The following discussion and analysis of our financial condition and results of operations contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statements. Please refer to our 2008 Annual Report on Form 10-K for further information related to our accounting policies and risk governance and administration.

For the tax year ending December 31, 2009, we expect to be taxed as a real estate investment trust (a "REIT"), and we intend to comply with the relevant provisions of the Internal Revenue Code to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing the majority of our earnings to shareholders and satisfying certain asset, income and stock ownership tests. To the extent we meet those provisions, with the exception of the income of our taxable REIT subsidiary, Wachovia Preferred Realty, LLC ("WPR"), we will not be subject to federal income tax on net income. We currently believe that we continue to satisfy each of these requirements and therefore continue to qualify as a REIT. We continue to monitor each of these complex tests.

In the event we do not continue to qualify as a REIT, we believe there should be minimal adverse effect of that characterization to us or to our shareholders:

† From a shareholder's perspective, the dividends we pay as a REIT are ordinary income not eligible for the dividends received deduction for corporate shareholders or for the favorable maximum 15% rate applicable to qualified dividends received by non-corporate taxpayers. If we were not a REIT, dividends we pay generally would qualify for the dividends received deduction and the favorable tax rate applicable to non-corporate taxpayers.

† In addition, we would no longer be eligible for the dividends paid deduction, thereby creating a tax liability for us. Wachovia agreed to make, or cause its subsidiaries to make, a capital contribution to us equal in amount to any income taxes payable by us, which obligation was assumed by Wells Fargo in the Wachovia acquisition. Therefore, we believe a failure to qualify as a REIT would not result in any net capital impact to us.

Please refer to our 2008 Annual Report on Form 10-K for additional information on WPR.

Our accounting and reporting policies are in accordance with GAAP, and they conform to general practices within the applicable industries. The application of certain of these principles involves a significant amount of judgment and the use of estimates based on assumptions for which the actual results are uncertain when we make the estimation. We have identified the allowance for loan losses policy as being particularly sensitive in terms of judgments and the extent to which estimates are used. For more information on our critical accounting policies, please refer to our 2008 Annual Report on Form 10-K.

Allowance for Loan Losses

Beginning in first quarter 2009, the allowance for loan losses was based upon the Wells Fargo methodology for estimating credit losses inherent in the loan portfolio at the balance sheet date. Wells Fargo has an established process, using several analytical tools and benchmarks, to estimate a range of possible outcomes and determine the adequacy of the allowance. In connection with Wells Fargo's acquisition of Wachovia, our methodology and processes were conformed to those of Wells Fargo. Below is more information on Wells Fargo's process to determine the adequacy of the allowance for loan losses.

While we attribute portions of the allowance to specific loan categories as part of our analytical process, the entire allowance may be used to absorb credit losses inherent in the total loan portfolio. For purposes of determining the allowance for credit losses, we pool loans by product type or business unit to achieve greater precision.

To measure estimated losses inherent in consumer loans, we use loss models and other quantitative, mathematical techniques to forecast losses. We use forecasted losses as a measure of probable inherent losses in the consumer portfolio. We use both internally developed and vendor supplied loss models. These models are independently validated and are reviewed by corporate credit personnel to ensure that the theory, assumptions, data, 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 the Wells Fargo 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 is estimated 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. 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.

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.

Loan recoveries and the provision for credit losses increase the allowance, while loan charge-offs decrease the allowance.

No single statistic or measurement determines the adequacy of the allowance. For more information on the process to determine the adequacy of the allowance for loan losses please refer to the Wells Fargo 2008 Annual Report on Form 10-K.

For more information on the previously used Wachovia estimation process, please refer to Wachovia Funding's 2008 Annual Report on Form 10-K.

For purposes of this discussion, the term "loans" includes loans and loan participation interests, the term "residential loans" includes home equity loans and residential mortgages and the term "commercial loans" includes commercial and commercial real estate loans. See Table 1 following "-Accounting and Regulatory Matters" for certain performance and dividend payout ratios for the six months ended June 30, 2009 and 2008.

Although we have the authority to acquire interests in an unlimited number of loans and other assets from unaffiliated third parties, the majority of our interests in loans we have acquired have been acquired from the Bank or an affiliate pursuant to loan participation agreements between the Bank or an affiliate and us. The remainder of our assets was acquired directly from the Bank. The Bank either originated the assets, or purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions.

On December 31, 2008, Wells Fargo acquired Wachovia and accordingly, under purchase accounting, the assets and liabilities of Wachovia and its subsidiaries were recorded at their respective fair values at December 31, 2008. The more significant fair value adjustments were recorded to the loan portfolio. Because the acquisition occurred on the last day of the reporting period, the income statement for 2008 was not affected by purchase accounting. Information for periods not affected by purchase accounting are labeled herein as "predecessor" and those reflecting purchase accounting are labeled "successor". Refer to Note 1 to Notes to Consolidated Financial Statements in this Report for further information.

2009 to 2008 Six Month Comparison

Net income available to common stockholders. We earned net income available to common stockholders of $348.4 million and $211.3 million in the first half of 2009 and 2008, respectively. This increase was driven by lower dividends on preferred stock, lower provision for credit losses, higher net interest income, lower management fees and lower income tax expense. These were partially offset by higher loan servicing costs and lower gains on interest rate swaps.

Interest Income. Interest income of $572.1 million in the first half of 2009 increased $7.0 million, or 1%, compared with the first half of 2008. Higher average interest-earning assets more than offset decreases in interest rates compared with the same period one year ago. The average interest rate on total interest-earning assets was 6.13% in the first half of 2009 compared with 6.34% in the first half of 2008 which reflects the impact of a lower interest rate environment in 2009.

Average home equity loans increased $1.8 billion to $14.3 billion compared with the first half of 2008 while average commercial loans decreased $619.6 million to $2.3 billion in the same period due to pay-downs. In the first half of 2009, interest income included $52.3 million from the amortization of discounts on purchased loans primarily driven by an acceleration of amortization from repayment of loans during the period. All loan pay-downs were reinvested in home equity loans. Average residential mortgages decreased $116.0 million to $704.2 million in the first half of 2009 compared with the same period one year ago. We currently anticipate that we will continue to reinvest loan pay-downs primarily in consumer real-estate secured loans. Interest income on cash invested in overnight eurodollar deposits decreased $20.6 million to $900 thousand in the first half of 2009 compared with the first half of 2008 driven by significantly lower short-term interest rates from the same period one year ago. See the interest rate risk management section under "Risk Governance and Administration" for more information on interest rates and interest income.

                                                   Six Months Ended                    Six Months Ended
                                                      June 30, 2009                       June 30, 2008
                                     ------------------------------      ------------------------------
                                       Average      Interest               Average      Interest
In thousands)                          Balance       Income    Rate        Balance       Income    Rate
----------------------------------   ------------   --------   ----      ------------   --------   ----
Commercial loans                     $  2,347,483     27,199   2.34 %    $  2,967,048     71,157   4.82 %
Home equity loans                      14,276,751    528,375   7.46        12,496,073    449,324   7.23
Residential mortgages                     704,198     15,581   4.43           820,231     23,090   5.63
Interest-bearing deposits in banks
and other earning assets                1,486,623        900   0.12         1,631,165     21,478   2.65
                                     - ----------   --------   ---- --   - ----------   --------   ---- --
Total interest-earning assets        $ 18,815,055    572,055   6.13 %    $ 17,914,517    565,049   6.34 %
                                     - ----------   --------   ---- --   - ----------   --------   ---- --

Interest Expense. Interest expense, which primarily relates to interest expense paid on our line of credit with the Bank, decreased to $232 thousand in the first half of 2009 compared with $4.8 million in the first half of 2008 primarily reflecting a significantly lower rate environment in the first half of 2009 compared with the same period one year ago. The line of credit with the Bank averaged $264.9 million in the first half of 2009 compared with $306.2 million in the first half of 2008. At June 30, 2009, there was no outstanding balance under the line of credit with the Bank as our borrowings were paid in full during the second quarter of 2009.

Provision for Credit Losses. The provision for credit losses was $93.2 million in the first half of 2009 compared with $150.8 million in the first six months of 2008. The decrease in the provision for credit losses resulted from the application of American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3"), which offset credit deterioration in the non SOP 03-3 portfolio. Please refer to Note 1 to Notes to Consolidated Financial Statementsfor more information on loans accounted for under SOP 03-3 and the "-Balance Sheet Analysis" section for information on the allowance for loan losses.

Gain on Interest Rate Swaps. Our interest rate swaps lose value in an increasing rate environment and gain value in a declining rate environment. The gain on interest rate swaps was $1.7 million in the first half of 2009 compared with a gain of $3.0 million in the first half of 2008. The lower gain in 2009 primarily reflects a lower magnitude of interest rate decreases in the first half of 2009 compared with the first half of 2008. Included in gain on interest rate swaps was expense associated with the derivative cash collateral received of $217 thousand and $3.9 million in the first half of 2009 and 2008, respectively.

Loan Servicing Costs. Loan servicing costs increased $2.3 million to $34.0 million in the first half of 2009 which reflects the impact of reinvesting pay-downs in home equity loans which have a higher servicing fee compared to other loan products. These loans are serviced by the Bank pursuant to our participation and servicing agreements which include market-based fees. For home equity loans, the monthly fee is equal to the outstanding principal balance of each loan multiplied by 0.50% per annum. For commercial loans, the monthly fee is equal to the total committed amount of each loan multiplied by 0.025% per annum. Servicing fees related to residential mortgages are negotiated when the Bank purchases loans from unrelated third parties, and are based on the purchase price of the loans.

Management Fees. Management fees were $5.8 million in the first half of 2009 compared with $11.9 million in the first half of 2008. Management fees represent reimbursements to the Bank for general overhead expenses paid on our behalf. In 2009, an affiliate is assessed monthly management fees based on its

Other Expense. Other expense primarily consists of costs associated with foreclosures on residential properties. In the first half of 2009 and 2008, these costs were not significant.

Income Tax Expense. Income tax expense, which is primarily based on the pre-tax income of WPR, our taxable REIT subsidiary, was $2.6 million in the first half of 2009 compared with $5.3 million in the first half of 2008. WPR holds our interest rate swaps as well as certain cash investments. The decrease in income tax expense in the six months 2009 was driven by a lower gain on interest rate swaps and lower interest income on cash invested in overnight eurodollar deposits driven by lower short-term interest rates in the first half of 2009.

Summary Results of Operations for the Three Months Ended June 30, 2009 and 2008

Net income available to common stockholders increased to $150.8 million in second quarter 2009 compared with $59.5 million in second quarter 2008. The majority of income for both quarters was earned from interest on commercial loans, home equity loans and residential mortgages. Net interest income increased $18.2 million to $293.9 million in second quarter 2009 compared with second quarter 2008 driven primarily by higher average interest-earning assets. The average interest rate received on total interest-earning assets was 6.29% in second quarter 2009 compared with 6.26% in the same quarter one year ago. Average total loans increased $1.1 billion in second quarter 2009 compared with second quarter 2008. Average home equity loans increased $1.8 billion to $14.3 billion compared with second quarter 2008 while average commercial loans decreased $618.9 million to $2.3 billion during the same time period due to pay-downs. Commercial loan pay-downs were reinvested in home equity loans. Average residential mortgages decreased $113.4 million to $690.0 million compared with second quarter 2008. Interest income on cash invested in overnight eurodollar deposits decreased $8.3 million in second quarter 2009 compared with the same period last year driven by lower short-term interest rates in 2009.

Provision for credit losses was $79.3 million in second quarter 2009 compared with $125.2 million in second quarter 2008. The higher expense in second quarter 2008 was driven by an update to our loss estimation process for home equity loans which was based on observed credit trends within our loan portfolio and in the market.

Interest rate swaps were a gain of $328 thousand in second quarter 2009 compared with a loss of $5.2 million in second quarter 2008. Included in interest rate swaps was expense associated with the derivative cash collateral received of $106 thousand and $1.5 million in second quarter 2009 and 2008, respectively. The gain in second quarter 2009, compared to a loss in second quarter 2008, primarily reflects a higher magnitude of rate decreases in second quarter 2009 compared with the year ago quarter.

Loan servicing costs increased by $792 thousand to $16.6 million in second quarter 2009 compared with second quarter 2008 reflecting higher average residential loans balances. Management fees of $2.7 million in second quarter 2009 decreased from $7.1 million in second quarter 2008 primarily reflecting the Bank's decreased allocable expense base.

Income tax expense was an expense of $1.4 million in second quarter 2009 compared with a benefit of $101 thousand in second quarter 2008. The benefit in second quarter 2008 was driven by lower interest income on cash invested in overnight eurodollar deposits compared with the same period one year ago and the impact of higher losses on interest rate swaps in second quarter 2008.

June 30, 2009 to December 31, 2008

Total Assets. Our assets primarily consist of commercial and residential loans although we have the authority to hold assets other than loans. Total assets were $18.5 billion at June 30, 2009, compared with $18.8 billion at December 31, 2008. Net loans were 90% of total assets at June 30, 2009, compared to 93% at December 31, 2008.

Loans. Net loans decreased $738.3 million to $16.7 billion at June 30, 2009, compared with December 31, 2008, primarily reflecting an increase in home equity loans resulting from $1.3 billion in reinvestments offset by pay-downs across the entire portfolio. At June 30, 2009, and at December 31, 2008, home equity loans comprised 83% and 81% of loans, respectively, and commercial loans comprised 13% and 14% respectively. See Table 2 following "-Accounting and Regulatory Matters" for additional information related to loans.

Allowance for Loan Losses. The allowance for loan losses increased $57.5 million from December 31, 2008, to $326.9 million at June 30, 2009. The December 31, 2008, allowance reflects a reduction of $55.6 million for the application of SOP 03-3, as described above. The reserve build was primarily driven by deterioration in economic conditions that increased projected losses in our consumer loan portfolio. Our reserve methodology relies on historical experience but also considers our current view of economic and housing market conditions. The establishment of the allowance considers credit trends, including, but not limited to growth in net charge-offs and nonaccrual loans. We use forecasted losses as a measure of probable inherent losses in the consumer portfolio and historical loss factors by current loan grade to estimate expected losses for the commercial portfolio as of the balance sheet date.

Nonaccrual loans increased to $121.4 million at June 30, 2009, from $11.9 million at December 31, 2008. The increase was primarily related to home equity loans. Net charge-offs were $36.1 million and $28.8 million for the six months ended June 30, 2009 and 2008, respectively. This increase was also primarily related to home equity loans. The increase in nonaccrual loans and net charge-offs is primarily attributable to deterioration in home equity loans.

At June 30, 2009, the allowance for loan losses included $291.4 million for residential loans, $19.1 million for commercial loans and $16.4 million for imprecision or uncertainty that incorporates the range of probable outcomes inherent in estimates used for the allowance. In the first half of 2009, the allowance for loan losses is based upon the Wells Fargo methodology for estimating credit losses. In connection with Wells Fargo's acquisition of Wachovia, our methodology and processes were conformed to those of Wells Fargo. See "-Critical Accounting Policies" for more information on the allowance for loan losses.

The reserve for unfunded lending commitments, which is included in other liabilities, was $373 thousand at June 30, 2009, compared with $570 thousand at December 31, 2008.

See Table 3 following "-Accounting and Regulatory Matters" for additional information related to the allowance for loan losses.

Interest Rate Swaps, Net. Interest rate swaps, net were $822 thousand at June 30, 2009, and $1.3 million at December 31, 2008, which represents the fair value of our net position in interest rate swaps.

Accounts Receivable-Affiliate, Net. Accounts receivable from affiliate, net was $225.4 million at June 30, 2009, compared with $167.0 million at December 31, 2008, as a result of intercompany cash transactions related to net loan pay-downs, interest receipts and funding with the Bank. The increase was due to higher pay-downs in June 2009 than occurred in December 2008.

Our commercial loan portfolio includes unfunded loan commitments that are provided in the normal course of business. For commercial borrowers, loan commitments generally take the form of revolving credit arrangements to finance customers' working capital requirements. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. For lending commitments, the contractual amount of a commitment represents the maximum potential credit risk if the entire commitment is funded and the borrower does not perform according to the terms of the contract. Some of these commitments expire without being funded, and accordingly, total contractual amounts are not representative of our actual future credit exposure or liquidity requirements. The "Risk Governance and Administration-Credit Risk Management" section in our 2008 Annual Report on Form 10-K describes how Wells Fargo, as owner of the Bank which originates and services the loans, manages credit risk when extending credit.

Loan commitments create credit risk in the event the counterparty draws on the commitment and subsequently fails to perform under the terms of the lending agreement. This risk is incorporated into an overall evaluation of credit risk and to the extent necessary, reserves are recorded on these commitments. Uncertainties around the timing and amount of funding under these commitments may create liquidity risk. At June 30, 2009, and at December 31, 2008, unfunded commitments to extend credit were $744.6 million and $730.8 million, respectively.

Liquidity and Capital Resources

Our internal sources of liquidity are primarily cash generated from interest and principal payments on loans in our portfolio. Our primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as the underlying loans mature or prepay, and pay dividends. We expect to distribute annually an aggregate amount of dividends with respect to our outstanding capital stock equal to approximately 100% of our REIT taxable income for federal income tax purposes, which primarily results from interest income on our loan portfolio. Such distributions may in some periods exceed net income determined under generally accepted accounting principles.

Proceeds received from paydowns of loans are typically sufficient to fund existing lending commitments and loan purchases. Depending upon the timing of the loan purchases, we may draw on the line of credit we have with the Bank as a short-term liquidity source. Wachovia Funding has a $1.0 billion line of credit with the Bank, and our subsidiaries Wachovia Real Estate Investment Corp. and WPR have lines of credit with the Bank of $1.0 billion and $200.0 million, respectively. Each of these lines is under a revolving demand note at a rate equal to the federal funds rate. Generally, we repay these borrowings within several months as we receive cash on loan pay-downs from our loan portfolio. At June 30, 2009, there were no borrowings on our line of credit with the Bank. Should a longer-term liquidity need arise, we could issue additional common or preferred stock, subject to any pre-approval rights of our shareholders. We do not have and do not anticipate having any material capital expenditures in the foreseeable future. We believe our existing sources of liquidity are sufficient to meet our funding needs.

Risk Governance and Administration

For additional information on credit risk management, concentration of credit risk, operational risk management, liquidity risk management and financial disclosure, please refer to our 2008 Annual Report on Form 10-K.

As a result of Wells Fargo's acquisition of Wachovia on December 31, 2008, our credit risk, operational risk management, liquidity risk management and financial disclosure processes are managed by Wells Fargo. The management of these processes by Wells Fargo is not materially different than the previous processes managed by Wachovia. For more information on these processes please refer to the "Risk Management" section within the Financial Review of the Wells Fargo 2008 Annual Report on Form 10-K.

Interest rate risk is the sensitivity of earnings to changes in interest rates. Our loan portfolio was comprised of approximately 18% of variable rate loans at June 30, 2009. In a declining rate environment, we may experience a reduction in interest income on our loan portfolio and a corresponding decrease in funds available to be distributed to our shareholders. The reduction in interest income may result from downward adjustments of the indices upon which the . . .