On December 31, 2008, Wells Fargo acquired Wachovia, one of the nation’s largest diversified financial services companies. Wachovia’s assets and liabilities were included in the December 31, 2008, consolidated balance sheet at their respective fair values on the acquisition date. Because the acquisition was completed on December 31, 2008, Wachovia’s results of operations were not included in our 2008 income statement. Beginning in 2009, our consolidated results and associated metrics, as well as our consolidated average balances, include Wachovia. The Wachovia acquisition was material to us, and the inclusion of results from Wachovia’s businesses in our 2009 financial statements is a material factor in the changes in our results compared with prior year periods.

Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on preliminary data as of an interim period with estimates through year end. We have validated and, where necessary, refined our December 31, 2008, fair value estimates and other purchase accounting adjustments. The impact of these refinements was recorded as an adjustment to goodwill in the first halfnine months of 2009. Based on the purchase price of $23.1 billion and the $12.4$12.9 billion fair value of net assets acquired, inclusive of refinements identified induring the first halfnine months of 2009, the transaction resulted in goodwill of $10.7$10.2 billion.

The more significant fair value adjustments in our purchase accounting for the Wachovia acquisition were to loans. As of December 31, 2008, certain of the loans acquired from Wachovia had evidence of credit deterioration since origination, and it was probable that we would not collect all contractually required principal and interest payments. Such loans identified at the time of the acquisition arewere accounted for under American Instituteusing the measurement provisions for purchased credit-impaired (PCI) loans, which are contained in the Receivables topic (FASB ASC 310) 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-impairedthe Codification. PCI loans bewere recorded at fair value at the date of acquisition, and prohibits carryover of theany related allowance for loan losses.losses cannot be carried over.

Loans subject to SOP 03-3PCI loans were written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual, even though they may be contractually past due, because we expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Loans subject to SOP 03-3PCI loans are also not included in the disclosure of loans 90 days or more past due and still accruing interest even though certaina portion of them are 90 days or more contractually past due.

As a result of the application of SOP 03-3 accounting to Wachovia’s loan portfolios, certainCertain credit-related ratios of the Company, including for example, the growth rate in nonperforming assets since December 31, 2008, may not necessarily be directly comparable with periods prior to the merger or with credit-related ratios of other financial institutions. As noted above, SOP 03-3PCI loans were reclassified from nonaccrual

Commercial and commercial real estate charge-offs were up 28% in third quarter 2009 from second quarter 2009. The increase in commercial and commercial real estate losses increasedin third quarter 2009 was entirely in the Wachovia portfolio, in part reflecting the fact that charge-offs are just now coming through Wachovia’s portfolio after having eliminated nonaccruals through purchase accounting at the end of 2008. The overall loss rate in third quarter as the effects2009 for Wachovia’s commercial and commercial real estate portfolio was roughly comparable to Wells Fargo’s commercial portfolio, which we believe was underwritten to conservative credit standards. In fact, legacy Wells Fargo’s commercial and commercial real estate losses declined $35 million, or 4%, from second quarter 2009.

Consumer losses were up 12% in third quarter 2009, with virtually all of the current economic cycle challenged moreincrease in Wachovia’s consumer portfolios. Over 40% of our commercial customers. Loss levels increasedthe increase in Wachovia consumer loan losses came from prior periods, driven by losses from loans to customers whose businesses rely on the residential real estate industry and consumer goods and services. We expect this trend to continue untilnon-impaired Pick-a-Pay portfolio, in large part reflecting the economy improves. We believe our losses will be moderated by thelagging effect of our long standing underwriting discipline and relationship-centric business strategy. Approximately one third of the commercial losses were generated from our legacy Wells Fargo Business Direct channel. This channel consists of small lines of credit to small business customers. Losses from Business Direct decreased slightly from first quarter 2009, and delinquency levels showed moderate signs of improvement during the quarter, indicating possible stabilization in this portfolio. Losses in our consumer portfolios increased as expected, as more of our customers were affected by unemployment and the prolonged residential real estate down cycle. In line with our first quarter trends, our consumer real estate and credit card portfolio losses increased, while losses in our auto secured portfolios improved as a result of vintage aging and price improvement in used car markets.

The provision for credit losses was $5.1$6.1 billion and $9.6$15.8 billion in the secondthird quarter and first halfnine months of 2009, respectively, compared with $3.0$2.5 billion and $5.0$7.5 billion, respectively, in the same periods a year ago. The provision in the secondthird quarter and first halfnine months of 2009 included $700 million$1.0 billion and $2.0$3.0 billion, respectively, of net build to the allowance for credit reserve buildlosses due to higher credit losses inherent in the loan portfolio. The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $23.5$24.5 billion (2.86%(3.07% of total loans) at JuneSeptember 30, 2009, compared with $21.7 billion (2.51%) at December 31, 2008.

Total nonaccrual loans were $15.8$20.9 billion (1.92%(2.61% of total loans) at JuneSeptember 30, 2009, compared with $10.5$15.8 billion (1.25%(1.92%) at March 31,June 30, 2009. Nonaccrual loans exclude PCI loans acquired from Wachovia accounted for under SOP 03-3 since these loans were written down in purchase accounting as of December 31, 2008, to an amount expected to be collectible. The increase in nonaccrual loans represented increases in both the commercial and consumer portfolios, with $3.2$3.7 billion related to Wachovia in secondthird quarter 2009. The increasesincrease in nonaccrual loans werewas concentrated in portfolios secured by real estate or with borrowers dependent on the housing industry. Total nonperforming assets (NPAs) were $18.3$23.5 billion (2.23%(2.93% of total loans) at JuneSeptember 30, 2009, compared with $12.6$18.3 billion (1.50%(2.23%) at March 31,June 30, 2009.

While commercial and commercial real estate nonaccrual loans were up in third quarter 2009, the dollar amount of the increase declined in third quarter 2009 and the rate of growth slowed considerably. Legacy Wells Fargo’s commercial and commercial real estate nonaccrual loans increased $777 million. Wachovia’s commercial and commercial real estate nonaccrual loans increased $1.9 billion. The growth rate in consumer nonaccrual loans slowed in third quarter 2009. Legacy Wells Fargo’s consumer nonaccrual loans increased $606 million, reflecting the more moderate deterioration we have experienced in consumer loans. Wachovia’s Pick-a-Pay portfolio represented the largest portion of consumer nonaccrual loans. While up $1.2 billion in third quarter 2009 from second quarter 2009, the increase in nonaccrual loans in boththe non-impaired Pick-a-Pay portfolio reflected the inflows to nonaccruals expected in the first and second quarter 2009 was in part a consequencefew quarters after purchase accounting write-downs. Due to our active loss mitigation efforts on Pick-a-Pay loans, some of purchase accounting. Typically, changes to nonaccrual loans from period to period represent inflows for loans that reach a specified past due status, net of any reductions for loans thatour modifications on the non-PCI portfolio are charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual because theyTDRs causing our NPA levels to remain elevated until the loans can demonstrate performance. To the extent these nonperforming loans return to accrual status. Substantially all of Wachovia’s nonaccrual loans were accounted for under SOP 03-3 in purchase accounting and, as a result, were reclassified to accrual status, on December 31, 2008. AsNPA growth may moderate.

We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). For more information on the Prudential joint venture, see the “Contractual Obligations”“Capital Management” section in our 2008 Form 10-K. In connection with the adoption of FAS 160 onthis Report. On January 1, 2009, we reclassified Prudential’s noncontrolling interest to equity. 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. On December 4, 2008, Prudential publicly announced its intention to exercise its option to put its noncontrolling interest to us at the end of the lookback period, as defined (January 1, 2010). As a result of the issuance of FAS 160 andnew accounting requirements for noncontrolling interests, related interpretive guidance, along with thisand Prudential’s stated intention, on January 1, 2009, we increased the carrying value of Prudential’s noncontrolling interest in the joint venture to the estimated maximum redemption amount, with the offset recorded to additional paid-in capital.

FAS 141RFASB ASC 805-10 (FAS 141R) requires an acquirer in a business combination to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date 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 isThis standard was applicable prospectively to business combinations completed on or after January 1, 2009.

FSPFASB ASC 820-10 (FSP FAS 157-4157-4) addresses measuring fair value under FAS 157 in situations where markets are inactive and transactions are not orderly. The FSPguidance acknowledges that in these circumstances quoted prices may not be determinative of fair value. The FSP emphasizes,value; however, that even if there has been a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement has not changed. Prior to issuance of this FSP, FAS 157 had been interpreted bypronouncement, many companies, including Wells Fargo, interpreted accounting guidance on fair value measurements to emphasize that fair value must be measured based on the most recently available quoted market prices, even for markets that have experienced a significant decline in the volume and level of activity relative to

FSPFASB ASC 320-10 (FSP FAS 115-2 and FAS 124-2124-2) states that an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is more likely than not that it will not be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.OCI. The provisions of this FSP arenew accounting requirements for recording OTTI on debt securities were effective for second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to cumulative other comprehensive incomeOCI for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had the FSPthis accounting guidance been effective for those periods.

FSPFASB ASC 260-10 (FSP EITF 03-6-103-6-1) requires that unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents be treated as participating securities and, therefore, included in the computation of earnings per share under the two-class method described in FAS 128,the Earnings per Share. topic in the Codification. This pronouncement iswas effective on January 1, 2009, with retrospective adoption required. The adoption of FSP EITF 03-6-1this standard did not have a material effect on our consolidated financial statements.

FSPFASB ASC 825-10 (FSP FAS 107-1 and APB 28-128-1) states that entities must disclose the fair value of financial instruments in interim reporting periods as well as in annual financial statements. The FSPEntities must also requires disclosure ofdisclose the methods and assumptions used to estimate fair value as well as any changes in methods and assumptions that occurred during the reporting period. We adopted this pronouncement in second

FAS 167 amends several key consolidation provisions containedrelated to variable interest entities (VIEs), which are included in FASB Interpretation No. 46 (Revised December 2003),ASC 810,Consolidation of Variable Interest Entities(FIN 46(R)). First, the scope of FAS 167 includes entities that were formerlyare currently designated as QSPEs under FAS 140.QSPEs. Second, FAS 167 changes the approach companies use to identify the VIEs for which they are deemed to be the primary beneficiary and are required to consolidate. Under FIN 46(R),existing rules, the primary beneficiary is the entity that absorbs the majority of a VIE’s losses and receives the majority of the VIE’s returns. The guidance in FAS 167 identifies a VIE’s primary beneficiary as the entity that has the power to direct the VIE’s significant activities, and has an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Third, FAS 167 requires companies to continually reassess whether they are the primary beneficiary of a VIE. Existing rules only require companies to reconsider primary beneficiary conclusions when certain triggering events have occurred. FAS 167 is effective for us as of January 1, 2010, and applies to all existingcurrent QSPEs and VIEs, and VIEs created after the effective date.

Application of FAS 166 and FAS 167 will result in the January 1, 2010, consolidation of certain QSPEs and VIEs that are not currently included in our consolidated financial statements. We have performed a preliminary analysis of these accounting standards with respect to QSPE and VIE structures currently applicable to us. Our preliminary estimate includes entities in which we have the power to direct significant activities through our servicing and advisory activities as well as variable interests that expose us and have identified the following itemsto benefits or risks that maycould potentially be consolidated.significant.

FAS 166 and FAS 167 are principles based and limited interpretive guidance is currently available. We will continue to evaluate QSPE and VIE structures applicable to us, monitor interpretive guidance, and work with our external auditors and other appropriate interested parties to properly implement these standards. In addition, we are evaluating the impact of potential fair value option elections. Accordingly, the amount of assets that actually become consolidated on our financial statements upon implementation of these standards on January 1, 2010, may differ materially from our preliminary analysis presented in the previous table. The cumulative effect of adopting these statements will be recorded as an adjustment to retained earnings at January 1, 2010.

FSPFASB ASC 715-20 (FSP FAS 132 (R)-1-1) requires new disclosures about plan assets that are applicable to the plan assets of our Cash Balance Plan and other postretirement benefit plans. The objectives of the new disclosures are to provide an understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure fair value, the effect of fair value measurements using significant unobservable inputs on the changes in plan assets and significant concentrations of risk within plan assets. The new disclosures under FSP FAS 132 (R)-1on postretirement benefits will be providedrequired prospectively for fiscal years ending after December 15, 2009.

ASU 2009-12 provides guidance for determining the fair value of certain alternative investments, which include hedge funds, private equity funds, and real estate funds. When alternative investments do not have readily determinable fair values, companies are permitted to use unadjusted net asset values or an equivalent measure to estimate fair value. This provision is only allowable for investments in entities that calculate net asset value (NAV) per share or its equivalent in accordance with Codification Topic 946,Financial Services — Investment Companies. The guidance also requires a company to consider its ability to redeem an investment at NAV when determining the appropriate classification of the related fair value measurement within the fair value hierarchy. ASU 2009-12 is effective for us in fourth quarter 2009 and disclosureswith prospective application. We are not required for earlier periods presented for comparative purposes.currently evaluating the impact ASU 2009-12 may have on our financial statements.