additional information in response to this Item 2 can be found in the 2008 Annual Report to Stockholders under “Financial Statements – Notes to Financial Statements – Note 7 (Premises, Equipment, Lease Commitments and Other Assets)” on page 110. That information is incorporated into this report by reference.
ITEM 3.          LEGAL PROCEEDINGS
Information in response to this Item 3 can be found in the 2008 Annual Report to Stockholders under “Financial Statements – Notes to Financial Statements – Note 15 (Guarantees and Legal Actions)” on pages 128-131. That information is incorporated into this report by reference.
ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company’s executive officers is included in Item 10 of this report.

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PART II
ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company’s common stock is listed on the New York Stock Exchange (symbol ‘WFC’). The Quarterly Financial Data table on page 165 of the 2008 Annual Report to Stockholders provides the quarterly prices of, and quarterly dividends paid on, the Company’s common stock for the two-year period ended December 31, 2008, and is incorporated herein by reference. Prices shown represent the daily high and low and the quarter-end sale prices of the Company’s common stock as reported on the New York Stock Exchange Composite Transaction Reporting System for the periods indicated. At January 31, 2009, there were 243,312 holders of record of the Company’s common stock.
DIVIDENDS
The dividend restrictions discussions on page 5 of this report and in the 2008 Annual Report to Stockholders under “Financial Statements – Notes to Financial Statements – Note 3 (Cash, Loan and Dividend Restrictions)” on page 103 are incorporated into this report by reference.
REPURCHASES OF COMMON STOCK
The following table shows Company’s repurchases of its common stock for each calendar month in the quarter ended December 31, 2008.
                                 
   
                            Maximum number of  
            Total number             shares that may yet  
            of shares     Weighted-average     be repurchased under  
Calendar month           repurchased  (1)    price paid per share     the authorizations  
 
                               
                         
October     3,937,091       $33.70       25,246,882  
                         
 
                               
November     3,073,671       29.51       22,173,211  
 
                               
                         
December     7,816,491       30.36       14,356,720  
                         
 
                               
Total
            14,827,253                  
 
                               
 
                               
 
(1)   All shares were repurchased under two authorizations covering up to 75 million and 25 million shares of common stock approved by the Board of Directors and publicly announced by the Company on November 7, 2007, and September 23, 2008, respectively. Unless modified or revoked by the Board, the authorizations do not expire.
ITEM 6.        SELECTED FINANCIAL DATA
Information in response to this Item 6 can be found in the 2008 Annual Report to Stockholders under “Financial Review” in Table 1 on page 37. That information is incorporated into this report by reference.

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ITEM 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information in response to this Item 7 can be found in the 2008 Annual Report to Stockholders under “Financial Review” on pages 34-83. That information is incorporated into this report by reference.
ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item 7A can be found in the 2008 Annual Report to Stockholders under “Financial Review – Risk Management – Asset/Liability and Market Risk Management” on pages 68-72. That information is incorporated into this report by reference.
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information in response to this Item 8 can be found in the 2008 Annual Report to Stockholders under “Financial Statements” on pages 86-164 and under “Quarterly Financial Data” on page 165. That information is incorporated into this report by reference.
ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.   CONTROLS AND PROCEDURES
Information in response to this Item 9A can be found in the 2008 Annual Report to Stockholders under “Controls and Procedures” on pages 84-85. That information is incorporated into this report by reference.
ITEM 9B.   OTHER INFORMATION
Not applicable.

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PART III
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE OFFICERS OF THE REGISTRANT
 
Howard I. Atkins (age 58)
Senior Executive Vice President and Chief Financial Officer since August 2005;
Executive Vice President and Chief Financial Officer from August 2001 to August 2005.
Mr. Atkins has served with the Company for 7 years.
 
Patricia R. Callahan (age 55)
Executive Vice President (Office of Transition) since January 2009;
Executive Vice President (Social Responsibility Group) from June 2008 to December 2008;
Executive Vice President (Compliance and Risk) from June 2005 to September 2007;
Executive Vice President (Human Resources) from November 1998 to June 2005.
Ms. Callahan has served with the Company or its predecessors for 31 years.
 
David M. Carroll (age 51)
Senior Executive Vice President (Wealth Management, Brokerage and Retirement Services) since January 2009;
Senior Executive Vice President of Wachovia Corporation from September 2001 to January 2009.
Mr. Carroll has served with the Company or its predecessors for 27 years.
 
 
David A. Hoyt (age 53)
Senior Executive Vice President (Wholesale Banking) since August 2005;
Group Executive Vice President (Wholesale Banking) from November 1998 to August 2005.
Mr. Hoyt has served with the Company or its predecessors for 27 years.
 
Richard M. Kovacevich (age 65)
Chairman since June 2007;
Chairman and Chief Executive Officer from August 2005 to June 2007;
Chairman, President and Chief Executive Officer from April 2001 to August 2005.
Mr. Kovacevich has served with the Company or its predecessors for 23 years.
 
Richard D. Levy (age 51)
Executive Vice President and Controller since February 2007;
Senior Vice President and Controller from September 2002 to February 2007.
Mr. Levy has served with the Company for 6 years.

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Michael J. Loughlin (age 53)
Executive Vice President and Chief Credit and Risk Officer since April 2006;
Deputy Chief Credit Officer from January 2006 to April 2006;
Executive Vice President of Wells Fargo Bank, N.A. from May 2000 to April 2006.
Mr. Loughlin has served with the Company or its predecessors for 27 years.
 
Mark C. Oman (age 54)
Senior Executive Vice President (Home and Consumer Finance) since August 2005;
Group Executive Vice President (Home and Consumer Finance) from September 2002 to August 2005;
Chairman of Wells Fargo Home Mortgage, Inc. (formerly known as Norwest Mortgage, Inc.) from February 1997 until the merger with Wells Fargo Bank, N.A. in May 2004.
Mr. Oman has served with the Company or its predecessors for 29 years.
 
Kevin A. Rhein (age 55)
Executive Vice President (Card Services and Consumer Lending) since January 2009;
Executive Vice President of Wells Fargo Bank, N.A. since February 2004;
President and Chief Executive Officer of Wells Fargo Card Services, Inc. from August 1999 to February 2004.
Mr. Rhein has served with the Company or its predecessors for 30 years.
 
James M. Strother (age 57)
Executive Vice President and General Counsel since January 2004.
Mr. Strother has served with the Company or its predecessors for 22 years.
 
John G. Stumpf (age 55)
President and Chief Executive Officer since June 2007;
President and Chief Operating Officer from August 2005 to June 2007;
Group Executive Vice President (Community Banking) from July 2002 to August 2005.
Mr. Stumpf has served with the Company or its predecessors for 27 years.
 
Carrie L. Tolstedt (age 49)
Senior Executive Vice President (Community Banking) since June 2007;
Group Executive Vice President (Regional Banking) from July 2002 to June 2007.
Ms. Tolstedt has served with the Company or its predecessors for 19 years.
 
Julie M. White (age 54)
Executive Vice President (Human Resources) since June 2007;
Executive Vice President (Human Resources – Home and Consumer Finance) from March 1998 to June 2007.
Ms. White has served with the Company or its predecessors for 22 years.
There is no family relationship between any of the Company’s executive officers or directors. All executive officers serve at the pleasure of the Board of Directors.

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AUDIT COMMITTEE INFORMATION
The Audit and Examination Committee is a standing audit committee of the Board of Directors established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Committee has eight members: John D. Baker II, Lloyd H. Dean, Enrique Hernandez, Jr., Robert L. Joss, Cynthia H. Milligan, Nicholas G. Moore, Philip J. Quigley and Susan G. Swenson. Each member is independent, as independence for audit committee members is defined by New York Stock Exchange rules. The Board of Directors has determined, in its business judgment, that each member of the Committee is financially literate, as required by New York Stock Exchange rules, and that each qualifies as an “audit committee financial expert” as defined by Securities and Exchange Commission regulations.
CODE OF ETHICS AND BUSINESS CONDUCT
The Company’s Code of Ethics and Business Conduct for team members (including executive officers), Director Code of Ethics, the Company’s corporate governance guidelines, and the charters for the Audit and Examination, Governance and Nominating, Human Resources, Credit, and Finance Committees are available at www.wellsfargo.com (select “About Us,” then “Corporate Governance”). This information is also available in print to any stockholder upon written request to the Office of the Secretary, Wells Fargo & Company, MAC N9305-173, Wells Fargo Center, Sixth and Marquette, Minneapolis, Minnesota 55479.
ADDITIONAL INFORMATION
Additional information in response to this Item 10 can be found in the 2009 Proxy Statement under “Ownership of Our Common Stock – Section 16(a) Beneficial Ownership Reporting Compliance” and “Item 1 – Election of Directors – Director Nominees for Election” and “–Other Matters Relating to Directors.” That information is incorporated into this report by reference.
ITEM 11.   EXECUTIVE COMPENSATION
Information in response to this Item 11 can be found in the 2009 Proxy Statement under “Item 1– Election of Directors – Compensation Committee Interlocks and Insider Participation” and “–Director Compensation,” under “Executive Compensation” (other than “Human Resources Committee – Executive Compensation Process and Procedures”) and under “Information About Related Persons – Related Person Transactions.” That information is incorporated into this report by reference.
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information in response to this Item 12 can be found in the 2009 Proxy Statement under “Ownership of Our Common Stock” and under “Equity Compensation Plan Information.” That information is incorporated into this report by reference.

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ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information in response to this Item 13 can be found in the 2009 Proxy Statement under “Corporate Governance – Director Independence” and under “Information About Related Persons.” That information is incorporated into this report by reference.
ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
Information in response to this Item 14 can be found in the 2009 Proxy Statement under “Item 2 – Appointment of Independent Auditors – KPMG Fees” and “–Audit and Examination Committee Pre-Approval Policies and Procedures.” That information is incorporated into this report by reference.
PART IV
ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. FINANCIAL STATEMENTS
The Company’s consolidated financial statements, including the notes thereto, and the report of the independent registered public accounting firm thereon, are set forth on pages 86 through 164 of the 2008 Annual Report to Stockholders, incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules for the Company have been included in the consolidated financial statements or the related footnotes, or are either inapplicable or not required.
3. EXHIBITS
A list of exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated into this report by reference.
Stockholders may obtain a copy of any of the following exhibits, upon payment of a reasonable fee, by writing to Wells Fargo & Company, Office of the Secretary, Wells Fargo Center, N9305-173, Sixth and Marquette, Minneapolis, Minnesota 55479.
The Company’s SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214. The former Wachovia Corporation filed documents under SEC file number 001-10000.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2009.
         
  WELLS FARGO & COMPANY
 
 
  By:   /s/ JOHN G. STUMPF  
    John G. Stumpf   
    President and Chief Executive Officer   
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
  By:   /s/ HOWARD I. ATKINS  
    Howard I. Atkins   
    Senior Executive Vice President and
Chief Financial Officer (Principal Financial Officer)
February 27, 2009 
 
  By:   /s/ RICHARD D. LEVY   
    Richard D. Levy   
    Executive Vice President and Controller
(Principal Accounting Officer)
February 27, 2009 
 
The Directors of Wells Fargo & Company listed below have duly executed powers of attorney empowering Nicholas G. Moore to sign this document on their behalf.
     
John D. Baker II
  Cynthia H. Milligan
John S. Chen
  Philip J. Quigley
Lloyd H. Dean
  Donald B. Rice
Susan E. Engel
  Judith M. Runstad
Enrique Hernandez, Jr.
  Stephen W. Sanger
Donald M. James
  Robert K. Steel
Robert L. Joss
  John G. Stumpf
Richard M. Kovacevich
  Susan G. Swenson
Richard D. McCormick
  Michael W. Wright
Mackey J. McDonald
   
         
     
  By:   /s/ NICHOLAS G. MOORE   
    Nicholas G. Moore   
    Director and Attorney-in-fact
February 27, 2009 
 
 

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EXHIBIT INDEX
         
Exhibit        
Number   Description   Location
 
       
3(a)
  Restated Certificate of Incorporation.   Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed September 28, 2006.
 
       
3(b)
  Certificate of Designations for the Company’s 2007 ESOP Cumulative Convertible Preferred Stock.   Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed March 19, 2007.
 
       
3(c)
  Certificate Eliminating the Certificate of Designations for the Company’s 1997 ESOP Cumulative Convertible Preferred Stock.   Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed March 19, 2007.
 
       
3(d)
  Certificate of Designations for the Company’s 2008 ESOP Cumulative Convertible Preferred Stock.   Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed March 18, 2008.
 
       
3(e)
  Certificate Eliminating the Certificate of Designations for the Company’s 1998 ESOP Cumulative Convertible Preferred Stock.   Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed March 18, 2008.
 
       
3(f)
  Certificate of Designations for the Company’s Non-Cumulative Perpetual Preferred Stock, Series A.   Incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed May 19, 2008.
 
       
3(g)
  Certificate of Designations for the Company’s Non-Cumulative Perpetual Preferred Stock, Series B.   Incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed September 10, 2008.
 
       
3(h)
  Certificate of Designations for the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D.   Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed October 30, 2008.
 
       
3(i)
  Certificate of Designations for the Company’s Dividend Equalization Preferred Shares.   Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 30, 2008.
 
       
3(j)
  Certificate of Designations for the Company’s Class A Preferred Stock, Series G.   Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed December 30, 2008.
 
       
3(k)
  Certificate of Designations for the Company’s Class A Preferred Stock, Series H.   Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed December 30, 2008.
 
       
3(l)
  Certificate of Designations for the Company’s Class A Preferred Stock, Series I.   Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed December 30, 2008.
 
       
3(m)
  Certificate of Designations for the Company’s 8.00% Non-Cumulative Perpetual Class A Preferred Stock, Series J.   Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed December 30, 2008.
 
       
3(n)
  Certificate of Designations for the Company’s Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series K.   Incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed December 30, 2008.
 
       
3(o)
  Certificate of Designations for the Company’s 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L.   Incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed December 30, 2008.

21


Table of Contents

         
Exhibit        
Number   Description   Location
 
       
3(p)
  By-Laws.   Incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed December 4, 2006.
 
       
4(a)
  See Exhibits 3(a) through 3(p).    
 
       
4(b)
  The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.    
 
       
10(a)*
  Long-Term Incentive Compensation Plan.   Incorporated by reference to Exhibit 10(a) to the Company’s Current Report on Form 8-K filed May 5, 2008.
 
       
 
 
Forms of Award Term Sheet for grants of restricted share rights.
  Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.
 
       
 
 
Forms of Non-Qualified Stock Option Agreement for executive officers:
   
 
       
 
 
For grant to Richard M. Kovacevich on February 26, 2008;
  Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
       
 
 
For grants on and after November 27, 2007;
  Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
       
 
 
For grants on and after February 28, 2006, but prior to November 27, 2007;
  Incorporated by reference to Exhibit 10(a) to the Company’s Current Report on Form 8-K filed March 6, 2006.
 
       
 
 
For grants on August 1, 2005;
  Incorporated by reference to Exhibit 10 to the Company’s Current Report on Form 8-K filed August 1, 2005.
 
       
 
 
For grants in 2004 and on February 22, 2005;
  Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
 
       
 
 
For grants after November 2, 1998, through 2003; and
  Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.
 
       
 
 
For grants on or before November 2, 1998.
  Incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.
 
       
10(b)*
  Long-Term Incentive Plan.   Incorporated by reference to Exhibit A to the former Wells Fargo’s Proxy Statement filed March 14, 1994.
 
       
10(c)*
  Wells Fargo Bonus Plan.   Incorporated by reference to Exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.
 
* Management contract or compensatory plan or arrangement

22


Table of Contents

         
Exhibit        
Number   Description   Location
 
       
10(d)*
  Performance-Based Compensation Policy.   Incorporated by reference to Exhibit 10(b) to the Company’s Current Report on Form 8-K filed May 5, 2008.
 
       
10(e)*
  Deferred Compensation Plan.   Incorporated by reference to Exhibit 10(f) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
 
       
 
 
Amendment to Deferred Compensation Plan, effective August 1, 2005.
  Incorporated by reference to Exhibit 10(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
 
       
 
 
Amendment to Deferred Compensation Plan, effective September 26, 2006.
  Incorporated by reference to Exhibit 10(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
 
       
 
 
Amendment to Deferred Compensation Plan, effective January 1, 2007.
  Incorporated by reference to Exhibit 10(f) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
 
       
10(f)*
  Directors Stock Compensation and Deferral Plan.   Incorporated by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
       
 
 
Amendments to Directors Stock Compensation and Deferral Plan, effective September 23, 2008.
  Incorporated by reference to Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.
 
       
 
 
Amendment to Directors Stock Compensation and Deferral Plan, effective January 22, 2008.
  Incorporated by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
       
 
 
Action of Governance and Nominating Committee Increasing Amount of Formula Stock and Option Awards Under Directors Stock Compensation and Deferral Plan, effective January 1, 2007.
  Incorporated by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
 
       
10(g)*
  1990 Director Option Plan for directors of the former Wells Fargo.   Incorporated by reference to Exhibit 10(c) to the former Wells Fargo’s Annual Report on Form 10-K for the year ended December 31, 1997.
 
       
10(h)*
  1987 Director Option Plan for directors of the former Wells Fargo; and   Incorporated by reference to Exhibit A to the former Wells Fargo’s Proxy Statement filed March 10, 1995.
 
       
 
 
Amendment to 1987 Director Option Plan, effective September 16, 1997.
  Incorporated by reference to Exhibit 10 to the former Wells Fargo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
 
       
10(i)*
  Deferred Compensation Plan for Non-Employee Directors of the former Norwest.   Incorporated by reference to Exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
 
       
 
 
Amendment to Deferred Compensation Plan for Non-Employee Directors, effective November 1, 2000.
  Filed as paragraph (4) of Exhibit 10(ff) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

23


Table of Contents

         
Exhibit        
Number   Description   Location
 
       
10(i)*
 
Amendment to Deferred Compensation Plan for Non-Employee Directors, effective January 1, 2004.
  Incorporated by reference to Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
 
       
10(j)*
  Directors’ Stock Deferral Plan for directors of the former Norwest.   Incorporated by reference to Exhibit 10(d) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
 
       
 
 
Amendment to Directors’ Stock Deferral Plan, effective November 1, 2000.
  Filed as paragraph (5) of Exhibit 10(ff) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
 
       
 
 
Amendment to Directors’ Stock Deferral Plan, effective January 1, 2004.
  Incorporated by reference to Exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
 
       
10(k)*
  Directors’ Formula Stock Award Plan for directors of the former Norwest.   Incorporated by reference to Exhibit 10(e) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
 
       
 
 
Amendment to Directors’ Formula Stock Award Plan, effective November 1, 2000.
  Filed as paragraph (6) of Exhibit 10(ff) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
 
       
 
 
Amendment to Directors’ Formula Stock Award Plan, effective January 1, 2004.
  Incorporated by reference to Exhibit 10(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
 
       
10(l)*
  Deferral Plan for Directors of the former Wells Fargo.   Incorporated by reference to Exhibit 10(b) to the former Wells Fargo’s Annual Report on Form 10-K for the year ended December 31, 1997.
 
       
 
 
Amendment to Deferral Plan, effective January 1, 2004.
  Incorporated by reference to Exhibit 10(d) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
 
       
10(m)*
  Supplemental 401(k) Plan.   Incorporated by reference to Exhibit 10(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
 
       
 
 
Amendment to Supplemental 401(k) Plan, effective August 4, 2006.
  Incorporated by reference to Exhibit 10(e) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
 
       
10(n)*
  Supplemental Cash Balance Plan.   Incorporated by reference to Exhibit 10(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
 
       
10(o)*
  Supplemental Long-Term Disability Plan.   Incorporated by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990.
 
       
 
 
Amendment to Supplemental Long-Term Disability Plan.
  Incorporated by reference to Exhibit 10(g) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1992.
 
       
10(p)*
  Agreement, dated July 11, 2001, between the Company and Howard I. Atkins.   Incorporated by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

24


Table of Contents

         
Exhibit        
Number   Description   Location
 
       
10(q)*
  Agreement between the Company and Mark C. Oman, dated May 7, 1999.   Incorporated by reference to Exhibit 10(y) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.
 
       
 
 
Amendment No. 1 to Agreement between the Company and Mark C. Oman, effective December 29, 2008.
  Filed herewith.
 
       
10(r)*
  Description of Relocation Program.   Incorporated by reference to Exhibit 10(y) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
 
       
10(s)*
  Description of Executive Financial Planning Program.   Incorporated by reference to Exhibit 10(w) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
 
       
10(t)
  PartnerShares Stock Option Plan.   Incorporated by reference to Exhibit 10(x) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
 
       
 
 
Amendment to PartnerShares Stock Option Plan, effective August 1, 2005.
  Incorporated by reference to Exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
 
       
 
 
Amendment to PartnerShares Stock Option Plan, effective August 4, 2006.
  Incorporated by reference to Exhibit 10(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
 
       
 
 
Amendment to PartnerShares Stock Option Plan, effective January 1, 2007.
  Incorporated by reference to Exhibit 10(g) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
 
       
 
 
Amendment to PartnerShares Stock Option Plan, effective January 22, 2008.
  Incorporated by reference to Exhibit 10(v) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
       
10(u)*
  Agreement, dated July 26, 2002, between the Company and Richard D. Levy, including a description of his executive transfer bonus.   Incorporated by reference to Exhibit 10(d) to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
 
       
10(v)
  Non-Qualified Deferred Compensation Plan for Independent Contractors.   Incorporated by reference to Exhibit 10(x) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
       
10(w)*
  Description of Chairman/CEO Post-Retirement Policy.   Filed herewith.
 
       
10(x)*
  Description of Non-Employee Director Equity Compensation Program   Filed herewith.
 
       
10(y)*
  Employment Agreement, dated December 30, 2008, between the Company and David M. Carroll.   Filed herewith.
 
       
10(z)*
 
Amended and Restated Wachovia Corporation Deferred Compensation Plan for Non-Employee Directors.
  Incorporated by reference to Exhibit (10)(f) to Wachovia Corporation’s Current Report on Form 8-K filed December 29, 2008.

25


Table of Contents

         
Exhibit        
Number   Description   Location
 
       
10(aa)*
  Wachovia Corporation Executive Deferred Compensation Plan.   Incorporated by reference to Exhibit (10)(d) to Wachovia Corporation’s Annual Report on Form 10-K for the year ended December 31, 1997.
 
       
10(bb)*
  Wachovia Corporation Supplemental Executive Long-Term Disability Plan, as amended and restated.   Incorporated by reference to Exhibit (99) to Wachovia Corporation’s Current Report on Form 8-K filed January 5, 2005.
 
       
10(cc)*
  Amended and Restated Wachovia Corporation Elective Deferral Plan (as amended and restated effective January 1, 2009).   Incorporated by reference to Exhibit (10)(a) to Wachovia Corporation’s Current Report on Form 8-K filed December 29, 2008.
 
       
10(dd)*
  Wachovia Corporation 1998 Stock Incentive Plan, as amended.   Incorporated by reference to Exhibit (10)(j) to Wachovia Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
       
10(ee)*
  Employment Agreement between Wachovia Corporation and David M. Carroll.   Incorporated by reference to Exhibit (10)(m) to Wachovia Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004.
 
       
 
  Amendment No. 1 to Employment Agreement between Wachovia Corporation and David M. Carroll.   Incorporated by reference to Exhibit (10)(a) to Wachovia Corporation’s Current Report on Form 8-K filed December 22, 2005.
 
       
 
  Amendment No. 2 to Employment Agreement between Wachovia Corporation and David M. Carroll.   Incorporated by reference to Exhibit (10)(h) to Wachovia Corporation’s Current Report on Form 8-K filed December 29, 2008.
 
       
10(ff)*
  Wachovia Corporation 2001 Stock Incentive Plan.   Incorporated by reference to Exhibit (10)(v) to Wachovia Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
       
10(gg)*
  Wachovia Corporation Savings Restoration Plan.   Incorporated by reference to Exhibit (10)(gg) to Wachovia Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002.
 
       
10(gg)*
  Amendment 2007-1 to Wachovia Corporation Savings Restoration Plan.   Incorporated by reference to Exhibit (10)(b) to Wachovia Corporation’s Current Report on Form 8-K filed December 20, 2007.
 
       
 
  Amendment 2008-1 to Wachovia Corporation Savings Restoration Plan.   Incorporated by reference to Exhibit (10)(c) to Wachovia Corporation’s Current Report on Form 8-K filed December 29, 2008.
 
       
10(hh)*
  Amended and Restated Wachovia Corporation Savings Restoration Plan.   Incorporated by reference to Exhibit (10)(b) to Wachovia Corporation’s Current Report on Form 8-K filed December 29, 2008.
 
       
10(ii)*
  Wachovia Corporation 2003 Stock Incentive Plan.   Incorporated by reference to Exhibit (10) to Wachovia Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

26


Table of Contents

         
Exhibit        
Number   Description   Location
 
       
10(ii)*
  Form of stock award agreement for Executive Officers of Wachovia Corporation, including David M. Carroll.   Incorporated by reference to Exhibit (10)(ss) to Wachovia Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004.
 
       
10(jj)*
  Amended and Restated Wachovia Corporation 2003 Stock Incentive Plan.   Incorporated by reference to Appendix E to Wachovia Corporation’s Registration Statement on Form S-4 (Reg. No. 333-134656) filed on July 24, 2006.
 
       
10(kk)*
  Form of Split-Dollar Life Insurance Termination Agreement between Wachovia Corporation and David M. Carroll.   Incorporated by reference to Exhibit (10)(hh) to Wachovia Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.
 
       
10(ll)*
  Agreement between Wachovia Corporation and Robert K. Steel.   Incorporated by reference to Exhibit (10) to Wachovia Corporation’s Current Report on Form 8-K filed July 10, 2008.
 
       
10(mm)*
  Stock Award Letter between Wachovia Corporation and Robert K. Steel.   Incorporated by reference to Exhibit (10)(a) to Wachovia Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.
 
       
12(a)
  Computation of Ratios of Earnings to Fixed Charges:   Filed herewith.
                                           
        Year ended December 31,
        2008   2007   2006   2005   2004
   
 
 
                                       
 
Including interest on deposits
    1.33       1.81       2.01       2.51       3.68
 
 
                                       
 
Excluding interest on deposits
    1.60       2.85       3.38       4.03       5.92
 
 
                                       
   
         
12(b)
  Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends:   Filed herewith.
                                           
        Year ended December 31,
        2008   2007   2006   2005   2004
   
 
 
                                       
 
Including interest on deposits
    1.28       1.81       2.01       2.51       3.68
 
 
                                       
 
Excluding interest on deposits
    1.50       2.85       3.38       4.03       5.92
 
 
                                       
   
         
13
  2008 Annual Report to Stockholders, pages 33 through 164.   Filed herewith.
 
       
21
  Subsidiaries of the Company.   Filed herewith.
 
       
23
  Consent of Independent Registered Public Accounting Firm.   Filed herewith.
 
       
24
  Powers of Attorney.   Filed herewith.
 
       
31(a)
  Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith.

27


Table of Contents

         
Exhibit        
Number   Description   Location
 
       
31(b)
  Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith.
 
       
32(a)
  Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.   Furnished herewith.
 
       
32(b)
  Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.   Furnished herewith.

28

Exhibit 10(q)
WELLS FARGO & COMPANY
AMENDMENT NO. 1 TO
LETTER AGREEMENT DATED AS OF MAY 7, 1999
WITH MARK C. OMAN
     This Amendment No. 1 (“Amendment No. 1”) to Letter Agreement dated as of May 7, 1999 between Wells Fargo & Company (“Wells Fargo”), a Delaware corporation, and Mark C. Oman (“Executive”) (the “Letter Agreement”) is entered into effective December 29, 2008 (the “Effective Date”).
     WHEREAS, pursuant to the terms of the Letter Agreement, Wells Fargo agreed to provide a special retirement benefit to Executive under a nonqualified, unfunded arrangement; and
     WHEREAS, Wells Fargo now desires to amend such Letter Agreement to ensure that such nonqualified arrangement complies with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations and guidance issued thereunder;
     NOW, THEREFORE, in consideration of the foregoing, Wells Fargo hereby amends the Letter Agreement as follows:
     1.     Definitions. Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Wells Fargo & Company Supplemental Cash Balance Plan.
     2.     Time and Form of Benefit Payment. Executive may file an irrevocable written election with Wells Fargo on or before December 31, 2008 (which election shall be effective January 1, 2009) that his benefit under the Letter Agreement shall be paid either (a) in a lump sum as soon as administratively feasible after the January 1 following the calendar year in which his Separation from Service occurs, but no later than the December 31 of that calendar year, or (b) in the form of a monthly annuity commencing as soon as administratively feasible after the January 1 following the calendar year in which his Separation from Service occurs, but no later than the December 31 of that calendar year. If Executive fails to file such an election by December 31, 2008, such benefit shall be paid in a lump sum as soon as administratively feasible after the January 1 following the calendar year in which the participant’s Separation from Service occurs, but no later than the December 31 of that calendar year.
     3.     Six-Month Delay if Specified Employee. If Wells Fargo determines that Executive is a “Specified Employee” for purposes of Code section 409A, no lump sum or monthly annuity payment shall be paid to Executive prior to the date that is six months after the date of his Separation from Service. Any payment that would otherwise be made on an earlier date pursuant to the terms of Section 2 of this Amendment No.1 shall be delayed to the extent necessary to comply with the previous sentence.
     4.     Application of Terms and Conditions under Supplemental Cash Balance Plans. Except as otherwise provided in the Letter Agreement, payment of the special retirement benefit under the Letter Agreement shall be subject to the general terms and conditions of the Wells Fargo & Company Supplemental Cash Balance Plan as if the benefit were payable under said Plan.
             
Dated: December 29, 2008   WELLS FARGO & COMPANY    
 
           
 
           
    /s/ Julie M. White    
         
 
  By:   Julie M. White    
 
      Senior Vice President, Human Resource    

 

Exhibit 10(w)
Wells Fargo & Company Chairman / CEO Post-Retirement Policy
For a period of two years following the date of retirement of a management Chairman of the Board of Wells Fargo & Company or CEO of Wells Fargo & Company who was elected on or after January 1, 2005, the Company, if approved by the Human Resources Committee, may provide the retired Chairman or CEO with an office, an administrative assistant and part-time driver at the Company’s expense. The benefits provided under this Post-Retirement Policy are conditioned upon the retired Chairman or CEO continuing to be available for consultation with management and to represent the Company with customers, the community and team members during the two year period. The monthly fair market value of the use of the office, the services provided by the administrative assistant and the services provided by the driver will be taxable to the retired Chairman or CEO each calendar year according to the Internal Revenue Code and IRS rules as calculated by the Company. In the event the retired Chairman or CEO dies during the time that the Chairman or CEO is covered under this Post-Retirement Policy, all benefits provided under the Post-Retirement Policy will cease.

 

Exhibit 10(x)
Description of Non-Employee Director Equity Compensation Program
Stock Awards:
  Each non-employee director elected at the Company’s annual meeting of stockholders receives, under the Company’s Long-Term Incentive Compensation Plan (LTICP), as of the date of such meeting, an award of Company common stock having an award value of $70,000. A non-employee director who joins the Board as of any other date receives, under the LTICP, as of such other date, an award of Company common stock having an award value based on the full-year award value of $70,000 prorated to reflect the number of months (rounded up to the next whole month) remaining until the next annual meeting of stockholders; provided, however, that if the New York Stock Exchange (NYSE) is not open on the day the director joins the Board, the award is granted as of the next following day on which the NYSE is open.
 
  The number of shares of Company common stock subject to an award is determined by dividing the award value by the NYSE-only closing price of Company common stock on the date of grant (rounded up to the nearest whole share).
 
  The stock awards vest in full immediately upon grant.
Option Grants:
  Each non-employee director elected at the Company’s annual meeting of stockholders receives, under the LTICP, as of the date of such meeting, an option to purchase Company common stock having a grant value of $60,000. A non-employee director who joins the Board as of any other date receives, under the LTICP, as of such other date, an option to purchase Company common stock based on the full-year grant value of $60,000 prorated to reflect the number of months (rounded up to the next whole month) remaining until the next annual meeting of stockholders; provided, however, that if the NYSE is not open on the day the director joins the Board, the option is granted as of the next following day on which the NYSE is open.
 
  Unless a higher conversion value is established by the Committee, the number of shares of Company common stock subject to the option is generally determined by dividing the grant value by 25% of the NYSE-only closing price of Company common stock on the date of grant (rounded up to the nearest even 10 shares). The exercise price per share of the option is the NYSE-only closing price of Company common stock on the date of grant.
 
  The option vests and becomes exercisable in full on the first anniversary of the date of grant. The option remains outstanding if the director leaves the Board for any reason other than his or her death or for cause. If the director dies, the option vests and becomes exercisable immediately by his or her beneficiary as determined in accordance with the LTICP. If the director is terminated for cause, the option terminates and is cancelled as of the date he or she ceases to be a director.

 

Exhibit 10(y)
EMPLOYMENT AGREEMENT
          THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of December 30, 2008, by and between David M. Carroll (the “Executive”) and Wells Fargo & Company, a Delaware corporation (the “Company”).
WITNESSETH THAT:
          The Company has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the dedication of the Executive following the transaction (the “Merger”) contemplated by the Agreement and Plan of Merger, dated as of October 3, 2008, between the Company and Wachovia Corporation (“Wachovia”) (the “Merger Agreement”), and the Company and the Executive have further agreed to the principal terms of the Executive’s employment with the Company effective as of the “Effective Date” (as defined below). Therefore, in order to accomplish these objectives, the Executive and the Company desire to enter into this Agreement.
          NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, and for other good and valuable consideration, it is hereby covenanted and agreed by the Executive and the Company as follows:
          1.     Effective Date. The “Effective Date” shall mean the date on which the “Effective Time” (as defined in the Merger Agreement) of the Merger occurs. In the event that the Effective Time shall not occur on or before December 31, 2008, this Agreement shall be null and void ab initio and of no further force and effect.
          2.     Employment Period. The Company hereby agrees to employ the Executive with its subsidiary Wells Fargo Bank, N.A. (which for purposes of this Agreement shall be included in references to the “Company” unless the reference to the “Company” in the context it is used indicates otherwise), and the Executive hereby agrees to serve the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the first anniversary of the Effective Date (the “Employment Period”). If continued employment is mutually desired after the end of the Employment Period, the Executive shall continue as an at-will employee of the Company.
          3.     Position and Duties. (a) During the Employment Period, the Executive shall (i) serve as a Senior Executive Vice President of the Company, leading the Company’s new Wealth, Brokerage and Retirement Services group (the “Group”) with such duties and responsibilities as are commensurate with such position as are assigned to the Executive from time to time; (ii) report directly to the Chief Executive Officer of the Company (the “CEO”); and (iii) perform his duties at the location Executive performed duties for Wachovia immediately prior to the Merger or such other location as shall be mutually agreed between the Company and the Executive.
          (b)     During the Employment Period, and excluding any periods of paid time off to which the Executive is entitled, the Executive agrees to devote his full professional attention and time during normal business hours to the business and affairs of the Company and to perform the responsibilities assigned to the Executive hereunder. During the Employment

 


 

Period it shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (iii) manage personal investments, so long as such activities do not interfere with the performance of the Executive’s responsibility as an employee of the Company in accordance with this Agreement and are consistent with the business or policies of the Company, including but not limited to the Company’s Code of Ethics and Business Conduct, or any subsidiary or affiliate thereof (the “Affiliated Entities”).
          4.     Compensation. Subject to the terms of this Agreement, during the Employment Period, the Company shall compensate the Executive for his services as follows:
          (a)     Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”) of not less than $700,000. Such Annual Base Salary shall be payable in bi-weekly installments in accordance with the Company’s payroll policies. The Executive’s Annual Base Salary may not be decreased at any time during the Employment Period, except with the written consent of the Executive. The term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as in effect from time to time, including any increases.
          (b)     Annual Incentive Payment. With respect to the Company’s 2009 calendar year, the Executive shall be eligible to receive an annual incentive payment (the “Incentive Payment”) as determined in accordance with the Company’s annual incentive plan applicable to senior executives of the Company (the “Annual Incentive Plan”) with a target incentive opportunity of 350% of the Annual Base Salary, with a maximum annual incentive payment of 600% of the Annual Base Salary, in each case subject to the terms and conditions of the Annual Incentive Plan, including, without limitation, the Company’s achievement of its threshold EPS goal for the applicable calendar year and the accomplishment of pre-determined Company and Group financial performance objectives. Any such Incentive Payment shall be paid to the Executive in cash no later than March 15, 2010 (unless the Executive has elected to defer receipt of any such Incentive Payment pursuant to an arrangement that complies with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)), provided that Executive satisfactorily performs his job duties and remains continuously employed with the Company through December 15, 2009. For calendar years after 2009 in which the Executive remains employed by the Company, the Company will review the Executive’s target and maximum payout opportunities to ensure the bonus opportunity aligns with the Group’s business objectives.
          (c)     Calendar Year 2009 Stock Option Award. In connection with the Company’s annual equity award program for calendar year 2009, the Executive will be recommended for a stock option award with a grant date value of $5,000,000 (the “2009 Stock Option Award”). The grant of the 2009 Stock Option Award shall be subject to the approval of the Human Resources Committee of the Board of Directors of the Company (the “HRC”) and contingent upon the Executive’s employment with the Company on the date of the HRC’s determination to make any such grant (the “Grant Date”). The number of shares of Company common stock subject to the 2009 Stock Option Award shall be determined by the Company based on the trading price of the Company’s common stock at the time that the recommendation in respect of the 2009 Stock Option Award is submitted to the HRC for approval. The 2009 Stock Option Award shall vest in three equal annual installments on the first, second and third

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anniversaries of the Grant Date, have an exercise price equal to the fair market value of the Company’s common stock on the Grant Date, have a term of up to ten years and such other terms and conditions as are consistent with the calendar year 2009 annual stock option awards granted to other executive managers of the Company generally.
          (d)     Retention Bonus. The Executive shall be eligible for a retention bonus award opportunity of $8,000,000 (the “Retention Bonus”). Twenty-five percent of the Retention Bonus (i.e., $2,000,000) will vest and be paid to the Executive on January 31, 2009, 25% of the Retention Bonus (i.e., $2,000,000) will vest and be paid to the Executive on April 30, 2009 and 50% of the Retention Bonus (i.e., $4,000,000) will vest and be paid to the Executive on December 31, 2009 (each date of vesting and payment a “Payment Date”), provided that the Executive satisfactorily performs his job duties and remains continuously employed with the Company through the applicable Payment Date.
          (e)     Employee Benefits. During the Employment Period prior to the Date of Termination, the Executive and/or the Executive’s family, as the case may be, shall be eligible to participate in the Wachovia employee benefit plans (as in effect from time to time) generally available to other peer executives of Wachovia following the Merger (“Wachovia Peer Executives”), which may include, without limitation, employee stock purchase plans, savings plans, retirement plans, welfare benefit plans (including, without limitation, medical, prescription, dental, disability, life, accidental death, and travel accident insurance, but excluding severance plans) and similar plans, practices policies and programs. The Executive’s qualifying service with Wachovia will be credited for purposes of eligibility, participation and vesting in such employee benefit plans (including paid time off) to the extent provided in Section 6.5(b) of the Merger Agreement.
          (f)     Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies, practices of the Company and the Affiliated Entities in effect from time to time for peer executives at the time when the expense is incurred.
          (g)     Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits and perquisite plans or programs generally available to Wachovia Peer Executives; provided that the Company reserves the right to modify, change or terminate such fringe benefits and perquisite plans or programs from time to time, in its sole discretion. As of the Effective Date, such fringe benefits include the Wachovia Executive Financial Planning Program, the Wachovia Executive Long-Term Disability Plan and the Wachovia Executive Life Insurance Program.
          (h)     Indemnification/D&O Insurance. During the Employment Period for acts prior to the Date of Termination, the Executive shall be entitled to indemnification with respect to the performance of his duties hereunder, and directors’ and officers’ liability insurance, on the same terms and conditions as generally available to peer executives of the Company.
          5.     Termination of Employment. (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has

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occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may provide the Executive with written notice in accordance with Section 11(f) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean termination of the Executive’s employment upon satisfaction of the requirements to receive benefits under Wachovia’s long-term disability plan.
          (b)     Cause. The Company may terminate the Executive’s employment during the Employment Period either with or without Cause. For purposes of this Agreement, “Cause” shall mean:
               (i)     the continued and willful failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Company which specifically identifies the manner in which the Company believes that the Executive has not substantially performed the Executive’s duties and a reasonable time for such substantial performance has elapsed since delivery of such demand;
               (ii)     the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company;
               (iii)     the Executive’s conviction of a crime involving dishonesty or breach of trust, conviction of a felony, or commission of any act that makes Employee ineligible for coverage under the Company’s fidelity bond or otherwise makes him ineligible for continued employment; or
               (iv)     the Executive’s violation of the Company’s written employment policies as set forth in the Handbook for Wells Fargo Team Members, including, but not limited to, the Wells Fargo Code of Ethics and Business Conduct.
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors of the Company (the “Board”), upon instruction from the CEO or upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company.
          (c)     Voluntary Resignation by the Executive other than a Window Period Termination. The Executive’s employment may be terminated by the Executive during the Employment Period at any time upon 30 days’ prior written notice to the Company other than a Window Period Termination (a “Voluntary Resignation”).

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          (d)     Window Period Termination. The Executive’s employment may be terminated either by the Company without Cause or by the Executive for any reason, during the period commencing on May 1, 2009 and ending on December 15, 2009, provided the Executive’s “separation from service” within the meaning of Section 409A of the Code occurs on or before December 15, 2009 (any such termination, a “Window Period Termination”).
          (e)     Notice of Termination. Any termination of the Executive’s employment by the Company for Cause or due to a Window Period Termination or by the Executive due to a Voluntary Resignation, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(f) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the Date of Termination (which date shall be not more than 30 days after the giving of such notice). The failure by the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause shall not waive any right of the Company hereunder or preclude the Company from asserting such fact or circumstance in enforcing its rights hereunder.
          (f)     Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, by either party due to a Window Period Termination or by the Executive due to a Voluntary Resignation, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be (which date shall, in the case of a Window Period Termination, be in no event later than December 15, 2009), (ii) if the Executive’s employment is terminated by the Company without Cause (other than a Window Period Termination) or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (iii) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. Notwithstanding the foregoing, in no event shall the Date of Termination occur until the Executive experiences a “separation from service” within the meaning of Section 409A of the Code, and the date on which such separation from service takes place shall be the “Date of Termination.”
          6.     Obligations of the Company upon Termination. (a) Window Period Termination or Termination without Cause. If the Executive’s employment shall terminate due to a Window Period Termination or shall be terminated by the Company without Cause,
               (i)     the Company shall pay to the Executive in a lump sum in cash within 60 days after the Date of Termination the aggregate of the following amounts:
                    A.     the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid and (2) any accrued paid time off to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the “Accrued Obligations”); and

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                    B.     subject to the Executive’s execution and non-revocation of a release of claims against the Company no later than 52 days following the Date of Termination, a lump sum cash severance payment equal to $14,400,000, less any portion of the Retention Bonus paid to the Executive as of the Date of Termination (the “Cash Severance Payment”) Notwithstanding the foregoing provisions of this Section 6(a), in the event that the Executive is a “specified employee” within the meaning of Section 409A of the Code (as determined in accordance with the methodology established by the Company as in effect on the Date of Termination) (a “Specified Employee”), the Cash Severance Payment shall instead be paid on the first business day after the date that is six months following the Executive’s Date of Termination (the “Delayed Payment Date”);
               (ii)     to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the Affiliated Entities through the Date of Termination (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).
               (iii)     for the remainder of the Executive’s life, the Company shall continue medical, dental and life insurance benefits to the Executive and/or the Executive’s family on a substantially equivalent basis to those which would have been provided to them in accordance with the medical, dental and life insurance plans, programs, practices and policies described in Section 4(e) of this Agreement if the Executive’s employment had not been terminated. Notwithstanding the foregoing, in the event the Executive becomes reemployed with another employer and becomes eligible to receive medical, dental and/or life insurance benefits from such employer, the medical, dental and/or life insurance benefits described herein shall be secondary to such benefits during the period of the Executive’s eligibility, but only to the extent that the Company reimburses the Executive for any increased cost and provides any additional benefits necessary to give the Executive the benefits provided hereunder. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have terminated employment with the Company on the Date of Termination. The amount of any life insurance benefits provided under the Wachovia Executive Life Insurance Plan (or any successor or replacement plan thereto) shall not affect the life insurance benefits that may be provided under that plan in any other taxable year, and the right to life insurance benefits under that plan may not be liquidated or exchanged for any other benefit. Notwithstanding the foregoing, if the Company reasonably determines that providing continued coverage under one or more of its welfare benefit plans contemplated herein could adversely affect the tax treatment of other participants covered under such plans, or would otherwise have adverse legal ramifications, the Company may, in its discretion, provide other coverage at least as valuable as the continued coverage through insurance.
               (iv)     for a period equal to (A) 36 months minus (B) the number of complete months that have elapsed from the Effective Date through the Date of

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Termination, the Executive shall continue participating in the Wachovia Executive Financial Planning Program, the Wachovia Executive Long-Term Disability Plan and the Wachovia Executive Physical Program, in each case, to the extent Executive participated in such plans, programs and policies immediately prior to the Date of Termination and, in each case, in accordance with the plans, programs and policies that exist on the Date of Termination.
          (b)     Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of the Other Benefits. Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, and the Executive’s estate shall be entitled after the Date of Termination to receive, death benefits as in effect at the Date of Termination generally with respect to senior executives of the Company. In addition, in the event that the Executive dies after delivery by the Company of a Notice of Termination with respect to a Window Period Termination or a Termination without Cause, but prior to the Date of Termination specified in such Notice of Termination, the Company shall pay the Cash Severance Payment to the Executive’s estate or a beneficiary designated by Executive for purposes of this Agreement, as applicable, in a lump sum in cash within 30 days of the Date of Termination of the Executive’s employment due to death.
          (c)     Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of the Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to senior executives of the Company. In addition, in the event that the Executive’s employment terminates due to Disability after delivery by the Company of a Notice of Termination with respect to a Window Period Termination or a Termination without Cause, but prior to the Date of Termination specified in such Notice of Termination, subject to the Executive’s execution and nonrevocation of a release of claims against the Company no later than 52 days following the Date of Termination, the Company shall pay the Cash Severance Payment to the Executive in a lump sum in cash within 60 days of the Date of Termination of the Executive’s employment due to Disability; provided that, in the event the Executive is a Specified Employee on the Date of Termination, the Cash Severance Payment shall instead be paid on the Delayed Payment Date.
          (d)     Cause; Voluntary Resignation. If the Executive’s employment shall be terminated by the Company for Cause or by the Executive due to a Voluntary Resignation, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of the Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

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          7.     Full Settlement. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Executive obtains other employment.
          8.     Additional Payments by the Company. Notwithstanding anything to the contrary in this Agreement, the provisions of, and the Executive’s rights under, Section 8 of that Employment Agreement by and between the Executive and Wachovia, dated as of November 1, 2001, and restated as of February 7, 2005, as amended on December 20, 2005 (the “Prior Agreement”), will continue in accordance with the terms thereof solely with respect to payments and benefits that are considered “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) and are “contingent on” or “closely associated with” the Merger. For the avoidance of doubt, Section 8 of the Prior Agreement shall not apply with respect to payments or benefits that are “contingent on” or “closely associated with” any transaction other than the Merger.
          9.     Restrictive Covenants.
          (a)     Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret, non-public or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their related businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies (or predecessors thereto). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In addition to the foregoing, the Executive will refrain from taking any action or making any statements, written or oral, which are intended to or which disparage the business, goodwill or reputation of the Company or any of its affiliated companies, or their respective directors, officers, executives or other employees, or which could adversely affect the morale of employees of the Company or any of its affiliated companies.
          (b)     Nonsolicitation. While employed by the Company and for one year after the Date of Termination, the Executive shall not, directly or indirectly, on behalf of the Executive or any other person, (i) solicit for employment by other than the Company, (ii) encourage to leave the employ of the Company, or (iii) interfere with the Company’s or its affiliated companies’ relationship with, any person employed by the Company or its affiliated companies.
          (c)     Equitable Remedies. In the event of a breach by the Executive of his obligations under this Agreement, the Company, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Executive acknowledges that the Company shall suffer irreparable harm in the event of a breach or prospective breach of Sections 9(a) or (b) of this

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Agreement and that monetary damages would not be adequate relief. Accordingly, the Company shall be entitled to injunctive relief in any federal or state court of competent jurisdiction located in the State of Delaware, or in any state in which the Executive resides.
          10.     Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive. This Agreement and any rights and benefits hereunder shall inure to the benefit of and be enforceable by the Executive’s legal representatives, heirs or legatees. This Agreement and any rights and benefits hereunder shall inure to the benefit of and be binding upon the Company and its successors and assigns.
          (b)     The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to satisfy all of the obligations under this Agreement in the same manner and to the same extent that the Company would be required to satisfy such obligations if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
          11.     Arbitration. Except with respect to the Company’s rights to injunctive relief for matters arising under Section 9 of this Agreement, any disputes or controversies arising under or in connection with this Agreement (including, without limitation, whether any such disputes or controversies have been brought in bad faith) shall be settled exclusively by arbitration in Charlotte, North Carolina in accordance with the commercial arbitration rules of the American Arbitration Association. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.
          12.     Miscellaneous. (a) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
          (b)     Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
          (c)     Applicable Law. The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Delaware, without regard to the conflict of law provisions of any state.
          (d)     Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified).
          (e)     Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision

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of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues.
          (f)     Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice):
          to the Company:
Wells Fargo & Company
420 Montgomery Street
San Francisco, CA 94163
Attention: General Counsel
          or to the Executive:
At the most recent address maintained
by the Company in its personnel records
Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. Such notices, demands, claims and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or in the case of certified or registered U.S. mail, five days after deposit in the U.S. mail; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received.
          (g)     Section 409A. The Agreement is intended to comply with the requirements of Section 409A of the Code or an exemption or exclusion therefrom and, with respect to amounts that are subject to Section 409A of the Code, shall in all respects be administered in accordance with Section 409A of the Code. Each payment under this Agreement shall be treated as a separate payment for purposes of Section 409A of the Code. In no event may the Executive, directly or indirectly, designate the calendar year of any payment to be made under this Agreement. If the Executive dies following the Date of Termination and prior to the payment of the any amounts delayed on account of Section 409A of the Code, such amounts shall be paid to the personal representative of the Executive’s estate within 30 days after the date of the Executive’s death. All reimbursements and in-kind benefits provided under this Agreement that constitute deferred compensation within the meaning of Section 409A of the Code shall be made or provided in accordance with the requirements of Section 409A of the Code, including, without limitation, that (i) in no event shall reimbursements by the Company under this Agreement be made later than the end of the calendar year next following the calendar year in which the applicable fees and expenses were incurred, provided, that the Executive shall

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have submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred; (ii) the amount of in-kind benefits that the Company is obligated to pay or provide in any given calendar year shall not affect the in-kind benefits that the Company is obligated to pay or provide in any other calendar year; (iii) the Executive’s right to have the Company pay or provide such reimbursements and in-kind benefits may not be liquidated or exchanged for any other benefit; and (iv) in no event shall the Company’s obligations to make such reimbursements or to provide such in-kind benefits apply later than the Executive’s remaining lifetime (or if longer, through the 20th anniversary of the Effective Date). Any tax gross-up payments under Section 8 of the Prior Agreement (as modified by Section 8 of this Agreement) shall be paid no later than the date on which the taxes on the underlying income are due to the applicable tax authority, and in any event prior to the end of Executive’s taxable year next following Executive’s taxable year in which the applicable taxes (and any income or other related taxes or interest or penalties thereon) are remitted to the applicable taxing authority. Prior to the Effective Date but within the time period permitted by the applicable Treasury Regulations (or such later time as may be permitted under Section 409A or any IRS or Department of Treasury rules or other guidance issued thereunder), the Company may, in consultation with the Executive, modify the Agreement, in the least restrictive manner necessary and without any diminution in the value of the payments to the Executive, in order to cause the provisions of the Agreement to comply with the requirements of Section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Section 409A of the Code.
          (h)     Survivorship. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto, including, without limitation, the Company’s rights and the Executive’s obligations under Section 9 of this Agreement, shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.
          (i)     Entire Agreement. From and after the Effective Date, this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof, including, except as expressly provided herein, and the Prior Agreement.
          (j)     Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

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          IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused these presents to be executed in its name and on its behalf, all as of the day and year first above written.
             
    David M. Carroll    
 
           
 
           
    /s/ David M. Carroll    
            
 
           
 
           
    WELLS FARGO & COMPANY    
 
           
 
           
 
  By:   /s/ Patricia R. Callahan    
 
           

EXHIBIT 12(a)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
 
                                         
    Year ended December 31,  
(in millions)   2008     2007     2006     2005     2004  
 
 
                                       
Earnings including interest on deposits (1):
                                       
Income before income tax expense
  $ 3,257     $ 11,627     $ 12,650     $ 11,548     $ 10,769  
Fixed charges
    9,991       14,428       12,498       7,656       4,017  
 
                             
 
  $ 13,248     $ 26,055     $ 25,148     $ 19,204     $ 14,786  
 
                             
 
                                       
Fixed charges (1):
                                       
Interest expense
  $ 9,755     $ 14,203     $ 12,288     $ 7,458     $ 3,817  
Estimated interest component of net rental expense
    236       225       210       198       200  
 
                             
 
  $ 9,991     $ 14,428     $ 12,498     $ 7,656     $ 4,017  
 
                             
 
                                       
Ratio of earnings to fixed charges (2)
    1.33       1.81       2.01       2.51       3.68  
 
                             
 
                                       
Earnings excluding interest on deposits:
                                       
Income before income tax expense
  $ 3,257     $ 11,627     $ 12,650     $ 11,548     $ 10,769  
Fixed charges
    5,470       6,276       5,324       3,808       2,190  
 
                             
 
  $ 8,727     $ 17,903     $ 17,974     $ 15,356     $ 12,959  
 
                             
 
                                       
Fixed charges:
                                       
Interest expense
  $ 9,755     $ 14,203     $ 12,288     $ 7,458     $ 3,817  
Less interest on deposits
    4,521       8,152       7,174       3,848       1,827  
Estimated interest component of net rental expense
    236       225       210       198       200  
 
                             
 
  $ 5,470     $ 6,276     $ 5,324     $ 3,808     $ 2,190  
 
                             
 
                                       
Ratio of earnings to fixed charges (2)
    1.60       2.85       3.38       4.03       5.92  
 
                             
 
 
(1)   As defined in Item 503(d) of Regulation S-K.
 
(2)   These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.

 

EXHIBIT 12(b)
WELLS FARGO & COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
 
                                         
    Year ended December 31,  
(in millions)   2008     2007     2006     2005     2004  
 
 
                                       
Earnings including interest on deposits (1):
                                       
Income before income tax expense
  $ 3,257     $ 11,627     $ 12,650     $ 11,548     $ 10,769  
Fixed charges
    9,991       14,428       12,498       7,656       4,017  
 
                             
 
  $ 13,248     $ 26,055     $ 25,148     $ 19,204     $ 14,786  
 
                             
 
                                       
Preferred dividend requirement
  $ 286     $ --     $ --     $ --     $ --  
Ratio of income before income tax expense
    1.23       1.44       1.50       1.51       1.54  
 
                             
 
                                       
Preferred dividends (2)
  $ 351     $ --     $ --     $ --     $ --  
 
                             
Fixed charges (1):
                                       
Interest expense
    9,755       14,203       12,288       7,458       3,817  
Estimated interest component of net rental expense
    236       225       210       198       200  
 
                             
 
    9,991       14,428       12,498       7,656       4,017  
 
                             
Fixed charges and preferred dividends
  $ 10,342     $ 14,428     $ 12,498     $ 7,656     $ 4,017  
 
                             
 
                                       
Ratio of earnings to fixed charges and preferred dividends (3)
    1.28       1.81       2.01       2.51       3.68  
 
                             
 
                                       
Earnings excluding interest on deposits:
                                       
Income before income tax expense
  $ 3,257     $ 11,627     $ 12,650     $ 11,548     $ 10,769  
Fixed charges
    5,470       6,276       5,324       3,808       2,190  
 
                             
 
  $ 8,727     $ 17,903     $ 17,974     $ 15,356     $ 12,959  
 
                             
 
                                       
Preferred dividends (2)
  $ 351     $ --     $ --     $ --     $ --  
 
                             
Fixed charges:
                                       
Interest expense
    9,755       14,203       12,288       7,458       3,817  
Less interest on deposits
    4,521       8,152       7,174       3,848       1,827  
Estimated interest component of net rental expense
    236       225       210       198       200  
 
                             
 
    5,470       6,276       5,324       3,808       2,190  
 
                             
Fixed charges and preferred dividends
  $ 5,821     $ 6,276     $ 5,324     $ 3,808     $ 2,190  
 
                             
 
                                       
Ratio of earnings to fixed charges and preferred dividends (3)
    1.50       2.85       3.38       4.03       5.92  
 
                             
 
 
(1)   As defined in Item 503(d) of Regulation S-K.
 
(2)   The preferred dividends, including accretion, were increased to amounts representing the pretax earnings that would be required to cover such dividend and accretion requirements.
 
(3)   These computations are included herein in compliance with Securities and Exchange Commission regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there was no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there was no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.

 

 
         
    Financial Review
 
       
34   Overview
 
       
41   Critical Accounting Policies
 
       
47   Earnings Performance
 
       
53   Balance Sheet Analysis
 
       
55   Off-Balance Sheet Arrangements
 
       
58   Risk Management
 
       
73   Capital Management
 
       
74   Comparison of 2007 with 2006
 
       
76   Risk Factors
 
       
    Controls and Procedures
 
       
84   Disclosure Controls and Procedures
 
       
84   Internal Control over Financial Reporting
 
       
84   Management’s Report on Internal Control over Financial Reporting
 
       
85   Report of Independent Registered Public Accounting Firm
 
       
    Financial Statements
 
       
86   Consolidated Statement of Income
 
       
87   Consolidated Balance Sheet
 
       
88   Consolidated Statement of Changes In Stockholders’ Equity and Comprehensive Income
 
       
90   Consolidated Statement of Cash Flows
 
       
    Notes to Financial Statements
 
       
91
  1   Summary of Significant Accounting Policies
 
       
100
  2   Business Combinations
             
 
           
 
           
 
           
103
    3     Cash, Loan and Dividend Restrictions
 
           
103
    4     Federal Funds Sold, Securities Purchased under Resale Agreements and Other Short-Term Investments
 
           
104
    5     Securities Available for Sale
 
           
106
    6     Loans and Allowance for Credit Losses
 
           
110
    7     Premises, Equipment, Lease Commitments and Other Assets
 
           
111
    8     Securitizations and Variable Interest Entities
 
           
119
    9     Mortgage Banking Activities
 
           
120
    10     Intangible Assets
 
           
121
    11     Goodwill
 
           
122
    12     Deposits
 
           
122
    13     Short-Term Borrowings
 
           
123
    14     Long-Term Debt
 
           
126
    15     Guarantees and Legal Actions
 
           
132
    16     Derivatives
 
           
137
    17     Fair Values of Assets and Liabilities
 
           
144
    18     Preferred Stock
 
           
146
    19     Common Stock and Stock Plans
 
           
149
    20     Employee Benefits and Other Expenses
 
           
153
    21     Income Taxes
 
           
155
    22     Earnings Per Common Share
 
           
155
    23     Other Comprehensive Income
 
           
156
    24     Operating Segments
 
           
158
    25     Condensed Consolidating Financial Statements
 
           
162
    26     Regulatory and Agency Capital Requirements
 
           
164     Report of Independent Registered Public Accounting Firm
 
           
165     Quarterly Financial Data


(GRAPHIC)

33


 

This Annual Report, including the Financial Review and the Financial Statements and related Notes, has 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 significantly from our forecasts and expectations due to several factors. Please refer to the “Risk Factors” section of this Report for a discussion of some of the factors that may cause results to differ.
Financial Review
Overview
 

Wells Fargo & Company is a $1.3 trillion diversified financial services company providing banking, insurance, investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states and in other countries. We ranked fourth in assets and first in market value of our common stock among our peers at December 31, 2008. When we refer to “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.
     We reported diluted earnings per common share of $0.70 for 2008 compared with $2.38 for 2007. Net income was $2.66 billion for 2008 compared with $8.06 billion for 2007. Net income for 2008 included an $8.14 billion (pre tax) credit reserve build, $2.01 billion (pre tax) of other-than-temporary impairment and $124 million (pre tax) of merger-related expenses.
     On December 31, 2008, Wells Fargo acquired Wachovia Corporation (Wachovia). Because the acquisition was completed at the end of 2008, Wachovia’s results are not included in the income statement, average balances or related metrics for 2008. Wachovia’s assets and liabilities are included in the consolidated balance sheet at December 31, 2008, at their respective acquisition date fair values.
     Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to give them all of the financial products that fulfill their needs. Our cross-sell strategy and diversified business model facilitate growth in strong and weak economic cycles, as we can grow by expanding the number of products our current customers have with us. We continued to earn more of our customers’ business in 2008 in both our retail and commercial banking businesses.
     Despite the unprecedented contraction in the credit markets, we continued to lend to credit-worthy customers. We made $106 billion in new loan commitments during 2008 to consumer, small business and commercial customers and originated $230 billion of residential mortgages. The fundamentals of our time-tested business model are as sound as ever. During fourth quarter 2008, our average core deposits grew an impressive 31% (annualized) over the prior quarter. Our cross-sell set records for the 10th consecutive year–our
average retail banking household now has 5.73 products, one of every four has eight or more products, 6.4 products for Wholesale Banking customers, and our average middle-market commercial banking customer has almost eight products. Business banking cross-sell reached 3.61 products. Our goal is eight products per customer, which is currently half of our estimate of potential demand. We were able to increase our lending to creditworthy customers because we were building capital and shrinking our balance sheet in 2005 and 2006, when credit spreads were unrealistically low and were not priced for their underlying risk. We did make some mistakes, but for the most part, we maintained our credit discipline. We understand our customers’ financial needs. As a result, our company at year-end 2008 was one of the world’s strongest financial institutions. At February 23, 2009, Wells Fargo Bank, N.A. has the highest credit rating currently given to U.S. banks by Moody’s Investors Service, “Aa1,” and Standard & Poor’s Ratings Services, “AA+.”
WACHOVIA MERGER On December 31, 2008, Wachovia merged into Wells Fargo & Company with Wells Fargo surviving the merger. Wachovia, based in Charlotte, North Carolina, was one of the nation’s largest diversified financial services companies, providing a broad range of retail banking and brokerage, asset and wealth management, and corporate and investment banking products and services to customers through 3,300 financial centers in 21 states from Connecticut to Florida and west to Texas and California, and nationwide retail brokerage, mortgage lending and auto finance businesses. In the merger, Wells Fargo exchanged 0.1991 shares of its common stock for each outstanding share of Wachovia common stock, issuing a total of 422.7 million shares of Wells Fargo common stock with a December 31, 2008, value of $12.5 billion to Wachovia shareholders. Shares of each outstanding series of Wachovia preferred stock were converted into shares (or fractional shares) of a corresponding series of Wells Fargo preferred stock having substantially the same rights and preferences. Wachovia’s assets and liabilities are included in the consolidated balance sheet at their respective acquisition date fair values. Wachovia’s year-end assets at fair value totaled $707 billion. Because the acquisition was completed at the end of 2008, Wachovia’s results of operations are not included in our income statement. Based on the purchase price of $23.1 billion and the fair value of net assets acquired of $14.3 billion, the transaction resulted in goodwill of $8.8 billion, which will change as acquisition date fair values


34


 

are refined over a period of up to one year following the acquisition. Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on data as of an interim period with estimates through year end. Accordingly, we will be re-validating and, where necessary, refining our purchase accounting adjustments. We expect that the refinements will focus largely on loans with evidence of credit deterioration. The impact of any changes will be recorded as an adjustment to goodwill.
     The more significant fair value adjustments in our purchase accounting for the Wachovia acquisition were to loans. Certain of the loans acquired from Wachovia have evidence of credit deterioration since origination and it is probable that we will not collect all contractually required principal and interest payments. Such loans are accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses.
     Loans within the scope of SOP 03-3 are initially recorded at fair value. The application of the SOP, and accordingly the process of estimating fair value, involves estimating the principal and interest cash flows expected to be collected on the credit-impaired loans and discounting those cash flows at a market rate of interest.
     Under SOP 03-3, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan losses to the extent any has been recorded) with a positive impact on interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, foreclosure or troubled debt restructurings (TDRs) result in removal of the loan from the SOP 03-3 portfolio at its carrying amount.
     Of the $446.1 billion of loans acquired in the Wachovia merger, $93.9 billion were determined to be credit-impaired and therefore subject to SOP 03-3. Generally, loans on nonaccrual status were considered to be credit-impaired for purposes of applying the SOP. The fair value of these loans was $58.8 billion at December 31, 2008. Wachovia’s allowance for loan losses related to the loans was $12.0 billion and such allowance was not carried forward to the Wells Fargo allowance, rather it
was reversed with an offset to goodwill. The allowance for loan losses of $7.5 billion (excluding the impact of conforming adjustments) associated with loans not within the scope of SOP 03-3 was carried over and is included in the consolidated allowance for loan losses.
     Loans subject to SOP 03-3 are written down to an amount estimated to be collectible. Accordingly, such loans are no longer classified as nonaccrual even though they may be contractually past due. We expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Of Wachovia’s pre-acquisition nonaccrual loans, $20.0 billion are no longer considered to be nonaccrual because of the application of SOP 03-3 and $97 million continue to be reported as nonaccrual because they are outside the scope of the SOP. Loans subject to SOP 03-3 are also excluded from the disclosure of loans 90 days or more past due and still accruing interest even though substantially all of them are 90 days or more contractually past due and they are considered to be accruing because the interest income on these loans relates to the establishment of an accretable yield in accordance with SOP 03-3.
     As a result of the application of SOP 03-3 to Wachovia’s loans, certain ratios of the combined company cannot be used to compare a portfolio that includes acquired credit-impaired loans accounted for under SOP 03-3 against one that does not, for example, in comparing peer companies, and cannot be used to compare ratios across years such as comparing 2008 ratios, which include the Wachovia acquisition, against prior periods, which do not. The ratios particularly affected by the accounting under SOP 03-3 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming assets as a percentage of total loans.
     Loans not subject to SOP 03-3 are recorded net of an adjustment to reflect market interest rates. The allowance for loan losses related to these loans of $7.5 billion was carried over and included in the consolidated allowance for loan losses.
SUMMARY RESULTS Revenue, the sum of net interest income and noninterest income, grew 6% to a record $41.9 billion in 2008 from $39.4 billion in 2007. The breadth and depth of our business model resulted in very strong and balanced growth in loans, deposits and fee-based products. We achieved positive operating leverage (revenue growth of 6%; expense decline of 1%), the best among large bank peers. Net income for 2008 of $2.66 billion included an $8.14 billion (pre tax) credit reserve build, $2.01 billion (pre tax) of other-than-temporary impairment and $124 million (pre tax) of merger-related expenses. Diluted earnings per share of $0.70 included credit reserve build ($1.51 per share) and other-than-temporary impairment ($0.37 per share). Industry-leading annual results included the highest growth in pre-tax pre-provision earnings (up 16%), highest net interest margin (4.83%), return on average common stockholders’ equity (ROE), return on average total assets (ROA) and highest total shareholder return among large bank peers (up 2%).


35


 

     We are among the banking industry’s leaders in increasing loans and assets and remained “open for business” in providing credit to consumers, small businesses and commercial customers. Average earning assets, primarily loans and securities, were up $119 billion, or 28%, since the start of the credit crisis in mid-2007. We have made $187 billion of new loan commitments to consumer and commercial customers since mid-2007. We have originated $354 billion of residential real estate loans since mid-2007, including $50 billion in fourth quarter 2008. We have continued to help homeowners remain in their homes. We delivered over 498,000 solutions to customers in 2008, including 143,000 in the fourth quarter alone, through repayment plans, modifications and other loss mitigation options and are working with government agencies, HOPE NOW and others. Wells Fargo has led the industry in development of programs for at-risk customers to avoid foreclosure.
     Among the many products and services that grew in 2008, we achieved the following results:
  Average loans grew 16%;
 
  Average core deposits grew 7%; and
 
  Assets under management were up 45%, including $510 billion from Wachovia.
     We have significantly strengthened the balance sheet and future earnings stream of the new Wells Fargo. This included the following actions:
  $37.2 billion of credit write-downs taken at December 31, 2008, through purchase accounting adjustments on $93.9 billion of high-risk loans in Wachovia’s loan portfolio
 
  Reduced the cost basis of the Wachovia securities portfolio by $9.6 billion, reflecting $2.4 billion of recognized losses in the fourth quarter and write-off of $7.2 billion of unrealized losses previously reflected in negative cumulative other comprehensive income
 
  Additional net $2.9 billion of Wachovia negative cumulative other comprehensive income written off, primarily related to pension obligations
 
  Wachovia period-end loans, securities, trading assets and loans held for sale reduced by $115.2 billion, or 17%, from June 30, 2008
 
  $8.1 billion credit reserve build, including $3.9 billion of provision to conform to the most conservative methodology from each company within Federal Financial Institutions Examination Council (FFIEC) guidelines
  -    $2.7 billion for Wells Fargo’s consumer portfolios
 
  -    $1.2 billion for Wachovia’s commercial and Pick-a-Pay portfolios
  Wells Fargo securities portfolio written down by $2.0 billion for other-than-temporary impairment
     Our combined allowance for credit losses was $21.7 billion at December 31, 2008, which represents 3.2 times coverage of nonaccrual loans. At December 31, 2008, our combined allowance covered 12 months of estimated losses for all consumer portfolios and at least 24 months for all commercial and commercial real estate portfolios. As described on page 35, our nonaccrual loans excluded $20.0 billion of SOP 03-3 loans that were previously reflected as nonaccrual by Wachovia.
     With the acquisition of Wachovia, we have leading market positions in deposits in many communities in our expanded banking footprint, including #1 market share in 18 of our 39 combined community banking states and the District of Columbia. In addition, we are the #1 lender in the following markets: middle-market companies, commercial real estate, small business and agriculture, and the #1 commercial real estate broker and bank-owned insurance broker.
     We have stated in the past that to consistently grow over the long term, successful companies must invest in their core businesses and maintain strong balance sheets. In addition to the Wachovia acquisition, we continued to make investments in 2008 by opening 58 regional banking stores and converting 32 stores acquired from Greater Bay Bancorp, Farmers State Bank and United Bancorporation of Wyoming, Inc. to our network.
     We believe it is important to maintain a well-controlled environment as we continue to grow our businesses. We manage our credit risk by setting what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to provide for future growth.
     At December 31, 2008, consolidated Tier 1 regulatory capital was $86.4 billion, after the impact of purchase accounting for credit impairments of loans and write-down of negative cumulative other comprehensive income at Wachovia, which, in the aggregate, reduced the Tier 1 capital ratio by approximately 230 basis points to 7.8% at year end, well above regulatory minimums for a well-capitalized bank.
     The Board of Directors declared a common stock dividend of $0.34 per share for first quarter 2009.
     Our financial results included the following:
     Net income in 2008 was $2.66 billion ($0.70 per share), compared with $8.06 billion ($2.38 per share) in 2007. Results for 2008 included the impact of our $8.1 billion (pre tax) credit reserve build, which included a $3.9 billion (pre tax) provision to conform both Wells Fargo’s and Wachovia’s credit reserve practices to the more conservative of each company. Results for 2007 included the impact of our $1.4 billion (pre tax) credit reserve build ($0.27 per share) and $203 million of Visa litigation expenses ($0.04 per share). Despite the challenging environment in 2008, we achieved both top line revenue growth and positive operating leverage (revenue growth of 6%; expense decline of 1%). ROA was 0.44% and ROE was 4.79% in 2008, compared with 1.55% and 17.12%, respectively, in 2007. Both ROA and ROE were at or near the top of our large bank peers.
     Net interest income on a taxable-equivalent basis was $25.4 billion in 2008, up from $21.1 billion a year ago, reflecting strong loan growth, disciplined deposit pricing and lower market funding costs. Average earning assets grew 17% from 2007. Our net interest margin was 4.83% for 2008, up from 4.74% in 2007, primarily due to the benefit of lower funding costs as market rates declined.


36


 

     Noninterest income decreased 9% to $16.8 billion in 2008 from $18.4 billion in 2007. Card fees were up 9% from a year ago, due to continued growth in new accounts and higher credit and debit card transaction volume. Insurance revenue was up 20%, due to customer growth, higher crop insurance revenue and the fourth quarter 2007 acquisition of ABD Insurance. However, trust and investment fees decreased 7% and other fees decreased 9%, due to depressed market conditions. Operating lease income decreased 39% from a year ago, due to continued softening in the auto market, reflecting tightened credit standards. Noninterest income included $300 million in net gains on debt and equity securities, including $2.01 billion of other-than-temporary impairment write-downs.
     During 2008, noninterest income was affected by changes in interest rates, widening credit spreads, and other credit and housing market conditions, including:
  ($2.01) billion of other-than-temporary impairment
 
  ($847) million in write-downs of loans in the mortgage warehouse due to changes in liquidity and other spreads, and additions to the mortgage repurchase reserve
 
  ($242) million mortgage servicing rights (MSRs) mark to market, net of hedge gain
 
  ($228) million of other changes in the mortgage pipeline/warehouse value including a decline in servicing value, net of pipeline/warehouse hedge results
     Noninterest expense was $22.7 billion in 2008, down 1% from $22.8 billion in 2007. We continued to invest in new stores and additional sales and service-related team members.
      In 2008, net charge-offs were $7.84 billion (1.97% of average total loans), up $4.3 billion from $3.54 billion (1.03%) in 2007. Commercial and commercial real estate net charge-offs increased $1.25 billion in 2008 from 2007, of which $379 million
was from loans originated through our Business Direct channel. Business Direct consists primarily of unsecured lines of credit to small firms and sole proprietors that tend to perform in a manner similar to credit cards. Total wholesale net charge-offs (excluding Business Direct) were $967 million (0.11% of average loans). The remaining balance of commercial and commercial real estate loans (other real estate mortgage, real estate construction and lease financing) experienced some deterioration from 2007 with loss levels increasing, reflecting the credit environment in 2008.
     Home Equity net charge-offs were $2.21 billion (2.59% of average Home Equity loans) in 2008, compared with $595 million (0.73%) in 2007. Since our loss experience through third party channels was significantly worse than other retail channels, in 2007 we segregated these indirect loans into a liquidating portfolio. While the $10.3 billion of loans in this liquidating portfolio represented about 1% of total loans outstanding at December 31, 2008, these loans represent some of the highest risk in our $129.5 billion Home Equity portfolios. The loans in the liquidating portfolio were primarily sourced through wholesale channels (brokers) and correspondents. Additionally, they are largely concentrated in geographic markets that have experienced the most abrupt and steepest declines in housing prices. We continue to provide home equity financing directly to our customers, but have stopped originating or acquiring new home equity loans through indirect channels unless they are behind a Wells Fargo first mortgage and have a combined loan-to-value ratio lower than 85%. We also experienced increased net charge-offs in our unsecured consumer portfolios, such as credit cards and lines of credit, in part due to growth and in part due to increased economic stress in households.

                                                                 
Table 1: Six-Year Summary of Selected Financial Data  
 
(in millions, except   2008     2007     2006     2005     2004     2003     % Change     Five-year  
per share amounts)                                                   2008/     compound  
                                                    2007     growth rate  
 
                                                               
INCOME STATEMENT
                                                               
Net interest income
  $ 25,143     $ 20,974     $ 19,951     $ 18,504     $ 17,150     $ 16,007       20 %     9 %
Noninterest income
    16,754       18,416       15,740       14,445       12,909       12,382       (9 )     6  
                                               
Revenue
    41,897       39,390       35,691       32,949       30,059       28,389       6       8  
Provision for credit losses
    15,979       4,939       2,204       2,383       1,717       1,722       224       56  
Noninterest expense
    22,661       22,824       20,837       19,018       17,573       17,190       (1 )     6  
Net income
  $ 2,655     $ 8,057     $ 8,420     $ 7,671     $ 7,014     $ 6,202       (67 )     (16 )
Earnings per common share
    0.70       2.41       2.50       2.27       2.07       1.84       (71 )     (18 )
Diluted earnings
                                                               
per common share
    0.70       2.38       2.47       2.25       2.05       1.83       (71 )     (17 )
Dividends declared
                                                               
per common share
    1.30       1.18       1.08       1.00       0.93       0.75       10       12  
 
                                                               
BALANCE SHEET
                                                               
(at year end)
                                                               
Securities available for sale
  $ 151,569     $ 72,951     $ 42,629     $ 41,834     $ 33,717     $ 32,953       108       36  
Loans
    864,830       382,195       319,116       310,837       287,586       253,073       126       28  
Allowance for loan losses
    21,013       5,307       3,764       3,871       3,762       3,891       296       40  
Goodwill
    22,627       13,106       11,275       10,787       10,681       10,371       73       17  
Assets
    1,309,639       575,442       481,996       481,741       427,849       387,798       128       28  
Core deposits (1)
    745,432       311,731       288,068       253,341       229,703       211,271       139       29  
Long-term debt
    267,158       99,393       87,145       79,668       73,580       63,642       169       33  
Common stockholders’ equity
    68,272       47,628       45,814       40,660       37,866       34,469       43       15  
Stockholders’ equity
    99,084       47,628       45,814       40,660       37,866       34,469       108       24  
   
 
(1)   Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).

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     Auto portfolio net charge-offs for 2008 were $1.23 billion (4.50% of average auto loans), compared with $1.02 billion (3.45%) in 2007. While we have continued to reduce the size of this portfolio and limited additional growth, the economic environment has adversely affected portfolio results. We have remained focused on our loss mitigation strategies, however, credit performance has deteriorated as a result of increased unemployment and depressed used car values, resulting in higher than expected losses for the year.
     The provision for credit losses was $15.98 billion in 2008, an increase of $11.04 billion from $4.94 billion in 2007, due to higher net charge-offs and the 2008 credit reserve build of $8.14 billion, including $3.9 billion to conform estimated loss emergence coverage periods to the most conservative of each company within FFIEC guidelines ($2.7 billion for Wells Fargo consumer loans and $1.2 billion for Wachovia commercial and Pick-a-Pay loans). The balance of the reserve build was attributed to higher projected loss rates across the majority of the consumer credit business, and some credit deterioration and growth in the wholesale portfolios. The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $21.7 billion (2.51% of total loans) at December 31, 2008, compared with $5.52 billion (1.44%) at December 31, 2007.
     At December 31, 2008, total nonaccrual loans were $6.80 billion (0.79% of total loans) up from $2.68 billion (0.70%) at December 31, 2007. Total nonaccrual loans at December 31, 2008, excluded $20.0 billion of SOP 03-3 loans that were previously reflected as nonaccrual by Wachovia. The majority of the $4.1 billion increase in nonaccrual loans was in the real estate 1-4 family first mortgage portfolio, including $742 million in Wells Fargo Financial real estate and $424 million in Wells Fargo Home Mortgage, and was due to the national rise in mortgage default rates. Total nonperforming assets (NPAs) were $9.01 billion (1.04% of total loans) at December 31, 2008, compared with $3.87 billion (1.01%) at December 31, 2007. Total NPAs at December 31, 2008, excluded $20.0 billion of SOP 03-3 loans that were previously reflected as nonperforming by Wachovia. Foreclosed assets were $2.19 billion at December 31, 2008, including $885 million from Wachovia, compared with $1.18 billion at December 31, 2007. Foreclosed assets, a component of total NPAs, included $1.53 billion and $649 million in residential property and auto loans and $667 million and $535 million of foreclosed real estate securing Government National Mortgage Association (GNMA) loans at December 31, 2008 and 2007, respectively, consistent with regulatory reporting requirements. The foreclosed real estate securing GNMA loans of $667 million represented eight basis points of the ratio of NPAs to loans at December 31, 2008. Both principal and interest for the GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs.
     The Company and each of its subsidiary banks remained “well capitalized” under applicable regulatory capital adequacy guidelines. The ratio of common stockholders’ equity to total
assets was 5.21% at December 31, 2008, compared with 8.28% at December 31, 2007. Our total risk-based capital (RBC) ratio at December 31, 2008, was 11.83% and our Tier 1 RBC ratio was 7.84%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our RBC ratios at December 31, 2007, were 10.68% and 7.59%, respectively. Our Tier 1 leverage ratios were 14.52% and 6.83% at December 31, 2008 and 2007, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.
                         
Table 2: Ratios and Per Common Share Data  
 
    Year ended December 31,
    2008     2007     2006  
 
                       
PROFITABILITY RATIOS
                       
Net income to average total assets (ROA)
    0.44 %     1.55 %     1.73 %
Net income applicable to common stock to average common stockholders’ equity (ROE)
    4.79       17.12       19.52  
 
                       
EFFICIENCY RATIO (1)
    54.1       57.9       58.4  
 
                       
CAPITAL RATIOS
                       
At year end:
                       
Common stockholders’ equity to assets
    5.21       8.28       9.51  
Risk-based capital (2)
                       
Tier 1 capital
    7.84       7.59       8.93  
Total capital
    11.83       10.68       12.49  
Tier 1 leverage (2)(3)
    14.52       6.83       7.88  
Average balances:
                       
Common stockholders’ equity to assets
    8.18       9.04       8.88  
 
                       
PER COMMON SHARE DATA
                       
Dividend payout (4)
    185.7       49.0       43.2  
Book value
  $ 16.15     $ 14.45     $ 13.57  
Market price (5)
                       
High
  $ 44.68     $ 37.99     $ 36.99  
Low
    19.89       29.29       30.31  
Year end
    29.48       30.19       35.56  
 
 
(1)   The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
 
(2)   See Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements for additional information.
 
(3)   Due to the Wachovia acquisition closing on December 31, 2008, the Tier 1 leverage ratio, which considers period-end Tier 1 capital and quarterly averages in the computation of the ratio, does not reflect average assets of Wachovia for the full period.
 
(4)   Dividends declared per common share as a percentage of earnings per common share.
 
(5)   Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
Current Accounting Developments
On January 1, 2008, we adopted the following new accounting pronouncements:
  FSP FIN 39-1 – Financial Accounting Standards Board (FASB) Staff Position on Interpretation No. 39, Amendment of FASB Interpretation No. 39;
 
  EITF 06-4 – Emerging Issues Task Force (EITF) Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements;
 
  EITF 06-10 – EITF Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements; and
 
  SAB 109 – Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings.


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     On July 1, 2008, we adopted the following new accounting pronouncement:
  FSP FAS 157-3 – FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.
     We adopted the following new accounting pronouncements, which were effective for year-end 2008 reporting:
  FSP FAS 140-4 and FIN 46(R)-8 – FASB Staff Position No. 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities;
 
  FSP FAS 133-1 and FIN 45-4 – FASB Staff Position No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161; and
 
  FSP EITF 99-20-1 – FASB Staff Position No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20.
     On April 30, 2007, the FASB issued FSP FIN 39-1, which amends Interpretation No. 39 to permit a reporting entity to offset the right to reclaim cash collateral (a receivable), or the obligation to return cash collateral (a payable), against derivative instruments executed with the same counterparty under the same master netting arrangement. The provisions of this FSP are effective for the year beginning on January 1, 2008, with early adoption permitted. We adopted FSP FIN 39-1 on January 1, 2008, and it did not have a material effect on our consolidated financial statements.
     On September 20, 2006, the FASB ratified the consensus reached by the EITF at its September 7, 2006, meeting with respect to EITF 06-4. On March 28, 2007, the FASB ratified the consensus reached by the EITF at its March 15, 2007, meeting with respect to EITF 06-10. These pronouncements require that for endorsement split-dollar life insurance arrangements and collateral split-dollar life insurance arrangements where the employee is provided benefits in postretirement periods, the employer should recognize the cost of providing that insurance over the employee’s service period by accruing a liability for the benefit obligation. Additionally, for collateral assignment split-dollar life insurance arrangements, an employer is required to recognize and measure an asset based upon the nature and substance of the agreement. EITF 06-4 and EITF 06-10 are effective for the year beginning on January 1, 2008, with early adoption permitted. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008, and reduced beginning retained earnings for 2008 by $20 million (after tax), primarily related to split-dollar life insurance arrangements from the acquisition of Greater Bay Bancorp.
     On November 5, 2007, the Securities and Exchange Commission (SEC) issued SAB 109, which provides the staff’s views on the accounting for written loan commitments recorded at fair value under U.S. generally accepted accounting principles (GAAP). To make the staff’s views consistent with current authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB 105, Application of
Accounting Principles to Loan Commitments. Specifically, SAB 109 states that the expected net future cash flows associated with the servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB 109, which we adopted on January 1, 2008, are applicable to written loan commitments recorded at fair value that are entered into beginning on or after January 1, 2008. The implementation of SAB 109 did not have a material impact on our first quarter 2008 results or the valuation of our loan commitments.
     On October 10, 2008, the FASB issued FSP FAS 157-3, which clarifies the application of FAS 157, Fair Value Measurements, in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The FSP states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction is acceptable. The FSP also indicates that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. In weighing a broker quote as an input to a fair value measurement, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (for example, whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence. The FSP was effective immediately and applied to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. We adopted the FSP prospectively, beginning July 1, 2008. The adoption of the FSP did not have a material impact on our consolidated financial results or fair value determinations.
     On December 11, 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8. This FSP is intended to improve disclosures about transfers of financial assets and continuing involvement with both qualifying special purpose entities (QSPEs) and variable interest entities (VIEs). The FSP requires qualitative and quantitative disclosures surrounding the nature of a company’s continuing involvement with QSPEs and VIEs, the carrying amount and classification of related assets and liabilities, including the nature of any restrictions on those assets and liabilities; contractual or non-contractual support provided to either QSPEs or VIEs; and a company’s maximum exposure to loss related to these activities. This FSP amends FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125, and FIN 46(R), Consolidation of Variable Interest Entities (revised December 2003) – an interpretation of ARB No. 51. The FSP is effective for reporting periods (annual or interim) ending after December 15, 2008.


39


 

Because the FSP amends only the disclosure requirements, the adoption of the FSP did not affect our consolidated financial results. For additional information, see Note 8 (Securitizations and Variable Interest Entities).
     On September 12, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4. This FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance and cash flows of the sellers of credit derivatives. It amends FAS 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others – an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend FAS 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008. Because the FSP amends only the disclosure requirements for credit derivatives and certain guarantees, the adoption of the FSP did not affect our consolidated financial results.
     On October 14, 2008, the SEC’s Office of the Chief Accountant (OCA) clarified its views on the application of other-than-temporary impairment guidance in FAS 115, Accounting for Certain Investments in Debt and Equity Securities, to certain perpetual preferred securities. The OCA concluded that it would not object to a registrant applying an other-than-temporary impairment model to investments in perpetual preferred securities that possess significant debt-like characteristics that is similar to the impairment model applied to debt securities, provided there has been no evidence of deterioration in credit of the issuer. An entity is permitted to apply the OCA’s views in its financial statements included in filings subsequent to the date of the letter. Accordingly, in third quarter 2008, we began applying this OCA guidance and have subsequently recorded other-than-temporary impairment on certain investment grade perpetual preferred securities where we believe credit events of the issuers have occurred.
     On January 12, 2009, the FASB issued FSP EITF 99-20-1, which amends EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets (EITF 99-20), to achieve more consistent determinations of whether other-than-temporary impairments of available-for-sale or held-to-maturity debt securities have occurred. The provisions of the FSP are to be applied prospectively and are considered effective for reporting periods (annual or interim) ending after December 15, 2008. Beginning with our fourth quarter 2008 results, based on this FSP guidance, we recorded no other-than-temporary impairment for certain EITF 99-20 securities that otherwise may have been considered impaired.
     On December 4, 2007, the FASB issued FAS 141 (revised 2007), Business Combinations (FAS 141R). This statement requires an acquirer to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, to be measured at their fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. The revised statement requires acquisition-related costs to be expensed separately from the acquisition. It also requires restructuring costs that the acquirer expected but was not obligated to incur, to be expensed separately from the business combination. FAS 141R is applicable prospectively to business combinations completed on or after January 1, 2009. Early adoption is not permitted.
     In December 2008, the FASB issued FAS 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (FAS 160). FAS 160 requires that noncontrolling interests (referred to as minority interests) be reported as a component of stockholders’ equity in the balance sheet. Prior to adoption of FAS 160 they are classified in liabilities or between liabilities and stockholders’ equity. This new standard also changes the way a minority interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. FAS 160 requires that a parent recognize a gain or loss when a subsidiary is deconsolidated. The remaining interest is initially recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions.
     FAS 160 is effective for fiscal years and interim periods within fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. Adoption is applied prospectively to all noncontrolling interests including those that arose prior to the adoption of FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.
     We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential) as described in more detail on page 57. Prudential’s noncontrolling interest of 23% is included in other liabilities in the balance sheet, and amounted to $824 million at December 31, 2008. Under the terms of the original agreement under which the joint venture was established between Wachovia and Prudential, each party has certain rights such that changes in our ownership interest can occur. Prudential has stated its intention to exercise its option to put its noncontrolling interest to us at a date in the future.
     As a result of the issuance of FAS 160 and related interpretive guidance, along with this stated intention, in the first quarter of 2009, the carrying value of Prudential’s noncontrolling interest in the joint venture will be increased from its December 31, 2008, carrying value to the estimated maximum redemption amount, with the offset recorded to additional paid-in capital.


40


 

     On February 20, 2008, the FASB issued FSP FAS No. 140-3, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FSP FAS 140-3). FSP FAS 140-3 requires that, if an entity transfers a loan to, and then subsequently executes a repurchase financing with the transferor collateralized by that loan, then the transferor would not be permitted to treat the initial transfer as a sale unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. The provisions of this FSP are effective beginning January 1, 2009, and shall be applied prospectively to initial transfers and repurchase financings for which the initial transfer is executed on or after this date. Early application is not permitted. FSP FAS 140-3 is not expected to have a material effect on our consolidated financial results.
     On March 19, 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. The provisions of FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 will not affect our consolidated financial results.


Critical Accounting Policies
 

Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements) are fundamental to understanding our results of operations and financial condition, because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Six of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:
  the allowance for credit losses;
 
  acquired loans accounted for under SOP 03-3;
 
  the valuation of residential mortgage servicing rights (MSRs);
 
  the fair valuation of financial instruments;
 
  pension accounting; and
 
  income taxes.
     Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee of the Company’s Board of Directors.
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. We have an established process, using several analytical tools and benchmarks, to calculate a range of possible outcomes and determine the adequacy of the allowance. The allowance carried over from Wachovia was generally subject to the same methodology described above. No single statistic or measurement determines the adequacy of the allowance. Loan recoveries and the provision for credit losses increase the allowance, while loan charge-offs decrease the allowance.
PROCESS TO DETERMINE THE ADEQUACY OF THE ALLOWANCE FOR CREDIT LOSSES While we attribute portions of the allowance to specific loan categories as part of our analytical process, the entire allowance is used to absorb credit losses inherent in the total loan portfolio.
     At December 31, 2008, the portion of the allowance for credit losses estimated at a pooled level for consumer loans and some segments of commercial small business loans was $16.4 billion. For purposes of determining the allowance for credit losses, we pool certain loans in our portfolio by product type, primarily for the auto, credit card and real estate mortgage portfolios. To achieve greater accuracy, we further segment selected portfolios. As appropriate, the business groups may attempt to achieve greater accuracy through segmentation by sub-product, origination channel, vintage, loss type, geography and other predictive characteristics. For example, credit cards are segmented by origination channel and the Home Equity portfolios are further segmented between liquidating and nonliquidating. In the case of residential mortgages, we segment the liquidating Pick-a-Pay portfolio, and further segment this portfolio based on origination channel.
     To measure losses inherent in consumer loans and some commercial small business loans, we use loss models and other quantitative, mathematical techniques to forecast losses. Each business group forecasts losses for loans as of the balance sheet date over the estimated loss emergence period.
     Each business group determines the model type and/or segmentation method that fits the loss characteristics of its portfolios and provides the greatest level of forecasting accuracy. We use both internally developed and vendor supplied roll rate/net cash flow models. Roll rate/net cash flow models, vintage base-models and behavior score models are often used for near-term loss projections as well as time series/statistical trend models for longer term projections. Models are independently validated and are reviewed by corporate credit personnel to ensure that the theory, assumptions, data,


41


 

computational processes, reporting and end-user controls of the models are appropriate and well documented. In addition, regulatory examiners review and perform detailed tests of our allowance processes.
     Forecasted losses are compared with actual losses and this information is used by management in order to develop an allowance that management believes adequate to cover losses inherent in the loan portfolio as of the reporting date.
     The portion of the allowance for commercial loans, commercial real estate loans and lease financing was $4.5 billion at December 31, 2008. We initially estimate this portion of the allowance by applying historical loss factors statistically derived from tracking losses associated with actual portfolio movements over a specified period of time, for each specific loan grade. Based on this process, we assign loss factors to each pool of graded loans and a loan equivalent amount for unfunded loan commitments and letters of credit. These estimates are then adjusted or supplemented where necessary from additional analysis of long-term average loss experience, external loss data or other risks identified from current conditions and trends in selected portfolios, including management’s judgment for imprecision and uncertainty.
     We also assess and account for certain nonaccrual commercial and commercial real estate loans that are over $5 million and certain consumer, commercial and commercial real estate loans whose terms have been modified in a troubled debt restructuring as impaired. We include the impairment on these nonperforming loans in the allowance unless it has already been recognized as a loss. At December 31, 2008, we included $816 million in the allowance related to impaired loans.
     Reflected in the portions of the allowance previously described is an amount for imprecision or uncertainty that incorporates the range of probable outcomes inherent in estimates used for the allowance, which may change from period to period. This amount is the result of our judgment of risks inherent in the portfolios, economic uncertainties, historical loss experience and other subjective factors, including industry trends, calculated to better reflect our view of risk in each loan portfolio.
     In addition, the allowance for credit losses included a reserve for unfunded credit commitments of $698 million at December 31, 2008.
     The total allowance reflects management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. To estimate the possible range of allowance required at December 31, 2008, and the related change in provision expense, we assumed the following scenarios of a reasonably possible deterioration or improvement in loan credit quality.
Assumptions for deterioration in loan credit quality were:
  for consumer loans, a 55 basis point increase in estimated loss rates from actual 2008 loss levels, prolonged residential real estate value deterioration, continued increase in unemployment levels and higher bankruptcy levels; and
  for wholesale loans, a 17 basis point increase in estimated loss rates from actual 2008 loss levels, an increase in corporate bankruptcies and continued deterioration in the homebuilder environment.
Assumptions for improvement in loan credit quality were:
  for consumer loans, a 24 basis point decrease in estimated loss rates from actual 2008 loss levels, adjusting for residential real estate value stabilization and real estate sales market improvement; and
  for wholesale loans, a 14 basis point decrease in estimated loss rates, large unexpected losses not realized and an improved home builder environment.
     Under these assumptions for deterioration in loan credit quality, another $3.2 billion in expected losses could occur and under the assumptions for improvement, a $1.6 billion reduction in expected losses could occur.
     Changes in the estimate of the allowance for credit losses and the related provision expense can materially affect net income. The example above is only one of a number of reasonably possible scenarios. Determining the allowance for credit losses requires us to make forecasts of losses that are highly uncertain and require a high degree of judgment. The increase in the allowance for credit losses in excess of net charge-offs in 2008 was primarily due to adjustments to conform to the most conservative methodology from Wells Fargo and Wachovia, general deterioration in most of our portfolios given the current economic environment, especially in the Home Equity portfolios stemming from the steeper than anticipated decline in national home prices and a lengthening in the loss emergence timing for consumer credit portfolios. See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements and “Risk Management — Credit Risk Management Process” for further discussion of our allowance for credit losses.
Acquired Loans Accounted for under SOP 03-3
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccrual status, recent borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans are accounted for under SOP 03-3 and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. We estimate the cash flows expected to be collected at acquisition using our internal credit risk, interest rate risk and prepayment risk models, which incorporate our best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds.
     Under SOP 03-3, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition,


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considering the impact of prepayments, is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan losses to the extent any has been recorded) with a positive impact on interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, foreclosure or TDRs, result in removal of the loan from the SOP 03-3 portfolio at its carrying amount.
     In connection with the Wachovia acquisition, we acquired certain loans that were deemed to be credit impaired under SOP 03-3. SOP 03-3 allows purchasers to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. With respect to the Wachovia acquisition, we aggregated all of the consumer loans and wholesale loans with balances of $3 million or less into pools with common risk characteristics. We accounted for wholesale loans with balances in excess of $3 million individually.
     To estimate the possible impact on the accounting for the SOP 03-3 loans as of December 31, 2008, we assumed the following scenarios of a reasonable possible improvement or deterioration in loan credit quality.
     Assumptions for deterioration in loan credit quality for SOP 03-3 loans were:
  for Pick-a-Pay loans, a 10% increase in expected life of loan loss rates from December 31, 2008, purchase accounting estimates, based on increased loss severity due to prolonged residential real estate value deterioration, continued increase in unemployment levels and higher bankruptcy levels; and
  for commercial real estate loans, a 10% increase in expected life of loan loss rates from December 31, 2008, purchase accounting estimates due to continued deterioration in the homebuilder and income property sectors.
     Assumptions for improvement in loan credit quality for SOP 03-3 were:
  for Pick-a-Pay loans, a 10% decrease in expected life of loan loss rates from December 31, 2008, purchase accounting estimates, based on decreased loss severity due to residential real estate value stabilization; and
  for commercial real estate loans, a 10% decrease in expected life of loan loss rates from December 31, 2008, purchase accounting estimates due to an improvement in the home-builder and income property sectors.
     Had the expected life of loan loss rates we used to determine the nonaccretable difference at December 31, 2008, for these two portfolios reflected the 10% increase or decrease in life of loan loss rates as described above, the nonaccretable difference would have changed by approximately $2.4 billion for Pick-a-Pay loans and $680 million for commercial real estate.
     In accordance with SOP 03-3, loans that were classified as nonperforming loans by Wachovia are no longer classified as nonperforming because, at acquisition, we believe we will fully collect the new carrying value of these loans. It is important to note that judgment is required in reclassifying loans subject to SOP 03-3 to performing status, and is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected, even if the loan is contractually past due.
Valuation of Residential Mortgage Servicing Rights
We recognize as assets the rights to service mortgage loans for others, or mortgage servicing rights (MSRs), whether we purchase the servicing rights, or the servicing rights result from the sale or securitization of loans we originate (asset transfers). We also acquire MSRs under co-issuer agreements that provide for us to service loans that are originated and securitized by third-party correspondents. We initially measure and carry our MSRs related to residential mortgage loans (residential MSRs) using the fair value measurement method, under which purchased MSRs and MSRs from asset transfers are capitalized and carried at fair value.
     At the end of each quarter, we determine the fair value of MSRs using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds (including housing price volatility), discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, ancillary income and late fees. The valuation of MSRs is discussed further in this section and in Note 1 (Summary of Significant Accounting Policies), Note 8 (Securitizations and Variable Interest Entities), Note 9 (Mortgage Banking Activities) and Note 17 (Fair Values of Assets and Liabilities) to Financial Statements.
     To reduce the sensitivity of earnings to interest rate and market value fluctuations, we may use securities available for sale and free-standing derivatives (economic hedges) to hedge the risk of changes in the fair value of MSRs, with the resulting gains or losses reflected in income. Changes in the fair value of the MSRs from changing mortgage interest rates are generally offset by gains or losses in the fair value of the derivatives depending on the amount of MSRs we hedge and the particular instruments used to hedge the MSRs. We may choose not to fully hedge MSRs, partly because origination volume tends to act as a “natural hedge.” For example, as interest rates decline, servicing values generally decrease and fees from origination volume tend to increase. Conversely, as interest rates increase, the fair value of the MSRs generally increases, while fees from origination volume tend to decline. See “Mortgage Banking Interest Rate and Market Risk” for discussion of the timing of the effect of changes in mortgage interest rates.


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     Net servicing income, a component of mortgage banking noninterest income, includes the changes from period to period in fair value of both our residential MSRs and the free-standing derivatives (economic hedges) used to hedge our residential MSRs. Changes in the fair value of residential MSRs from period to period result from (1) changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates) and (2) other changes, representing changes due to collection/realization of expected cash flows.
     We use a dynamic and sophisticated model to estimate the value of our MSRs. The model is validated by an independent internal model validation group operating in accordance with Company policies. Senior management reviews all significant assumptions quarterly. Mortgage loan prepayment speed–a key assumption in the model–is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income–another key assumption in the model–is the required rate of return investors in the market would expect for an asset with similar risk. To determine the discount rate, we consider the risk premium for uncertainties from servicing operations (e.g., possible changes in future servicing costs, ancillary income and earnings on escrow accounts). Both assumptions can, and generally will, change quarterly as market conditions and interest rates change. For example, an increase in either the prepayment speed or discount rate assumption results in a decrease in the fair value of the MSRs, while a decrease in either assumption would result in an increase in the fair value of the MSRs. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and the discount rate. These fluctuations can be rapid and may be significant in the future. Therefore, estimating prepayment speeds within a range that market participants would use in determining the fair value of MSRs requires significant management judgment.
     These key economic assumptions and the sensitivity of the fair value of MSRs to an immediate adverse change in those assumptions are shown in Note 8 (Securitizations and Variable Interest Entities) to Financial Statements.
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. Trading assets, securities available for sale, derivatives, prime residential mortgages held for sale (MHFS), certain commercial loans held for sale (LHFS), principal investments and securities sold but not yet purchased (short sale liabilities) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as nonprime residential and commercial MHFS, certain LHFS, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of
individual assets. Further, we include in Notes to Financial Statements information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value we disclose the estimate of their fair value.
     FAS 157, Fair Value Measurements (FAS 157), defines fair value as the price that would be received to sell the financial asset or paid to transfer the financial liability in an orderly transaction between market participants at the measurement date.
     FAS 157 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.
  Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury and other U.S. government securities that are traded by dealers or brokers in active over-the-counter markets.
  Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques, such as matrix pricing, for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in less active dealer or broker markets and MHFS that are valued based on prices for other mortgage whole loans with similar characteristics.
  Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
     In accordance with FAS 157, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves, prepayment speeds, option volatilities and currency rates. Most of our financial instruments use either of the foregoing methodologies, collectively Level 1 and Level 2 measurements, to determine fair value adjustments recorded to our financial statements. However, in certain cases, when market observable inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument.


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     The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. When significant adjustments are required to available observable inputs, it may be appropriate to utilize an estimate based primarily on unobservable inputs. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.
     Approximately 19% of total assets ($247.5 billion) at December 31, 2008, and 22% of total assets ($123.8 billion) at December 31, 2007, consisted of financial instruments recorded at fair value on a recurring basis. Assets for which fair values were measured using significant Level 3 inputs represented approximately 19% of these financial instruments (4% of total assets) at December 31, 2008, and approximately 18% (4% of total assets) at December 31, 2007. The fair value of the remaining assets were measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.
     Our financial assets valued using Level 3 measurements consisted of certain asset-backed securities, including those collateralized by auto leases and cash reserves, private collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), auction-rate securities, certain derivative contracts such as credit default swaps related to CMO, CDO and CLO exposures and certain MHFS and MSRs. While MSR valuations generally require use of significant unobservable inputs and therefore are classified as Level 3, significant judgment may be required to determine whether certain other assets measured at fair value are included in Level 2 or Level 3. For example, we closely monitor market conditions involving assets that have become less actively traded, such as MHFS, private CMOs, and certain other debt securities, including CDOs and CLOs. See Note 8 (Securitizations and Variable Interest Entities) to Financial Statements for a detailed discussion of the key assumptions used to determine the fair value of our MSRs and the related sensitivity analysis. If fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume and do not require significant adjustment using unobservable inputs, those assets are classified as Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment. In 2008, $4.3 billion of fair
value option MHFS and $1.9 billion of debt securities available for sale were transferred from Level 2 to Level 3 because significant inputs to the valuation became unobservable, largely due to reduced levels of market liquidity.
     We use prices from independent pricing services and to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure fair value of our investment securities. See Note 17 (Fair Values of Assets and Liabilities) to Financial Statements for the amount and fair value hierarchy classification of those securities measured at fair value using an independent pricing service and those measured at fair value using broker quotes. We utilize multiple independent pricing services and brokers to obtain fair values, however, we generally obtain one price/quote for each individual security. For securities priced by independent pricing services, we determine the most appropriate and relevant pricing service for each security class and have that vendor provide the price for each security in the class. We record the unadjusted value provided by the independent pricing service/broker in our financial statements, subject to our internal price verification procedures. We validate prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary 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. Based upon our internal price verification procedures and review of fair value methodology documentation provided by independent pricing services, we have concluded that the fair values for our investment securities at year end were consistent with the guidance in FAS 157.
     Approximately 2% of total liabilities ($18.8 billion) at December 31, 2008, and 0.5% ($2.6 billion) at December 31, 2007, consisted of financial instruments recorded at fair value on a recurring basis. Liabilities valued using Level 3 measurements were $638 million and $280 million at December 31, 2008 and 2007, respectively.
     See Note 17 (Fair Values of Assets and Liabilities) to Financial Statements for a complete discussion on our use of fair valuation of financial instruments, our related measurement techniques and its impact to our financial statements.
Pension Accounting
We account for our defined benefit pension plans using an actuarial model required by FAS 87, Employers’ Accounting for Pensions, as amended by FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). FAS 158 was issued on September 29, 2006, and became effective for us on December 31, 2006. FAS 158 requires us to recognize the funded status of our pension and postretirement benefit plans in our balance sheet. Additionally, FAS 158 required us to use a year-end measurement date beginning in 2008. The adoption of FAS 158 did not change the amount of net periodic benefit expense recognized in our income statement.


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     We use four key variables to calculate our annual pension cost: size and characteristics of the employee population, actuarial assumptions, expected long-term rate of return on plan assets, and discount rate. We describe below the effect of each of these variables on our pension expense.
SIZE AND CHARACTERISTICS OF THE EMPLOYEE POPULATION Pension expense is directly related to the number of employees covered by the plans, and other factors including salary, age and years of employment.
ACTUARIAL ASSUMPTIONS To estimate the projected benefit obligation, actuarial assumptions are required about factors such as the rates of mortality, turnover, retirement, disability and compensation increases for our participant population. These demographic assumptions are reviewed periodically. In general, the range of assumptions is narrow.
EXPECTED LONG-TERM RATE OF RETURN ON PLAN ASSETS We determine the expected return on plan assets each year based on the composition of assets and the expected long-term rate of return on that portfolio. The expected long-term rate of return assumption is a long-term assumption and is not anticipated to change significantly from year to year.
     To determine if the expected rate of return is reasonable, we consider such factors as (1) long-term historical return experience for major asset class categories (for example, large cap and small cap domestic equities, international equities and domestic fixed income), and (2) forward-looking return expectations for these major asset classes. Our expected rate of return for 2009 is 8.75%, the same rate used for 2008 and 2007. Differences in each year, if any, between expected and actual returns are included in our net actuarial gain or loss amount, which is recognized in other comprehensive income. We generally amortize any net actuarial gain or loss in excess of a 5% corridor (as defined in FAS 87) in net periodic pension expense calculations over the next five years. Due to the dramatic downturn in market conditions during 2008, our actual rate of return for 2008 was negative, and was therefore significantly less than our long-term expected rate of return of 8.75%. This difference will increase our 2009 pension expense by approximately $600 million due to higher actuarial loss amortization combined with a lower rate of return component of pension expense, as compared to our 2008 pension expense. Although our plan assets experienced a negative return in 2008, our plan assets have earned an average annualized rate of return of about 9% over the last 25 years. Our average remaining service period is approximately 10 years. See Note 20 (Employee Benefits and Other Expenses) to Financial Statements for information on funding, changes in the pension benefit obligation, and plan assets (including the investment categories, asset allocation and the fair value).
     If we were to assume a 1% increase/decrease in the expected long-term rate of return, holding the discount rate and other actuarial assumptions constant, 2009 pension expense would decrease/increase by approximately $74 million.
DISCOUNT RATE We use a discount rate to determine the present value of our future benefit obligations. The discount rate reflects the current rates available on long-term high-quality fixed-income debt instruments, and is reset annually on the measurement date. To determine the discount rate, we review, with our independent actuary, spot interest rate yield curves based upon yields from a broad population of high-quality bonds, adjusted to match the timing and amounts of the Cash Balance Plan’s expected benefit payments. We used a discount rate of 6.75% in 2008 and 6.25% in 2007.
     If we were to assume a 1% increase in the discount rate, and keep the expected long-term rate of return and other actuarial assumptions constant, pension expense would decrease by approximately $72 million. If we were to assume a 1% decrease in the discount rate, and keep other assumptions constant, 2009 pension expense would increase by approximately $70 million. The decrease in pension expense due to a 1% increase in discount rate differs slightly from the increase in pension expense due to a 1% decrease in discount rate due to the impact of the 5% gain/loss corridor.
Income Taxes
We are subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we operate. We account for income taxes in accordance with FAS 109, Accounting for Income Taxes, as interpreted by FIN 48, Accounting for Uncertainty in Income Taxes. Our income tax expense consists of two components: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period and includes income tax expense related to our uncertain tax positions. We determine deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognized enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to management’s judgment that realization is “more likely than not.” Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes is greater than 50% likely of being realized upon settlement. Foreign taxes paid are generally applied as credits to reduce federal income taxes payable. We account for interest and penalties as a component of income tax expense.
     The income tax laws of the jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions by the govern-


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ment taxing authorities, both domestic and foreign. Our interpretations may be subjected to review during examination by taxing authorities and disputes may arise over the respective tax positions. We attempt to resolve these disputes during the tax examination and audit process and ultimately through the court systems when applicable.
     We monitor relevant tax authorities and revise our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory
authorities on a quarterly basis. Revisions of our estimate of accrued income taxes also may result from our own income tax planning and from the resolution of income tax controversies. Such revisions in our estimates may be material to our operating results for any given quarter.
     See Note 21 (Income Taxes) to Financial Statements for a further description of our provision for income taxes and related income tax assets and liabilities.


Earnings Performance
 

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 and long-term and short-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
     Net interest income on a taxable-equivalent basis was $25.4 billion in 2008, up 20% from $21.1 billion in 2007. Our net interest margin increased to 4.83% for 2008 from 4.74% for 2007. Both the increase in net interest income and the increase in the net interest margin were largely driven by disciplined deposit pricing and lower market funding costs.
     Average earning assets increased $77.6 billion to $523.5 billion in 2008 from $445.9 billion in 2007. Average loans increased to $398.5 billion in 2008 from $344.8 billion in 2007. Average mortgages held for sale decreased to $25.7 billion in 2008 from $33.1 billion in 2007. Average debt securities available for sale increased to $86.3 billion in 2008 from $57.0 billion in 2007.
     The purchase accounting adjustments that we recorded on Wachovia’s interest-earning assets and interest-bearing liabilities to reflect market rates of interest for each instrument or pool of instruments will affect net interest income beginning in first quarter 2009. The more significant of these adjustments include an $8.2 billion net increase to loans where amortization will decrease net interest income, a $4.4 billion net increase to deposits, specifically certificates of deposit, and a $190 million increase to long-term debt, where amortization for both will increase net interest income.
     Core deposits are an important contributor to growth in net interest income and the net interest margin, and are a low-cost source of funding. Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). We have one of the largest bases of core deposits among large U.S. banks. Average core deposits grew 7% to $325.2 billion in 2008 from $303.1 billion in 2007 and funded 82% and 88% of average total loans in 2008 and 2007, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, for 2008 grew $13.1 billion (6%) from 2007. Average mortgage escrow deposits decreased to $21.0 billion in 2008 from $21.5 billion in 2007. Average savings certificates of deposit decreased to $39.5 billion in 2008 from $40.5 billion in 2007 and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings) increased to $260.2 billion in 2008 from $241.9 billion in 2007. Total average interest-bearing deposits increased to $266.1 billion in 2008 from $239.2 billion in 2007, predominantly due to growth in market rate and other savings, along with growth in foreign deposits, offset by a decline in other time deposits.
     Table 3 presents the individual components of net interest income and the net interest margin.


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Table 3: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)(3)
 
                                                                         
(in millions)   2008     2007  
    Average     Yields/     Interest     Average     Yields/     Interest  
    balance     rates     income/     balance     rates     income/  
                expense                 expense  
 
                                               
EARNING ASSETS
                                               
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 5,293       1.71 %   $ 90     $ 4,468       4.99 %   $ 223  
Trading assets
    4,971       3.80       189       4,291       4.37       188  
Debt securities available for sale (4):
                                               
Securities of U.S. Treasury and federal agencies
    1,083       3.84       41       848       4.26       36  
Securities of U.S. states and political subdivisions
    6,918       6.83       501       4,740       7.37       342  
Mortgage-backed securities:
                                               
Federal agencies
    44,777       5.97       2,623       38,592       6.10       2,328  
Private collateralized mortgage obligations
    20,749       6.04       1,412       6,548       6.12       399  
 
                                       
Total mortgage-backed securities
    65,526       5.99       4,035       45,140       6.10       2,727  
Other debt securities (5)
    12,818       7.17       1,000       6,295       7.52       477  
 
                                       
Total debt securities available for sale (5)
    86,345       6.22       5,577       57,023       6.34       3,582  
Mortgages held for sale (6)
    25,656       6.13       1,573       33,066       6.50       2,150  
Loans held for sale (6)
    837       5.69       48       896       7.76       70  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    98,620       6.12       6,034       77,965       8.17       6,367  
Other real estate mortgage
    41,659       5.80       2,416       32,722       7.38       2,414  
Real estate construction
    19,453       5.08       988       16,934       7.80       1,321  
Lease financing
    7,141       5.62       401       5,921       5.84       346  
 
                                       
Total commercial and commercial real estate
    166,873       5.90       9,839       133,542       7.82       10,448  
Consumer:
                                               
Real estate 1-4 family first mortgage
    75,116       6.67       5,008       61,527       7.25       4,463  
Real estate 1-4 family junior lien mortgage
    75,375       6.55       4,934       72,075       8.12       5,851  
Credit card
    19,601       12.13       2,378       15,874       13.58       2,155  
Other revolving credit and installment
    54,368       8.72       4,744       54,436       9.71       5,285  
 
                                       
Total consumer
    224,460       7.60       17,064       203,912       8.71       17,754  
Foreign
    7,127       10.50       748       7,321       11.68       855  
 
                                       
Total loans (6)
    398,460       6.94       27,651       344,775       8.43       29,057  
Other
    1,920       4.73       91       1,402       5.07       71  
 
                                       
 
                                               
Total earning assets
  $ 523,482       6.69       35,219     $ 445,921       7.93       35,341  
 
                                       
FUNDING SOURCES
                                               
Deposits:
                                               
Interest-bearing checking
  $ 5,650       1.12       64     $ 5,057       3.16       160  
Market rate and other savings
    166,691       1.32       2,195       147,939       2.78       4,105  
Savings certificates
    39,481       3.08       1,215       40,484       4.38       1,773  
Other time deposits
    6,656       2.83       187       8,937       4.87       435  
Deposits in foreign offices
    47,578       1.81       860       36,761       4.57       1,679  
 
                                       
Total interest-bearing deposits
    266,056       1.70       4,521       239,178       3.41       8,152  
Short-term borrowings
    65,826       2.25       1,478       25,854       4.81       1,245  
Long-term debt
    102,283       3.70       3,789       93,193       5.18       4,824  
 
                                       
Total interest-bearing liabilities
    434,165       2.25       9,788       358,225       3.97       14,221  
Portion of noninterest-bearing funding sources
    89,317                   87,696              
 
                                       
 
                                               
Total funding sources
  $ 523,482       1.86       9,788     $ 445,921       3.19       14,221  
 
                                       
 
                                               
Net interest margin and net interest income on a taxable-equivalent basis (7)
            4.83 %   $ 25,431               4.74 %   $ 21,120  
 
                                           
 
                                               
NONINTEREST-EARNING ASSETS
                                               
Cash and due from banks
  $ 11,175                     $ 11,806                  
Goodwill
    13,353                       11,957                  
Other
    56,386                       51,068                  
 
                                           
 
                                               
Total noninterest-earning assets
  $ 80,914                     $ 74,831                  
 
                                           
 
                                               
NONINTEREST-BEARING FUNDING SOURCES
                                               
Deposits
  $ 87,820                     $ 88,907                  
Other liabilities
    28,939                       26,557                  
Preferred stockholders’ equity
    4,051                                        
Common stockholders’ equity
    49,421                       47,063                  
Noninterest-bearing funding sources used to fund earning assets
    (89,317 )                     (87,696 )                
 
                                           
 
                                               
 
                                               
Net noninterest-bearing funding sources
  $ 80,914                     $ 74,831                  
 
                                           
 
                                               
TOTAL ASSETS
  $ 604,396                     $ 520,752                  
 
                                           
 
                                               
 
(1)   Because the Wachovia acquisition was completed at the end of 2008, Wachovia’s assets and liabilities are not included in average balances, and Wachovia’s results are not reflected in interest income/expense.
 
(2)   Our average prime rate was 5.09%, 8.05%, 7.96%, 6.19% and 4.34% for 2008, 2007, 2006, 2005 and 2004, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 2.93%, 5.30%, 5.20%, 3.56% and 1.62% for the same years, respectively.
 
(3)   Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.

48


 

 
                                                                         
(in millions)   2006     2005     2004  
    Average     Yields/     Interest     Average     Yields/     Interest     Average     Yields/     Interest  
    balance     rates     income/     balance     rates     income/     balance     rates     income/  
                expense                 expense                 expense  
 
                                                                       
EARNING ASSETS
                                                                       
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 5,515       4.80 %   $ 265     $ 5,448       3.01 %   $ 164     $ 4,254       1.49 %   $ 64  
Trading assets
    4,958       4.95       245       5,411       3.52       190       5,286       2.75       145  
Debt securities available for sale (4):
                                                                       
Securities of U.S. Treasury and federal agencies
    875       4.36       39       997       3.81       38       1,161       4.05       46  
Securities of U.S. states and political subdivisions
    3,192       7.98       245       3,395       8.27       266       3,501       8.00       267  
Mortgage-backed securities:
                                                                       
Federal agencies
    36,691       6.04       2,206       19,768       6.02       1,162       21,404       6.03       1,248  
Private collateralized mortgage obligations
    6,640       6.57       430       5,128       5.60       283       3,604       5.16       180  
 
                                                           
Total mortgage-backed securities
    43,331       6.12       2,636       24,896       5.94       1,445       25,008       5.91       1,428  
Other debt securities (5)
    6,204       7.10       439       3,846       7.10       266       3,395       7.72       236  
 
                                                           
Total debt securities available for sale (5)
    53,602       6.31       3,359       33,134       6.24       2,015       33,065       6.24       1,977  
Mortgages held for sale (6)
    42,855       6.41       2,746       38,986       5.67       2,213       32,263       5.38       1,737  
Loans held for sale (6)
    630       7.40       47       2,857       5.10       146       8,201       3.56       292  
Loans:
                                                                       
Commercial and commercial real estate:
                                                                       
Commercial
    65,720       8.13       5,340       58,434       6.76       3,951       49,365       5.77       2,848  
Other real estate mortgage
    29,344       7.32       2,148       29,098       6.31       1,836       28,708       5.35       1,535  
Real estate construction
    14,810       7.94       1,175       11,086       6.67       740       8,724       5.30       463  
Lease financing
    5,437       5.72       311       5,226       5.91       309       5,068       6.23       316  
 
                                                           
Total commercial and commercial real estate
    115,311       7.78       8,974       103,844       6.58       6,836       91,865       5.62       5,162  
Consumer:
                                                                       
Real estate 1-4 family first mortgage
    57,509       7.27       4,182       78,170       6.42       5,016       87,700       5.44       4,772  
Real estate 1-4 family junior lien mortgage
    64,255       7.98       5,126       55,616       6.61       3,679       44,415       5.18       2,300  
Credit card
    12,571       13.29       1,670       10,663       12.33       1,315       8,878       11.80       1,048  
Other revolving credit and installment
    50,922       9.60       4,889       43,102       8.80       3,794       33,528       9.01       3,022  
 
                                                           
Total consumer
    185,257       8.57       15,867       187,551       7.36       13,804       174,521       6.38       11,142  
Foreign
    6,343       12.39       786       4,711       13.49       636       3,184       15.30       487  
 
                                                           
Total loans (6)
    306,911       8.35       25,627       296,106       7.19       21,276       269,570       6.23       16,791  
Other
    1,357       4.97       68       1,581       4.34       68       1,709       3.81       65  
 
                                                           
 
                                               
Total earning assets
  $ 415,828       7.79       32,357     $ 383,523       6.81       26,072     $ 354,348       5.97       21,071  
 
                                                           
FUNDING SOURCES
                                                                       
Deposits:
                                                                       
Interest-bearing checking
  $ 4,302       2.86       123     $ 3,607       1.43       51     $ 3,059       0.44       13  
Market rate and other savings
    134,248       2.40       3,225       129,291       1.45       1,874       122,129       0.69       838  
Savings certificates
    32,355       3.91       1,266       22,638       2.90       656       18,850       2.26       425  
Other time deposits
    32,168       4.99       1,607       27,676       3.29       910       29,750       1.43       427  
Deposits in foreign offices
    20,724       4.60       953       11,432       3.12       357       8,843       1.40       124  
 
                                                           
Total interest-bearing deposits
    223,797       3.21       7,174       194,644       1.98       3,848       182,631       1.00       1,827  
Short-term borrowings
    21,471       4.62       992       24,074       3.09       744       26,130       1.35       353  
Long-term debt
    84,035       4.91       4,124       79,137       3.62       2,866       67,898       2.41       1,637  
 
                                                           
Total interest-bearing liabilities
    329,303       3.73       12,290       297,855       2.50       7,458       276,659       1.38       3,817  
Portion of noninterest-bearing funding sources
    86,525                   85,668                   77,689              
 
                                                           
 
                                               
Total funding sources
  $ 415,828       2.96       12,290     $ 383,523       1.95       7,458     $ 354,348       1.08       3,817  
 
                                                           
 
                                                                       
Net interest margin and net interest income on a taxable-equivalent basis (7)
            4.83 %   $ 20,067               4.86 %   $ 18,614               4.89 %   $ 17,254  
 
                                                                 
 
                                                                       
NONINTEREST-EARNING ASSETS
                                                                       
Cash and due from banks
  $ 12,466                     $ 13,173                     $ 13,055                  
Goodwill
    11,114                       10,705                       10,418                  
Other
    46,615                       38,389                       32,758                  
 
                                                                 
 
                                                                       
Total noninterest-earning assets
  $ 70,195                     $ 62,267                     $ 56,231                  
 
                                                                 
 
                                                                       
NONINTEREST-BEARING FUNDING SOURCES
                                                                       
Deposits
  $ 89,117                     $ 87,218                     $ 79,321                  
Other liabilities
    24,467                       21,559                       18,764                  
Preferred stockholders’ equity
                                                                 
Common stockholders’ equity
    43,136                       39,158                       35,835                  
Noninterest-bearing funding sources used to fund earning assets
    (86,525 )                     (85,668 )                     (77,689 )                
 
                                                                 
 
                                                                       
 
                                                                       
Net noninterest-bearing funding sources
  $ 70,195                     $ 62,267                     $ 56,231                  
 
                                                                 
 
                                                                       
TOTAL ASSETS
  $ 486,023                     $ 445,790                     $ 410,579                  
 
                                                                 
 
                                                                       
 
(4)   Yields are based on amortized cost balances computed on a settlement date basis.
 
(5)   Includes certain preferred securities.
 
(6)   Nonaccrual loans and related income are included in their respective loan categories.
 
(7)   Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate was 35% for all years presented.

49


 

     Table 4 allocates the changes in net interest income on a taxable-equivalent basis to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities. Because of the numerous simultaneous volume and rate changes during any period, it is not
     possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion to the percentage changes in average volume and average rate.


Table 4: Analysis of Changes in Net Interest Income
 
                                                 
(in millions)   Year ended December 31,  
    2008 over 2007     2007 over 2006  
    Volume     Rate     Total     Volume     Rate     Total  
 
                                               
Increase (decrease) in interest income:
                                               
Federal funds sold, securities purchased under resale agreements and other short-term investments
  $ 35     $ (168 )   $ (133 )   $ (52 )   $ 10     $ (42 )
Trading assets
    26       (25 )     1       (30 )     (27 )     (57 )
Debt securities available for sale:
                                               
Securities of U.S. Treasury and federal agencies
    9       (4 )     5       (2 )     (1 )     (3 )
Securities of U.S. states and political subdivisions
    181       (22 )     159       117       (20 )     97  
Mortgage-backed securities:
                                               
Federal agencies
    349       (54 )     295       102       20       122  
Private collateralized mortgage obligations
    1,017       (4 )     1,013       (5 )     (26 )     (31 )
Other debt securities
    543       (20 )     523       8       30       38  
Mortgages held for sale
    (460 )     (117 )     (577 )     (634 )     38       (596 )
Loans held for sale
    (4 )     (18 )     (22 )     21       2       23  
Loans:
                                               
Commercial and commercial real estate:
                                               
Commercial
    1,471       (1,804 )     (333 )     1,001       26       1,027  
Other real estate mortgage
    581       (579 )     2       248       18       266  
Real estate construction
    176       (509 )     (333 )     167       (21 )     146  
Lease financing
    69       (14 )     55       28       7       35  
Consumer:
                                               
Real estate 1-4 family first mortgage
    924       (379 )     545       292       (11 )     281  
Real estate 1-4 family junior lien mortgage
    258       (1,175 )     (917 )     634       91       725  
Credit card
    470       (247 )     223       448       37       485  
Other revolving credit and installment
    (7 )     (534 )     (541 )     339       57       396  
Foreign
    (22 )     (85 )     (107 )     116       (47 )     69  
Other
    25       (5 )     20       2       1       3  
 
                                   
Total increase (decrease) in interest income
    5,641       (5,763 )     (122 )     2,800       184       2,984  
 
                                   
 
                                               
Increase (decrease) in interest expense:
                                               
Deposits:
                                               
Interest-bearing checking
    17       (113 )     (96 )     23       14       37  
Market rate and other savings
    469       (2,379 )     (1,910 )     345       535       880  
Savings certificates
    (43 )     (515 )     (558 )     343       164       507  
Other time deposits
    (94 )     (154 )     (248 )     (1,134 )     (38 )     (1,172 )
Deposits in foreign offices
    396       (1,215 )     (819 )     732       (6 )     726  
Short-term borrowings
    1,158       (925 )     233       211       42       253  
Long-term debt
    439       (1,474 )     (1,035 )     465       235       700  
 
                                   
Total increase (decrease) in interest expense
    2,342       (6,775 )     (4,433 )     985       946       1,931  
 
                                   
 
                                               
Increase (decrease) in net interest income on a taxable-equivalent basis
  $ 3,299     $ 1,012     $ 4,311     $ 1,815     $ (762 )   $ 1,053  
 
                                   
 
                                               
 

Noninterest Income
We earn trust, investment and IRA fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At December 31, 2008, these assets totaled $1.62 trillion, including $510 billion from the Wachovia acquisition, up 45% from $1.12 trillion at December 31, 2007. Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of the assets under management or administration. The fees declined 6% in 2008 from a year ago, while the S&P 500 declined 35% over the same period.
     We also receive commissions and other fees for providing services to full-service and discount brokerage customers. Generally, these fees include transactional commissions,
which are based on the number of transactions executed at the customer’s direction, or asset-based fees, which are based on the market value of the customer’s assets. At December 31, 2008, brokerage balances totaled $970 billion, including $859 billion from the Wachovia acquisition, up from $131 billion at December 31, 2007.
     Card fees increased 9% to $2,336 million in 2008 from $2,136 million in 2007, due to continued growth in new accounts and higher credit and debit card transaction volume. Purchase volume on these cards increased 8% from a year ago and average card balances were up 25%.
     Mortgage banking noninterest income was $2,525 million in 2008, compared with $3,133 million in 2007. In addition to servicing fees, net servicing income includes both changes in the fair value of MSRs during the period as well as changes in


50


 

Table 5: Noninterest Income
 
                                         
(in millions)   Year ended December 31,     % Change  
    2008     2007     2006     2008/     2007/  
                            2007     2006  
 
                                       
Service charges on deposit accounts
  $ 3,190     $ 3,050     $ 2,690       5 %     13 %
Trust and investment fees:
                                       
Trust, investment and IRA fees
    2,161       2,305       2,033       (6 )     13  
Commissions and all other fees
    763       844       704       (10 )     20  
 
                                 
Total trust and investment fees
    2,924       3,149       2,737       (7 )     15  
Card fees
    2,336       2,136       1,747       9       22  
Other fees:
                                       
Cash network fees
    188       193       184       (3 )     5  
Charges and fees on loans
    1,037       1,011       976       3       4  
All other fees
    872       1,088       897       (20 )     21  
 
                                 
Total other fees
    2,097       2,292       2,057       (9 )     11  
Mortgage banking:
                                       
Servicing income, net
    979       1,511       893       (35 )     69  
Net gains on mortgage loan origination/sales activities
    1,183       1,289       1,116       (8 )     16  
All other
    363       333       302       9       10  
 
                                 
Total mortgage banking
    2,525       3,133       2,311       (19 )     36  
Operating leases
    427       703       783       (39 )     (10 )
Insurance
    1,830       1,530       1,340       20       14  
Net gains from trading activities
    275       544       544       (49 )      
Net gains (losses) on debt securities available for sale
    1,037       209       (19 )     396     NM
Net gains (losses) from equity investments
    (737 )     734       738     NM     (1 )
All other
    850       936       812       (9 )     15  
 
                                 
 
                                       
Total
  $ 16,754     $ 18,416     $ 15,740       (9 )     17  
 
                                 
 
NM – Not meaningful
the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income for 2008 included a $242 million net MSRs valuation loss that was recorded to earnings ($3.34 billion fair value loss offsetting by a $3.10 billion economic hedging gain) and for 2007 included a $583 million net MSRs valuation gain ($571 million fair value loss offsetting a $1.15 billion economic hedging gain). Our portfolio of loans serviced for others was $1.86 trillion, including $379 billion acquired from Wachovia, at December 31, 2008, up 30% from $1.43 trillion at December 31, 2007. At December 31, 2008, the ratio of MSRs to related loans serviced for others was 0.87%.
     Net gains on mortgage loan origination/sales activities were $1,183 million in 2008, down from $1,289 million in 2007. Residential real estate originations totaled $230 billion in 2008, compared with $272 billion in 2007. For additional detail, see “Asset/Liability and Market Risk Management –Mortgage Banking Interest Rate and Market Risk,” and Note 1 (Summary of Significant Accounting Policies), Note 9 (Mortgage Banking Activities) and Note 17 (Fair Values of Assets and Liabilities) to Financial Statements.
     Mortgage loans are repurchased based on standard representations and warranties and early payment default clauses in mortgage sale contracts. The $234 million increase in the repurchase reserve in 2008 included $208 million related to standard representations and warranties as the housing market deteriorated and loss severities on repurchases increased. An additional $26 million related to an increase in projected early payment defaults, due to the overall deterioration in the market. To the extent the market does not recover, Home
Mortgage could continue to have increased loss severity on repurchases, causing future increases in the repurchase reserve. In addition, there was $29 million in warehouse valuation adjustments in 2008 due to increasing losses associated with repurchase risk. The write-down of the mortgage warehouse/pipeline in 2008 was $584 million, including losses of $320 million due to spread widening primarily on the prime mortgage warehouse caused by changes in liquidity. The remaining $264 million of losses were primarily losses on unsalable loans. Due to the deterioration in the overall credit market and related secondary market liquidity challenges, these losses have been significant. Similar losses on unsalable loans could be possible in the future if the housing market does not recover.
     The 1-4 family first mortgage unclosed pipeline was $71 billion (including $5 billion from Wachovia) at December 31, 2008, and $43 billion at December 31, 2007.
     Operating lease income decreased 39% from a year ago, due to continued softening in the auto market, reflecting tightened credit standards. In third quarter 2008, we stopped originating new indirect auto leases, but will continue to service existing lease contracts.
     Insurance revenue was up 20% from 2007, due to customer growth, higher crop insurance revenue and the fourth quarter 2007 acquisition of ABD Insurance.
     Income from trading activities was $275 million in 2008 and $544 million in 2007. Income from trading activities and “all other” income collectively included a $106 million charge in 2008 related to unsecured counterparty exposure on derivative contracts with Lehman Brothers. Net investment gains (debt and equity) totaled $300 million for 2008 and included other-than-temporary impairment charges of $646 million for Fannie Mae, Freddie Mac and Lehman Brothers, an additional $1,364 million of other-than-temporary write-downs and $1,710 million of net realized investment gains. Net gains on debt securities available for sale were $1,037 million for 2008 and $209 million for 2007. Net gains (losses) from equity investments were $(737) million in 2008, compared with $734 million in 2007. For additional detail, see “Balance Sheet Analysis – Securities Available for Sale” in this Report.
Noninterest Expense
We continued to build our business with investments in additional team members, largely sales and service professionals, and new banking stores in 2008. Noninterest expense in 2008 decreased 1% from the prior year. In 2008, we opened 58 regional banking stores and converted 32 stores acquired from Greater Bay Bancorp, Farmers State Bank and United Bancorporation of Wyoming, Inc. to our network. Noninterest expense for 2008 included $124 million of merger integration and severance costs.
     Operating lease expense decreased 31% to $389 million in 2008 from $561 million in 2007, as we stopped originating new indirect auto leases in third quarter 2008.
     Insurance expense increased to $725 million in 2008 from $416 million in 2007 due to the fourth quarter 2007 acquisition of ABD Insurance, additional insurance reserves at our captive mortgage reinsurance operation as well as higher commissions on increased sales volume.


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Table 6: Noninterest Expense
 
                                         
(in millions)   Year ended December 31,     % Change  
    2008     2007     2006     2008/     2007/  
                            2007     2006  
 
                                       
Salaries
  $ 8,260     $ 7,762     $ 7,007       6 %     11 %
Commission and incentive compensation
    2,676       3,284       2,885       (19 )     14  
Employee benefits
    2,004       2,322       2,035       (14 )     14  
Equipment
    1,357       1,294       1,252       5       3  
Net occupancy
    1,619       1,545       1,405       5       10  
Operating leases
    389       561       630       (31 )     (11 )
Outside professional services
    847       899       942       (6 )     (5 )
Insurance
    725       416       257       74       62  
Outside data processing
    480       482       437             10  
Travel and entertainment
    447       474       542       (6 )     (13 )
Contract services
    407       448       579       (9 )     (23 )
Advertising and promotion
    378       412       456       (8 )     (10 )
Postage
    338       345       312       (2 )     11  
Telecommunications
    321       321       279             15  
Stationery and supplies
    218       220       223       (1 )     (1 )
Core deposit and other customer relationship intangibles
    186       158       177       18       (11 )
Security
    178       176       179       1       (2 )
Operating losses
    142       437       275       (68 )     59  
All other
    1,689       1,268       965       33       31  
 
                                 
 
                                       
Total
  $ 22,661     $ 22,824     $ 20,837       (1 )     10  
 
                                 
 
     Operating losses in 2008 included a $151 million reversal of Visa litigation expenses related to the Visa initial public offering. Operating losses for 2007 included $203 million for 2007 of litigation expenses associated with indemnification obligations arising from our ownership interest in Visa.
Income Tax Expense
Our effective tax rate for 2008 was 18.5%, compared with 30.7% for 2007. The decrease in the effective tax rate was primarily due to a lower level of pre-tax income and higher amounts of tax credits and tax-exempt income.
Operating Segment Results
We have three lines of business for our 2008 management reporting results: Community Banking, Wholesale Banking and Wells Fargo Financial. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 24 (Operating Segments) to Financial Statements. To reflect the realignment of our corporate trust business from Community Banking into Wholesale Banking in first quarter 2008, results for prior periods have been revised.
Community Banking’s net income decreased 43% to $2.93 billion in 2008 from $5.11 billion in 2007. Double-digit revenue growth was driven by strong balance sheet growth, combined with disciplined expense management, and was offset by higher credit costs, including a $4.7 billion (pre tax) credit reserve build. Revenue increased 11% to $27.76 billion from $24.93 billion in 2007. Net interest income increased 24% to $16.19 billion in 2008 from $13.10 billion in 2007. Net interest
margin increased 36 basis points to 5.02% due to earning assets growth of $41.4 billion, or 15%, offsetting lower investment yields. The growth in earning assets was primarily driven by loan and investment growth. Average loans were up 13% to $218.8 billion in 2008 from $194.0 billion in 2007. Average core deposits were up 5% to $254.6 billion in 2008 from $242.2 billion a year ago. Noninterest income decreased 2% to $11.57 billion in 2008 from $11.83 billion in 2007, primarily due to lower mortgage banking income and trust and investment fees. The provision for credit losses for 2008 increased to $9.56 billion from $3.19 billion in 2007. Noninterest expense decreased 2% to $14.35 billion in 2008 from $14.70 billion in 2007.
Wholesale Banking’s net income decreased 48% to $1.29 billion in 2008 from $2.47 billion in 2007, largely due to the $1.12 billion (pre tax) provision for credit losses, which included a $586 million (pre tax) credit reserve build. Revenue decreased 5% to $8.54 billion from $8.95 billion in 2007. Net interest income increased 23% to $4.47 billion for 2008 from $3.65 billion for 2007 driven by strong loan and deposit growth. Average loans increased 31% to $112.1 billion in 2008 from $85.6 billion in 2007, with double-digit increases across nearly all wholesale lending businesses. Average core deposits grew 16% to $70.6 billion from a year ago, primarily from large corporate, middle market and correspondent banking customers. The increase in provision for credit losses to $1.12 billion in 2008 from $69 million in 2007 was due to higher net charge-offs and additional provision taken to build reserves for the wholesale portfolio. Noninterest income decreased 23% to $4.07 billion in 2008, primarily due to impairment charges and other losses in our capital markets areas, as well as lower commercial real estate brokerage and trust and investment fees. Noninterest expense increased 9% to $5.55 billion in 2008 from $5.08 billion in 2007, due to the acquisition of ABD Insurance as well as higher agent commissions in the crop insurance business stemming from higher commodity prices and the liability recorded for a capital support agreement for a structured investment vehicle.
Wells Fargo Financial reported a net loss of $764 million in 2008 compared with net income of $481 million in 2007, reflecting higher credit costs, including a $1.7 billion credit reserve build due to continued softening in the real estate, auto and credit card markets. Revenue was up 2% to $5.59 billion in 2008 from $5.51 billion in 2007. Net interest income increased 6% to $4.48 billion from $4.23 billion in 2007 due to growth in average loans, which increased 4% to $67.6 billion in 2008 from $65.2 billion in 2007. The provision for credit losses increased $2.38 billion in 2008 from 2007, primarily due to the $1.7 billion credit reserve build, and an increase in net charge-offs in the credit card and auto portfolios due to continued softening in these markets. Noninterest income decreased $171 million in 2008 from 2007. Noninterest expense decreased 9% to $2.76 billion in 2008 from 2007, primarily due to lower expenses from the run off of the auto lease portfolio and reduction in team members.


52


 

Balance Sheet Analysis
 

Securities Available for Sale
Our 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 primarily includes liquid, high-quality federal agency debt as well as privately issued mortgage-backed securities. At December 31, 2008, we held $145.4 billion of debt securities available for sale, including $63.7 billion acquired from Wachovia, with net unrealized losses of $9.8 billion, compared with $70.2 billion at December 31, 2007, with net unrealized gains of $775 million. We also held $6.1 billion of marketable equity securities available for sale at December 31, 2008, including $3.7 billion acquired from Wachovia, and $2.8 billion at December 31, 2007, with net unrealized losses of $160 million and $95 million for the same periods, respectively. The net unrealized loss in cumulative other comprehensive income at December 31, 2008, related entirely to the legacy Wells Fargo portfolio. The net unrealized loss related to the legacy Wachovia portfolio was written off in purchase accounting.
     The significant increase in net unrealized losses on debt securities available for sale to $9.8 billion at December 31, 2008, from net unrealized gains of $775 million at December 31, 2007, was primarily due to extraordinarily wide asset spreads for residential mortgage, commercial mortgage and commercial loan asset-backed securities resulting from an extremely illiquid market, causing these assets to be valued at significant discounts from their cost. We conduct other-than-temporary impairment analysis on a quarterly basis or more often if a potential loss-triggering event occurs. We recognize an other-than-temporary impairment when it is probable that we will be unable to collect all amounts due according to the contractual terms of the security and the fair value of the investment security is less than its amortized cost. The initial indication of other-than-temporary impairment for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and our ability and intent to hold the investment for a period of time, including maturity, sufficient to allow for any anticipated recovery in the fair value of the security. For marketable equity securities, we also consider the issuer’s financial condition, capital strength and near-term
prospects. For debt securities and for perpetual preferred securities, which are treated as debt securities for the purpose of other-than-temporary analysis, we also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, any change in agencies’ ratings at evaluation date from acquisition date and any likely imminent action, and for asset-backed securities, the credit performance of the underlying collateral, including delinquency rates, cumulative losses to date, and the remaining credit enhancement compared to expected credit losses of the security.
     We have approximately $7 billion of investments in securities, primarily municipal bonds, that are guaranteed against loss by bond insurers. These securities are almost exclusively investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of our on-going impairment analysis of our securities available for sale, but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers.
     The weighted-average expected maturity of debt securities available for sale was 5.3 years at December 31, 2008. Since 69% of this portfolio is mortgage-backed securities, 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 mortgage-backed securities available for sale is shown in Table 7.
Table 7: Mortgage-Backed Securities
 
                         
(in billions)   Fair     Net     Remaining  
    value     unrealized     maturity  
            gain (loss)          
 
                       
At December 31, 2008
  $ 99.7     $ (6.8 )   2.9 yrs.  
 
                       
At December 31, 2008,
assuming a 200 basis point:
                       
Increase in interest rates
    90.9       (15.6 )   4.3 yrs.  
Decrease in interest rates
    104.0       (2.5 )   1.8 yrs.  
 
     See Note 5 (Securities Available for Sale) to Financial Statements for securities available for sale by security type.


53


 

Loan Portfolio
A discussion of average loan balances is included in “Earnings Performance – Net Interest Income” on page 47 and a comparative schedule of average loan balances is included in Table 3; year-end balances are in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements.
     Total loans at December 31, 2008, were $864.8 billion, up $482.6 billion from $382.2 billion at December 31, 2007, including $446.1 billion (net of $30.5 billion of purchase accounting net write-downs) acquired from Wachovia. Consumer loans were $474.9 billion at December 31, 2008, up $253.0 billion from $221.9 billion a year ago, including $246.8 billion (net of $21.0 billion of purchase accounting net
write-downs) acquired from Wachovia. Commercial and commercial real estate loans of $356.1 billion at December 31, 2008, increased $203.3 billion from a year ago, including $171.4 billion (net of $7.9 billion of purchase accounting net write-downs) acquired from Wachovia. Mortgages held for sale decreased to $20.1 billion at December 31, 2008, from $26.8 billion a year ago, including $1.4 billion acquired from Wachovia.
     A summary of the major categories of loans outstanding showing those subject to SOP 03-3 is presented in the following table. For further detail on SOP 03-3 loans see Note 1 (Summary of Significant Accounting Policies – Loans) and Note 6 (Loans and Allowance for Credit Losses).


Table 8: Loan Portfolios
 
                                 
(in millions)   December 31,  
    2008     2007  
    SOP 03-3     All     Total          
    loans     other                  
            loans                  
 
                               
Commercial and commercial real estate:
                               
Commercial
  $ 4,580     $ 197,889     $ 202,469     $ 90,468  
Other real estate mortgage
    7,762       95,346       103,108       36,747  
Real estate construction
    4,503       30,173       34,676       18,854  
Lease financing
          15,829       15,829       6,772  
 
                       
Total commercial and commercial real estate
    16,845       339,237       356,082       152,841  
Consumer:
                               
Real estate 1-4 family first mortgage
    39,214       208,680       247,894       71,415  
Real estate 1-4 family junior lien mortgage
    728       109,436       110,164       75,565  
Credit card
          23,555       23,555       18,762  
Other revolving credit and installment
    151       93,102       93,253       56,171  
 
                       
Total consumer
    40,093       434,773       474,866       221,913  
Foreign
    1,859       32,023       33,882       7,441  
 
                       
Total loans
  $ 58,797     $ 806,033     $ 864,830     $ 382,195  
 
                       
 

     Table 9 shows contractual loan maturities and interest rate sensitivities for selected loan categories.
Table 9: Maturities for Selected Loan Categories
 
                                 
(in millions)   December 31, 2008  
    Within     After     After     Total  
    one     one year     five          
    year     through     years          
            five years                  
 
                               
Selected loan maturities:
                               
Commercial
  $ 59,246     $ 109,764     $ 33,459     $ 202,469  
Other real estate mortgage
    23,880       45,565       33,663       103,108  
Real estate construction
    19,270       13,942       1,464       34,676  
Foreign
    23,605       7,288       2,989       33,882  
 
                       
 
Total selected loans
  $ 126,001     $ 176,559     $ 71,575     $ 374,135  
 
                       
 
                               
Sensitivity of loans due after one year to changes in interest rates:
                               
Loans at fixed interest rates
          $ 24,766     $ 23,628          
Loans at floating/variable interest rates
            151,793       47,947          
 
                           
 
Total selected loans
          $ 176,559     $ 71,575          
 
                           
 


54


 

Deposits
Year-end deposit balances totaling $781.4 billion, which included $426.2 billion from Wachovia (reflecting an increase of $4.4 billion of interest rate related purchase accounting adjustments), are shown in Table 10. A comparative detail of average deposit balances is included in Table 3. Average core deposits, which did not include Wachovia deposits, increased $22.1 billion to $325.2 billion in 2008 from $303.1 billion in 2007. Average core deposits funded 53.8% and 58.2% of average total assets in 2008 and 2007, respectively. Total average interest-bearing deposits increased to $266.1 billion in 2008 from $239.2 billion in 2007, predominantly due to growth in market rate and other savings, along with growth in foreign deposits, offset by a decline in other time deposits. Total average non-interest-bearing deposits declined to $87.8 billion in 2008 from $88.9 billion in 2007. Savings certificates decreased on average to $39.5 billion in 2008 from $40.5 billion in 2007.
Table 10: Deposits
 
                         
(in millions)   December 31,     %  
    2008     2007     Change  
 
                       
Noninterest-bearing
  $ 150,837     $ 84,348       79 %
Interest-bearing checking
    72,828       5,277     NM
Market rate and other savings
    306,255       153,924       99  
Savings certificates
    182,043       42,708       326  
Foreign deposits (1)
    33,469       25,474       31  
 
                   
Core deposits
    745,432       311,731       139  
Other time deposits
    28,498       3,654       680  
Other foreign deposits
    7,472       29,075       (74 )
 
                   
Total deposits
  $ 781,402     $ 344,460       127  
 
                   
 
NM – Not meaningful
(1) Reflects Eurodollar sweep balances included in core deposits.


Off-Balance Sheet Arrangements
 

In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital. These are described below as off-balance sheet transactions with unconsolidated entities, and guarantees and certain contingent arrangements.
Off-Balance Sheet Transactions with Unconsolidated Entities
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs). SPEs are corporations, trusts or partnerships that are established for a limited purpose. The majority of SPEs are formed in connection with securitization transactions. In a securitization transaction, assets from our balance sheet are transferred to an SPE, which then issues to investors various forms of interests in those assets and may also enter into derivative transactions. In a securitization transaction, we typically receive cash and/or other interests in an SPE as proceeds for the assets we transfer. Also, in certain transactions, we may retain the right to service the transferred receivables and to repurchase those receivables from the SPE if the outstanding balance of the receivables fall to a level where the cost exceeds the benefits of servicing such receivables.
     In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:
  underwriting securities issued by SPEs and subsequently making markets in those securities;
  providing liquidity facilities to support short-term obligations of SPEs issued to third party investors;
 
  providing credit enhancement to securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps;
 
  entering into other derivative contracts with SPEs;
 
  holding senior or subordinated interests in SPEs;
 
  acting as servicer or investment manager for SPEs; and
 
  providing administrative or trustee services to SPEs.
     The SPEs we use are primarily either qualifying SPEs (QSPEs) or variable interest entities (VIEs). A QSPE represents a specific type of SPE. A QSPE is a passive entity that has significant limitations on the types of assets and derivative instruments it may own and the extent of activities and decision making in which it may engage. For example, a QSPE’s activities are generally limited to purchasing assets, passing along the cash flows of those assets to its investors, servicing its assets and, in certain transactions, issuing liabilities. Among other restrictions on a QSPE’s activities, a QSPE may not actively manage its assets through discretionary sales or modifications. A QSPE is exempt from consolidation.
     A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is the entity that, through its variable interests, absorbs the majority of a VIE’s variability. A variable interest is a contractual, ownership or other interest that changes with changes in the fair value of the VIE’s net assets.


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     Our significant continuing involvement with QSPEs and unconsolidated VIEs as of December 31, 2008 and 2007, is presented below.
Table 11:   Qualifying Special Purpose Entities and Unconsolidated Variable Interest Entities
 
                         
(in millions)   December 31, 2008  
 
    Total     Carrying     Maximum  
    entity     value     exposure  
    assets             to loss  
 
                       
QSPEs
                       
Residential mortgage loan securitizations
  $ 1,144,775     $29,939     $31,438  
Commercial mortgage securitizations
    355,267       3,060       6,376  
Student loan securitizations
    2,765       133       133  
Auto loan securitizations
    4,133       115       115  
Other
    11,877       71       1,576  
 
                     
 
                       
Total QSPEs
  $ 1,518,817     $33,318     $39,638  
 
                     
 
                       
Unconsolidated VIEs
                       
CDOs
  $ 48,802     $15,133     $20,443  
Wachovia administered ABCP (1) conduit
    10,767             15,824  
Asset-based lending structures
    11,614       9,096       9,482  
Tax credit structures
    22,882       3,850       4,926  
CLOs
    23,339       3,326       3,881  
Investment funds
    105,808       3,543       3,690  
Credit-linked note structures
    12,993       1,522       2,303  
Money market funds
    31,843       60       101  
Other
    1,832       3,806       4,699  
 
                     
 
                       
Total unconsolidated VIEs
  $ 269,880     $40,336     $65,349  
 
                     
 
                       
 
 
(1)   Asset-backed commercial paper
     We have excluded from the table SPEs and unconsolidated VIEs where our only involvement is in the form of investments in trading securities, investments in securities or loans underwritten by third parties, and administrative or trustee services. We have also excluded investments accounted for in accordance with the AICPA Investment Company Audit Guide, investments accounted for under the cost method and investments accounted for under the equity method.
     For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 8 (Securitizations and Variable Interest Entities) to Financial Statements.
     We also have significant involvement with voting interest SPEs. Wells Fargo Home Mortgage (Home Mortgage), in the ordinary course of business, originates a portion of its mortgage loans through unconsolidated joint ventures in which we own an interest of 50% or less. Loans made by these joint ventures are funded by Wells Fargo Bank, N.A. through an established line of credit and are subject to specified underwriting criteria. At December 31, 2008, the total assets of these mortgage origination joint ventures were approximately $46 million. We provide liquidity to these joint ventures in the form of outstanding lines of credit and, at December 31, 2008, these liquidity commitments totaled $135 million.
     We also hold interests in other unconsolidated joint ventures formed with unrelated third parties to provide efficiencies from economies of scale. A third party manages our real estate lending services joint ventures and provides customers with title, escrow, appraisal and other real estate related services. Our fraud prevention services partnership facilitates the exchange of information between financial services organizations to detect and prevent fraud. At December 31, 2008, total assets of our real estate lending joint ventures and fraud prevention services partnership were approximately $132 million.
Guarantees and Certain Contingent Arrangements
Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of securities lending indemnifications, standby letters of credit, liquidity agreements, recourse obligations, residual value guarantees, written put options and contingent consideration. The following table presents the carrying amount, maximum risk of loss of our guarantees and, for December 31, 2008, the amount with a higher payment risk.


Table 12: Guarantees and Certain Contingent Arrangements
 
                                         
(in millions)                           December 31,  
    2008     2007  
    Carrying     Maximum     Higher     Carrying     Maximum  
    amount     risk of     payment     amount     risk of  
            loss     risk             loss  
 
                                       
Standby letters of credit
  $   130     $  47,191     $17,293     $    7     $12,530  
Securities and other lending indemnifications
          30,120       1,907              
Liquidity agreements
    30       17,602                    
Written put options
    1,376       10,182       5,314       48       2,569  
Loans sold with recourse
    53       6,126       2,038             2  
Residual value guarantees
          1,121                    
Contingent consideration
    11       187             67       246  
Other guarantees
          38             1       59  
 
                                       
 
                                       
Total guarantees
  $1,600     $112,567     $26,552     $123     $15,406  
 
                                       
 
                                       
 
     For more information on guarantees and certain contingent arrangements, see Note 15 (Guarantees and Legal Actions) to Financial Statements.

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Contractual Obligations
In addition to the contractual commitments and arrangements previously described, which, depending on the nature of the obligation, may or may not require use of our resources, we enter into other contractual obligations in the ordinary course of business, including debt issuances for the funding of operations and leases for premises and equipment.
     Table 13 summarizes these contractual obligations at December 31, 2008, except obligations for short-term borrowing arrangements and pension and postretirement benefit plans. More information on those obligations is in Note 13 (Short-Term Borrowings) and Note 20 (Employee Benefits and Other Expenses) to Financial Statements.


Table 13: Contractual Obligations
 
                                                         
(in millions)   Note(s) to     Less than     1-3     3-5     More than     Indeterminate     Total  
    Financial     1 year     years     years     5 years     maturity (1)         
    Statements                                                  
 
                                                       
Contractual payments by period:
                                                       
Deposits
    12     $ 201,250     $ 27,084     $ 19,928     $ 3,213     $ 529,927     $ 781,402  
Long-term debt (2)
    7, 14       53,893       81,063       38,850       93,352             267,158  
Operating leases
    7       1,408       3,170       1,723       3,995             10,296  
Unrecognized tax obligations
    21       2,311                         2,952       5,263  
Purchase obligations (3)
            510       878       192       41             1,621  
 
                                         
 
                                                       
Total contractual obligations
          $ 259,372     $ 112,195     $ 60,693     $ 100,601     $ 532,879     $ 1,065,740  
 
                                         
 
                                                       
 
 
(1)   Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
 
(2)   Includes obligations under capital leases of $103 million.
 
(3)   Represents agreements to purchase goods or services.
     We are subject to the income tax laws of the U.S., its states and municipalities, and those of the foreign jurisdictions in which we operate. We have various unrecognized tax obligations related to these operations which may require future cash tax payments to various taxing authorities. Because of their uncertain nature, the expected timing and amounts of these payments generally are not reasonably estimable or determinable. We attempt to estimate the amount payable in the next 12 months based on the status of our tax examinations and settlement discussions. See Note 21 (Income Taxes) to Financial Statements for more information.
     We enter into derivatives, which create contractual obligations, as part of our interest rate risk management process, for our customers or for other trading activities. See “Asset/Liability and Market Risk Management” in this Report and Note 16 (Derivatives) to Financial Statements for more information.
PRUDENTIAL JOINT VENTURE Our financial statements include Prudential Financial Inc.’s (Prudential) minority interest in Wachovia Securities Financial Holdings, LLC (WSFH). As a result of Wachovia’s contribution to WSFH on January 1, 2008, of the retail securities business of A.G. Edwards, Inc. (A.G. Edwards), which Wachovia acquired on October 1, 2007, Prudential’s percentage interest in WSFH was diluted as of that date based on the value of the contributed business relative to the value of WSFH. Although the adjustment in Prudential’s interest will be effective on a retroactive basis as of the January 1, 2008, contribution date, the valuations necessary to calculate the precise reduction in that percentage interest have not been finalized. Based on currently available information, Wells Fargo estimates that Prudential’s percentage interest has been diluted from its pre-contribution percentage interest of 38% to approximately 23% as a result of the A.G. Edwards contribution. This percentage interest may be adjusted higher or lower in a subsequent quarter retroactive
to January 1, 2008, if the final valuations differ from Wells Fargo’s current estimate.
     In connection with Wachovia’s contribution of A.G. Edwards to the joint venture, Prudential elected to exercise its lookback option, which permits Prudential to delay until January 1, 2010, its decision to make or not make an additional capital contribution to the joint venture or other payments to avoid or limit dilution of its ownership interest in the joint venture. During this lookback period, Prudential’s share in the joint venture’s earnings and one-time costs associated with the combination will be based on Prudential’s diluted ownership level following the A.G. Edwards combination. At the end of the lookback period, Prudential may elect to make an additional capital contribution or other payment, based on the appraised value (as defined in the joint venture agreements) of the existing joint venture and the A.G. Edwards business as of January 1, 2008, to avoid or limit dilution. Alternatively, at the end of the lookback period, Prudential may put its joint venture interests to Wells Fargo based on the appraised value of the joint venture, excluding the A.G. Edwards business, as of January 1, 2008. Prudential has announced its intention to exercise, but has not yet formally exercised, this lookback put option. Prudential has until September 30, 2009, to exercise the lookback put option. If Prudential exercises the lookback put option, the closing would occur on or about January 1, 2010. Prudential also has a discretionary right to put its joint venture interests to Wells Fargo, including the A.G. Edwards business, at any time after July 1, 2008. If Prudential exercises this discretionary put option, the closing would occur approximately one year from the date of exercise and the appraised value would be determined at that time. Wells Fargo may pay the purchase price for either the lookback or discretionary put option in cash, shares of Wells Fargo common stock, or a combination thereof.


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Transactions with Related Parties
FAS 57, Related Party Disclosures, requires disclosure of material related party transactions, other than compensation arrangements, expense allowances and other similar items in
the ordinary course of business. We had no related party transactions required to be reported under FAS 57 for the years ended December 31, 2008, 2007 and 2006.


Risk Management
 

Credit Risk Management Process
Our credit risk management process provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs and a continual loan review and audit process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes. We continually evaluate and modify our credit policies to address unacceptable levels of risk as they are identified.
     Managing credit risk is a company-wide process. We have credit policies for all banking and nonbanking operations incurring credit risk with customers or counterparties that provide a prudent approach to credit risk management. We use detailed tracking and analysis to measure credit performance and exception rates, and we routinely review and modify credit policies as appropriate. We have corporate data integrity standards to ensure accurate and complete credit performance reporting for the consolidated company. We strive to identify problem loans early and have dedicated, specialized collection and work-out units.
     The Chief Credit and Risk Officer provides company-wide credit oversight. Each business unit with direct credit risks has a senior credit officer who has the primary responsibility for managing its own credit risk. The Chief Credit and Risk Officer delegates authority, limits and other requirements to the business units. These delegations are routinely reviewed and amended if there are significant changes in personnel, credit performance or business requirements. The Chief Credit and Risk Officer is a member of the Company’s Management Committee and reports to the Chief Executive Officer. The Chief Credit and Risk Officer provides a quarterly credit review to the Credit Committee of the Board of Directors and meets with them periodically.
     Our business units and the office of the Chief Credit and Risk Officer periodically review all credit risk portfolios to ensure that the risk identification processes are functioning properly and that credit standards are followed. Business units conduct quality assurance reviews to ensure that loans meet portfolio or investor credit standards. Our loan examiners in risk asset review and internal audit independently review portfolios with credit risk, monitor performance, sample credits, review and test adherence to credit policy and recommend/require corrective actions as necessary.
     Our primary business focus on middle-market commercial, commercial real estate, residential real estate, auto, credit card and small consumer lending results in portfolio diversification. We assess loan portfolios for geographic, industry or other concentrations and use mitigation strategies, which may include loan sales, syndications or third party insurance, to minimize these concentrations, as we deem appropriate.
     In our commercial loan, commercial real estate loan and lease financing portfolios, larger or more complex loans are individually underwritten and judgmentally risk rated. They are periodically monitored and prompt corrective actions are taken on deteriorating loans. Smaller, more homogeneous commercial small business loans are approved and monitored using statistical techniques.
     Retail loans are typically underwritten with statistical decision-making tools and are managed throughout their life cycle on a portfolio basis. The Chief Credit and Risk Officer establishes corporate standards for model development and validation to ensure sound credit decisions and regulatory compliance, and approves new model implementation and periodic validation.
     Residential real estate mortgages are one of our core products. We offer a broad spectrum of first mortgage and junior lien loans that we consider mostly prime or near prime. These loans are almost entirely secured by a primary residence for the purpose of purchase money, refinance, debt consolidation or home improvements. We now hold option adjustable rate mortgages (option ARMs) in the Pick-a-Pay portfolio acquired from Wachovia. This portfolio will be managed as a liquidating portfolio. See page 61 of this Report for additional information on the Pick-a-Pay portfolio. It has not been our practice, nor do we intend to originate negative amortizing option ARMs or variable-rate mortgage products with fixed payment amounts. We have manageable ARM reset risk across our Wells Fargo originated and owned mortgage loan portfolios.
     We originate mortgage loans through a variety of sources, including our retail sales force and licensed real estate brokers. We apply consistent credit policies, borrower documentation standards, Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) compliant appraisal requirements, and sound underwriting, regardless of application source. We perform quality control reviews for third party originated loans and actively manage or terminate sources that do not meet our credit standards. For example, during 2007 we stopped originating first and junior lien resi-


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dential mortgages where credit performance had deteriorated beyond our expectations, specifically high combined loan-to-value home equity loans sourced through third party channels not behind a Wells Fargo first mortgage.
     We believe our underwriting process is well controlled and appropriate for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans. We only approve applications and make loans if we believe the customer has the ability to repay the loan or line of credit according to all its terms. We have significantly tightened our bank-selected reduced documentation requirements as a precautionary measure and substantially reduced third party originations due to the negative loss trends experienced in these channels. Appraisals or automated valuation models are used to support property values.
     In the mortgage industry, it has been common for consumers, lenders and servicers to purchase mortgage insurance, which can enhance the credit quality of the loan for investors and serves generally to expand the market for home ownership.
     In our servicing portfolio, certain of the loans we service carry mortgage insurance, based largely on the requirements of investors, who bear the ultimate credit risk. Within our $1.8 trillion owned residential servicing portfolio at December 31, 2008, we service approximately $128 billion of loans that carry approximately $31 billion of mortgage insurance coverage purchased from a group of mortgage insurance companies that are rated AA or higher by one or more of the major rating agencies. Should any of these companies experience a downgrade by one or more of the rating agencies, investors may be exposed to a higher level of credit risk. In this event, as servicer, we would work with the investors to determine if it is necessary to obtain replacement coverage with another insurer. Our mortgage servicing portfolio consists of over 85% prime loans and we continue to be among the highest rated loan servicers for residential real estate mortgage loans, based on various servicing criteria. The foreclosure rate in our mortgage servicing portfolio was 1.4% at year-end 2008.
     Similarly, for certain loans that we held for investment or for sale at December 31, 2008, we obtained approximately $3 billion of mortgage insurance coverage. In the event a mortgage insurer is unable to meet its obligations on defaulted loans in accordance with the insurance contract, we might be exposed to higher credit losses if replacement coverage on those loans cannot be obtained. However, approximately one-fourth of the coverage related to the debt consolidation nonprime real estate 1-4 family mortgage loans held by Wells Fargo Financial, which have had a low level of credit losses (0.99% loss rate in 2008 for the entire debt consolidation portfolio). The remaining coverage primarily related to prime real estate 1-4 family mortgage loans, primarily high quality ARMs for our retail and wealth management customers, which also have had low loss rates.
     Each business unit regularly completes asset quality forecasts to quantify its intermediate-term outlook for loan losses and recoveries, nonperforming loans and market trends. To make sure our overall loss estimates and the allowance for credit losses are adequate, we conduct periodic stress tests.
This includes a portfolio loss simulation model that simulates a range of possible losses for various sub-portfolios assuming various trends in loan quality, stemming from economic conditions or borrower performance.
     We routinely review and evaluate risks that are not borrower specific but that may influence the behavior of a particular credit, group of credits or entire sub-portfolios. We also assess risk for particular industries, geographic locations such as states or Metropolitan Statistical Areas (MSAs) and specific macroeconomic trends.
Loan Portfolio Concentrations
Loan concentrations may exist when there are borrowers engaged in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers or portfolios to be similarly impacted by economic or other conditions.
Table 14: Real Estate 1-4 Family Mortgage Loans by State
 
                                 
(in millions)   December 31, 2008  
    Real estate     Real estate     Total real     % of  
    1-4 family     1-4 family     estate 1-4     total  
    first     junior lien     family     loans  
    mortgage     mortgage     mortgage        
 
                               
SOP 03-3 loans:
                               
California
    $  26,196       $       300       $  26,496       3 %
Florida
    4,012       142       4,154       1  
New Jersey
    1,175       54       1,229       *  
Arizona
    971       15       986       *  
Other (1)
    6,860       217       7,077       *  
 
                               
 
                               
Total SOP
                               
03-3 loans
    39,214       728       39,942       4  
 
                               
 
                               
All other loans:
                               
California
    59,921       32,209       92,130       11  
Florida
    22,234       9,334       31,568       4  
New Jersey
    10,470       6,810       17,280       2  
Virginia
    6,864       5,171       12,035       1  
New York
    7,607       4,142       11,749       1  
Pennsylvania
    7,094       4,335       11,429       1  
North Carolina
    7,365       3,978       11,343       1  
Texas
    7,688       1,944       9,632       1  
Georgia
    5,528       3,829       9,357       1  
Arizona
    5,287       3,582       8,869       1  
Other (2)
    68,622       34,102       102,724       13  
 
                               
 
                               
Total all
                               
other loans
    208,680       109,436       318,116       37  
 
                               
 
                               
Total
    $247,894       $110,164       $358,058       41 %
 
                               
 
*   Less than 1%.
(1)   Consists of 46 states; no state had loans in excess of $704 million.
(2)   Consists of 40 states; no state had loans in excess of $8,127 million. Includes $7,880 million in GNMA early pool buyouts.
REAL ESTATE 1-4 FAMILY FIRST MORTGAGE LOANS As part of the Wachovia acquisition, we have acquired residential first and home equity loans that are very similar to the Wells Fargo originated portfolio for these loan types. Additionally, we acquired the Pick-a-Pay option ARM first mortgage portfolio. The nature of this product creates an potential opportunity for negative amortization. As part of our purchase accounting activities, the option ARM loans with the highest probability of default were marked down to fair value. The concentrations of real estate 1-4 family mortgage loans by state are


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presented in the following table. Our real estate 1-4 family mortgage loans to borrowers in the state of California represented approximately 14% of total loans at December 31, 2008, compared with 13% of total loans at the end of 2007. Of this amount, 3% of total loans were credit-impaired loans acquired from Wachovia. These loans are mostly within the larger metropolitan areas in California, with no single area consisting of more than 2% of total loans. Changes in real estate values and underlying economic or market conditions for these areas are monitored continuously within the credit risk management process. Beginning in 2007, the residential real estate markets experienced signifi-
cant declines in property values, and several markets in California, specifically the Central Valley and several Southern California MSAs, experienced more severe declines.
     Some of our real estate 1-4 family mortgage loans, including first mortgage and home equity products, include an interest-only feature as part of the loan terms. At December 31, 2008, these loans were approximately 11% of total loans, compared with 20% at the end of 2007. Most of these loans are considered to be prime or near prime. We have manageable ARM reset risk across our Wells Fargo originated and owned mortgage loan portfolios.


Table 15: Home Equity Portfolios (1)
 
                                                 
(in millions)   Outstanding     % of loans     Loss rate (2)
    balances     two payments        
                    or more past due        
    December 31,     December 31,     December 31,  
    2008     2007     2008     2007     2008     2007  
 
                                               
Liquidating portfolio
                                               
California
  $ 4,008     $ 4,387       6.69 %     2.94 %     9.26 %     7.34 %
Florida
    513       582       8.41       4.98       11.24       7.08  
Arizona
    244       274       7.40       2.67       8.58       5.84  
Texas
    191       221       1.27       0.83       1.56       0.78  
Minnesota
    127       141       3.79       3.18       5.74       4.09  
Other
    5,226       6,296       3.28       2.00       3.40       2.94  
 
                                           
Total
    10,309       11,901       4.93       2.50       6.18       4.80  
 
                                           
 
                                               
Core portfolio (3)
                                               
California
    31,544       25,991       2.95       1.63       2.93       1.27  
Florida
    11,781       2,614       3.36       2.92       2.79       2.57  
New Jersey
    7,888       1,795       1.41       1.63       0.66       0.42  
Virginia
    5,688       1,780       1.50       1.14       1.08       0.66  
Pennsylvania
    5,043       1,002       1.10       1.17       0.38       0.32  
Other
    56,415       39,147       1.97       1.38       1.14       0.52  
 
                                           
Total
    118,359       72,329       2.27       1.52       1.70       0.86  
 
                                           
 
                                               
Total liquidating and core portfolios
    128,668       84,230       2.48       1.66       2.10       1.42  
 
                                           
 
                                               
SOP 03-3 portfolio (4)
    821                                        
 
                                           
 
                                               
Total home equity portfolios
  $ 129,489     $ 84,230                                  
 
                                           
 
(1)   Consists of real estate 1-4 family junior lien mortgages and lines of credit secured by real estate from all groups, including the National Home Equity Group, Wachovia, Wells Fargo Financial and Wealth Management.
(2)   Loss rate for 2007 data is based on the annualized loss rate for month of December 2007.
(3)   Loss rates for the core portfolio in the table above reflect 2008 results for Wachovia (not included in the Wells Fargo reported results) and Wells Fargo. For the Wells Fargo core portfolio on a stand-alone basis, outstanding balances and related loss rates were $29,399 million (2.90%) for California, $2,677 million (5.04%) for Florida, $1,925 million (1.33%) for New Jersey, $1,827 million (1.14%) for Virginia, $1,073 million (0.92%) for Pennsylvania, $38,934 million (1.34%) for all other states, and $75,835 million (2.05%) in total, at December 31, 2008.
(4)   Consists of $728 million real estate 1-4 family junior lien mortgages and $93 million of real estate 1-4 family first mortgages.

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     The deterioration in specific segments of the Home Equity portfolios required a targeted approach to managing these assets. A liquidating portfolio, consisting of home equity loans generated through the wholesale channel not behind a Wells Fargo first mortgage, and home equity loans acquired through correspondents, was identified. While the $10.3 billion of loans in this liquidating portfolio represented about 1% of total loans outstanding at December 31, 2008, these loans represented some of the highest risk in the $129.5 billion Home Equity portfolios, with a loss rate of 6.18% compared with 1.70% for the core portfolio. The loans in the liquidating portfolio are largely concentrated in geographic markets that have experienced the most abrupt and steepest declines in housing prices. The core portfolio was $118.4 billion at December 31, 2008, of which 98% was originated through the retail channel and approximately 15% of the outstanding balance was in a first lien position. Table 15 includes the credit attributes of these two portfolios.
PICK-A-PAY PORTFOLIO Our Pick-a-Pay loan portfolio, which we acquired in the Wachovia merger, had an outstanding balance of $119.6 billion and a carrying value of $95.3 billion at December 31, 2008. The carrying value is net of $22.2 billion of purchase accounting net write-downs to reflect SOP 03-3 loans at fair value and a $249 million increase to reflect all other loans at a market rate of interest. Pick-a-Pay loans 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. Approximately 80% of the Pick-a-Pay portfolio has payment options calculated using a monthly adjustable interest rate; the rest of the portfolio is fixed rate.
     Approximately 85% of the December 31, 2008, Pick-a-Pay loan portfolio was originated under Wachovia’s “Quick Qualifier” program where the level of documentation obtained from a prospective customer relative to income and assets was determined based in part on data provided by the customer in their loan application. The remaining 15% was originated with full documentation (verified assets and verified income).
     The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The new minimum monthly payment amount generally cannot exceed the prior year’s minimum payment amount by more than 7.5%. 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.” Our Pick-a-Pay customers have been fairly constant in their utilization of the minimum payment option. Of our Pick-a-Pay customers, approximately 66% at December 31, 2008, based on number of loans, had elected this option.
At December 31, 2008, approximately 51% of Pick-a-Pay customers had elected the minimum payment option in each of the past six months.
     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 of the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the original loan balance. 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. 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. 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 balance of loans to recast based on reaching the cap: $5 million in 2009, $15 million in 2010, $16 million in 2011 and $45 million in 2012. In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast; $27 million in 2009, $59 million in 2010, $92 million in 2011 and $163 million in 2012.
     Included in the Pick-a-Pay portfolio are loans accounted for under SOP 03-3 with a total outstanding balance of $61.9 billion and a carrying value of $37.6 billion. Loans that we acquired from Wachovia with evidence of credit quality deterioration since origination and for which it was probable at the date of the Wachovia acquisition that we will be unable to collect all contractually required payments are accounted for under SOP 03-3, which requires that acquired credit-impaired loans be recorded at fair value and prohibits carrying over of the related allowance in the initial accounting.
     In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is a key metric in predicting future loan performance, including charge-offs. Because SOP 03-3 loans are carried at fair value, the LTV ratio is not necessarily a predictor of future loan performance. For informational purposes we have also included the ratio of the carrying amount to the current value of the loans.
     To maximize return and allow flexibility for customers to avoid foreclosure, we have in place several loss mitigation strategies for our Pick-a-Pay loan portfolio. We contact customers who are experiencing difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.


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     We also have in place proactive steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at-risk, we will offer combinations of term extensions of up to 40 years, interest rate reductions, charge no interest on a portion of the principal for some period of time and, in geographies with substantial property value declines, we will even use permanent principal reductions.
     We expect to continually reassess our loss mitigation strategies and may adopt additional strategies in the future. To the extent that these strategies involve making an economic concession to a customer experiencing financial difficulty, they will be accounted for and reported as TDRs.


Table 16: Pick-a-Pay Portfolio
                                                 
   
(in millions)   December 31, 2008  
    SOP 03-3 loans     All other loans  
    Outstanding     Current     Carrying     Ratio of     Outstanding     Current  
    balance (1)   LTV ratio (2)   amount     carrying     balance     LTV ratio (2)
                            amount                  
                            to current                  
                            value                  
 
                                               
California
    $42,650       133 %     $25,472       85 %     $28,107       86 %
Florida
    5,992       119       3,439       76       6,099       89  
New Jersey
    1,809       94       1,246       60       3,545       74  
Texas
    562       72       385       49       2,231       61  
Arizona
    1,552       133       895       85       1,449       95  
Other states
    9,381       92       6,178       61       16,269       75  
 
                                               
Total Pick-a-Pay loans
    $61,946               $37,615               $57,700          
 
                                               
 
                                               
   
(1) Outstanding balances exclude purchase accounting nonaccretable difference of $(24.3) billion; include accretable yield.
 
(2) Current LTV ratio is based on collateral values and is updated quarterly by an independent vendor. LTV ratio includes outstanding balance on equity lines of credit (included in Table 15) that share common collateral and are junior to the above Pick-a-Pay loans.

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WELLS FARGO FINANCIAL Wells Fargo Financial originates real estate secured debt consolidation loans, and both prime and non-prime auto secured loans, unsecured loans and credit cards.
     Wells Fargo Financial had $29.1 billion in real estate secured loans as of December 31, 2008. Of this portfolio, $1.8 billion is considered prime based on secondary market standards and has been priced to the customer accordingly. The remaining portfolio is non-prime but has been originated with standards that effectively mitigate credit risk. It has been originated through our retail channel with documented income, LTV limits based on credit quality and property characteristics, and risk-based pricing. In addition, the loans were originated without teaser rates, interest-only or negative amortization features. Credit losses in the portfolio have increased in the current economic environment compared with historical levels, but performance remained similar to prime portfolios in the industry with overall credit losses in 2008 of 1.08% on the entire portfolio. Of the portfolio, $9.7 billion was originated with customer FICO scores below 620, but these loans have further restrictions on LTV and debt-to-income ratios to limit the credit risk.
     Wells Fargo Financial also had $23.6 billion in auto secured loans and leases as of December 31, 2008, of which $6.3 billion was originated with customer FICO scores below 620. Net charge-offs in this portfolio for 2008 were 4.05% for FICO scores of 620 and above, and 6.27% for FICO scores below 620. These loans were priced based on relative risk. Of this portfolio, $18.2 billion represented loans and leases originated through its indirect auto business, which Wells Fargo Financial ceased originating near the end of 2008.
     Wells Fargo Financial had $8.4 billion in unsecured loans and credit card receivables as of December 31, 2008, of which $1.3 billion was originated with customer FICO scores below 620. Net charge offs in this portfolio for 2008 were 9.22% for FICO scores of 620 and above, and 12.82% for FICO scores below 620. These receivables were priced based on relative risk. Wells Fargo Financial has been actively tightening credit policies and managing credit lines to reduce exposure given current economic conditions.
COMMERCIAL AND COMMERCIAL REAL ESTATE For purposes of portfolio risk management, we aggregate commercial loans and lease financing according to market segmentation and standard industry codes. Commercial loans and lease financing are presented by industry in Table 17. These groupings contain a highly diverse mix of customer relationships throughout our target markets. Loan types and product offerings are carefully underwritten and monitored. Credit policies incorporate specific industry risks.
Table 17: Commercial Loans and Lease Financing by Industry
                 
   
(in millions)   December 31, 2008  
    Commercial     % of  
    loans and lease     total  
    financing     loans  
 
               
SOP 03-3 loans:
               
Real estate investment trust
    $       704       * %
Investors
    436       *  
Media
    428       *  
Residential construction
    360       *  
Leisure
    294       *  
Other (1)
    2,358       *  
 
               
 
               
Total SOP 03-3 loans
    4,580       1  
 
               
 
               
All other loans:
               
Financial institutions
    12,275       1  
Oil and gas
    11,828       1  
Cyclical retailers
    11,433       1  
Utilities
    10,821       1  
Industrial equipment
    9,566       1  
Food and beverage
    9,483       1  
Healthcare
    9,137       1  
Business services
    8,614       1  
Public administration
    7,176       1  
Hotel/restaurant
    6,339       1  
Other (1)
    117,046       14  
 
               
 
               
Total all other loans
    213,718       24  
 
               
 
               
Total
    $218,298       25 %
 
               
 
               
   
* Less than 1%.
 
(1) No other single category had loans in excess of $170 million and $6,329 million for SOP 03-3 and all other loans, respectively.


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     Other real estate mortgages and real estate construction loans that are diversified in terms of both the state where the property is located and by the type of property securing the loans are presented in Table 18. The composition of these portfolios was stable throughout 2008 and the distribution is consistent with our target markets and focus on customer relationships.
     Approximately $63.9 billion of other real estate and construction loans are loans to owner-occupants where more than 50% of the property is used in the conduct of their business. Of this amount, 11% represented SOP 03-3 loans.


Table 18: Commercial Real Estate Loans by State and Property Type
                                 
   
(in millions)   December 31, 2008  
    Other real     Real     Total     % of  
    estate     estate     commercial     total  
    mortgage     construction     real estate     loans  
 
                               
By state:
                               
 
                               
SOP 03-3 loans:
                               
Florida
    $    1,355       $  1,159       $    2,514       * %
California
    1,589       233       1,822       *  
Georgia
    515       545       1,060       *  
North Carolina
    459       586       1,045       *  
Virginia
    549       334       883       *  
Other (1)
    3,295       1,646       4,941       *  
 
                               
Total SOP 03-3 loans (2)
    7,762       4,503       12,265       1  
 
                               
 
                               
All other loans:
                               
California
    20,068       6,066       26,134       3  
Florida
    11,345       2,752       14,097       2  
Texas
    6,323       2,606       8,929       1  
North Carolina
    5,996       1,620       7,616       1  
Georgia
    4,797       974       5,771       1  
Virginia
    3,559       1,634       5,193       1  
Arizona
    3,060       1,431       4,491       1  
New Jersey
    3,430       824       4,254       *  
New York
    2,652       1,390       4,042       *  
Pennsylvania
    3,005       487       3,492       *  
Other (3)
    31,111       10,389       41,500       5  
 
                               
Total all other loans (4)
    95,346       30,173       125,519       15  
 
                               
Total
    $103,108       $34,676       $137,784       16 %
 
                               
 
                               
By property type:
                               
 
                               
SOP 03-3 loans:
                               
Apartments
    $    1,317       $  1,292       $    2,609       * %
Office buildings
    2,022       221       2,243       *  
1-4 family land
    851       1,361       2,212       *  
1-4 family structure
    257       1,040       1,297       *  
Land – unimproved
    732       247       979       *  
Other
    2,583       342       2,925       *  
 
                               
Total SOP 03-3 loans (2)
    7,762       4,503       12,265       1  
 
                               
 
                               
All other loans:
                               
Office buildings
    25,246       3,159       28,405       3  
Agricultural
    16,284       1,889       18,173       2  
Real estate – other
    14,247       1,478       15,725       2  
Retail
    11,659       1,167       12,826       1  
Apartments
    7,178       4,471       11,649       1  
Industrial
    3,359       6,591       9,950       1  
Land – unimproved
    5,362       2,683       8,045       *  
Shopping center
    4,802       1,314       6,116       *  
1-4 family structure
    1,383       3,491       4,874       *  
Hotel/motel
    806       3,585       4,391       *  
Other
    5,020       345       5,365       *  
 
                               
Total all other loans (4)
    95,346       30,173       125,519     &