SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-31557

Wachovia Preferred Funding Corp.

(Exact name of registrant as specified in its charter)

Delaware

56-1986430

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

90 South 7th Street, 13^th Floor

Minneapolis, Minnesota 55402

(Address of principal executive offices)

(Zip Code)

(855) 825-1437

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer x

Smaller reporting company ¨

(Do not check if a smaller

reporting company.)

Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 31, 2012, there were 99,999,900 shares of the registrant’s common stock outstanding.

FORM 10-Q

CROSS-REFERENCE INDEX


PART I	Financial Information

Item 1.	Financial Statements	Page
	Consolidated Statement of Income	25
	Consolidated Balance Sheet	26
	Consolidated Statement of Changes in Stockholders’ Equity	27
	Consolidated Statement of Cash Flows	28
	Notes to Financial Statements
	1 - Summary of Significant Accounting Policies	29
	2 - Loans and Allowance for Credit Losses	31
	3 - Derivatives	45
	4 - Fair Values of Assets and Liabilities	46
	5 - Common and Preferred Stock	48
	6 - Transactions with Related Parties	50

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)
	Summary Financial Data	2
	Overview	3
	Earnings Performance	5
	Balance Sheet Analysis	7
	Risk Management	8
	Critical Accounting Policy	21
	Current Accounting Developments	21
	Forward-Looking Statements	22
	Risk Factors	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	24

PART II	Other Information

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	52

Signature		53

Exhibit Index		52

PART I – FINANCIAL INFORMATION


Summary Financial Data


	Quarter ended							% Change Sept. 30, 2012 from						Nine months ended
(in thousands, except per share data)	Sept. 30, 2012			June 30, 2012		Sept. 30, 2011		June 30, 2012			Sept. 30, 2011			Sept. 30, 2012			Sept. 30, 2011		% Change


For the period
Net income	$	138,990			181,987		192,848		(24	) %		(28	)	$	470,992			654,051		(28	) %
Net income available to common stockholders		90,980			133,839		147,650		(32	)		(38	)		325,248			516,900		(37	)
Diluted earnings per common share		0.91			1.34		1.48		(32	)		(39	)		3.25			5.17		(37	)
Profitability ratios (annualized)
Return on average assets		4.06	%		5.38		5.56		(25	)		(27	)		4.61	%		5.78		(20	)
Return on average stockholders’ equity		4.09			5.40		5.58		(24	)		(27	)		4.65			5.81		(20	)
Average stockholders’ equity to assets		99.29			99.59		99.71		-			-			99.13			99.45		-
Dividend payout ratio		154.69			110.53		109.52		40			41			130.73			106.28		23
Total revenue	$	213,378			225,993		238,471		(6	)		(11	)	$	656,647			762,351		(14	)
Average loans		12,090,692			12,262,259		13,165,428		(1	)		(8	)		12,203,841			13,963,475		(13	)
Average assets		13,610,250			13,598,650		13,756,016		-			(1	)		13,645,041			15,133,480		(10	)
Net interest margin		6.19	%		6.57		6.80		(6	)		(9	)		6.35	%		6.68		(5	)
Net loan charge-offs	$	69,800			43,127		47,193		62			48		$	166,100			164,011		1
As a percentage of average total loans (annualized)		2.30	%		1.41		1.42		63			62			1.82	%		1.57		16
At period end
Loans, net of unearned	$	12,032,760			12,163,049		12,761,864		(1	)		(6	)	$	12,032,760			12,761,864		(6	)
Allowance for loan losses		278,056			292,780		292,746		(5	)		(5	)		278,056			292,746		(5	)
As a percentage of total loans		2.31	%		2.41		2.29		(4	)		1			2.31	%		2.29		1
Assets	$	13,432,409			13,511,538		13,645,052		(1	)		(2	)	$	13,432,409			13,645,052		(2	)
Total stockholders’ equity		13,357,691			13,433,711		13,580,773		(1	)		(2	)		13,357,691			13,580,773		(2	)
Total nonaccrual loans and foreclosed assets		490,621			403,461		348,904		22			41			490,621			348,904		41
As a percentage of total loans		4.08	%		3.32		2.73		23			49			4.08	%		2.73		49
Loans 90 days or more past due and still accruing (1)	$	22,315			21,670		35,690		3			(37	)	$	22,315			35,690		(37	)

(1)	The carrying value of PCI loans contractually 90 days or more past due is excluded. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.

This Quarterly Report on Form 10-Q, including 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 might differ materially from our forecasts and expectations due to several factors. Factors that could cause our results to differ materially from our forward looking statements are discussed in this Report, including in the “Forward-Looking Statements” and “Risk Factors” sections in this Report. Some of these factors are also described in the Financial Statements and related Notes. For a discussion of other important factors, refer to the “Risk Factors” section in this Report and to the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K), filed with the Securities and Exchange Commission (SEC) and available on the SEC’s website at www.sec.gov and on Wells Fargo’s website, www.wellsfargo.com.

“Wachovia Funding”, “we”, “our” and “us” refer to Wachovia Preferred Funding Corp. “Wachovia Preferred Holding” refers to Wachovia Preferred Funding Holding Corp., the “Bank” refers to Wells Fargo Bank, National Association including predecessor entities, “Wachovia” refers to Wachovia Corporation, a North Carolina corporation, and “Wells Fargo” refers to Wells Fargo & Company.

Financial Review

Overview

Wachovia Funding is engaged in acquiring, holding and managing domestic real estate-related assets and other authorized investments that generate net income for distribution to our shareholders. We are classified as a real estate investment trust (REIT) for income tax purposes. As of September 30, 2012, we had $13.4 billion in assets, which included $12.0 billion in loans.

We are a direct subsidiary of Wachovia Preferred Holding and an indirect subsidiary of Wells Fargo and the Bank. At September 30, 2012, the Bank was considered “well-capitalized” under risk-based capital guidelines issued by federal banking regulators.

REIT Tax Status

For the tax year ending December 31, 2012, we intend to comply with the relevant provisions of the 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, 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. Wells Fargo agreed to make, or cause its subsidiaries to make, a capital contribution to us equal in amount to any income taxes payable by us. Therefore, we believe a failure to qualify as a REIT would not result in any net capital impact to us.

Financial Performance

We earned $139.0 million in third quarter 2012, or $0.91 diluted earnings per common share, compared with $192.8 million, or $1.48 per common share, in third quarter 2011. For the first nine months of 2012, our net income was $471.0 million, or $3.25 per common share, compared with $654.1 million, or $5.17 per common share a year ago. The third quarter and first nine months decrease in year over year net income was primarily attributable to a decline in interest income and a higher provision for credit losses in 2012.

Loans

Total loans, which consist of loan participation interests, were $12.0 billion at September 30, 2012, compared with $12.5 billion at December 31, 2011. Loans represented approximately 90% and 93% of assets at September 30, 2012 and December 31, 2011, respectively. We reinvested loan pay-downs by purchasing $2.0 billion of loans from the Bank in the first nine months of 2012, which consisted of $751.8 million of commercial loans in third quarter 2012 and $1.3 billion of consumer loans in the first half of 2012. In the first nine months of 2011 we did not purchase loans from the Bank. Our board of directors declared special capital distributions of $4.5 billion to holders of our common stock in the first nine months of 2011 that reduced elevated levels of cash on our balance sheet, in order to continue to qualify for the exemption from registration under the Investment Company Act. If in future periods we do not reinvest loan pay-downs at sufficient levels by purchasing loans, management may request our board of directors to consider an additional return of capital to holders of our common stock. For 2012, however, we expect loan purchases to exceed proceeds received from loan pay-downs.

Purchased credit-impaired (PCI) loans were less than 1 percent of total loans at both September 30, 2012 and December 31, 2011. See Note 1 (Summary of Significant Accounting Policies - Loans) in our 2011 Form 10-K for additional information.

Our reported credit metrics in third quarter 2012 were affected by implementation of the guidance in the Office of the Comptroller of the Currency (OCC) update to the Bank Accounting Advisory Series (OCC guidance) issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value and classified as nonaccrual troubled debt restructurings (TDRs), regardless of their delinquency status. As of September 30, 2012, only 9% of the performing loans placed on nonaccrual status as a result of the OCC guidance were 30 days or more past due. Implementation of the OCC guidance in third quarter 2012 resulted in the following:

•

$87.7 million reclassification of performing consumer loans to nonaccrual status;

•

$28.6 million increase in loan charge-offs; and

•

$120.7 million of loans classified as TDRs.

Our nonaccrual loans totaled $480.3 million at September 30, 2012, up from $349.1 million at December 31, 2011. The increase was primarily the result of $87.7 million from the OCC guidance and reclassifying $55.2 million of real estate 1-4 family junior lien mortgages to nonaccrual status in first quarter 2012 in accordance with junior lien mortgage industry guidance issued by bank regulators during that quarter. See the “Risk Management – Credit Risk Management – Nonperforming Assets” section in this report for more information.

During the last week of October 2012, Hurricane Sandy and related storms caused destruction along the East Coast, including in Connecticut, New Jersey, New York, Pennsylvania, Delaware, Maryland, Virginia and Washington D.C., and resulted in, among other things, property damage for our customers and the closing of many businesses and financial markets. We are currently assessing the impact to our business as a result of Hurricane Sandy. The financial impact to us is expected to primarily relate to our consumer and commercial real estate loan portfolios and will depend on a number of factors, including, as to our consumer and commercial loan portfolios, the types of loans most affected by the storms, the extent of damage to our collateral, the extent of available insurance coverage, the availability of government assistance for our borrowers, and whether our borrowers’ ability

to repay their loans has been diminished. We are actively reviewing our exposure but are currently unable to reasonably estimate the extent of losses we may incur as a result of these storms.

Capital Distributions

Dividends declared to holders of our preferred securities totaled $48.0 million and $145.7 million for the third quarter and first nine months of 2012, which included $13.6 million and $40.8 million, respectively, in dividends on our Series A preferred securities held by non-affiliated investors. Distributions made to holders of our preferred securities were $45.2 million and $137.2 million for the third quarter and first nine months of 2011, which included $13.6 million and $40.8 million, respectively, in dividends on our Series A preferred securities.

Distributions made to holders of our common stock totaled $167.0 million and $470.0 million for the third quarter and first nine months of 2012. Distributions made to holders of our common stock totaled $166.0 million and $5.1 billion for third quarter and first nine months of 2011, which included $166.0 million and $558.0 million, respectively, in dividends. Distributions for the first nine months of 2011 also included $4.5 billion of special capital distributions.

Regulatory Capital

In June 2012, federal banking agencies, including the Board of Governors of the Federal Reserve System (FRB), jointly published notices of proposed rulemaking, which would substantially amend the risk-based capital rules for banks. The proposed capital rules are intended to implement in the U.S. the Basel III regulatory capital reforms (Basel III NPR), comply with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. Based on our current interpretation, we believe the Wachovia Funding Series A preferred securities would no longer constitute Tier 1 capital for Wells Fargo or the Bank under the Basel III NPR. However, following the comment period, the FRB may not adopt the Basel III NPR as proposed or may make additional changes to the applicable Tier 1 capital rules prior to final adoption. In the event the FRB’s applicable final rules regarding Tier 1 capital treatment are the same as the Basel III NPR or otherwise result in the Series A preferred securities no longer constituting Tier 1 capital for Wells Fargo or the Bank, Wachovia Funding may determine to redeem the Wachovia Funding Series A preferred securities due to a Regulatory Capital Event. See also “Risk Factors” and “Note 5: Common and Preferred Stock”.

Earnings Performance

Net Income Available to Common Stockholders

We earned net income available to common stockholders of $91.0 million and $147.7 million in third quarter 2012 and 2011, respectively. For the first nine months of 2012, net income available to common stockholders was $325.2 million compared with $516.9 million in the first nine months of 2011. The third quarter and nine months decrease in period over period net income was primarily attributable to a decline in interest income and a higher provision for credit losses in 2012.

Interest Income

Interest income of $212.8 million in third quarter 2012 decreased $25.3 million, or 10.6%, compared with third quarter 2011. Interest income was $655.2 million in the first nine months of 2012 compared with $761.4 million a year ago. The decrease from 2011 related primarily to lower average interest-earning assets coupled with changes in average yield.

The average yield on total interest-earning assets was 6.19% in third quarter 2012 compared with 6.80% in third quarter 2011. The decrease in the average yield was due to lower discount accretion on purchased consumer loans and an increase in lower yielding assets that resulted from pay-downs of higher yielding real estate 1-4 family loans being reinvested into commercial loans or held as interest-bearing deposits. In third quarter 2012 and 2011, interest income included discount accretion of $35.5 million and $44.4 million, respectively.

The average yield on total interest-earning assets was 6.35% in the first nine months of 2012 compared with 6.68% in the first nine months of 2011. The overall decline in the average yield on the combined consumer and commercial loan portfolio was primarily attributable to a lower level of accretion of discounts on purchased consumer loans. In the first nine months of 2012 and 2011, interest income included discount accretion of $118.1 million and $153.0 million, respectively. The decrease in discount accretion was primarily driven by lower loan pay-downs and pay-offs in the first nine months of 2012 compared with the first nine months of 2011. Real estate 1-4 family loans as a percentage of total assets were lower during the first nine months of 2012 as compared with the first nine months of 2011. The decrease resulted from the reinvestment of real estate 1-4 family pay-downs into commercial loans in 2012 and a distribution of cash in the form of special capital distributions to common shareholders in 2011. We expect continued pressure on our average yield on total interest-earning assets as we reinvest loan pay-down proceeds in the current low interest rate environment and we recognize lower discount accretion. While Wachovia Funding believes it has the ability to increase net interest income over time, net interest income in any one period can be impacted by a variety of factors, including mix and size of the earning asset portfolio and outstanding borrowings from our lines of credit.

Average consumer loans in third quarter declined $1.1 billion compared with third quarter 2011 and average commercial loans declined $16.7 million compared with the same period of 2011. Average consumer loans decreased $1.6 billion to $10.9 billion compared with the first nine months of 2011 while average commercial loans decreased $182.2 million to $1.3 billion in the same period due to pay-downs, charge-offs and loan sales. To the extent we reinvest loan pay-downs or make purchases, we anticipate that we will acquire consumer and commercial real-estate secured loans and other REIT-eligible assets. See the interest rate risk management section under “Risk Management” for more information on interest rates and interest income.

Table 1 presents the components of earning assets and related average yield to provide an analysis of period-over-period changes that influenced interest income.


Table 1: Interest Income


	Quarter ended September 30,
					2012							2011

(in thousands)	Average balance		Interest income		Yields			Average balance		Interest income		Yields

Commercial loans (1)	$	1,435,440		8,797		2.44	%	$	1,452,165		8,821		2.41	%
Real estate 1-4 family		10,655,252		202,980		7.59			11,713,263		229,230		7.78
Interest-bearing deposits in banks and other interest-earning assets		1,613,019		1,031		0.25			756,030		97		0.05

Total interest-earning assets	$	13,703,711		212,808		6.19	%	$	13,921,458		238,148		6.80	%



	Nine months ended September 30,
					2012							2011

(in thousands)	Average balance		Interest income		Yields			Average balance		Interest income		Yields

Commercial loans (1)	$	1,310,089		23,649		2.41	%	$	1,492,247		26,361		2.36	%
Real estate 1-4 family		10,893,752		628,986		7.71			12,471,228		734,534		7.87
Interest-bearing deposits in banks and other interest-earning assets		1,581,122		2,602		0.22			1,264,163		479		0.05

Total interest-earning assets	$	13,784,963		655,237		6.35	%	$	15,227,638		761,374		6.68	%

(1)	Includes taxable-equivalent adjustments.

Interest Expense

Wachovia Funding and its subsidiaries have $2.2 billion of lines of credit with the Bank. Based on sufficient levels of cash and cash equivalents, we did not borrow on our lines of credit in third quarter or the first nine months of 2012 or 2011; accordingly, we did not incur interest expense during these periods.

Provision for Credit Losses

The provision for credit losses was $57.2 million for third quarter 2012, compared with $30.3 million in third quarter 2011. For the first nine months of 2012, the provision for credit losses was $136.4 million, compared with $57.8 million for the same period of 2011. The higher level of provision in 2012 primarily reflected a slower rate of delinquency improvement. Additionally, implementation of OCC guidance resulted in increased charge-offs in third quarter 2012. Please refer to the “—Balance Sheet Analysis” and “Risk Management—Allowance for Credit Losses” sections in this Report for additional information on the allowance for credit losses.

Noninterest Income

Noninterest income for third quarter 2012 was $572 thousand, compared with $325 thousand for third quarter 2011. Noninterest income totaled $1.4 million in the first nine months of 2012, compared with $983 thousand in the first nine months of 2011, which included a $128 thousand net loss on loan sales to affiliates.

Noninterest Expense

Noninterest expense for third quarter 2012 was $17.0 million, compared with $15.3 million in third quarter 2011.

Noninterest expense totaled $48.9 million in the first nine months of 2012, compared with $50.3 million in the same period a year ago. Noninterest expense primarily consists of loan servicing costs, and to a lesser extent, management fees, foreclosed assets expense and other expenses.

Loan servicing costs decreased $4.9 million to $31.9 million in the first nine months of 2012, which reflected a decrease in the average commercial and consumer loan portfolios. These costs are driven by the size and mix of our loan portfolio.

Management fees were $5.8 million in the first nine months of 2012, compared with $4.8 million in the first nine months of 2011. The increase in management fees related to an increase in the rates of certain technology system and support expenses. Management fees represent reimbursements made to the Bank for general overhead expenses incurred on our behalf.

Foreclosed assets expense was $8.7 million in the first nine months of 2012 and $6.3 million in the first nine months of 2011. Substantially all of our real estate owned consists of residential 1-4 family real estate assets.

Income Tax Expense

Income tax expense, which is based on the pre-tax income of Wachovia Preferred Realty, LLC (WPR), our taxable REIT subsidiary, was $135 thousand and $34 thousand in third quarter 2012 and 2011, respectively. Income tax expense was $363 thousand and $192 thousand in the first nine months of 2012 and 2011, respectively. WPR increase in net income for the first nine months of 2012 resulted primarily from increased yields on cash investments. WPR held our interest rate swaps and holds certain cash investments.

Balance Sheet Analysis

Total Assets

Our assets primarily consist of commercial and consumer loans, although we have the authority to hold assets other than loans. Total assets were $13.4 billion at September 30, 2012, and $13.5 billion at December 31, 2011.

Cash and Cash Equivalents

Cash and cash equivalents were $1.5 billion at September 30, 2012 and $1.2 billion at December 31, 2011. We reinvested loan pay-downs by purchasing $2.0 billion of loans from the Bank in the first nine months of 2012, which consisted of $751.8 million of commercial loans in third quarter 2012 and $1.3 billion of consumer loans in the first half of 2012.

Loans

Loans, net of unearned income decreased $511.0 million to $12.0 billion at September 30, 2012, compared with $12.5 billion at December 31, 2011, primarily reflecting pay-downs, charge-offs and loan sales across the entire portfolio partially offset by loan purchases. In the first nine months of 2012, we purchased $751.8 million commercial and $1.3 billion consumer loans from the Bank at their estimated fair value. We did not purchase loans in the first nine months of 2011. At September 30, 2012 and December 31, 2011, consumer loans represented 86% and 89% of loans, respectively, and commercial loans represented the balance of our loan portfolio.

Allowance for Loan Losses

The allowance for loan losses decreased $35.7 million to $278.1 million at September 30, 2012, from $313.8 million at December 31, 2011. The decrease in the allowance was primarily due to lower levels of inherent credit loss in the portfolio compared with levels existing at December 31, 2011. The decrease also reflected the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value and classified as nonaccrual troubled debt restructurings (TDRs), regardless of their delinquency status.

At September 30, 2012, the allowance for loan losses included $253.9 million for consumer loans and $24.2 million for commercial loans. The total allowance reflects management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. The “—Risk Management—Allowance for Credit Losses” section in this Report describes how management estimates the allowance for loan losses and the allowance for unfunded credit commitments.

Interest Rate Swaps

Interest rate swaps were carried at fair value, which resulted in a net asset position of $1.0 million at December 31, 2011. The interest rate swaps expired in June 2012 and were not renewed.

Accounts Receivable/Payable—Affiliates, Net

The accounts payable and receivable from affiliates result from intercompany transactions in the normal course of business related to net loan pay-downs, interest receipts, and other transactions with the Bank.

Dividends Payable—Affiliates

Dividends payable to affiliates was $34.4 million at September 30, 2012, and represented third quarter 2012 dividends payable primarily to Wachovia Preferred Holding. These amounts were paid on October 1, 2012.

Risk Management

We use Wells Fargo’s risk management framework to manage our credit, interest rate, market and liquidity and funding risks.

For more information about how we manage these risks, see the “Risk Management” section in our 2011 Form 10-K. The discussion that follows is intended to provide an update on these risks.

Loans represent the largest component of our balance sheet and their related credit risk is among the most

significant risks we manage. We define credit risk as the risk of loss associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms).

The table below represents loans by segment and class of financing receivable and the weighted average maturity for those loans calculated using contractual maturity dates.

Credit Risk Management

Table 2: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable and Weighted Average Maturity

Loans outstanding

Weighted average maturity in years

Sept. 30,

Dec. 31,

Sept. 30,

Dec. 31,

(in thousands)

2012

2011

2012

2011

Commercial:

Commercial and industrial

176,086

287,174

1.2

1.4

Real estate mortgage

1,523,040

1,015,087

3.1

3.8

Real estate construction

28,058

45,887

5.3

5.0

Total commercial

1,727,184

1,348,148

3.0

3.3

Consumer:

Real estate 1-4 family first mortgage

7,341,748

7,945,746

19.2

20.0

Real estate 1-4 family junior lien mortgage

2,963,828

3,249,882

17.2

17.9

Total consumer

10,305,576

11,195,628

18.6

19.4

Total loans

12,032,760

12,543,776

16.3

17.7

The discussion that follows provides analysis of the risk elements of our various loan portfolios and updates to our credit risk management and measurement practices. See Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information.

In order to maintain REIT status, the composition of the loans underlying the participation interests are highly concentrated in real estate.

We continually evaluate and modify our credit policies. Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, Fair Isaac Corporation (FICO) scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an appropriate allowance for credit losses.

LOAN PORTFOLIO BY GEOGRAPHY The following table is a summary of the geographical distribution of our loan

portfolio for the top five states by loans outstanding.


Table 3: Loan Portfolio by Geography


	September 30, 2012
			Real estate		Real estate
			1-4 family		1-4 family				% of
			first		junior lien				total
(in thousands)	Commercial		mortgage		mortgage		Total		loans

Florida	$	280,043		948,154		381,766		1,609,963		13	%
New Jersey		224,738		780,974		567,387		1,573,099		13
Pennsylvania		44,455		943,773		458,934		1,447,162		12
North Carolina		201,527		794,126		224,536		1,220,189		10
Virginia		113,234		569,345		295,170		977,749		8
All other states		863,187		3,305,376		1,036,035		5,204,598		44

Total loans	$	1,727,184		7,341,748		2,963,828		12,032,760		100	%

COMMERCIAL AND INDUSTRIAL LOANS (C&I) Table 4 summarizes C&I loans by industry. We believe the C&I loan portfolio is appropriately underwritten and diversified. Our credit risk management process for this portfolio primarily focuses on a customer’s ability to repay the loan through

their cash flow. A majority of the loans in our C&I portfolio are secured by short-term assets, such as accounts receivable, inventory and securities, as well as long-lived assets, such as equipment and other business assets. Generally, the collateral securing this portfolio represents a secondary source of repayment.


Table 4: Commercial and Industrial Loans by Industry


	September 30, 2012
			% of
			total
(in thousands)	Total		C&I loans

Management of companies and enterprises	$	81,523		46	%
Other services (except public administration)		33,231		19
Real estate-other (1)		29,494		17
Manufacturing		18,319		10
Healthcare and social assistance		5,661		3
Wholesale trade		3,362		2
Arts, entertainment and recreation		1,805		1
Administrative and support		952		1
Other		1,739		1

Total loans	$	176,086		100	%

(1) Includes lessors, building operators and real estate agents.

COMMERCIAL REAL ESTATE (CRE) The CRE portfolio consists of both CRE mortgage loans and CRE construction loans. Table 5 summarizes CRE loans by state and property type. To identify and manage newly emerging problem CRE loans, we employ a high level of monitoring and regular customer interaction to understand and manage the risks associated with these loans, including regular loan reviews and appraisal updates. Wachovia Funding last acquired

CRE loans in 2002. In third quarter 2012, we purchased CRE loans primarily to diversify the composition of our loan portfolio. We consider the creditworthiness of the customers and collateral valuations when selecting CRE loans for purchase. In future periods, we expect to consider purchases of CRE loans in addition to other REIT qualifying assets such as 1-4 family residential mortgage loans.


Table 5: CRE Loans by State and Property Type

	September 30, 2012
							% of
	Real estate		Real estate		Total		total
(in thousands)	mortgage		construction		CRE loans		CRE loans

By state:
California	$	288,228		-		288,228		19	%
Florida		243,451		8,742		252,193		16
North Carolina		182,913		11,621		194,534		13
New Jersey		176,439		-		176,439		11
Georgia		151,512		1,125		152,637		10
All other states		480,497		6,570		487,067		31

Total loans	$	1,523,040		28,058		1,551,098		100	%

By property:
Industrial/warehouse	$	457,714		-		457,714		30	%
Office buildings		447,854		5,039		452,893		29
Shopping center		155,421		-		155,421		10
Retail (excluding shopping center)		130,785		1,773		132,558		9
Apartments		92,684		733		93,417		6
Hotel/motel		75,742		-		75,742		5
Real estate—other		59,958		6,765		66,723		4
Institutional		43,682		-		43,682		3
Manufacturing plant		40,244		-		40,244		2
Land (excluding 1-4 family)		9,344		10,359		19,703		1
Other		9,612		3,389		13,001		1

Total loans	$	1,523,040		28,058		1,551,098		100	%

REAL ESTATE 1-4 FAMILY MORTGAGE LOANS The concentrations of real estate 1-4 family mortgages by state and the related combined loan–to–value (CLTV) ratio are presented in Table 6. Our underwriting and periodic review of loans collateralized by residential real property includes appraisals or estimates from automated valuation models (AVMs). Additional information about AVMs and our policy for their use can be found in the “Risk Management – Credit Risk Management” section in our 2011 Form 10-K.

We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers in the current difficult economic cycle. For more information on our participation in the U.S. Treasury’s Making Home Affordable (MHA) programs, see the “Risk Management – Credit Risk Management” section in our 2011 Form 10-K.

We also monitor changes in real estate values and underlying economic or market conditions for all geographic areas of our real estate 1-4 family mortgage portfolio as part of our credit risk management process.

The Bank and/or other Wells Fargo affiliates act as servicer for our loan portfolio, including our consumer real

estate loans. See the “Risk Management – Credit Risk Management” section in our 2011 Form 10-K for discussion of the Bank’s settlement with various banking regulators’ involving mortgage loan servicing and foreclosure practices. We believe this settlement will not have a material impact on our financial statements.

Credit metrics for third quarter 2012 real estate 1-4 family mortgage loans were affected by the implementation of OCC guidance, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value and classified as nonaccrual TDRs, regardless of their delinquency status. As of September 30, 2012, only 9% of the performing loans placed on nonaccrual status as a result of the OCC guidance were 30 days or more past due. Implementation of the OCC guidance in third quarter 2012 resulted in the following:

•

$87.7 million reclassification of performing loans to nonaccrual status;

•

$28.6 million increase in loan charge-offs; and

•

$120.7 million of loans classified as TDRs.


Table 6: Real Estate 1-4 Family Mortgage Loans by State and CLTV


	September 30, 2012
	Real estate		Current
	1-4 family		CLTV
(in thousands)	mortgage		ratio (1)

Pennsylvania	$	1,402,707		68	%
New Jersey		1,348,361		73
Florida		1,329,920		82
North Carolina		1,018,662		71
Virginia		864,515		70
All other states		4,341,411		72

Total loans	$	10,305,576

(1)	Collateral values are generally determined using AVMs and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas.

HOME EQUITY PORTFOLIOS Our home equity portfolio includes real estate 1-4 family junior lien mortgages secured by real estate. The majority of our junior lien loans are amortizing payment loans with fixed interest rates and repayment periods between 5 to 30 years. Junior lien loans with balloon payments at the end of the repayment term represent a small portion of our junior lien loans. We frequently monitor the credit performance of our junior lien mortgage portfolio for trends and factors that influence the frequency and severity of loss.

In first quarter 2012, we implemented Interagency Supervisory Guidance on Allowance for Loan and Lease Losses Estimation Practices for Loans and Lines of Credit

Secured by Junior Liens on 1-4 Family Residential Properties issued January 31, 2012 (Interagency Guidance). Junior lien loans are now reported as a nonaccrual loan if the related first lien is 120 days past due or is in the process of foreclosure. This action had minimal financial impact as the expected loss content of these loans was already considered in the loan loss allowance. See the “Risk Management – Credit Risk Management – Nonperforming Assets” section in this report for more information.

Table 7 summarizes quarterly delinquency and loss rates by state for our home equity portfolio, which reflected the largest portion of our credit losses.

Table 7: Home Equity Portfolio (1)


					% of loans two payments					Loss rate (annualized)
	Outstanding balance				or more past due					Quarter ended
	Sept. 30,		Dec. 31,		Sept. 30,			Dec. 31,		Sept. 30,		June 30,		Mar. 31,		Dec. 31,		Sept. 30,
(in thousands)	2012		2011		2012			2011		2012 (2)		2012		2012		2011		2011

New Jersey	$	564,333		668,234		5.21	%		5.69		7.68		3.21		3.67		4.01		3.86
Pennsylvania		456,366		534,996		3.59			3.90		4.47		2.62		1.36		2.38		1.80
Florida		380,835		453,952		4.78			5.66		8.26		6.54		7.03		7.52		5.35
Virginia		293,484		332,236		3.56			3.12		4.97		3.15		2.50		2.05		2.51
North Carolina		222,537		257,958		3.70			3.83		6.53		3.46		3.60		2.43		3.05
Other		1,030,782		985,059		3.51			4.86		6.70		3.43		4.27		3.84		3.78

Total	$	2,948,337		3,232,435		4.03			4.73		6.56		3.64		3.82		3.86		3.50

(1)	Consists of real estate 1-4 family junior lien mortgages, excluding PCI loans of $15,491 at September 30, 2012 and $17,447 at December 31, 2011.

(2)

Reflects the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value, regardless of their delinquency status. Excluding the impact of OCC guidance, the total loss rate for third quarter 2012 was 3.06%. We believe that the presentation of certain information in this Report excluding the impact of the OCC guidance provides useful disclosure regarding the underlying credit quality of our loan portfolios.

NONPERFORMING ASSETS (NONACCRUAL LOANS AND FORECLOSED ASSETS) We generally place loans on nonaccrual status when:

•

the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any);

•

they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest or principal, unless both well-secured and in the process of collection;

•

part of the principal balance has been charged off; or

•

effective first quarter 2012, for junior lien mortgages, we have evidence that the related first lien mortgage may be 120 days past due or in the process of foreclosure regardless of the junior lien delinquency status.

In first quarter 2012, the implementation of Interagency Guidance, which requires us to place junior liens on nonaccrual status if the related first lien is nonaccrual, increased our nonperforming assets by $55.2 million.

In third quarter 2012, the implementation of OCC guidance, which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status, increased our nonperforming assets by $87.7 million. We charged off $28.6 million for these loans and they had the following characteristics:

•

91% of the loans were current or less than 30 days past due;

•

100% of the loans are currently paying principal, in addition to interest payments; and

•

customers had an average current FICO of 682 and an average current CLTV of 84%.

Table 8 provides the comparative data for nonaccrual loans and foreclosed assets.

Table 8: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)


	Sept. 30,			June 30,		Mar. 31,		Dec. 31,		Sept. 30,
(in thousands)	2012			2012		2012		2011		2011

Nonaccrual loans:
Commercial:
Real estate mortgage		24,054			22,324		18,623		21,132		25,834
Real estate construction		-			29		180		251		263

Total commercial		24,054			22,353		18,803		21,383		26,097

Consumer:
Real estate 1-4 family first mortgage		313,389			233,500		235,737		228,363		212,626
Real estate 1-4 family junior lien mortgage (1)		142,896			136,609		152,824		99,347		102,763

Total consumer (2)		456,285			370,109		388,561		327,710		315,389

Total nonaccrual loans		480,339			392,462		407,364		349,093		341,486

Foreclosed assets		10,282			10,999		6,769		6,926		7,418

Total nonperforming assets	$	490,621			403,461		414,133		356,019		348,904

As a percentage of total loans		4.08	%		3.32		3.28		2.84		2.73

(1)

Includes $55.2 million at March 31, 2012, resulting from implementation of the Interagency Guidance issued on January 31, 2012. This guidance accelerated the timing of placing these loans on nonaccrual to coincide with the timing of placing the related real estate 1-4 family first mortgage loans on nonaccrual.

(2)

Includes $87.7 million of performing loans at September 30, 2012, consisting of $69.3 million of first mortgages and $18.4 million of junior liens, resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status.


Table 9: Analysis of Changes in Nonaccrual Loans

		Quarter ended
	Sept. 30,			June 30,			Mar. 31,			Dec. 31,			Sept. 30,
(in thousands)	2012			2012			2012			2011			2011

Commercial nonaccrual loans
Balance, beginning of quarter	$	22,353			18,803			21,383			26,097			23,262
Inflows		3,714			4,796			1,871			1,469			3,268
Outflows		(2,013	)		(1,246	)		(4,451	)		(6,183	)		(433	)

Balance, end of quarter		24,054			22,353			18,803			21,383			26,097

Consumer nonaccrual loans
Balance, beginning of quarter		370,109			388,561			327,710			315,389			339,934
Inflows (1)		174,193			89,718			154,618			109,847			87,055
Outflows:
Returned to accruing		(44,316	)		(53,016	)		(42,556	)		(51,317	)		(67,175	)
Foreclosures		(3,921	)		(7,696	)		(4,897	)		(1,946	)		(2,233	)
Charge-offs		(36,052	)		(38,171	)		(42,903	)		(37,660	)		(29,594	)
Payment, sales and other		(3,728	)		(9,287	)		(3,411	)		(6,603	)		(12,598	)

Total outflows		(88,017	)		(108,170	)		(93,767	)		(97,526	)		(111,600	)

Balance, end of quarter		456,285			370,109			388,561			327,710			315,389

Total nonaccrual loans	$	480,339			392,462			407,364			349,093			341,486

(1)

Quarter ended September 30, 2012, includes $87.7 million of performing loans moved to nonaccrual status as a result of the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status. Quarter ended March 31, 2012, includes $55.2 million of loans moved to nonaccrual status as a result of implementing Interagency Guidance issued January 31, 2012.

Typically, changes to nonaccrual loans period-over-period represent inflows for loans that are placed on nonaccrual status per our policy, offset by reductions for loans that are charged off, sold, transferred to foreclosed assets, or are no longer classified as nonaccrual as a result of

continued performance and an improvement in the borrower’s financial condition and loan repayment capabilities. In certain instances in 2012, clarifying regulatory guidance required additional inflows as described in Table 9.

TROUBLED DEBT RESTRUCTURINGS (TDRs)


Table 10: Troubled Debt Restructurings (TDRs) (1)


	Sept. 30,		June 30,		Mar. 31,		Dec. 31,		Sept. 30,
(in thousands)	2012		2012		2012		2011		2011

Commercial TDRs:
Commercial and industrial	$	-		-		-		-		-
Real estate mortgage		3,696		5,134		2,664		2,470		2,582
Real estate construction		-		-		-		-		-


Total commercial TDRs		3,696		5,134		2,664		2,470		2,582

Consumer TDRs:
Real estate 1-4 family first mortgage		320,821		206,720		198,756		191,773		179,694
Real estate 1-4 family junior lien mortgage		136,316		108,726		110,441		111,463		109,645
Trial modifications (1)		22,300		22,875		23,681		21,369		20,373


Total consumer TDRs (2)		479,437		338,321		332,878		324,605		309,712

Total TDRs	$	483,133		343,455		335,542		327,075		312,294


TDRs on nonaccrual status	$	234,310		96,465		97,942		85,733		87,368

TDRs on accrual status		248,823		246,990		237,600		241,342		224,926

Total TDRs	$	483,133		343,455		335,542		327,075		312,294

(1)

Based on clarifying guidance from the SEC received in December 2011, we classify trial modifications as TDRs at the beginning of the trial period. For many of our consumer real estate modification programs, we may require a borrower to make trial payments generally for a period of three to four months. Prior to the SEC clarification, we classified trial modifications as TDRs once a borrower successfully completed the trial period in accordance with the terms.

(2)	September 30, 2012, includes $120.7 million of loans, consisting of $91.8 million of first mortgages and $28.9 million of junior liens, resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be classified as TDRs.



Table 11: Analysis of Changes in TDRs

	Quarter ended
	Sept. 30,			June 30,			Mar. 31,			Dec. 31,			Sept. 30,
(in thousands)	2012			2012			2012			2011			2011


Commercial TDRs:
Balance, beginning of quarter	$	5,134			2,664			2,470			2,582			2,426
Inflows		74			2,505			1,377			-			156
Outflows		(1,512	)		(35	)		(1,183	)		(112	)		-


Balance, end of quarter		3,696			5,134			2,664			2,470			2,582


Consumer TDRs:
Balance, beginning of quarter		338,321			332,878			324,605			309,712			294,483
Inflows (1)		155,557			19,722			19,648			27,840			42,219
Outflows:
Charge-offs		(5,161	)		(7,693	)		(7,223	)		(6,618	)		(5,621	)
Foreclosures		-			(749	)		(141	)		-			(36	)
Payments, sales and other (2)		(8,705	)		(5,031	)		(6,323	)		(7,325	)		(13,447	)
Net change in trial modifications (3)		(575	)		(806	)		2,312			996			(7,886	)

Total outflows		(14,441	)		(14,279	)		(11,375	)		(12,947	)		(26,990	)

Balance, end of quarter		479,437			338,321			332,878			324,605			309,712


Total TDRs	$	483,133			343,455			335,542			327,075			312,294

(1)	Quarter ended September 30, 2012, includes $120.7 million of loans, resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be classified as TDRs.

(2)	Other outflows include normal amortization/accretion of loan basis adjustments.

(3)

Net change in trial modifications includes: inflows of new TDRs entering the trial payment period, net of outflows for modifications that either (i) successfully perform and enter into a permanent modification or (ii) do not successfully perform according to the terms of the trial period plan and are subsequently charged-off, foreclosed upon or otherwise resolved. Our recent experience is that a majority of the mortgages that enter a trial payment period program are successful in completing the program requirements.

Table 10 provides information regarding the recorded investment of loans modified in TDRs. Table 11 provides an analysis of the changes in TDRs. The allowance for loan losses for TDRs was $102.5 million and $104.3 million at September 30, 2012 and December 31, 2011, respectively. See Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more information. Those loans discharged in bankruptcy and reported as TDRs this quarter have been written down to net realizable collateral value.

In those situations where principal is forgiven, the entire amount of such principal forgiveness is immediately charged

off to the extent not done so prior to the modification. We sometimes delay the timing on the repayment of a portion of principal (principal forbearance) and charge off the amount of forbearance if that amount is not considered fully collectible.

LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING Certain loans 90 days or more past due as to interest or principal are still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family mortgage loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans of $6.6 million at September 30, 2012, and $7.6 million at December 31, 2011, are excluded from this disclosure even though they are 90 days or more

contractually past due. These PCI loans are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.

Loans 90 days or more past due and still accruing at September 30, 2012, were down $15.8 million, from December 31, 2011, predominantly due to loss mitigation activities including modifications, seasonality, and credit stabilization. Table 12 reflects non-PCI loans 90 days or more past due and still accruing.


Table 12: Loans 90 Days or More Past Due and Still Accruing

	Sept. 30,		June 30,		Mar. 31,		Dec. 31,		Sept. 30,
(in thousands)	2012		2012		2012		2011		2011


Commercial:
Commercial and industrial	$	-		-		-		-		-
Real estate mortgage		-		-		-		1,596		1,483
Real estate construction		-		-		-		-		-


Total commercial		-		-		-		1,596		1,483

Consumer:
Real estate 1-4 family first mortgage		14,502		16,343		16,211		21,008		20,519
Real estate 1-4 family junior lien mortgage (1)		7,813		5,327		5,560		15,492		13,688


Total consumer		22,315		21,670		21,771		36,500		34,207


Total	$	22,315		21,670		21,771		38,096		35,690

(1)	During first quarter 2012, $2.7 million of 1-4 family junior lien mortgages were transferred to nonaccrual upon implementation of the Interagency Guidance issued on January 31, 2012.

NET CHARGE-OFFS


Table 13: Net Charge-offs


	Quarter ended
	September 30,					June 30,					March 31,					December 31,					September 30,
	2012					2012					2012					2011					2011
	Net loan		% of			Net loan		% of			Net loan		% of			Net loan		% of			Net loan		% of
	charge-		avg.			charge-		avg.			charge-		avg.			charge-		avg.			charge-		avg.
($ in thousands)	offs		loans (1)			offs		loans (1)			offs		loans (1)			offs		loans (1)			offs		loans (1)


Total commercial	$	1,461		0.40	%	$	187		0.06	%	$	248		0.08	%	$	586		0.17	%	$	85		0.02	%
Consumer:
Real estate 1-4 family first mortgage		17,791		0.93			14,327		0.73			22,865		1.18			17,959		0.92			16,324		0.79
Real estate 1-4 family junior lien mortgage		50,548		6.52			28,613		3.62			30,060		3.80			32,162		3.85			30,784		3.49

Total consumer (2)		68,339		2.55			42,940		1.56			52,925		1.94			50,121		1.79			47,108		1.60

Total	$	69,800		2.30	%	$	43,127		1.41	%	$	53,173		1.74	%	$	50,707		1.61	%	$	47,193		1.42	%

(1)	Quarterly net charge-offs as a percentage of average loans are annualized.

(2)

Quarter ended September 30, 2012, includes $28.6 million resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status. Excluding this impact, net charge offs were $41.2 million (1.36% of average total loans outstanding).

Table 13 presents net charge-offs for the current and previous four quarters. Net charge-offs in third quarter 2012 were $69.8 million (2.30% of average total loans outstanding, annualized) compared with $47.2 million (1.42%) in third quarter 2011. Current quarter net charge-offs included $28.6 million resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status. Excluding the impact of this guidance, net charge-offs were $41.2 million (1.36% of average total loans outstanding, annualized), a decrease from third quarter 2011 in part due to lower average loan balances and as a result of continued modest improvement in economic conditions and aggressive loss mitigation activities aimed at working with our customers through their financial challenges. The majority of net losses were in consumer real estate.

Net charge-offs in the 1-4 family first mortgage portfolio totaled $17.8 million in third quarter 2012 compared with $16.3 million in third quarter 2011.

Net charge-offs in the real estate 1-4 family junior lien portfolio totaled $50.5 million in third quarter 2012 compared with $30.8 million in third quarter 2011. Excluding the $27.0 million impact of the OCC guidance, net charge-offs declined. More information about the home equity portfolio is available in Table 7 in this Report.

Commercial and industrial and CRE net charge-offs in third quarter 2012 and 2011 were not significant. Although economic stress and decreased CRE values have resulted in the deterioration of our commercial and industrial and CRE credit portfolios, there have been relatively small net losses. Due to the larger dollar amounts associated with individual commercial and industrial and CRE loans, loss recognition tends to be irregular and exhibits more variation than consumer loan portfolios.

ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio and unfunded credit commitments at the balance sheet date. The detail of the changes in the allowance for credit losses by portfolio segment (including charge-offs and recoveries by loan class) is in Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

We employ a disciplined process and methodology to establish our allowance for credit losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific loss factors. The process involves subjective as well as complex judgments. In addition, we review a variety of credit metrics and trends. However, these trends do not solely determine the appropriate level of the allowance as we use several analytical tools for such evaluation. For additional information on our allowance for credit losses, see the “Critical Accounting Policies – Allowance for Credit Losses” section and Note 2 (Loans and Allowance for Credit Losses) to Financial Statements in our 2011 Form 10-K.

At September 30, 2012, the allowance for credit losses totaled $278.6 million, compared with $313.9 million, at December 31, 2011. We believe the allowance for credit losses of $278.6 million at September 30, 2012, was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments. The allowance for credit losses is subject to change and considers existing factors at the time, including economic or market conditions and ongoing internal and external examination processes.

The ratio of the allowance for credit losses to total nonaccrual loans may fluctuate from period to period due to

such factors as the mix of loan types in the portfolio, the amount of nonaccrual loans that have been written down to current collateral value, borrower credit strength and the value and marketability of collateral.

Charge-offs exceeded the provision for credit losses by $12.6 million and $29.7 million in third quarter and the first nine months of 2012, respectively. Charge-offs exceeded the provision for credit losses by $16.9 million and $106.2 million in third quarter and the first nine months of 2011, respectively. The higher level of provision expense in 2012 primarily reflected a slower rate of delinquency improvement. Implementation of the OCC guidance resulted in increased charge-offs for third quarter 2012. Although provision expense increased for the third quarter and first nine months of 2012 when compared with the same periods in 2011, Wachovia Funding experienced a reduction in the allowance for credit losses in 2012 due to continued improvement portfolio delinquency and overall loss trends.

In determining the appropriate allowance attributable to our residential real estate portfolios, our process considers the associated credit cost, including re-defaults of modified loans and projected loss severity for loan modifications that occur or are probable to occur. In addition, our process incorporates the estimated allowance associated with recent events including the Wells Fargo/Bank settlement regarding mortgage servicing and foreclosure practices and high risk portfolios defined in the Interagency Guidance.

Changes in the allowance reflect changes in statistically derived loss estimates, historical loss experience, current trends in borrower risk and/or general economic activity on portfolio performance, and management’s estimate for imprecision and uncertainty.

Table 14 presents an analysis of the allowance for credit losses for the last five quarters.

Table 14: Allowance for Credit Losses


(in thousands)	Sept. 30, 2012			June 30, 2012		Mar. 31, 2012		Dec. 31, 2011		Sept. 30, 2011

Components:
Allowance for loan losses	$	278,056			292,780		309,913		313,762		292,746
Allowance for unfunded credit commitments		582			258		200		166		167

Allowance for credit losses	$	278,638			293,038		310,113		313,928		292,913

Allowance for loan losses as a percentage of total loans		2.31	%		2.41		2.45		2.50		2.29
Allowance for loan losses as a percentage of annualized net charge-offs		100.13			168.79		144.91		155.97		156.35
Allowance for credit losses as a percentage of total loans		2.32			2.41		2.45		2.50		2.30
Allowance for credit losses as a percentage of total nonaccrual loans		58.01			74.67		76.13		89.93		85.78

Asset/Liability Management

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk and liquidity and funding.

INTEREST RATE RISK Interest rate risk is the sensitivity of earnings to changes in interest rates. Approximately 19% of our loan portfolio consisted of variable rate loans at September 30, 2012. 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 adjustment of the indices upon which the interest rates on loans are based and from prepayments of loans with fixed interest rates, resulting in reinvestment of the proceeds in lower yielding assets.

At September 30, 2012, approximately 81% of our loans had fixed interest rates. Such loans increase our interest rate risk. We monitor the rate sensitivity of assets acquired. Our methods for evaluating interest rate risk include an analysis of interest-rate sensitivity “gap,” which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds interest rate-sensitive assets.

During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution is perfectly matched in each maturity category.

At September 30, 2012, $3.8 billion, or 28% of our assets, had variable interest rates and could be expected to reprice with changes in interest rates. At September 30, 2012, our liabilities were $74.7 million, or 1% of our assets, while stockholders’ equity was $13.4 billion, or 99% of our assets. This positive gap between our assets and liabilities indicates that an increase in interest rates would result in an increase in net interest income and a decrease in interest rates would result in a decrease in net interest income.

MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. Market risk arises primarily from interest rate risk inherent in lending and borrowing activities.

LIQUIDITY AND FUNDING The objective of effective liquidity management is to ensure that we can meet

customer loan requests and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Wells Fargo’s Corporate Asset/Liability Management Committee establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets.

Proceeds received from pay-downs 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 lines of credit we have with the Bank as a short-term liquidity source. At September 30, 2012, there were no borrowings outstanding on our lines of credit with the Bank.

Wachovia Funding’s primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as the underlying loans mature or repay, and pay dividends. Operating expenses and dividends are expected to be funded through cash generated by operations or paid-in capital, while funding commitments and the acquisition of additional participation interests in loans are intended to be funded with the proceeds obtained from repayment of principal balances by individual borrowers. In the first nine months of 2012, we purchased $2.0 billion of loan participations from the Bank. If in future periods we do not reinvest loan pay-downs at sufficient levels, management may request our board of directors to consider an additional return of capital to holders of our common stock. We expect to distribute annually an aggregate amount of dividends with respect to outstanding capital stock equal to approximately 100 percent of our REIT taxable income for federal tax purposes. Such distributions may in some periods exceed net income.

To the extent that we determine that additional funding is required, we could issue additional common or preferred stock, subject to any pre-approval rights of our shareholders or raise funds through debt financings, retention of cash flows or a combination of these methods. 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. However, any cash flow retention must be consistent with the provisions of the Investment Company Act and the Code which requires the distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income.

Except in certain circumstances, our Series A preferred securities may not be redeemed prior to December 31, 2022. Prior to that date, among other things, if regulators adopt capital standards that do not permit Wells Fargo or the Bank to treat our Series A preferred securities as Tier 1 capital, we may determine to redeem the Series A preferred securities, as provided in our certificate of incorporation.

In June 2012, federal banking agencies, including the FRB, jointly published notices of proposed rulemaking,

which would substantially amend the risk-based capital rules for banks. The proposed capital rules are intended to implement in the U.S. the Basel III regulatory capital reforms, comply with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. Based on our current interpretation, we believe the Wachovia Funding Series A preferred securities would no longer constitute Tier 1 capital for Wells Fargo or the Bank under the Basel III NPR. However, following the comment period, the FRB may not adopt the Basel III NPR as proposed or may make additional changes to the applicable Tier 1 capital rules prior to final adoption. In the event the FRB’s applicable final rules regarding Tier 1 capital treatment are the same as the Basel III NPR or otherwise result in the Series A preferred securities no longer constituting Tier 1 capital for Wells Fargo or the Bank, Wachovia Funding may determine to redeem the Wachovia Funding Series A preferred securities due to a Regulatory Capital Event. Although any such redemption must be in whole for a redemption price of $25.00 per Series A security, plus all authorized, declared but unpaid dividends to the date of redemption, such event may have an adverse effect on the trading price of the Series A preferred securities. We continue to monitor and evaluate the potential impact on regulatory capital and liquidity management of regulatory proposals, including Basel III and those required under the Dodd-Frank Act, including the Basel III NPR, throughout the rule-making process.

At September 30, 2012, our liabilities principally consisted of dividends payable to affiliates and other liabilities. Our certificate of incorporation does not contain any limitation on the amount or percentage of debt, funded or otherwise, we may incur, except the incurrence of debt for borrowed money or our guarantee of debt for borrowed money in excess of amounts borrowed or guaranteed. However, the certificate of designation for our Series A preferred securities contains a covenant in which we agree not to incur indebtedness over 20% of our stockholders’ equity unless approved by two-thirds of the Series A preferred securities, voting as a separate class.

Critical Accounting Policy

Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2011 Form 10-K) 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. One of these policies is critical because it requires 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. We have identified the allowance for credit losses policy as being particularly sensitive in terms of judgments and the extent to which estimates are used.

Management has reviewed and approved this critical accounting policy and has discussed this policy with the Audit Committee of Wachovia Funding’s board of directors. This policy is described in the “Critical Accounting Policy” section in our 2011 Form 10-K.

Current Accounting Developments

There are no pending accounting pronouncements issued by the Financial Accounting Standards Board (FASB) that would impact Wachovia Preferred Funding.

Forward-Looking Statements

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “target”, “projects,” “outlook,” “forecast,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about: future results of Wachovia Funding; expectations for consumer and commercial credit losses, life-of-loan losses, and the sufficiency of our credit loss allowance to cover future credit losses; our net interest income, including our expectation that we expect continued pressure on average yield on total interest-earning assets; expectations regarding loan purchases and pay downs; future capital expenditures; possible capital distributions; the expected outcome and impact of proposed regulatory capital standards, including the Basel III NPR, the possibility of the Series A preferred securities no longer constituting Tier 1 capital of Wells Fargo or the Bank, and the possibility of a Regulatory Capital Event; the expected outcome and impact of legal, regulatory and legislative developments, including the effects to Wachovia Funding of the Bank’s settlement with certain regulatory authorities related to mortgage servicing and foreclosure practices; and Wachovia Funding’s plans, objectives and strategies.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:

•

the effect of political and economic conditions and geopolitical events;

•

losses relating to Hurricane Sandy and related storms, including as to our consumer and commercial loan portfolios, the extent of damage or loss to our collateral for loans in our portfolios or the unavailability of adequate insurance coverage or government assistance for our borrowers;

•

economic conditions that affect the general economy, housing prices, the job market, consumer confidence and spending habits, including our borrowers’ repayment of our loan participations;

•

the level and volatility of the capital markets, interest rates, currency values and other market indices that affect the value of our assets and liabilities;

•

the availability and cost of both credit and capital as well as the credit ratings assigned to our debt instruments;

•

investor sentiment and confidence in the financial markets;

•

our reputation;

•

the impact of current, pending and future legislation, regulation and legal actions, including capital standards applicable to the Bank or Wells Fargo (including the proposed Basel III NPR);

•

changes in accounting standards, rules and interpretations;

•

mergers and acquisitions, and our ability to integrate them;

•

various monetary and fiscal policies and regulations of the U.S. and foreign governments;

•

a failure in or breach of our, the Bank’s or Wells Fargo’s operational or security systems or infrastructure, or those of third party vendors and other security providers, including as a result of cyber attacks;

•

financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and legislation; and

•

the other factors described in “Risk Factors” in this Report.

In addition to the above factors, we also caution that there is no assurance that our allowance for credit losses will be appropriate to cover future credit losses, especially if housing prices decline, unemployment worsens or losses from Hurricane Sandy are significant. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially adversely affect our financial results and condition.

Any forward-looking statement made by us in this Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Risk Factors

An investment in Wachovia Funding involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. We discuss previously under “Forward-Looking Statements” and elsewhere in this Report, as well as in other documents we file with the SEC, risk factors that could adversely affect our financial results and condition and the value of, and return on, an investment in Wachovia Funding. We refer you to the Financial Review section and Financial Statements (and related Notes) in this Report for more information about credit, interest rate, market, and litigation risks and to the “Risk Factors” sections in our 2011 Form 10-K for more information about risks. Any factor described below or elsewhere in this Report or in our 2011 Form 10-K could by itself, or together with other factors, adversely affect our financial results and condition, or the value of an investment in Wachovia Funding. There are factors not described below or elsewhere in this Report that could adversely affect our financial results and condition.

The following risk factor supplements the risk factors set forth in our 2011 Form 10-K, 2012 First Quarter Report on Form 10-Q and 2012 Second Quarter Report on Form 10-Q and should be read in conjunction with the other risk factors described in those reports.

Changes to regulatory capital standards if adopted, may cause our Series A preferred securities to be redeemed early. Except in certain circumstances, our Series A preferred securities may not be redeemed prior to December 31, 2022. Prior to that date, among other things, if regulators adopt capital standards such that the Series A preferred securities no longer constitute Tier 1 capital for Wells Fargo or the Bank, we may determine to redeem the Series A preferred securities, as provided in our certificate of incorporation. In June 2012, federal banking agencies, including the FRB, jointly published notices of proposed rulemaking, which would substantially amend the risk-based capital rules for banks. The proposed capital rules are intended to implement in the U.S. the Basel III regulatory capital reforms, comply with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. If the FRB adopts the Basel III NPR in its current proposed form, it is possible that Wachovia Funding may be able to redeem the Series A preferred securities because the Series A preferred securities may no longer constitute Tier 1 capital for Wells Fargo or the Bank. However, following the comment period, the FRB may not adopt the Basel III NPR in the proposed form or may make additional changes to the Tier 1 capital regulations affecting the Series A preferred securities. We will continue to monitor the proposed capital standards and whether such capital standards would result in our determination that a Regulatory Capital Event as defined in our certificate of incorporation has occurred and therefore cause the Series A preferred securities to become redeemable under their terms. Although any such

redemption must be in whole for a redemption price of $25.00 per Series A preferred security, plus all authorized, declared but unpaid dividends to the date of redemption, such event may have an adverse effect on the trading price for the Series A preferred securities.

Unexpected rates of loan prepayments may cause us to violate the Investment Company Act of 1940 or cause a decrease in our net income. We generally reinvest the cash from loan pay-downs and prepayments in purchasing new loan participations. In the event we are unable to purchase new loan participations, determine not to purchase loan participations, or if actual prepayment rates exceed the expected rates, excess cash may accumulate on our balance sheet. If we have cash on our balance sheet greater than permitted pursuant to exemptions from registration under the Investment Company Act of 1940, we may violate such act. In order to avoid any such violation, we may request our board of directors to consider a return of capital to holders of our common stock.

Additionally, we earn interest income on our loan participation portfolio. Excessive loan prepayments may cause our loan participation portfolio balances to decline and may decrease our net income.

Controls and Procedures

Disclosure Controls and Procedures

As required by SEC rules, Wachovia Funding’s management evaluated the effectiveness, as of September 30, 2012, of disclosure controls and procedures. Wachovia Funding’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the chief executive officer and chief financial officer concluded that Wachovia Funding’s disclosure controls and procedures were effective as of September 30, 2012.

Internal Control Over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, Wachovia Funding’s principal executive and principal financial officers and effected by Wachovia Funding’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

•

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of Wachovia Funding;

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of Wachovia Funding are being made only in accordance with authorizations of management and directors of Wachovia Funding; and

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Wachovia Funding’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during third quarter 2012 that has materially affected, or is reasonably likely to materially affect, Wachovia Funding’s internal control over financial reporting.

Financial Statements

Wachovia Preferred Funding Corp. and Subsidiaries

Consolidated Statement of Income (Unaudited)



	Quarter ended Sept. 30,			Nine months ended Sept.30,

(in thousands, except per share amounts)		2012	2011		2012	2011
Interest income	$	212,806	238,146		655,232	761,368
Interest expense		-	-		-	-


Net interest income		212,806	238,146		655,232	761,368
Provision for credit losses		57,228	30,280		136,402	57,793

Net interest income after provision for credit losses		155,578	207,866		518,830	703,575


Noninterest income
Gain on interest rate swaps		-	11		82	264
Loss on loan sales to affiliate		-	-		-	(128	)
Other		572	314		1,333	847


Total noninterest income		572	325		1,415	983

Noninterest expense
Loan servicing costs		10,332	11,602		31,880	36,756
Management fees		1,985	1,636		5,837	4,806
Foreclosed assets		4,069	1,521		8,740	6,343
Other		639	550		2,433	2,410


Total noninterest expense		17,025	15,309		48,890	50,315


Income before income tax expense		139,125	192,882		471,355	654,243
Income tax expense		135	34		363	192


Net income		138,990	192,848		470,992	654,051
Comprehensive income		138,990	192,848		470,992	654,051
Dividends on preferred stock		48,010	45,198		145,744	137,151


Net income applicable to common stock	$	90,980	147,650		325,248	516,900


Per common share information
Earnings per common share	$	0.91	1.48		3.25	5.17
Diluted earnings per common share		0.91	1.48		3.25	5.17
Dividends declared per common share	$	1.67	1.66		4.70	5.58
Average common shares outstanding		99,999.9	99,999.9		99,999.9	99,999.9
Diluted average common shares outstanding		99,999.9	99,999.9		99,999.9	99,999.9

The accompanying notes are an integral part of these statements.

Financial Statements

Wachovia Preferred Funding Corp. and Subsidiaries

Consolidated Balance Sheet (Unaudited)




	September 30,			December 31,
(in thousands, except shares)	2012			2011

Assets
Cash and cash equivalents	$	1,530,309			1,186,165
Loans, net of unearned income		12,032,760			12,543,776
Allowance for loan losses		(278,056	)		(313,762	)


Net loans		11,754,704			12,230,014

Interest rate swaps, net		-			963
Accounts receivable - affiliates, net		94,090			64,235
Other assets		53,306			53,018


Total assets	$	13,432,409			13,534,395

Liabilities
Dividends payable - affiliates	$	34,417			-
Deferred income taxes		-			9,327
Other liabilities		40,301			22,625


Total liabilities		74,718			31,952

Stockholders’ Equity
Preferred stock		743			743
Common stock – $0.01 par value, authorized 100,000,000 shares; issued and outstanding 99,999,900 shares		1,000			1,000
Additional paid-in capital		14,026,608			14,026,608
Retained earnings (deficit)		(670,660	)		(525,908	)


Total stockholders’ equity		13,357,691			13,502,443


Total liabilities and stockholders’ equity	$	13,432,409			13,534,395

The accompanying notes are an integral part of these statements.

Financial Statements

Wachovia Preferred Funding Corp. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)




(in thousands, except per share data)		Preferred stock	Common stock	Additional paid-in capital		Retained earnings (deficit)		Total stockholders’ equity

Balance, December 31, 2010	$	743	1,000	18,526,608		(406,478	)	18,121,873

Net income		-	-	-		654,051		654,051
Cash dividends
Series A preferred securities at $1.36 per share		-	-	-		(40,781	)	(40,781	)
Series B preferred securities at $0.40 per share		-	-	-		(15,858	)	(15,858	)
Series C preferred securities at $19.01 per share		-	-	-		(80,473	)	(80,473	)
Series D preferred securities at $42.50 per share		-	-	-		(39	)	(39	)
Common stock at $5.58 per share		-	-	-		(558,000	)	(558,000	)
Common stock special capital distribution		-	-	(4,500,000	)	-		(4,500,000	)


Balance, September 30, 2011	$	743	1,000	14,026,608		(447,578	)	13,580,773


Balance, December 31, 2011	$	743	1,000	14,026,608		(525,908	)	13,502,443


Net income		-	-	-		470,992		470,992
Cash dividends
Series A preferred securities at $1.36 per share		-	-	-		(40,781	)	(40,781	)
Series B preferred securities at $0.44 per share		-	-	-		(17,500	)	(17,500	)
Series C preferred securities at $20.65 per share		-	-	-		(87,424	)	(87,424	)
Series D preferred securities at $42.50 per share		-	-	-		(39	)	(39	)
Common stock at $4.70 per share		-	-	-		(470,000	)	(470,000	)


Balance, September 30, 2012	$	743	1,000	14,026,608		(670,660	)	13,357,691

The accompanying notes are an integral part of these statements.

Financial Statements

Wachovia Preferred Funding Corp. and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)




	Nine months ended September 30,
(in thousands)	2012			2011

Cash flows from operating activities:
Net income	$	470,992			654,051
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Accretion of discounts on loans		(107,916	)		(153,970	)
Provision for credit losses		136,402			57,793
Deferred income tax benefits		(9,327	)		(15,493	)
Other operating activities, net		(6,328	)		6,304
Net cash provided by operating activities		483,823			548,685
Cash flows from investing activities:
Increase (decrease) in cash realized from
Loans:
Purchases		(2,045,150	)		-
Proceeds from payments and sales		2,472,139			2,992,754
Interest rate swaps		35,326			36,360
Net cash provided by investing activities		462,315			3,029,114
Cash flows from financing activities:
Decrease in cash realized from
Collateral held on interest rate swaps		(34,260	)		(35,184	)
Common stock special capital distributions		-			(4,500,000	)
Cash dividends paid		(567,734	)		(695,151	)

Net cash used by financing activities		(601,994	)		(5,230,335	)

Net change in cash and cash equivalents		344,144			(1,652,536	)
Cash and cash equivalents at beginning of period		1,186,165			2,774,299
Cash and cash equivalents at end of period	$	1,530,309			1,121,763
Supplemental cash flow disclosures:
Cash paid for income taxes	$	10,500			14,000
Change in non cash items:
Transfers from loans to foreclosed assets		16,350			12,361

The accompanying notes are an integral part of these statements.

Note 1: Summary of Significant Accounting Policies

Wachovia Preferred Funding Corp. (Wachovia Funding) is a direct subsidiary of Wachovia Preferred Funding Holding Corp. (Wachovia Preferred Holding) and an indirect subsidiary of both Wells Fargo & Company (Wells Fargo) and Wells Fargo Bank, National Association (the Bank). Wachovia Funding is a real estate investment trust (REIT) for income tax purposes.

The accounting and reporting policies of Wachovia Funding are in accordance with U.S. generally accepted accounting principles (GAAP). Our significant accounting policies are discussed in our Form 10-K for the year ended December 31, 2011 (2011 Form 10-K). The preparation of the financial statements in accordance with GAAP requires management to make estimates based on assumptions about future economic and market conditions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual future conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates related to the allowance for credit losses (Note 2). Actual results could differ from those estimates.

The information furnished in these unaudited interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our 2011 Form 10-K.

Accounting Standards Adopted in 2012

In first quarter 2012, we adopted Accounting Standards Update (ASU or Update) ASU 2011-4, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.

ASU 2011-04 modifies accounting guidance and expands existing disclosure requirements for fair value measurements. This Update clarifies how fair values should be measured for instruments classified in stockholders’ equity and under what circumstances premiums and discounts should be applied in fair value measurements. This Update also permits entities to measure fair value on a net basis for financial instruments that are managed based on net exposure to market risks and/or counterparty credit risk. ASU 2011-04 requires new disclosures for financial instruments classified as Level 3, including: 1) quantitative information about unobservable inputs used in measuring fair value, 2) qualitative discussion of the sensitivity of fair value measurements to changes in unobservable inputs, and 3) a description of valuation processes used. This Update also requires disclosure of fair value levels for financial instruments that are not recorded at fair value but for which fair

value is required to be disclosed. We adopted this guidance in first quarter 2012 with prospective application, resulting in expanded fair value disclosures. The measurement clarifications of this Update did not have a material effect on our consolidated financial statements.

Significant Accounting Policy Update

In first quarter 2012, we implemented the Interagency Supervisory Guidance on Allowance for Loan and Lease Losses Estimation Practices for Loans and Lines of Credit Secured by Junior Liens on 1-4 Family Residential Properties (Interagency Guidance), which was issued on January 31, 2012. As a result, we aligned our nonaccrual accounting policy with this guidance to accelerate the timing of placing junior lien loans on nonaccrual to coincide with the timing of placing the related real estate 1-4 family first mortgage loans on nonaccrual.

We implemented the guidance in the Office of the Comptroller of the Currency (OCC) update to Bank Accounting Advisory Series (OCC guidance) issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be written down to net realizable collateral value and classified as nonaccrual troubled debt restructurings (TDRs), regardless of their delinquency status.

Our updated nonaccrual policy is as follows:

We generally place loans on nonaccrual status when:

•

the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any);

•

they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest or principal, unless both well-secured and in the process of collection;

•

part of the principal balance has been charged off; or

•

There have been no other material changes to our significant accounting policies, as discussed in Note 1 in our 2011 Form 10-K.

Subsequent Events

We have evaluated the effects of subsequent events that have occurred subsequent to period end September 30, 2012, and there have been no material events that would require recognition in our third quarter 2012 consolidated financial statements or disclosure in the Notes to the financial statements. During the last week of October 2012, Hurricane Sandy and related storms caused destruction along the East Coast, including in Connecticut, New Jersey, New York, Pennsylvania, Delaware, Maryland, Virginia and Washington D.C., and resulted in, among other things, property damage for our customers and the closing of many businesses and financial markets. We are currently assessing the impact to our customers and our business as a result of Hurricane Sandy. The financial

impact to us is expected to primarily relate to our consumer and commercial real estate loan portfolios and will depend on a number of factors, including, as to our consumer and commercial loan portfolios, the types of loans most affected by the storms, the extent of damage to our collateral, the extent of available insurance coverage, the availability of government assistance for our borrowers, and whether our borrowers’ ability to repay their loans has been diminished. We are actively reviewing our exposure but are currently unable to reasonably estimate the extent of losses we may incur as a result of these storms.

Note 2: Loans and Allowance for Credit Losses

Wachovia Funding obtains participation interests in loans originated or purchased by the Bank. In order to maintain Wachovia Funding’s status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. Underlying loans are concentrated primarily in Florida, New Jersey, Pennsylvania, North Carolina and Virginia. These markets include

approximately 56% of Wachovia Funding’s total loan balance at September 30, 2012.

The following table presents loans by segments and classes. Outstanding balances include a total net reduction for unearned discounts of $500.5 million and $604.4 million at September 30, 2012 and December 31, 2011, respectively.


(in thousands)	September 30, 2012		December 31, 2011

Commercial:
Commercial and industrial	$	176,086		287,174
Real estate mortgage		1,523,040		1,015,087
Real estate construction		28,058		45,887

Total commercial		1,727,184		1,348,148
Consumer:
Real estate 1-4 family first mortgage		7,341,748		7,945,746
Real estate 1-4 family junior lien mortgage		2,963,828		3,249,882

Total consumer		10,305,576		11,195,628

Total loans	$	12,032,760		12,543,776

The following table summarizes the proceeds paid (including accrued interest receivable of $1.0 million and $5.1 million in the third quarter and first nine months of 2012,

respectively) or received from the Bank for purchases and sales of loans, respectively.


	2012									2011

(in thousands)	Commercial			Consumer			Total			Commercial			Consumer			Total

Quarter ended September 30,
Purchases	$	751,764			-			751,764			-			-			-
Sales		-			(19,641	)		(19,641	)		(86	)		(16,727	)		(16,813	)

Nine months ended September 30,
Purchases	$	751,764			1,293,386			2,045,150			-			-			-
Sales		(900	)		(47,706	)		(48,606	)		(1,005	)		(67,721	)		(68,726	)

Commitments to Lend

The contract or notional amount of commercial loan commitments to extend credit at September 30, 2012 and December 31, 2011 was $499.8 million and $329.6 million, respectively.

Allowance for Credit Losses (ACL)

The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded credit commitments. Changes in the allowance for credit losses were:



	Quarter ended September 30,					Nine months ended September 30,

(in thousands)		2012		2011			2012		2011

Balance, beginning of period	$	293,038		311,714			313,928		403,555
Provision (reversal of provision) for credit losses		57,228		30,280			136,402		57,793
Interest income on certain impaired loans (1)		(1,828	)	(1,888	)		(5,592	)	(4,424	)
Loan charge-offs:
Commercial:
Commercial and industrial		-		-			-		-
Real estate mortgage		(1,432	)	(88	)		(1,697	)	(224	)
Real estate construction		(29	)	(3	)		(209	)	(212	)
Total commercial		(1,461	)	(91	)		(1,906	)	(436	)

Consumer:
Real estate 1-4 family first mortgage		(18,322	)	(17,525	)		(56,814	)	(60,804	)
Real estate 1-4 family junior lien mortgage		(52,501	)	(33,350	)		(116,372	)	(112,117	)

Total consumer (2)		(70,823	)	(50,875	)		(173,186	)	(172,921	)
Total loan charge-offs		(72,284	)	(50,966	)		(175,092	)	(173,357	)

Loan recoveries:
Commercial:
Commercial and industrial		-		-			-		166
Real estate mortgage		-		1			4		106
Real estate construction		-		5			6		5
Total commercial		-		6			10		277
Consumer:
Real estate 1-4 family first mortgage		531		1,201			1,831		2,239
Real estate 1-4 family junior lien mortgage		1,953		2,566			7,151		6,830
Total consumer		2,484		3,767			8,982		9,069
Total loan recoveries		2,484		3,773			8,992		9,346

Net loan charge-offs		(69,800	)	(47,193	)		(166,100	)	(164,011	)

Balance, end of period	$	278,638		292,913			278,638		292,913
Components:
Allowance for loan losses	$	278,056		292,746			278,056		292,746
Allowance for unfunded credit commitments		582		167			582		167
Allowance for credit losses	$	278,638		292,913			278,638		292,913
Net loan charge-offs (annualized) as a percentage of average total loans (2)		2.30	%	1.42			1.82		1.57
Allowance for loan losses as a percentage of total loans		2.31		2.29			2.31		2.29
Allowance for credit losses as a percentage of total loans		2.32		2.30			2.32		2.30

(1)	Certain impaired loans with an allowance calculated by discounting expected cash flows using the loan’s effective interest rate over the remaining life of the loan recognize reductions in allowance as interest income.

(2)

Quarter and nine months ended September 30, 2012, include $28.6 million resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status.

The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.



		2012									2011
(in thousands)		Commercial			Consumer			Total			Commercial			Consumer			Total

Quarter ended September 30,
Balance, beginning of period	$		21,257			271,781			293,038			27,347			284,367			311,714
Provision (reversal of provision) for credit losses			4,922			52,306			57,228			(3,457	)		33,737			30,280
Interest income on certain impaired loans			-			(1,828	)		(1,828	)		-			(1,888	)		(1,888	)

Loan charge-offs			(1,461	)		(70,823	)		(72,284	)		(91	)		(50,875	)		(50,966	)
Loan recoveries			-			2,484			2,484			6			3,767			3,773
Net loan charge-offs			(1,461	)		(68,339	)		(69,800	)		(85	)		(47,108	)		(47,193	)
Balance, end of period	$		24,718			253,920			278,638			23,805			269,108			292,913

Nine months ended September 30,
Balance, beginning of period	$		23,091			290,837			313,928			26,413			377,142			403,555
Provision (reversal of provision) for credit losses			3,523			132,879			136,402			(2,449	)		60,242			57,793
Interest income on certain impaired loans			-			(5,592	)		(5,592	)		-			(4,424	)		(4,424	)

Loan charge-offs			(1,906	)		(173,186	)		(175,092	)		(436	)		(172,921	)		(173,357	)
Loan recoveries			10			8,982			8,992			277			9,069			9,346

Net loan charge-offs			(1,896	)		(164,204	)		(166,100	)		(159	)		(163,852	)		(164,011	)
Balance, end of period	$		24,718			253,920			278,638			23,805			269,108			292,913

The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.


		Allowance for credit losses						Recorded investment in loans
(in thousands)		Commercial		Consumer		Total		Commercial		Consumer		Total

September 30, 2012

Collectively evaluated (1)	$		14,458		153,494		167,952		1,697,642		9,776,293		11,473,935
Individually evaluated (2)			10,232		100,426		110,658		23,079		479,437		502,516
Purchased credit-impaired (PCI) (3)			28		-		28		6,463		49,846		56,309
Total	$		24,718		253,920		278,638		1,727,184		10,305,576		12,032,760

December 31, 2011

Collectively evaluated (1)	$		12,487		188,604		201,091		1,320,845		10,815,112		12,135,957
Individually evaluated (2)			10,436		102,233		112,669		20,198		324,605		344,803
PCI (3)			168		-		168		7,105		55,911		63,016
Total	$		23,091		290,837		313,928		1,348,148		11,195,628		12,543,776

(1)	Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans.

(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

(3)	Represents the allowance and related loan carrying value determined in accordance with ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI loans.

Credit Quality

We monitor credit quality as indicated by evaluating various attributes and utilize such information in our evaluation of the adequacy of the allowance for credit losses. The following sections provide the credit quality indicators we most closely monitor. The majority of credit quality indicators are based on September 30, 2012, information, with the exception of updated Fair Isaac Corporation (FICO) scores and updated loan-to-value (LTV)/combined LTV (CLTV), which are obtained at least quarterly. Generally, these indicators are updated in the second month of each quarter, with updates no older than June 30, 2012.

COMMERCIAL CREDIT QUALITY INDICATORS In addition to monitoring commercial loan concentration risk, we manage a consistent process for assessing commercial loan credit quality. Generally commercial loans are subject to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to Pass and Criticized categories. The Criticized category includes Special Mention, Substandard, and Doubtful categories which are defined by bank regulatory agencies.

The table below provides a breakdown of outstanding commercial loans by risk category.

(in thousands)

Commercial
and
industrial

Real

estate
mortgage

Real

estate
construction

Total

September 30, 2012

By risk category:

Pass

175,247

1,396,937

19,286

1,591,470

Criticized

839

126,103

8,772

135,714

Total commercial loans

176,086

1,523,040

28,058

1,727,184

December 31, 2011

By risk category:

Pass

286,228

852,464

35,705

1,174,397

Criticized

946

162,623

10,182

173,751

Total commercial loans

287,174

1,015,087

45,887

1,348,148

In addition, while we monitor past due status, we do not consider it a key driver of our credit risk management practices for commercial loans. The following table provides past due information for commercial loans.



(in thousands)	Commercial and industrial		Real estate mortgage		Real estate construction		Total

September 30, 2012

By delinquency status:
Current-29 days past due (DPD) and still accruing	$	176,086		1,495,817		27,989		1,699,892
30-89 DPD and still accruing		-		3,169		69		3,238
90+ DPD and still accruing		-		-		-		-
Nonaccrual loans		-		24,054		-		24,054

Total commercial loans	$	176,086		1,523,040		28,058		1,727,184
December 31, 2011

By delinquency status:
Current-29 DPD and still accruing	$	282,703		943,712		45,636		1,272,051
30-89 DPD and still accruing		4,471		48,320		-		52,791
90+ DPD and still accruing		-		1,923		-		1,923
Nonaccrual loans		-		21,132		251		21,383

Total commercial loans	$	287,174		1,015,087		45,887		1,348,148

CONSUMER CREDIT QUALITY INDICATORS We have various classes of consumer loans that present respective unique risks. Loan delinquency, FICO credit scores and LTV/CLTV for loan types are common credit quality indicators that we monitor and utilize in our evaluation of the adequacy of the allowance for credit losses for the consumer portfolio segment.

The majority of our loss estimation techniques used for the allowance for credit losses rely on delinquency matrix models or delinquency roll rate models. Therefore, delinquency is an important indicator of credit quality and the establishment of our allowance for credit losses.

The following table provides the outstanding balances of our consumer portfolio by delinquency status.



(in thousands)	Real estate 1-4 family first mortgage			Real estate 1-4 family junior lien mortgage			Total


September 30, 2012

By delinquency status:
Current - 29 DPD	$	7,039,638			2,845,315			9,884,953
30-59 DPD		78,414			40,455			118,869
60-89 DPD		39,906			22,131			62,037
90-119 DPD		22,700			15,929			38,629
120-179 DPD		40,091			19,779			59,870
180+ DPD		137,114			22,998			160,112
Remaining PCI accounting adjustments		(16,115	)		(2,779	)		(18,894	)

Total consumer loans	$	7,341,748			2,963,828			10,305,576

December 31, 2011

By delinquency status:
Current - 29 DPD	$	7,645,674			3,098,012			10,743,686
30-59 DPD		80,409			48,886			129,295
60-89 DPD		42,387			27,824			70,211
90-119 DPD		34,471			21,434			55,905
120-179 DPD		39,314			28,939			68,253
180+ DPD		120,819			28,874			149,693
Remaining PCI accounting adjustments		(17,328	)		(4,087	)		(21,415	)

Total consumer loans	$	7,945,746			3,249,882			11,195,628

The following table provides a breakdown of our consumer portfolio by updated FICO. We obtain FICO scores at loan origination and the scores are updated at least

quarterly. FICO is not available for certain loan types and may not be obtained if we deem it unnecessary due to strong collateral and other borrower attributes.




(in thousands)	Real estate 1-4 family first mortgage			Real estate 1-4 family junior lien mortgage			Total


September 30, 2012

By updated FICO:
< 600	$	495,671			319,975			815,646
600-639		332,944			178,179			511,123
640-679		604,022			310,619			914,641
680-719		1,111,650			485,629			1,597,279
720-759		1,500,908			620,268			2,121,176
760-799		2,005,054			680,549			2,685,603
800+		1,137,193			350,960			1,488,153
No FICO available		170,421			20,428			190,849
Remaining PCI accounting adjustments		(16,115	)		(2,779	)		(18,894	)

Total consumer loans	$	7,341,748			2,963,828			10,305,576

December 31, 2011

By updated FICO:
< 600	$	537,949			387,232			925,181
600-639		321,284			195,122			516,406
640-679		572,899			331,988			904,887
680-719		1,128,538			514,089			1,642,627
720-759		1,542,772			634,491			2,177,263
760-799		2,324,799			757,186			3,081,985
800+		1,338,881			384,579			1,723,460
No FICO available		195,952			49,282			245,234
Remaining PCI accounting adjustments		(17,328	)		(4,087	)		(21,415	)

Total consumer loans	$	7,945,746			3,249,882			11,195,628

LTV refers to the ratio comparing the loan’s balance to the property’s collateral value. CLTV refers to the combination of first mortgage and junior lien mortgage ratios. LTVs and CLTVs are updated quarterly using a cascade approach which first uses values provided by automated valuation models (AVMs) for the property. If an AVM is not available, then the value is estimated using the original appraised value adjusted by the change in Home Price Index (HPI) for the property location. If an HPI is not available, the original appraised value is used. The HPI value is normally the only method considered for high value properties as the AVM values have proven less accurate for these properties.

The following table shows the most updated LTV and CLTV distribution of the real estate 1-4 family first and junior

lien mortgage loan portfolios. The residential real estate markets remain weak and continue to experience declines in property values in some states. These trends are considered in the way that we monitor credit risk and establish our allowance for credit losses. LTV does not necessarily reflect the likelihood of performance of a given loan, but does provide an indication of collateral value. In the event of a default, any loss should be limited to the portion of the loan amount in excess of the net realizable value of the underlying real estate collateral value. Certain loans do not have an LTV or CLTV primarily due to industry data availability and portfolios acquired from or serviced by other institutions.




(in thousands)	Real estate 1-4 family first mortgage by LTV			Real estate 1-4 family junior lien mortgage by CLTV			Total


September 30, 2012

By LTV/CLTV:
0-60%	$	3,302,435			626,910			3,929,345
60.01-80%		2,108,200			632,027			2,740,227
80.01-100%		1,190,023			708,217			1,898,240
100.01-120% (1)		447,775			532,884			980,659
> 120% (1)		247,414			462,850			710,264
No LTV/CLTV available		62,016			3,719			65,735
Remaining PCI accounting adjustments		(16,115	)		(2,779	)		(18,894	)

Total consumer loans	$	7,341,748			2,963,828			10,305,576

December 31, 2011

By LTV/CLTV:
0-60%	$	3,764,740			676,585			4,441,325
60.01-80%		2,273,111			599,394			2,872,505
80.01-100%		1,098,818			812,647			1,911,465
100.01-120% (1)		473,691			614,633			1,088,324
> 120% (1)		303,808			545,323			849,131
No LTV/CLTV available		48,906			5,387			54,293
Remaining PCI accounting adjustments		(17,328	)		(4,087	)		(21,415	)

Total consumer loans	$	7,945,746			3,249,882			11,195,628

(1)	Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the event of default, the loss content would generally be limited to only the amount in excess of 100% LTV/CLTV.

NONACCRUAL LOANS The following table provides loans on nonaccrual status. PCI loans are excluded from this table due to the existence of the accretable yield.



(in thousands)	Sept. 30, 2012		Dec. 31, 2011

Commercial:
Commercial and industrial	$	-		-
Real estate mortgage		24,054		21,132
Real estate construction		-		251

Total commercial		24,054		21,383

Consumer:
Real estate 1-4 family first mortgage		313,389		228,363
Real estate 1-4 family junior lien mortgage (1)		142,896		99,347

Total consumer (2)		456,285		327,710

Total nonaccrual loans
(excluding PCI)	$	480,339		349,093

(1)	The balance at September 30, 2012 reflects the impact from the transfer of 1-4 family junior lien mortgages to nonaccrual loans in accordance with the Interagency Guidance issued on January 31, 2012.

(2)

Includes $87.7 million at September 30, 2012, consisting of $69.3 million of first mortgages and $18.4 million of junior liens, resulting from the implementation of OCC guidance issued in third quarter 2012, which requires consumer loans discharged in bankruptcy to be placed on nonaccrual status and written down to net realizable collateral value, regardless of their delinquency status.

The following table shows non-PCI loans 90 days or more past due and still accruing.



(in thousands)	Sept. 30, 2012		Dec. 31, 2011

Commercial:
Commercial and industrial	$	-		-
Real estate mortgage		-		1,596
Real estate construction		-		-

Total commercial		-		1,596

Consumer:
Real estate 1-4 family first mortgage		14,502		21,008
Real estate 1-4 family junior lien mortgage (1)		7,813		15,492

Total consumer		22,315		36,500

Total past due (excluding PCI)	$	22,315		38,096

(1)	The balance at September 30, 2012 reflects the impact from the transfer of 1-4 family junior lien mortgages to nonaccrual loans in accordance with the Interagency Guidance issued on January 31, 2012.

IMPAIRED LOANS The table below summarizes key information for impaired loans. Our impaired loans predominately include loans on nonaccrual status in the commercial portfolio segment and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated loss which is included in the allowance for credit losses. Impaired loans exclude PCI loans.

Based on clarifying guidance from the Securities and Exchange Commission (SEC) received in December 2011, we now classify trial modifications as TDRs at the beginning of the trial period. The table below includes trial modifications that totaled $22.3 million at September 30, 2012 and $21.4 million at December 31, 2011.



			Recorded investment
(in thousands)	Unpaid principal balance		Impaired loans (1)		Impaired loans with related allowance for credit losses		Related allowance for credit losses

September 30, 2012

Commercial:
Commercial and industrial	$	-		-		-		-
Real estate mortgage		26,905		23,079		23,079		10,232
Real estate construction		-		-		-		-

Total commercial		26,905		23,079		23,079		10,232

Consumer:
Real estate 1-4 family first mortgage		406,108		337,323		245,803		48,544
Real estate 1-4 family junior lien mortgage		183,072		142,114		113,450		51,882

Total consumer		589,180		479,437		359,253		100,426

Total impaired loans (excluding PCI)	$	616,085		502,516		382,332		110,658

December 31, 2011

Commercial:
Commercial and industrial	$	-		-		-		-
Real estate mortgage		25,684		19,947		19,947		10,330
Real estate construction		264		251		251		106

Total commercial		25,948		20,198		20,198		10,436
Consumer:
Real estate 1-4 family first mortgage		245,837		207,447		207,447		50,853
Real estate 1-4 family junior lien mortgage		124,974		117,158		117,158		51,380

Total consumer		370,811		324,605		324,605		102,233

Total impaired loans (excluding PCI)	$	396,759		344,803		344,803		112,669

(1)

The recorded investment of impaired loans balance at September 30, 2012, includes $120.7 million of consumer loans, consisting of $91.8 million of first mortgages and $28.9 million of junior liens, resulting from the implementation of OCC guidance issued in third quarter 2012, which requires loans discharged in bankruptcy to be written down to net realizable collateral value and classified as TDRs.

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.

Quarter ended September 30,

Nine months ended September 30,

2012

2011

2012

WACHOVIA PREFERRED FUNDING CORP 10-Q