UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008March 31, 2009
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
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| Delaware | | No. 41-0449260 |
| (State of incorporation) | | (I.R.S. Employer Identification No.) |
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 1-866-249-3302
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | þ | | | | Accelerated filero |
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| Non-accelerated filer | | o | | (Do not check if a smaller reporting company) | | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | | Shares Outstanding |
| | | October 27, 2008April 30, 2009 |
| Common stock, $1-2/3 par value | | 3,325,244,156 | 4,263,860,323 | |
FORM 10-Q
CROSS-REFERENCE INDEX
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PART I – FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA (1)(2)
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| | | % Change | | | | | | |
| | | Quarter ended | | Sept. 30, 2008 from | | Nine months ended | | | | | Quarter ended | |
| | | Sept. 30 | , | | June 30 | , | | Sept. 30 | , | | June 30 | , | | Sept. 30 | , | | Sept. 30 | , | | Sept. 30 | , | | % | | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , |
| ($ in millions, except per share amounts) | | 2008 | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | Change | | | 2009 | | 2008 | | 2008 | |
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| Net income | | $ | 1,637 | | $ | 1,753 | | $ | 2,173 | | | (7 | )% | | | (25 | )% | | $ | 5,389 | | $ | 6,696 | | | (20 | )% | |
| Diluted earnings per common share | | 0.49 | | 0.53 | | 0.64 | | | (8 | ) | | | (23 | ) | | 1.62 | | 1.97 | | | (18 | ) | |
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| Wells Fargo net income (loss) | | | $ | 3,045 | | $ | (2,734 | ) | | $ | 1,999 | |
| Wells Fargo net income (loss) applicable to common stock | | | 2,384 | | | (3,020 | ) | | 1,999 | |
| Diluted earnings (loss) per common share | | | 0.56 | | | (0.84 | ) | | 0.60 | |
Profitability ratios (annualized): | | |
| Net income to average total assets (ROA) | | | 1.06 | % | | | 1.19 | % | | | 1.59 | % | | | (11 | ) | | | (33 | ) | | | 1.21 | % | | | 1.76 | % | | | (31 | ) | |
| Net income to average stockholders’ equity (ROE) | | 13.63 | | 14.58 | | 18.22 | | | (7 | ) | | | (25 | ) | | 15.02 | | 19.15 | | | (22 | ) | |
| | 53.2 | | 51.1 | | 57.5 | | 4 | | | (7 | ) | | 52.0 | | 58.0 | | | (10 | ) | |
| Wells Fargo net income (loss) to average assets (ROA) | | | | 0.96 | % | | | (1.72 | )% | | | 1.40 | % |
| Net income (loss) to average assets | | | 0.97 | | | (1.72 | ) | | 1.41 | |
| Wells Fargo net income (loss) applicable to common stock to average Wells Fargo common stockholders’ equity (ROE) | | | 14.49 | | | (22.32 | ) | | 16.86 | |
| Net income (loss) to average total equity | | | 11.97 | | | (15.53 | ) | | 16.93 | |
| | | 56.2 | | 61.3 | | 51.5 | |
| | $ | 10,379 | | $ | 11,459 | | $ | 9,853 | | | (9 | ) | | 5 | | $ | 32,401 | | $ | 29,185 | | 11 | | | $ | 21,017 | | $ | 9,477 | | $ | 10,563 | |
| Pre-tax pre-provision profit (4) | | | 9,199 | | 3,667 | | 5,121 | |
Dividends declared per common share | | 0.34 | | 0.31 | | 0.31 | | 10 | | 10 | | 0.96 | | 0.87 | | 10 | | | 0.34 | | 0.34 | | 0.31 | |
Average common shares outstanding | | 3,316.4 | | 3,309.8 | | 3,339.6 | | — | | | (1 | ) | | 3,309.6 | | 3,355.5 | | | (1 | ) | | 4,247.4 | | 3,582.4 | | 3,302.4 | |
| Diluted average common shares outstanding | | 3,331.0 | | 3,321.4 | | 3,374.0 | | — | | | (1 | ) | | 3,323.4 | | 3,392.9 | | | (2 | ) | | 4,249.3 | | 3,593.6 | | 3,317.9 | |
| | $ | 404,203 | | $ | 391,545 | | $ | 350,683 | | 3 | | 15 | | $ | 393,262 | | $ | 334,801 | | 17 | | | $ | 855,591 | | $ | 413,940 | | $ | 383,919 | |
| Average assets | | 614,194 | | 594,749 | | 541,533 | | 3 | | 13 | | 594,717 | | 508,992 | | 17 | | | 1,289,716 | | 633,223 | | 574,994 | |
| Average core deposits (2) | | 320,074 | | 318,377 | | 306,135 | | 1 | | 5 | | 318,582 | | 299,142 | | 6 | | |
| Average retail core deposits (3) | | 234,140 | | 230,365 | | 220,984 | | 2 | | 6 | | 230,935 | | 219,356 | | 5 | | |
| Average core deposits (5) | | | 753,928 | | 344,957 | | 317,278 | |
| Average retail core deposits (6) | | | 590,502 | | 243,464 | | 228,448 | |
| | | 4.79 | % | | | 4.92 | % | | | 4.55 | % | | | (3 | ) | | 5 | | | 4.80 | % | | | 4.79 | % | | — | | | | 4.16 | % | | | 4.90 | % | | | 4.69 | % |
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| Securities available for sale | | $ | 86,882 | | $ | 91,331 | | $ | 57,440 | | | (5 | ) | | 51 | | $ | 86,882 | | $ | 57,440 | | 51 | | | $ | 178,468 | | $ | 151,569 | | $ | 81,787 | |
| Loans | | 411,049 | | 399,237 | | 362,922 | | 3 | | 13 | | 411,049 | | 362,922 | | 13 | | | 843,579 | | 864,830 | | 386,333 | |
| Allowance for loan losses | | 7,865 | | 7,375 | | 3,829 | | 7 | | 105 | | 7,865 | | 3,829 | | 105 | | | 22,281 | | 21,013 | | 5,803 | |
| Goodwill | | 13,520 | | 13,191 | | 12,018 | | 2 | | 12 | | 13,520 | | 12,018 | | 12 | | | 23,825 | | 22,627 | | 13,148 | |
| Assets | | 622,361 | | 609,074 | | 548,727 | | 2 | | 13 | | 622,361 | | 548,727 | | 13 | | | 1,285,891 | | 1,309,639 | | 595,221 | |
| Core deposits (2) | | 334,076 | | 310,410 | | 303,853 | | 8 | | 10 | | 334,076 | | 303,853 | | 10 | | |
| Stockholders’ equity | | 46,957 | | 47,964 | | 47,566 | | | (2 | ) | | | (1 | ) | | 46,957 | | 47,566 | | | (1 | ) | |
| Tier 1 capital (4) | | 45,182 | | 42,471 | | 38,107 | | 6 | | 19 | | 45,182 | | 38,107 | | 19 | | |
| Total capital (4) | | 60,525 | | 57,909 | | 51,625 | | 5 | | 17 | | 60,525 | | 51,625 | | 17 | | |
| Core deposits (5) | | | 756,183 | | 745,432 | | 327,360 | |
| Wells Fargo stockholders’ equity | | | 100,295 | | 99,084 | | 48,159 | |
| Total equity | | | 107,057 | | 102,316 | | 48,439 | |
| Tier 1 capital (7) | | | 88,977 | | 86,397 | | 39,211 | |
| Total capital (7) | | | 131,820 | | 130,318 | | 54,522 | |
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| Stockholders’ equity to assets | | | 7.54 | % | | | 7.87 | % | | | 8.67 | % | | | (4 | ) | | | (13 | ) | | | 7.54 | % | | | 8.67 | % | | | (13 | ) | |
| Risk-based capital (4) | | |
| Wells Fargo common stockholders’ equity to assets | | | | 5.40 | % | | | 5.21 | % | | | 8.09 | % |
| Total equity to assets | | | 8.33 | | 7.81 | | 8.14 | |
| Average Wells Fargo common stockholders’ equity to average assets | | | 5.17 | | 8.50 | | 8.29 | |
| Average total equity to average assets | | | 8.11 | | 11.09 | | 8.34 | |
| Risk-based capital (7) | | |
| Tier 1 capital | | 8.59 | | 8.24 | | 8.17 | | 4 | | 5 | | 8.59 | | 8.17 | | 5 | | | 8.30 | | 7.84 | | 7.92 | |
| Total capital | | 11.51 | | 11.23 | | 11.07 | | 2 | | 4 | | 11.51 | | 11.07 | | 4 | | | 12.30 | | 11.83 | | 11.01 | |
| Tier 1 leverage (4) | | 7.54 | | 7.35 | | 7.26 | | 3 | | 4 | | 7.54 | | 7.26 | | 4 | | |
| Tier 1 leverage (7) | | | 7.09 | | 14.52 | | 7.04 | |
Book value per common share | | $ | 14.14 | | $ | 14.48 | | $ | 14.30 | | | (2 | ) | | | (1 | ) | | $ | 14.14 | | $ | 14.30 | | | (1 | ) | | $ | 16.28 | | $ | 16.15 | | $ | 14.58 | |
Team members (active, full-time equivalent) | | 159,000 | | 160,500 | | 158,800 | | | (1 | ) | | — | | 159,000 | | 158,800 | | — | | | 272,800 | | 270,800 | | 160,900 | |
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| High | | $ | 44.68 | | $ | 32.40 | | $ | 37.99 | | 38 | | 18 | | $ | 44.68 | | $ | 37.99 | | 18 | | | $ | 30.47 | | $ | 38.95 | | $ | 34.56 | |
| Low | | 20.46 | | 23.46 | | 32.66 | | | (13 | ) | | | (37 | ) | | 20.46 | | 32.66 | | | (37 | ) | | 7.80 | | 19.89 | | 24.38 | |
| Period end | | 37.53 | | 23.75 | | 35.62 | | 58 | | 5 | | 37.53 | | 35.62 | | 5 | | | 14.24 | | 29.48 | | 29.10 | |
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| (1) | | Wells Fargo & Company (Wells Fargo) acquired Wachovia Corporation (Wachovia) on December 31, 2008. Because the acquisition was completed on December 31, 2008, Wachovia’s results are included in the income statement, average balances and related metrics beginning in 2009. Wachovia’s assets and liabilities are included in the consolidated balance sheet beginning on December 31, 2008. |
| (2) | | On January 1, 2009, we adopted Statement of Financial Accounting Standards (FAS) No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity. |
| (3) | | The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income). |
(2)(4) | | Total revenue less noninterest expense. |
| (5) | | Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). |
(3)(6) | | Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits. To reflect the realignment of our corporate trust business from Community Banking into Wholesale Banking in first quarter 2008, balances for prior periods have been revised. |
(4)(7) | | Because the Wachovia acquisition was completed on December 31, 2008, the Tier 1 leverage ratio at December 31, 2008, which considers period-end Tier 1 capital and quarterly average assets in the computation of the ratio, does not reflect average assets of Wachovia for 2008. See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information. |
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This Report onForm 10-Q for the quarter ended September 30, 2008,March 31, 2009, including the Financial Review and the Financial Statements and related Notes, has forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results might differ significantly from our forecasts and expectations due to several factors. Some of these factors are described in the Financial Review and in the Financial Statements and related Notes. For a discussion of other factors, refer to the “Risk Factors” section in this Report and to the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report onForm 10-K for the year ended December 31, 2007 (20072008 (2008 Form 10-K)10-K), filed with the Securities and Exchange Commission (SEC) and available on the SEC’s website atwww.sec.gov.
OVERVIEW
Wells Fargo & Company is a $622 billion$1.3 trillion diversified financial services company providing banking, insurance, investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia and in other countries. We ranked fifthfourth in assets and thirdsecond in market value of our common stock among our peers at September 30, 2008.March 31, 2009. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the “Parent,” we mean Wells Fargo & Company.
We earned $1.64 billion, or $0.49 per share, in third quarter 2008, after incurring $0.13 per share of previously announced write-downs for investments in Fannie Mae, Freddie Mac and Lehman Brothers. We built our credit reserves by an additional $500 million ($0.10 per share), bringing the allowance for credit losses When we refer to $8.0 billion, a $4.0 billion increase in the allowance since the disruption in credit markets began a year ago. Business momentum remained strong in the quarter, with double-digit loan and earning asset growth (both up 15% year over year), double-digit growth in core deposits (up 10% from September 30, 2007, and 30% (annualized) from June 30, 2008), growth in assets under management, primarily mutual funds (up 12% year over year), and a record 5.7 cross-sell in our retail banking business.
Our net interest margin remained among the best of the large bank holding companies at 4.79%, reflecting the decline in our funding costs since last year and continued above-market growth in core deposits. Finally, despite the strong growth in earning assets, investment write-downs and higher credit costs in the quarter, our capital ratios increased, with Tier 1 capital rising to 8.59%, among the strongest capital positions in the industry.
On October 3, 2008,“legacy Wells Fargo,” we announced that we had signed a definitive agreement to acquire all outstanding shares ofmean Wells Fargo excluding Wachovia Corporation (Wachovia) in a stock-for-stock transaction. Wachovia, based in Charlotte, North Carolina, had total assets of $764 billion at September 30, 2008, and is one of the nation’s largest diversified financial services companies, providing a broad range of retail banking and brokerage, asset and wealth management, and corporate and investment banking products and services to customers through 3,300 financial centers in 21 states from Connecticut to Florida and west to Texas and California, and nationwide retail brokerage, mortgage lending and auto finance businesses. Under terms of the agreement, Wachovia shareholders will receive 0.1991 shares of .
Wells Fargo net income was a record $3.05 billion in first quarter 2009, with net income applicable to common stock in exchange for eachof $2.38 billion. Earnings per common share were $0.56, after merger-related and restructuring expense of Wachovia$206 million ($0.03 per common stock. The agreement is subject to approval of Wachovia shareholdersshare) and a $1.3 billion credit reserve build ($0.19 per common share).
On December 31, 2008, Wells Fargo acquired Wachovia. Because the merger is expected to beacquisition was completed byat the end of 2008. For more2008, Wachovia’s results are included in the income statement, average balances and related metrics beginning in 2009. Wachovia’s assets and liabilities are included, at fair value, in the consolidated balance sheet beginning on December 31, 2008, but not in averages.
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On January 1, 2009, we adopted Statement of Financial Accounting Standards (FAS) No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,on a retrospective basis for disclosure and, accordingly, prior period information aboutreflects the pending merger with Wachovia, referadoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts attributable to both Wells Fargo interests and the Company’s Current Report on Form 8-K, including exhibits, filed on October 9, 2008, with the SEC and available on the SEC’s website at www.sec.gov.noncontrolling interests.
Our vision is to satisfy all our customers’ financial needs, help them succeed financially, be recognized as the premier financial services company in our markets and be one of America’s great companies. Our primary strategy to achieve this vision is to increase the number of products our customers buy from us and to give them all of the financial products that fulfill their needs. Our cross-sell strategy and diversified business model facilitate growth in both strong and weak economic cycles, as we can grow by expanding the number of products our current
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customers have with us. We continued to earn more of our customers’ business in 2009 in both our retail and commercial banking businesses.
Despite the continuing turmoil in the credit markets, we continued to lend to credit-worthy customers. We extended significant credit to U.S. taxpayers in first quarter 2009, $190 billion in mortgage applications and $101 billion in mortgage originations – we helped over 450,000 homeowners purchase a home or refinance. We have extended more than $225 billion in credit to U.S. taxpayers since last October. The fundamentals of our time-tested business model are as sound as ever. In first quarter 2009, our average core deposits were $754 billion. Our cross-sell at legacy Wells Fargo set records for the tenth consecutive year – our average retail banking household now has a record 5.75.81 products, with us.almost one of every four has eight or more products, 6.4 products for Wholesale Banking customers, and our average middle-market commercial banking customer has almost eight products. Business banking cross-sell reached 3.66 products at legacy Wells Fargo. Our goal is eight products per customer, which is currently half of our estimate of potential demand. Our
We have stated in the past that to consistently grow over the long term, successful companies must invest in their core products grewbusinesses and maintain strong balance sheets. In first quarter 2009, we opened 14 banking stores throughout the combined Company for a retail network total of 6,638 stores. Conversion of Wachovia stores to the Wells Fargo platform is scheduled to begin later this quarter from a year ago, with average loans up 15%, average core deposits up 5% and assets under management or administration up 4%.year.
We believe it is important to maintain a well-controlled environment as we continue to grow our businesses and integrate the Wachovia businesses. We manage our credit risk by setting what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. We have maintainedmaintain strong capital levels to provide for future growth. Our stockholder value has increased over time due to customer satisfaction, strong
Wachovia Merger
On December 31, 2008, Wells Fargo acquired Wachovia, one of the nation’s largest diversified financial services companies. Wachovia’s assets and liabilities were included in the December 31, 2008, consolidated balance sheet at their respective acquisition date fair values. Because the acquisition was completed on December 31, 2008, Wachovia’s results investmentof operations were not included in our businesses, consistent execution2008 income statement, and Wachovia’s assets and liabilities did not contribute to the consolidated averages. Beginning in 2009, our consolidated results and our consolidated average balances include Wachovia.
Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on preliminary data as of an interim period with estimates through year end. Accordingly, we are re-validating and, where necessary, refining our business modelDecember 31, 2008, fair value estimates and other purchase accounting adjustments. The impact of these refinements was recorded as an adjustment to goodwill in first quarter 2009. Based on the purchase price of $23.1 billion and the management of our business risks.
Our financial results included the following:
Net income for third quarter 2008 was $1.64$13.1 billion ($0.49 per share), compared with $2.17 billion ($0.64 per share) for third quarter 2007. Return on assets (ROA) was 1.06% and return on equity (ROE) was 13.63% for third quarter 2008, compared with 1.59% and 18.22%, respectively, for third quarter 2007.
Net income for the first nine months of 2008 was $5.39 billion, or $1.62 per share, down from $6.70 billion, or $1.97 per share, for the first nine months of 2007. ROA was 1.21% and ROE was 15.02% for the first nine months of 2008, and 1.76% and 19.15%, respectively, for the first nine months of 2007.
Net interest income on a taxable-equivalent basis was $6.44 billion for third quarter 2008, up 21% from $5.32 billion for third quarter 2007, driven by 15% earning asset growth combined with a 24 basis point increase in the net interest margin to 4.79%.
Noninterest income was $4.0 billion for third quarter 2008 down from $4.57 billion for third quarter 2007, including a $756 million decline in net investment gains. Net investment losses of $423 million in third quarter 2008 consisted of previously announced other-than-temporary impairment charges of $646 million for Fannie Mae, Freddie Mac and Lehman Brothers, an additional $247 million of other-than-temporary write-downs and $470 millionfair value of net realized gains.
Despiteassets acquired, inclusive of refinements identified in first quarter 2009, the 24% declinetransaction resulted in third quarter 2008 in the S&P500® from a year ago, trust and investment fees declined only 5%. Card fees were up 7% in third quarter 2008 from a year agogoodwill of $9.9 billion.
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The more significant fair value adjustments in our purchase accounting for the Wachovia acquisition were to loans. Certain of the loans acquired from Wachovia have evidence of credit deterioration since origination, and it is probable that we will not collect all contractually required principal and interest payments. Such loans are accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3). SOP 03-3 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses.
Loans subject to SOP 03-3 are written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual even though they may be contractually past due because we expect to continued growth infully collect the new accountscarrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Loans subject to SOP 03-3 are also excluded from the disclosure of loans 90 days or more past due and higher credit and debit card transaction volume. Insurance revenue was up 33% in third quarter 2008 from a year ago due to customer growth, higher crop insurance revenues and the fourth quarter 2007 acquisitionstill accruing interest even though certain of ABD Insurance. Charges and fees on loans were up 8% in third quarter 2008, primarily reflecting strong commercial loan demand.them are 90 days or more contractually past due.
Mortgage banking noninterest income was $892 million in third quarter 2008, up $69 million from third quarter 2007. The owned mortgage servicing portfolio was $1.56 trillion at September 30, 2008, up 6% from a year ago. Mortgage applications of $83 billion in third quarter 2008 were down 13% from a year ago but at wider margins. Mortgage originations declined asAs a result of the application of SOP 03-3 to certain of Wachovia’s loans, certain ratios of the combined slowdownCompany cannot be used to compare a portfolio that includes acquired credit-impaired loans accounted for under SOP 03-3 against ones that do not, for example, in home purchasecomparing peer companies, and refinance activities,cannot be used to compare ratios across periods such as periods that include the Wachovia acquisition against prior periods that do not. The ratios particularly affected by the accounting under SOP 03-3 include the allowance for loan losses and mortgage servicing benefited fromallowance for credit losses as percentages of loans, of nonaccrual loans and of nonperforming assets; nonaccrual loans and nonperforming assets as a percentage of total loans; and net charge-offs as a percentage of average loans.
For further detail on the declinemerger see “Loan Portfolio” in mortgage prepayments. Thirdthis section and Note 2 (Business Combinations) to Financial Statements in this Report.
Summary Results
Wells Fargo net income in first quarter 2008 results included a $75 million net gain related to changes in the value of our mortgage servicing rights (MSRs), net of hedge results (reflected in net servicing income).
Net unrealized losses on securities available for sale were $4.92009 was $3.05 billion at September 30, 2008,($0.56 per share), compared with net unrealized gains of $680 million at December 31, 2007. The change$2.00 billion ($0.60 per share) in valuefirst quarter 2008. Wells Fargo return on average total assets (ROA) was largely due to wider spreads0.96% and return on mortgage-backed securities,average common stockholders’ equity (ROE) was 14.49% in first quarter 2009, compared with 1.40% and an increase16.86%, respectively, in market yields for the first nine months ofquarter 2008.
Revenue, the sum of net interest income and noninterest income, was $10.38of $21.02 billion in thirdfirst quarter 2008, up 5% from $9.85 billion in third2009 included another quarter 2007. The write-downs for investments in Fannie Mae, Freddie Mac and Lehman Brothers reduced revenue growth by 7 percentage points. Revenue was up 11% to $32.4 billion for the first nine months of 2008. Many of our businesses continued to generaterecord, double-digit revenue growth at legacy Wells Fargo, up 16% year over year, as well as a strong contribution from Wachovia, which accounted for 41% of the Company’s combined revenue. Our results also reflected growth at legacy Wells Fargo in both net interest income and fee income resulting from our diversified business model. The breadth and depth of our business model resulted in strong and balanced growth in loans, deposits and fee-based products.
Our balance sheet is well positioned given the current economic environment. Our allowance for credit losses was $22.8 billion at March 31, 2009, compared with $21.7 billion at December 31, 2008. Our allowance was adequate to cover expected consumer losses for at least the next 12 months and to provide approximately 24 months of anticipated loss coverage for the commercial and commercial real estate portfolios. We reduced risk in our balance sheet
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through write-downs taken at December 31, 2008, on Wachovia’s higher-risk loan and securities portfolios. We recorded $516 million of other-than-temporary impairment on securities in first quarter 2009. Our ratio of capitalized mortgage servicing rights (MSRs) to owned servicing declined to 74 basis points, the lowest ratio since 2003. Since year-end 2008, our higher risk portfolios (home equity loans originated through third party channels, Pick-a-Pay and indirect auto at legacy Wells Fargo) were reduced by $4.5 billion and trading assets by $8.4 billion.
Our financial results included the following:
Net interest income on a taxable-equivalent basis was $11.55 billion in first quarter 2007, including asset-based lending, commercial2009, with approximately 40% contributed by Wachovia, up from $5.81 billion in first quarter 2008, reflecting a strong combined net interest margin on average earnings assets of $1.11 trillion. At 4.16% in first quarter 2009, our net interest margin remained strong and the highest among our large bank peers, due in part to continued growth in core deposits and deposit pricing discipline.
Noninterest income reached $9.6 billion in first quarter 2009, up from $4.8 billion a year ago, driven by continued success in satisfying customers’ financial needs and the combined Company’s expanded breadth of products and services. Noninterest income included:
Mortgage banking noninterest income of $2.5 billion:
| – | | $1.6 billion in revenue from mortgage loan originations/sales activities on $101 billion in new originations, includes a reduction to revenue of $138 million to increase the mortgage repurchase reserve and a write-down of the mortgage warehouse for spread and other liquidity-related valuation adjustments |
| – | | Unclosed application pipeline of $100 billion, up 41% from prior quarter, indicates solid origination momentum heading into second quarter 2009 |
| – | | $875 million MSRs mark-to-market net of hedge results, reflecting a $2.8 billion reduction in the fair value of the MSRs offset by a $3.7 billion hedge gain, with the net difference largely due to hedge carry income due to low short-term interest rates |
| • | | Trust and investment fees of $2.2 billion reflected solid results in retail brokerage commissions, managed account fees and asset management fees |
| • | | Service charges on deposit accounts of $1.4 billion reflected continued growth in checking accounts and the effect of higher average checking account balances |
| • | | Trading revenue of $787 million; approximately two-thirds from customer business, including revenue earned on sales of foreign exchange and interest rate products and services |
| • | | $516 million write-down through earnings for other-than-temporary impairment on debt and equity securities, with an additional $334 million (pre tax) of non-credit-related impairment on debt securities charged directly to equity through other comprehensive income |
Net unrealized losses on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Of the improvement, $4.5 billion was due to the early adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) No. 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which clarified the use of trading prices in determining fair value for securities in illiquid markets, thus moderating the need to use distressed prices in valuing these securities in illiquid markets as we had done in prior periods. See “Current Accounting Developments” in this Report for more information on
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FSP 157-4. The remaining $700 million of the improvement was due to declining interest rates and narrower credit cards, mortgage banking, insurance, international and wealth management.spreads.
Noninterest expense was $5.52$11.82 billion for thirdin first quarter 2009, up from $5.44 billion in first quarter 2008, down $154 million, or 3%, from $5.67 billion forlargely attributable to the same period of 2007. We continued to make investmentsWachovia acquisition. Noninterest expense reflected our expanded geographic platform and capabilities in distributionbusinesses such as retail brokerage, asset management and sales and service team members, adding over 1,000 platform bankers since last year end and adding 12 newinvestment banking, stores in third quarter 2008 alone. We continued to be disciplined about our efforts to restrict expenses to revenue-creating opportunities while atwhich, like mortgage banking, typically include higher revenue-based incentive expense than the same time paring down other unit costs. Themore traditional banking businesses. Our efficiency ratio was 53.2%56.2% in thirdfirst quarter 2008 even after taking into account2009.
We expect to generate $5 billion of annual merger-related expense savings, which will begin to emerge in the other-than-temporary impairment charges on debtsecond quarter and equity investment securities.are expected to be fully realized upon completion of the integration. We further expect additional efficiency initiatives to lower expenses over the remainder of 2009. After refining our initial models, we now expect total integration expense to be less than our original estimate of $7.9 billion and to be spread over the integration period rather than all by year-end 2009.
Net charge-offs for thirdin first quarter 20082009 were $2.0$3.3 billion (1.96%(1.54% of average total loans outstanding, annualized), including $371 million in the Wachovia portfolio, compared with $1.5$2.8 billion (1.55%(2.69%) for secondin fourth quarter 2008 and $892 million (1.01%$1.5 billion (1.60%) in first quarter 2008. Wachovia loans accounted for thirdunder SOP 03-3 were written down to fair value at December 31, 2008, and accordingly charge-offs on that portfolio will only occur if the portfolio deteriorates subsequent to the acquisition. All first quarter 2007. During the first nine months of 2008, net2009 charge-offs were $5.04 billion (1.71%), compared with $2.33 billion (0.93%) for the first nine months of 2007. Total provision expense in third quarter 2008 was $2.5 billion, including a $500 million credit reserve build, primarily related to higher projected losses in several consumer credit businesses and commercial real estate, as well as growth in the wholesale portfolios, bringing the allowance for credit losses to $8.0 billion, double its level from just before the disruption in credit markets began a year ago. As expected, consumer behavior continued to be influenced by weakness in residential real estate values. Additionally, the effects of higher energy prices and higher unemployment levels impacted the performance of the consumer loan portfolios during the quarter. Loan requests in our wholesale businesses have increased as quality borrowers are providing attractive business opportunities that are both well-structured and appropriately priced for risk.
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Net charge-offs in the real estate 1-4 family first mortgage portfolio increased $123 million in third quarter 2008 from a year ago, including an increase of $53 million from Wells Fargo Financial’s residential real estate portfolio. Credit card net charge-offs increased $185 million in third quarter 2008 from a year ago due to the effect of the current economic environment on consumers. Loss levels continued to increase in this credit cycle as the impacts from lower disposable income and unemployment weigh on the consumer. Net charge-offs in the auto portfolio in third quarter 2008 were up $58 million from a year ago and up $74 million linked quarter. While we remain optimistic about the positive impacts of process improvements and underwriting changes we made in the auto business in prior quarters, as well as our robust loss mitigation efforts, the economic environment continued to stress the consumer and influence loan performance.
Net credit losses in the real estate 1-4 family junior lien category were up $488 million for third quarter 2008 compared with third quarter 2007 and up $307 million linked quarter. A significant part of the sequential increase reflected the change in the National Home Equity Group (Home Equity) charge-off policy in second quarter 2008, which deferred an estimated $265 million of charge-offs from second quarter 2008. The fact that property values continued to drop in many markets directly impacted loss levels in this portfolio. Until residential real estate values stabilize, the Home Equity portfolio is expected to produce higher than normal loss levels.
non-SOP 03-3 loans. Commercial and commercial real estate charge-offs increased $213 millionloan losses remained at relatively low levels reflecting the historically disciplined underwriting standards applied by Wells Fargo and the customer-relationship focus in third quarter 2008 from third quarter 2007. Commercial and commercial real estate charge-offs include Business Direct (primarily unsecured lines of credit to small businesses), which increased $98 millionthis portfolio. Losses in third quarter 2008 from a year ago and decreased $7 million linked quarter. The wholesale businesses continued to weather the turbulent credit environment. Commercial credits related to residential real estate and credit cards rose modestly in the consumer segmentquarter, in line with expectations, while other credit losses, principally in indirect auto lending, declined due to seasonality and our risk reduction actions in indirect auto over the last two years.
As long as the U.S. economy remains weak, losses on the combined portfolio will increase. Over the last two years, we have shown some weakness, but remained withintaken and will continue to take actions to enable us to navigate through this current economic and credit cycle. In addition to the significant write-downs taken to reduce risk in the Wachovia portfolio at close, we ceased originations and are liquidating certain higher-risk, lower-return portfolios, such as Pick-a-Pay and legacy Wells Fargo indirect auto and liquidating home equity portfolios. In addition, during first quarter 2009, we incorporated Wells Fargo’s risk policies and procedures into Wachovia, which is essential to our expectations.ability to properly manage risk as we continue to meet our customers’ needs. We believe these risk reduction actions better position us for continued credit deterioration and economic headwinds.
The provision for credit losses was $2.5$4.6 billion in thirdfirst quarter 2008, $3.02009, $8.4 billion in secondfourth quarter 2008 and $892 million$2.0 billion in thirdfirst quarter 2007.2008. The provision for thirdin first quarter 20082009 included an additional $500 million ina $1.3 billion credit reserve build primarily relateddue to higher projectedcredit losses in several consumer credit businesses and commercial real estate, as well as growthinherent in the wholesale portfolios. We have provided $3.9 billion in excess of net charge-offs since the beginning of fourth quarter 2007, including $2.5 billion in the first nine months of 2008.loan portfolio. The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $8.03$22.8 billion (1.95%(2.71% of total loans) at September 30, 2008,March 31, 2009, compared with $5.52$21.7 billion (1.44%(2.51%) at December 31, 2007,2008, and $4.02$6.0 billion (1.11%(1.56%) at September 30, 2007.March 31, 2008. Wachovia’s allowance related to loans not within the scope of SOP 03-3 of $9.3 billion was carried over and was included in our allowance as of December 31, 2008.
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Total nonaccrual loans were $5.00$10.52 billion (1.22%(1.25% of total loans) at September 30, 2008, up from $2.68March 31, 2009, compared with $6.80 billion (0.70%(0.79%) at December 31, 2007,2008, and $2.09$3.26 billion (0.58%(0.84%) at September 30, 2007, reflecting economic conditions, primarily in portfolios affected by residential real estate conditions and the associated impact on the consumer. A portion of theMarch 31, 2008. Nonaccrual loans exclude loans acquired from Wachovia accounted for under SOP 03-3. The $3.7 billion increase in nonaccrual loans from a year ago continued to relate to our active loss mitigation strategies at Home Equity, Wells Fargo Home Mortgage (Home Mortgage) and Wells Fargo Financial as we are aggressively working with customers to keep themDecember 31, 2008, represented increases in their homes or find alternative solutions to their financial challenges. Home builders, mortgage service providers, contractors, suppliers and others in the residential real estate-related segments continued to be stressed during this credit cycle. Additionally, as consumers cut back on discretionary spending, we are seeing some ofboth the commercial loanand retail segments, with $1.5 billion related to Wachovia. The increases in nonaccrual loans were concentrated in portfolios secured by real estate or with borrowers dependent on their spending weaken. The $2.9 billion increase in
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nonaccrual loans at September 30, 2008, from a year ago included $681 million in Wells Fargo Financial real estate, $578 million in Home Equity and $333 million in Home Mortgage.
the housing industry. Total nonperforming assets (NPAs) were $6.29$12.61 billion (1.53%(1.50% of total loans) at September 30, 2008,March 31, 2009, compared with $3.87$9.01 billion (1.01%(1.04%) at December 31, 2007,2008, and $3.18$4.50 billion (0.88%(1.16%) at September 30, 2007.March 31, 2008. Foreclosed assets were $1,240 million$2.06 billion at September 30, 2008, $1,184 millionMarch 31, 2009, $2.19 billion at December 31, 2007,2008, and $1,090 million$1.22 billion at September 30, 2007. ForeclosedMarch 31, 2008.
We have strengthened our capital position in first quarter 2009. Tangible common equity (TCE) was $41.1 billion at quarter end, an increase of $4.5 billion. The ratio of TCE to tangible assets a component of total NPAs, included $596 million, $535 million and $487 million of foreclosed real estate securing Government National Mortgage Association (GNMA) loanswas 3.28%, up from 2.86% at September 30, 2008, December 31, 20072008. TCE was 3.84% of risk-weighted assets. At March 31, 2009, Tier 1 capital was $89.0 billion and September 30, 2007, respectively, consistent with regulatory reporting requirements. The foreclosed real estate securing GNMA loans of $596 million represented 14 basis points of the Tier 1 capital ratio of NPAs to loanswas 8.30%, up from 7.84% at September 30,December 31, 2008. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs. Until conditions improve in the residential real estate and liquidity markets, we will continue to hold more nonperforming assets on our balance sheet as it is currently the most economic option available. Increases in commercial nonperforming assets were also a direct result of the conditions in the residential real estate markets and general consumer economy.
The Company and each of its subsidiary banks continued to remain well-capitalized. The ratio of stockholders’ equity to total assets was 7.54% at September 30, 2008, 8.28% at December 31, 2007, and 8.67% at September 30, 2007. Our total risk-based capital (RBC) ratio at September 30, 2008,March 31, 2009, was 11.51%12.30% and our Tier 1 RBC ratio was 8.59%8.30%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our total RBC ratio was 10.68% and 11.07% at December 31, 2007 and September 30, 2007, respectively,11.83% and our Tier 1 RBC ratio was 7.59% and 8.17% for the same periods.7.84% at December 31, 2008. Our Tier 1 leverage ratio was 7.54%, 6.83%7.09% and 7.26%14.52% at September 30, 2008,March 31, 2009, and December 31, 2007 and September 30, 2007,2008, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.
On May 7, 2009, the Federal Reserve confirmed that under its adverse stress test scenario the Company’s Tier 1 capital exceeded the minimum level needed for well-capitalized institutions. In conjunction with the stress test, the Company has agreed with the Federal Reserve to increase common equity by $13.7 billion by November 9, 2009. On May 8, 2009, the Company agreed to issue 341 million shares of its common stock at a price of $22 per share. Also on May 8, 2009, the underwriters in the offering exercised their option to purchase up to an additional 51.15 million shares of common stock from the Company at $22 per share to cover over-allotments. The Company will receive net proceeds of $8.4 billion from the offering including the exercise of the over-allotment option. The Company expects to satisfy the remainder of the capital requirement through profits and other internally generated sources. The Company can satisfy any part of the capital requirement by exchanging up to $13.7 billion of its $25 billion of Capital Purchase Program (CPP) funds for the Treasury’s Capital Assistance Program (CAP) on a dollar-for-dollar basis.
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Current Accounting Developments
On January 1, 2008,In first quarter 2009, we adopted the following new accounting pronouncements:
| • | | FSP FIN 39-1FAS 161,Disclosures about Derivative Instruments and Hedging Activities – Financial Accounting Standards Board (FASB) Staff Position on Interpretation No. 39,Amendmentan amendment of FASB InterpretationStatement No. 39;133; |
| • | | EITF 06-4FAS 160,Noncontrolling Interests in Consolidated Financial Statements – Emerging Issues Task Force (EITF) Issuean amendment of ARB No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements;51; |
| • | | EITF 06-10 – EITF Issue No. 06-10,FAS 141R (revised 2007),Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements;Business Combinationsand; |
• | | SAB 109 – Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings. |
On July 1, 2008, we adopted the following new accounting pronouncement:
| • | | FSP FAS 157-3 – FASB Staff Position No. FAS 157-3,157-4,Determining the Fair Value of a Financial Asset When the MarketVolume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Asset IsAre Not ActiveOrderly; |
| • | | FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments; and |
| • | | FASB Emerging Issues Task Force (EITF) No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. |
In addition, FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, was issued by the FASB, but is not yet effective. Each of these pronouncements is described in more detail below.
FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. We adopted FAS 161 for first quarter 2009 reporting. See Note 12 (Derivatives) to Financial Statements in this Report for complete disclosures under FAS 161. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 does not affect our consolidated financial results.
FAS 160 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160, they were classified outside of equity. This new standard also changes the way a noncontrolling interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. FAS 160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The remaining interest is initially recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions. FAS 160 was effective for us on January 1, 2009. Adoption is applied prospectively to all noncontrolling interests including those that arose prior to the adoption of FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.
We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). For more information, see “Contractual Obligations” in our 2008 Form 10-K. In connection with the adoption of FAS 160 on January 1, 2009, we reclassified Prudential’s noncontrolling interest to equity. Under the terms of the original agreement under which the joint venture was established between Wachovia and Prudential, each party has certain rights such that changes in our ownership interest can occur. Prudential has stated its intention to exercise its option to put its
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On April 30, 2007,noncontrolling interest to us at a date in the FASB issued FSP FIN 39-1, which amends Interpretation No. 39 to permitfuture, but has not yet done so. As a reporting entity to offsetresult of the right to reclaim cash collateral (a receivable), or the obligation to return cash collateral (a payable), against derivative instruments executedissuance of FAS 160 and related interpretive guidance, along with the same counterparty under the same master netting arrangement. The provisions of this FSP are effective for the year beginningstated intention, on January 1, 2008, with early adoption permitted. We adopted FSP FIN 39-1 on January 1, 2008, and it did not have a material effect on our consolidated financial statements.
On September 20, 2006,2009, we increased the FASB ratifiedcarrying value of Prudential’s noncontrolling interest in the consensus reached byjoint venture to the EITF at its September 7, 2006, meeting with respect to EITF 06-4. On March 28, 2007, the FASB ratified the consensus reached by the EITF at its March 15, 2007, meeting with respect to EITF 06-10. These pronouncements require that for endorsement split-dollar life insurance arrangements and collateral split-dollar life insurance arrangements where the employee is provided benefits in postretirement periods, the employer should recognize the cost of providing that insurance over the employee’s service period by accruing a liability for the benefit obligation. Additionally, for collateral assignment split-dollar life insurance arrangements, an employer is required to recognize and measure an asset based upon the nature and substance of the agreement. EITF 06-4 and EITF 06-10 are effective for the year beginning on January 1, 2008, with early adoption permitted. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008, and reduced beginning retained earnings for 2008 by $20 million (after tax), primarily related to split-dollar life insurance arrangements from the acquisition of Greater Bay Bancorp.
On November 5, 2007, the Securities and Exchange Commission (SEC) issued SAB 109, which provides the staff’s views on the accounting for written loan commitments recorded at fair value under U.S. generally accepted accounting principles (GAAP). To make the staff’s views consistent with current authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB 105,Application of Accounting Principles to Loan Commitments. Specifically, SAB 109 states the expected net future cash flows associatedestimated maximum redemption amount, with the servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB 109, which we adopted on January 1, 2008, are applicableoffset recorded to written loan commitments recorded at fair value that are entered into beginning on or after January 1, 2008. The implementation of SAB 109 did not have a material impact on our results or the valuation of our loan commitments.additional paid-in capital.
On October 10, 2008, the FASB issued Staff Position No. 157-3, which clarifies the application of FAS 157,Fair Value Measurements, in141R requires an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The FSP states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the assetacquirer in a current sale transaction would be acceptable. The FSP also indicates that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. In weighing a broker quote as an input to a fair value measurement, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (for example, whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence. The FSP is effective immediately and applies to prior periods for which financial statements
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have not been issued, including interim or annual periods ending on or before September 30, 2008. Accordingly, we adopted the FSP prospectively, beginning July 1, 2008. The adoption of the FSP did not have a material impact on our financial results or fair value determinations.
On October 14, 2008, the SEC’s Office of the Chief Accountant (OCA), clarified its views on the application of other-than-temporary impairment guidance in FAS 115,Accounting for Certain Investments in Debt and Equity Securities, to certain perpetual preferred securities. The OCA concluded that it would not object to a registrant applying an other-than-temporary impairment model to investments in perpetual preferred securities that possess significant debt-like characteristics that is similar to the impairment model applied to debt securities, provided there has been no evidence of deterioration in credit of the issuer. An entity is permitted to apply the OCA’s views in its financial statements included in filings subsequent to the date of the letter. At September 30, 2008, based on the OCA guidance, we recorded no other-than-temporary impairment for our investments in investment-grade perpetual preferred securities that had no evidence of credit deterioration and that we have the intent and ability to hold to recovery.
On December 4, 2007, the FASB issued FAS 141R,Business Combinations. This statement requires an acquirerbusiness combination to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, to be measured at their fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. The revised statement requires acquisition-related costs to be expensed separately from the acquisition. It also requires restructuring costs that the acquirer expected but was not obligated to incur, to be expensed separately from the business combination. FAS 141R shall be appliedis applicable prospectively to business combinations completed on or after January 1, 2009. Early adoption is not permitted.
On December 4, 2007, the FASB issued FAS 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. FAS 160 specifies that noncontrolling interests in a subsidiary are to be treated as a separate component of equity and, as such, increases and decreases in the parent’s ownership interest that leave control intact are accountedWe will account for as capital transactions. It changes the way the consolidated income statement is presented by requiring that an entity’s consolidated net income include the amounts attributable to both the parent and the noncontrolling interest. FAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. This statement should be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The statement is effective for fiscal years, and interim periods within those fiscal years, beginningbusiness combinations with acquisition dates on or after December 15, 2008. Early adoptionJanuary 1, 2009, under FAS 141R.
FSP FAS 157-4 addresses measuring fair value under FAS 157 in situations where markets are inactive and transactions are not orderly. The FSP acknowledges that in these circumstances quoted prices may not be determinative of fair value. The FSP emphasizes, however, that even if there has been a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement has not changed. Prior to issuance of this FSP, FAS 157 had been interpreted by many companies, including Wells Fargo, to emphasize that fair value must be measured based on the most recently available quoted market prices, even for markets that have experienced a significant decline in the volume and level of activity relative to normal conditions and therefore could have increased frequency of transactions that are not orderly. Under the provisions of the FSP, price quotes for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly. For inactive markets, we note there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring. The FSP does not prescribe a specific method for adjusting transaction or quoted prices, however, it does provide guidance for determining how much weight to give transaction or quoted prices. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value. Price quotes based upon transactions that are orderly shall be considered in determining fair value and the weight given is based upon the facts and circumstances. If sufficient information is not permitted. Weavailable to determine if price quotes are currently evaluatingbased upon orderly transactions, less weight should be given to the impactprice quote relative to other transactions that FAS 160 may have on our consolidated financial statements.are known to be orderly.
On February 20, 2008, the FASB issued Staff Position FAS No. 140-3,Accounting for Transfers and ServicingThe provisions of Financial Assets and Extinguishments of Liabilities. FSP FAS 140-3 requires157-4 are effective in second quarter 2009; however, as permitted under the pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted in an initial transferincrease in the valuation of securities available for sale of $4.5 billion ($2.8 billion after tax), which is included in other comprehensive income, and trading assets of $18 million, which is reflected in earnings. See “Critical Accounting Policies” in this Report for more information.
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FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment (OTTI) write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a financial asset and a repurchase financingsecurity, (2) it is more likely than not that was entered into contemporaneouslythe entity will be required to sell the security before recovery of its amortized cost basis, or in contemplation(3) the entity does not expect to recover the entire amortized cost basis of the initial transfersecurity. If an entity intends to sell a security or if it is more likely than not the entity will be evaluated as a linked transaction under FAS 140 unless certain criteria are met, includingrequired to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the transferred asset must be readily obtainablesecurity before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the marketplace.amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective beginningin second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and shall be applied prospectivelyincreased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to initial transfers and repurchase
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financingsaccumulated other comprehensive income for whichOTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had the initial transfer is executed on or after this date. Early application is not permitted.
On March 19, 2008, the FASB issued FAS 161,Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance, and cash flows. The provisions of FAS 161 areFSP been effective for financial statements issued for fiscal yearsthose periods.
EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents be treated as participating securities and, interim periods beginning after November 15, 2008,therefore, included in the computation of earnings per share under the two-class method described in FAS 128,Earnings per Share. This pronouncement is effective on January 1, 2009, with earlyretrospective adoption encouraged. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, therequired. The adoption of FAS 161 willEITF 03-6-1 did not affecthave a material effect on our consolidated financial results.statements.
On September 12, 2008, the FASB issued Staff Position No. 133-1FSP FAS 107-1 and FIN 45-4,Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP is intended to improveAPB 28-1 requires disclosures about credit derivatives by requiring more information about the potential adverse effectsfair value of changesfinancial instruments for interim reporting periods as well as in credit risk on theannual financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FAS 133,Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others(FIN 45), to require an additional disclosure about the current status of the payment/performance risk of a guarantee.statements. The provisions of the FSP that amend FAS 133 and FIN 45 are effective for interim reporting periods (annual or interim) ending after NovemberJune 15, 2008.2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt this FSP for June 30, 2009, reporting. Because the FSP amends only the disclosure requirements for credit derivatives and certain guarantees,related to the fair value of financial instruments, the adoption of the FSP will not affect our consolidated financial results.
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CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are fundamental to understanding our results of operations and financial condition because some accounting policiesthey require that we use estimates and assumptions that may affect the value of our assets or liabilities, and our financial results. FiveSix of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern the allowance for credit losses, the valuation of residential mortgage servicing rights (MSRs) and financial instruments, pension accounting and income taxes. govern:
| • | | the allowance for credit losses; |
| • | | acquired loans accounted for under SOP 03-3; |
| • | | the valuation of residential mortgage servicing rights (MSRs); |
| • | | the fair valuation of financial instruments; |
| • | | pension accounting; and |
| • | | income taxes. |
Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee of the Board of Directors.Committee. These policies are described in “Financial Review – Critical Accounting Policies” and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 20072008 Form 10-K. Due to the adoption of FSP FAS 157-4, which affects the measurement of fair value of certain assets, principally securities and trading assets, we have updated and provided herein the policy on the fair value of financial instruments, as described below.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We use fair value measurements to record fair value adjustments to certain financial instruments and determineto develop fair value disclosures. (SeeSee our 20072008 Form 10-K for the complete critical accounting policy related to fair value of financial instruments.)
In connection with the adoption of FSP FAS 157-4, we developed policies and procedures to determine when the level and volume of activity for our assets and liabilities requiring fair value measurements have declined significantly relative to normal conditions. For items that use price quotes, such as certain security classes within securities available for sale, the degree of market inactivity and distressed transactions is estimated to determine the appropriate adjustment to the price quotes. The methodology we use to adjust the quotes generally involves weighting the price quotes and results of internal pricing techniques, such as the net present value of future expected cash flows (with observable inputs, where available) discounted at a rate of return market participants require. The more active and orderly markets for particular security classes were determined to be, the more weighting we assign to price quotes. The less active and the orderly markets were determined to be, the less weighting we assign to price quotes. Applying these policies to securities available for sale within the scope of the FSP of $40.0 billion (22% of the securities available-for-sale portfolio) at March 31, 2009, resulted in a $4.5 billion ($2.8 billion after tax) reduction in the net unrealized loss, which is reflected in equity. The more significant components of the $4.5 billion included $2.3 billion related to residential mortgage-backed securities and $1.3 billion related to commercial mortgage-backed securities. In addition, applying these policies to trading assets resulted in an $18 million increase in the fair value of certain trading assets, which is reflected in first quarter earnings.
1012
Approximately 22% of total assets ($134.7285.3 billion) at September 30, 2008,March 31, 2009, and 22%19% of total assets ($123.8247.5 billion) at December 31, 2007,2008, consisted of financial instruments recorded at fair value on a recurring basis. At September 30, 2008,Assets for which fair values were measured using significant Level 3 inputs (before derivative netting adjustments) represented approximately 74%22% of these financial instruments used(5% of total assets) at March 31, 2009, and approximately 22% (4% of total assets) at December 31, 2008. The fair value of the remaining assets were measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value. The remaining 26% of these financial instruments (6% of total assets) were measured using model-based techniques, with primarily unobservable inputs.measurements.
Our financial assets valued using Level 3 measurements consisted of MSRs, asset-backed securities collateralized by auto leases and cash reserves, certain mortgages held for sale (MHFS) and certain debt securities available for sale. While MSRs and our asset-backed securities collateralized by auto leases and cash reserves do not have observable market data and therefore are classified as Level 3, significant judgment may be required to determine whether certain other assets measured at fair value are included in Level 2 or Level 3. For example, we closely monitor market conditions involving assets that have become less actively traded, such as MHFS, non-agency mortgage-backed securities and certain other debt securities, including collateralized debt obligations. If fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level 2; if not, they are classified as Level 3. Making this assessment requires significant judgment. In thirdfirst quarter 2008, $456 million of debt securities available for sale and, in the first nine months of 2008, $2.22009, $5.6 billion of debt securities available for sale and $4.3 billion of mortgages held for sale were transferred from Level 2 to Level 3 because significant inputs to the valuation became unobservable, largely due to reduced levels of market liquidity.
We use prices from independent pricing services and to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure fair value of our investment securities. See Note 13 (Fair Values of Assets and Liabilities) for the amount and fair value hierarchy classification of those securities. We validate prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, and review of pricing by Company personnel familiar with market liquidity and other market related conditions. Generally, we do not adjust prices received from pricing services or brokers, unless it is evident the fair value measurement is not consistent with FAS 157.
Approximately 2% of total liabilities ($10.820.6 billion) at September 30, 2008,March 31, 2009, and 0.5%2% ($2.618.8 billion) at December 31, 2007,2008, consisted of financial instruments recorded at fair value on a recurring basis. Liabilities valued using Level 3 measurements (before derivative netting adjustments) were $550 million$8.6 billion and $9.3 billion at September 30, 2008. See Note 13 (Fair Values of AssetsMarch 31, 2009, and Liabilities) to Financial Statements in this Report for additional detail for third quarter 2008. See Note 8 (Securitizations and Variable Interest Entities) to Financial Statements in our 2007 Form 10-K for a detailed discussion of the key assumptions used to determine the fair value of our MSRs and the related sensitivity analysis.
December 31, 2008, respectively.
1113
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits and long-term and short-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
Net interest income on a taxable-equivalent basis was $11.55 billion in first quarter 2009, with approximately 40% contributed by Wachovia, and $5.81 billion in first quarter 2008. Net interest income reflected a strong combined net interest margin of 4.16%, due in part to continued growth in core deposits and deposit pricing discipline.
Average earning assets increased to $1.1 trillion in first quarter 2009 from $496.9 billion in first quarter 2008. Average loans increased to $855.6 billion in first quarter 2009 from $383.9 billion a year ago. Average mortgages held for sale increased to $31.1 billion in first quarter 2009 from $26.3 billion a year ago. Average debt securities available for sale increased to $160.4 billion in first quarter 2009 from $75.2 billion a year ago.
Core deposits are a low-cost source of funding and thus an important contributor to growth in net interest income and the net interest margin. Core deposits include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose to $753.9 billion in first quarter 2009 from $317.3 billion in first quarter 2008, with over half of the increase from Wachovia, and funded 88% and 83% of average loans in first quarter 2009 and 2008, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, grew $362.1 billion to $590.5 billion for first quarter 2009 from $228.4 billion a year ago. Average mortgage escrow deposits were $24.7 billion in first quarter 2009, up $4.3 billion from $20.4 billion a year ago. Average savings certificates of deposits increased to $170.1 billion in first quarter 2009 from $41.9 billion a year ago and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings) increased to $554.1 billion in first quarter 2009 from $250.0 billion a year ago. Total average interest-bearing deposits increased to $635.4 billion in first quarter 2009 from $258.4 billion a year ago.
The following table presents the individual components of net interest income and the net interest margin.
14
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)(1)(2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Quarter ended September 30 | , | | Quarter ended March 31 | , |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | Interest | | Interest | | | Interest | | Interest | |
| | | Average | | Yields | / | | income | / | | Average | | Yields | / | | income | / | | Average | | Yields/ | | income/ | | Average | | Yields/ | | income/ | |
| (in millions) | | balance | | rates | | expense | | balance | | rates | | expense | | | balance | | rates | | expense | | balance | | rates | | expense | |
| | | | |
| | |
| Federal funds sold, securities purchased under resale agreements and other short-term investments | | $ | 3,463 | | | 2.09 | % | | $ | 18 | | $ | 4,219 | | | 5.01 | % | | $ | 53 | | | $ | 24,074 | | | 0.84 | % | | $ | 50 | | $ | 3,888 | | | 3.30 | % | | $ | 32 | |
| Trading assets | | 4,838 | | 3.72 | | 46 | | 4,043 | | 3.69 | | 37 | | | 22,203 | | 4.97 | | 275 | | 5,129 | | 3.73 | | 48 | |
| Debt securities available for sale (3): | | |
| Securities of U.S. Treasury and federal agencies | | 1,141 | | 3.99 | | 11 | | 871 | | 4.27 | | 10 | | | 2,899 | | 0.93 | | 7 | | 975 | | 3.86 | | 9 | |
| Securities of U.S. states and political subdivisions | | 7,211 | | 6.65 | | 124 | | 5,021 | | 7.31 | | 90 | | | 12,213 | | 6.43 | | 213 | | 6,290 | | 7.43 | | 120 | |
| Mortgage-backed securities: | | |
| Federal agencies | | 50,528 | | 5.83 | | 731 | | 52,681 | | 6.03 | | 794 | | | 76,545 | | 5.71 | | 1,068 | | 36,097 | | 6.10 | | 535 | |
| Private collateralized mortgage obligations | | 21,358 | | 5.82 | | 346 | | 4,026 | | 6.22 | | 62 | | |
| Residential and commercial | | | 38,690 | | 8.57 | | 1,017 | | 20,994 | | 6.08 | | 324 | |
| | | | | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | 71,886 | | 5.83 | | 1,077 | | 56,707 | | 6.05 | | 856 | | | 115,235 | | 6.82 | | 2,085 | | 57,091 | | 6.09 | | 859 | |
| Other debt securities (4) | | 12,622 | | 7.17 | | 248 | | 5,822 | | 7.67 | | 114 | | | 30,080 | | 6.81 | | 551 | | 10,825 | | 6.93 | | 196 | |
| | | | | | | | | | | | | | | | | | | |
| Total debt securities available for sale (4) | | 92,860 | | 6.06 | | 1,460 | | 68,421 | | 6.26 | | 1,070 | | | 160,427 | | 6.69 | | 2,856 | | 75,181 | | 6.30 | | 1,184 | |
| Mortgages held for sale (5) | | 24,990 | | 6.31 | | 394 | | 35,552 | | 6.59 | | 586 | | | 31,058 | | 5.34 | | 415 | | 26,273 | | 6.00 | | 394 | |
| Loans held for sale (5) | | 677 | | 6.95 | | 12 | | 960 | | 7.79 | | 19 | | | 7,949 | | 3.40 | | 67 | | 647 | | 7.54 | | 12 | |
| Loans: | | |
| Commercial and commercial real estate: | | |
| Commercial | | 100,688 | | 5.92 | | 1,496 | | 79,713 | | 8.24 | | 1,655 | | | 196,923 | | 3.87 | | 1,884 | | 91,085 | | 6.92 | | 1,569 | |
| Other real estate mortgage | | 43,616 | | 5.60 | | 615 | | 32,641 | | 7.42 | | 610 | | | 104,271 | | 3.47 | | 894 | | 37,426 | | 6.44 | | 600 | |
| Real estate construction | | 19,715 | | 4.82 | | 238 | | 16,914 | | 7.94 | | 338 | | | 34,493 | | 3.03 | | 258 | | 18,932 | | 6.06 | | 285 | |
| Lease financing | | 7,250 | | 5.48 | | 100 | | 6,026 | | 5.78 | | 87 | | | 15,810 | | 8.77 | | 347 | | 6,825 | | 5.77 | | 98 | |
| | | | | | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | 171,269 | | 5.69 | | 2,449 | | 135,294 | | 7.90 | | 2,690 | | | 351,497 | | 3.89 | | 3,383 | | 154,268 | | 6.65 | | 2,552 | |
| Consumer: | | |
| Real estate 1-4 family first mortgage | | 76,197 | | 6.64 | | 1,265 | | 63,929 | | 7.26 | | 1,162 | | | 245,494 | | 5.64 | | 3,444 | | 72,308 | | 6.90 | | 1,246 | |
| Real estate 1-4 family junior lien mortgage | | 75,379 | | 6.36 | | 1,206 | | 73,476 | | 8.19 | | 1,515 | | | 110,128 | | 5.05 | | 1,375 | | 75,263 | | 7.31 | | 1,368 | |
| Credit card | | 19,948 | | 12.19 | | 609 | | 16,261 | | 13.68 | | 557 | | | 23,295 | | 12.10 | | 704 | | 18,776 | | 12.33 | | 579 | |
| Other revolving credit and installment | | 54,104 | | 8.64 | | 1,175 | | 54,165 | | 9.79 | | 1,336 | | | 92,820 | | 6.68 | | 1,527 | | 55,910 | | 9.09 | | 1,264 | |
| | | | | | | | | | | | | | | | | | | |
| Total consumer | | 225,628 | | 7.52 | | 4,255 | | 207,831 | | 8.75 | | 4,570 | | | 471,737 | | 6.03 | | 7,050 | | 222,257 | | 8.05 | | 4,457 | |
| Foreign | | 7,306 | | 10.28 | | 188 | | 7,558 | | 11.62 | | 221 | | | 32,357 | | 4.36 | | 349 | | 7,394 | | 11.27 | | 207 | |
| | | | | | | | | | | | | | | | | | | |
| Total loans (5) | | 404,203 | | 6.79 | | 6,892 | | 350,683 | | 8.48 | | 7,481 | | | 855,591 | | 5.09 | | 10,782 | | 383,919 | | 7.55 | | 7,216 | |
| Other | | 2,126 | | 4.64 | | 24 | | 1,396 | | 5.01 | | 20 | | | 6,140 | | 2.87 | | 43 | | 1,825 | | 4.54 | | 20 | |
| | | | | | | | | | | | | | | | | | | |
| Total earning assets | | $ | 533,157 | | 6.57 | | 8,846 | | $ | 465,274 | | 7.92 | | 9,266 | | | $ | 1,107,442 | | 5.22 | | 14,488 | | $ | 496,862 | | 7.19 | | 8,906 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| Deposits: | | |
| Interest-bearing checking | | $ | 5,483 | | 0.87 | | 12 | | $ | 5,160 | | 3.20 | | 42 | | | $ | 80,393 | | 0.15 | | 30 | | $ | 5,226 | | 1.92 | | 25 | |
| Market rate and other savings | | 166,710 | | 1.18 | | 495 | | 149,194 | | 2.89 | | 1,085 | | | 313,445 | | 0.54 | | 419 | | 159,865 | | 1.97 | | 784 | |
| Savings certificates | | 37,192 | | 2.57 | | 240 | | 41,080 | | 4.38 | | 454 | | | 170,122 | | 0.92 | | 387 | | 41,915 | | 3.96 | | 413 | |
| Other time deposits | | 7,930 | | 2.59 | | 53 | | 10,948 | | 5.10 | | 140 | | | 25,555 | | 1.97 | | 124 | | 4,763 | | 3.53 | | 42 | |
| Deposits in foreign offices | | 49,054 | | 1.78 | | 219 | | 41,326 | | 4.77 | | 497 | | | 45,896 | | 0.35 | | 39 | | 46,641 | | 2.84 | | 330 | |
| | | | | | | | | | | | | | | | | | | |
| Total interest-bearing deposits | | 266,369 | | 1.52 | | 1,019 | | 247,708 | | 3.55 | | 2,218 | | | 635,411 | | 0.64 | | 999 | | 258,410 | | 2.48 | | 1,594 | |
| Short-term borrowings | | 83,458 | | 2.35 | | 492 | | 36,415 | | 5.06 | | 464 | | | 76,068 | | 0.66 | | 123 | | 52,970 | | 3.23 | | 425 | |
| Long-term debt | | 103,745 | | 3.43 | | 892 | | 94,686 | | 5.33 | | 1,267 | | | 258,957 | | 2.77 | | 1,783 | | 100,686 | | 4.29 | | 1,077 | |
| Other liabilities | | | 3,778 | | 3.88 | | 36 | | -- | | -- | | -- | |
| | | | | | | | | | | | | | | | | | | |
| Total interest-bearing liabilities | | 453,572 | | 2.11 | | 2,403 | | 378,809 | | 4.14 | | 3,949 | | | 974,214 | | 1.22 | | 2,941 | | 412,066 | | 3.02 | | 3,096 | |
| Portion of noninterest-bearing funding sources | | 79,585 | | — | | — | | 86,465 | | — | | — | | | 133,228 | | -- | | -- | | 84,796 | | -- | | -- | |
| | | | | | | | | | | | | | | | | | | |
| Total funding sources | | $ | 533,157 | | 1.78 | | 2,403 | | $ | 465,274 | | 3.37 | | 3,949 | | | $ | 1,107,442 | | 1.06 | | 2,941 | | $ | 496,862 | | 2.50 | | 3,096 | |
| | | | | | | | | | | | | | | | | | | |
Net interest margin and net interest income on a taxable-equivalent basis(6) | | | 4.79 | % | | $ | 6,443 | | | 4.55 | % | | $ | 5,317 | | |
Net interest margin and net interest income on
a taxable-equivalent basis (6) | | | | 4.16 | % | | $ | 11,547 | | | 4.69 | % | | $ | 5,810 | |
| | | | | | | | | | | | | | | | | | | |
NONINTEREST-EARNING ASSETS | | |
| Cash and due from banks | | $ | 11,024 | | $ | 11,579 | | | $ | 20,255 | | $ | 11,648 | |
| Goodwill | | 13,531 | | 12,008 | | | 23,183 | | 13,161 | |
| Other | | 56,482 | | 52,672 | | | 138,836 | | 53,323 | |
| | | | | | | | | | | |
| Total noninterest-earning assets | | $ | 81,037 | | $ | 76,259 | | | $ | 182,274 | | $ | 78,132 | |
| | | | | | | | | | | |
NONINTEREST-BEARING FUNDING SOURCES | | |
| Deposits | | $ | 87,095 | | $ | 88,991 | | | $ | 160,308 | | $ | 84,886 | |
| Other liabilities | | 25,762 | | 26,413 | | | 50,566 | | 30,062 | |
| Stockholders’ equity | | 47,765 | | 47,320 | | |
| Total equity | | | 104,628 | | 47,980 | |
| Noninterest-bearing funding sources used to fund earning assets | | | (79,585 | ) | | | (86,465 | ) | | | | (133,228 | ) | | | (84,796 | ) | |
| | | | | | | | | | | |
| Net noninterest-bearing funding sources | | $ | 81,037 | | $ | 76,259 | | | $ | 182,274 | | $ | 78,132 | |
| | | | | | | | | | | |
| | $ | 614,194 | | $ | 541,533 | | | $ | 1,289,716 | | $ | 574,994 | |
| | | | | | | | | | | |
| | | | |
| | |
| (1) | | Our average prime rate was 5.00%3.25% and 8.18%6.22% for the quarters ended September 30,March 31, 2009 and 2008, and 2007, respectively, and 5.43% and 8.23% for the nine months ended September 30, 2008 and 2007, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 2.91%1.24% and 5.44%3.29% for the same quarters, ended September 30, 2008 and 2007, respectively, and 2.98% and 5.39% for the nine months ended September 30, 2008 and 2007, respectively. |
| (2) | | Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories. |
| (3) | | Yields are based on amortized cost balances computed on a settlement date basis. |
| (4) | | Includes certain preferred securities. |
| (5) | | Nonaccrual loans and related income are included in their respective loan categories. |
| (6) | | Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented. |
1215
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | Nine months ended September 30 | , |
| | | 2008 | | | 2007 | |
| | | | | | | | | | | Interest | | | | | | | | | | | Interest | |
| | | Average | | | Yields | / | | income | / | | Average | | | Yields | / | | income | / |
| | | balance | | | rates | | | expense | | | balance | | | rates | | | expense | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 3,734 | | | | 2.59 | % | | $ | 72 | | | $ | 4,972 | | | | 5.09 | % | | $ | 189 | |
| | | | 4,960 | | | | 3.57 | | | | 133 | | | | 4,306 | | | | 4.70 | | | | 151 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 1,055 | | | | 3.88 | | | | 30 | | | | 821 | | | | 4.29 | | | | 27 | |
| | | | 6,848 | | | | 6.88 | | | | 362 | | | | 4,318 | | | | 7.36 | | | | 232 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 42,448 | | | | 5.93 | | | | 1,854 | | | | 39,656 | | | | 6.08 | | | | 1,794 | |
| | | | 21,589 | | | | 5.92 | | | | 1,010 | | | | 3,945 | | | | 6.32 | | | | 185 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 64,037 | | | | 5.92 | | | | 2,864 | | | | 43,601 | | | | 6.10 | | | | 1,979 | |
| | | | 12,351 | | | | 6.78 | | | | 670 | | | | 5,564 | | | | 7.57 | | | | 316 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 84,291 | | | | 6.11 | | | | 3,926 | | | | 54,304 | | | | 6.32 | | | | 2,554 | |
| | | | 26,417 | | | | 6.11 | | | | 1,211 | | | | 34,664 | | | | 6.52 | | | | 1,694 | |
| | | | 686 | | | | 6.66 | | | | 34 | | | | 873 | | | | 7.78 | | | | 51 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 95,697 | | | | 6.29 | | | | 4,509 | | | | 74,934 | | | | 8.28 | | | | 4,641 | |
| | | | 40,351 | | | | 5.91 | | | | 1,788 | | | | 31,663 | | | | 7.44 | | | | 1,762 | |
| | | | 19,288 | | | | 5.29 | | | | 763 | | | | 16,404 | | | | 7.97 | | | | 978 | |
| | | | 7,055 | | | | 5.63 | | | | 298 | | | | 5,698 | | | | 5.82 | | | | 249 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 162,391 | | | | 6.05 | | | | 7,358 | | | | 128,699 | | | | 7.92 | | | | 7,630 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 74,064 | | | | 6.77 | | | | 3,761 | | | | 58,920 | | | | 7.31 | | | | 3,228 | |
| | | | 75,220 | | | | 6.78 | | | | 3,820 | | | | 70,998 | | | | 8.19 | | | | 4,348 | |
| | | | 19,256 | | | | 12.11 | | | | 1,749 | | | | 15,262 | | | | 13.89 | | | | 1,590 | |
| | | | 54,949 | | | | 8.84 | | | | 3,637 | | | | 53,725 | | | | 9.77 | | | | 3,926 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 223,489 | | | | 7.74 | | | | 12,967 | | | | 198,905 | | | | 8.79 | | | | 13,092 | |
| | | | 7,382 | | | | 10.72 | | | | 592 | | | | 7,197 | | | | 11.72 | | | | 631 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 393,262 | | | | 7.10 | | | | 20,917 | | | | 334,801 | | | | 8.52 | | | | 21,353 | |
| | | | 1,995 | | | | 4.55 | | | | 68 | | | | 1,351 | | | | 5.11 | | | | 54 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 515,345 | | | | 6.81 | | | | 26,361 | | | $ | 435,271 | | | | 8.00 | | | | 26,046 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 5,399 | | | | 1.31 | | | | 53 | | | $ | 4,991 | | | | 3.23 | | | | 121 | |
| | | | 162,792 | | | | 1.45 | | | | 1,765 | | | | 145,135 | | | | 2.83 | | | | 3,070 | |
| | | | 38,907 | | | | 3.23 | | | | 940 | | | | 39,784 | | | | 4.40 | | | | 1,308 | |
| | | | 6,163 | | | | 2.87 | | | | 133 | | | | 8,284 | | | | 5.06 | | | | 313 | |
| | | | 49,192 | | | | 2.13 | | | | 785 | | | | 33,988 | | | | 4.73 | | | | 1,204 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 262,453 | | | | 1.87 | | | | 3,676 | | | | 232,182 | | | | 3.46 | | | | 6,016 | |
| | | | 67,714 | | | | 2.51 | | | | 1,274 | | | | 23,084 | | | | 5.01 | | | | 865 | |
| | | | 101,668 | | | | 3.71 | | | | 2,825 | | | | 91,569 | | | | 5.22 | | | | 3,579 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 431,835 | | | | 2.40 | | | | 7,775 | | | | 346,835 | | | | 4.03 | | | | 10,460 | |
| | | | 83,510 | | | | — | | | | — | | | | 88,436 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 515,345 | | | | 2.01 | | | | 7,775 | | | $ | 435,271 | | | | 3.21 | | | | 10,460 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 4.80 | % | | $ | 18,586 | | | | | | | | 4.79 | % | | $ | 15,586 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 11,182 | | | | | | | | | | | $ | 11,698 | | | | | | | | | |
| | | | 13,289 | | | | | | | | | | | | 11,575 | | | | | | | | | |
| | | | 54,901 | | | | | | | | | | | | 50,448 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 79,372 | | | | | | | | | | | $ | 73,721 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 86,676 | | | | | | | | | | | $ | 89,673 | | | | | | | | | |
| | | | 28,268 | | | | | | | | | | | | 25,726 | | | | | | | | | |
| | | | 47,938 | | | | | | | | | | | | 46,758 | | | | | | | | | |
| | | | (83,510 | ) | | | | | | | | | | | (88,436 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 79,372 | | | | | | | | | | | $ | 73,721 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 594,717 | | | | | | | | | | | $ | 508,992 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| |
13
NET INTEREST INCOME
Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits and long-term and short-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
Net interest income on a taxable-equivalent basis increased 21% to $6.44 billion in third quarter 2008 from $5.32 billion in third quarter 2007. The increase was driven by 15% earning asset growth combined with an increase in the net interest margin to 4.79%, up 24 basis points from a year ago. The improvement in the net interest margin reflects our focus on higher risk-adjusted yields on new loans and securities, a decline in funding costs, our disciplined deposit pricing, and the high percentage of checking and transaction accounts in our core deposit mix. Net interest income on a taxable-equivalent basis increased $3.0 billion to $18.59 billion for the first nine months of 2008 from $15.59 billion for the same period a year ago. For the first nine months of 2008, growth in net interest income has largely offset the impact of the credit crisis on charge-offs.
Average earning assets increased $67.9 billion (15%) to $533.2 billion in third quarter 2008 from $465.3 billion in third quarter 2007. Average loans increased to $404.2 billion in third quarter 2008 from $350.7 billion a year ago. Average mortgages held for sale decreased to $25.0 billion in third quarter 2008 from $35.6 billion a year ago. Average debt securities available for sale increased to $92.9 billion in third quarter 2008 from $68.4 billion a year ago.
Core deposits are an important contributor to growth in net interest income and the net interest margin, and are a low-cost source of funding. Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). Average core deposits rose 5% to $320.1 billion for third quarter 2008 from $306.1 billion for third quarter 2007 and funded 79% and 87% of average loans in third quarter 2008 and 2007, respectively. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, grew $13.2 billion (6%) to $234.1 billion for third quarter 2008 from a year ago. Average mortgage escrow deposits were $21.2 billion for third quarter 2008, down $1.2 billion from a year ago. Average savings certificates of deposits decreased to $37.2 billion in third quarter 2008 from $41.1 billion a year ago and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings) increased to $259.3 billion in third quarter 2008 from $243.3 billion a year ago. Total average interest-bearing deposits increased to $266.4 billion in third quarter 2008 from $247.7 billion a year ago.
The previous table presents the individual components of net interest income and the net interest margin.
14
NONINTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | Quarter | | | | | | | Nine months | | | | |
| | | ended Sept. 30 | , | | % | | | ended Sept. 30 | , | | % | |
| (in millions) | | 2008 | | | 2007 | | | Change | | | 2008 | | | 2007 | | | Change | |
| |
Service charges on deposit accounts | | $ | 839 | | | $ | 837 | | | | — | % | | $ | 2,387 | | | $ | 2,262 | | | | 6 | % |
Trust and investment fees: | | | | | | | | | | | | | | | | | | | | | | | | |
| Trust, investment and IRA fees | | | 549 | | | | 573 | | | | (4 | ) | | | 1,674 | | | | 1,720 | | | | (3 | ) |
| Commissions and all other fees | | | 189 | | | | 204 | | | | (7 | ) | | | 589 | | | | 627 | | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total trust and investment fees | | | 738 | | | | 777 | | | | (5 | ) | | | 2,263 | | | | 2,347 | | | | (4 | ) |
| | | 601 | | | | 561 | | | | 7 | | | | 1,747 | | | | 1,548 | | | | 13 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Cash network fees | | | 48 | | | | 51 | | | | (6 | ) | | | 143 | | | | 146 | | | | (2 | ) |
| Charges and fees on loans | | | 266 | | | | 246 | | | | 8 | | | | 765 | | | | 737 | | | | 4 | |
| All other fees | | | 238 | | | | 269 | | | | (12 | ) | | | 654 | | | | 832 | | | | (21 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total other fees | | | 552 | | | | 566 | | | | (2 | ) | | | 1,562 | | | | 1,715 | | | | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Servicing income, net | | | 525 | | | | 797 | | | | (34 | ) | | | 1,019 | | | | 968 | | | | 5 | |
| Net gains (losses) on mortgage loan origination/ sales activities | | | 276 | | | | (61 | ) | | NM | | | | 1,419 | | | | 1,069 | | | | 33 | |
| All other | | | 91 | | | | 87 | | | | 5 | | | | 282 | | | | 265 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total mortgage banking | | | 892 | | | | 823 | | | | 8 | | | | 2,720 | | | | 2,302 | | | | 18 | |
| | | 102 | | | | 171 | | | | (40 | ) | | | 365 | | | | 550 | | | | (34 | ) |
| Insurance | | | 439 | | | | 329 | | | | 33 | | | | 1,493 | | | | 1,160 | | | | 29 | |
| Net gains (losses) from trading activities | | | 65 | | | | (43 | ) | | NM | | | | 684 | | | | 482 | | | | 42 | |
| Net gains on debt securities available for sale | | | 84 | | | | 160 | | | | (48 | ) | | | 316 | | | | 149 | | | | 112 | |
| Net gains (losses) from equity investments | | | (507 | ) | | | 173 | | | NM | | | | (148 | ) | | | 512 | | | NM | |
| All other | | | 193 | | | | 219 | | | | (12 | ) | | | 593 | | | | 672 | | | | (12 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 3,998 | | | $ | 4,573 | | | | (13 | ) | | $ | 13,982 | | | $ | 13,699 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | |
| |
NM - Not meaningful| | | | | | | | | |
| | |
| | | Quarter | |
| | | ended March 31 | , |
| (in millions) | | 2009 | | | 2008 | |
| | |
| Service charges on deposit accounts | | $ | 1,394 | | | $ | 748 | |
| | | | | | | | |
| Trust and investment fees: | | | | | | | | |
| Trust, investment and IRA fees | | | 722 | | | | 559 | |
| Commissions and all other fees | | | 1,493 | | | | 204 | |
| | | | | | | |
| Total trust and investment fees | | | 2,215 | | | | 763 | |
| | | | | | | | |
| Card fees | | | 853 | | | | 558 | |
| Other fees: | | | | | | | | |
| Cash network fees | | | 58 | | | | 48 | |
| Charges and fees on loans | | | 433 | | | | 248 | |
| All other fees | | | 410 | | | | 203 | |
| | | | | | | |
| Total other fees | | | 901 | | | | 499 | |
| | | | | | | | |
| Mortgage banking: | | | | | | | | |
| Servicing income, net | | | 843 | | | | 273 | |
| Net gains on mortgage loan origination/sales activities | | | 1,582 | | | | 267 | |
| All other | | | 79 | | | | 91 | |
| | | | | | | |
| Total mortgage banking | | | 2,504 | | | | 631 | |
| | | | | | | | |
| Insurance | | | 581 | | | | 504 | |
| Net gains from trading activities | | | 787 | | | | 103 | |
| Net gains (losses) on debt securities available for sale | | | (119 | ) | | | 323 | |
| Net gains (losses) from equity investments | | | (157 | ) | | | 313 | |
| Operating leases | | | 130 | | | | 143 | |
| All other | | | 552 | | | | 218 | |
| | | | | | | |
| | | | | | | | |
| Total | | $ | 9,641 | | | $ | 4,803 | |
| | | | | | | |
| | |
We earn trust, investment and IRA fees from managing and administering assets, including mutual funds, corporate trust, personal trust, employee benefit trust and agency assets. At September 30, 2008,March 31, 2009, these assets totaled $1.17$1.53 trillion, including $474 billion from Wachovia, up 4% from $1.12$1.13 trillion at September 30, 2007.March 31, 2008. Trust, investment and IRA fees are primarily based on a tiered scale relative to the market value of the assets under management or administration. TheseThe fees declined 4%increased to $722 million in thirdfirst quarter 20082009 from $559 million a year ago, while the S&P 500® declined 24% over the same period.ago.
We also receive commissions and other fees for providing services to full-service and discount brokerage customers. Generally, these fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, or asset-based fees, which are based on the market value of the customer’s assets. At September 30, 2008 and 2007,March 31, 2009, brokerage balances totaled $123$910 billion, and $132including $812 billion respectively.from Wachovia, compared with $126 billion at March 31, 2008. The fees increased to $1,493 million from $204 million a year ago.
Card fees increased 7% to $601$853 million in thirdfirst quarter 20082009 from $561$558 million in third quarter 2007, due to continued growth in new accounts and higher credit and debit card transaction volume. Purchase volume on these cards was up 8% from a year ago, and averagepredominantly due to $268 million in card balancesfees from the Wachovia portfolio.
Mortgage banking noninterest income was $2,504 million in first quarter 2009, compared with $631 million a year ago. Net gains on mortgage loan origination/sales activities of $1,582 million in first quarter 2009 were up 26%.from $267 million a year ago. Business performance was very strong in first quarter 2009, reflecting strong refinance activity due to the low interest rate environment, with residential real estate originations of $101 billion compared with $66 billion a
1516
year ago. The 1-4 family first mortgage unclosed pipeline was $100 billion (including $4 billion from Wachovia) at March 31, 2009, $71 billion (including $5 billion from Wachovia) at December 31, 2008, and $61 billion at March 31, 2008. For additional detail, see “Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate and Market Risk” and Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities include changes in the fair value of loans in the mortgage warehouse and additions to the mortgage repurchase reserve. Mortgage loans are repurchased based on standard representations and warranties. A $78 million increase in the repurchase reserve in first quarter 2009 from December 31, 2008, was due to higher defaults and loss severities and overall deterioration in the market. To the extent the market does not recover, the residential mortgage business could continue to have increased loss severity on repurchases, causing future increases in the repurchase reserve. In addition, there were $60 million in warehouse valuation adjustments in first quarter 2009 related to credit and liquidity losses. Due to the deterioration in the overall credit market and related secondary market liquidity challenges, losses on unsalable loans have been significant. Similar losses on unsalable loans could be possible in the future until the housing market recovers.
Within mortgage banking noninterest income, was $892 million in third quarter 2008, compared with $823 million in third quarter 2007. In addition to servicing fees, net servicing income includes both changes in the fair value of MSRs during the period as well as changes in the value of derivatives (economic hedges) used to hedge the MSRs. Net servicing income for thirdin first quarter 20082009 included a $75an $875 million net MSRs valuation gain that was recorded toin earnings ($546 million(a $2.8 billion reduction in the fair value loss offsettingof the MSRs offset by a $621 million economic hedging$3.7 billion hedge gain) and for thirdin first quarter 20072008 included a $562$94 million net MSRs valuation gain ($638 million1.8 billion reduction in the fair value loss offsettingof MSRs offset by a $1.20$1.9 billion economic hedginghedge gain). Our portfolio of loans serviced for others was $1.46$1.85 trillion at September 30, 2008, up 6% from $1.38March 31, 2009, and $1.86 trillion at September 30, 2007.December 31, 2008, which included $379 billion acquired from Wachovia. At September 30, 2008,March 31, 2009, the ratio of MSRs to related loans serviced for others was 1.34%0.74%.
Net gains on mortgage loan origination/sales activities were $276 million in third quarter 2008, compared with $61 million in net losses in third quarter 2007. The year-over-year increase reflected wider margins and decreased losses from spread widening caused by changes in liquidity. Residential real estate originations totaled $51 billion in third quarter 2008 and $68 billion in third quarter 2007. (For additional detail, see “Asset/Liability and Market Risk Management – Mortgage Banking Interest Rate and Market Risk,” Note 8 (Mortgage Banking Activities) and Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.)
The 1-4 family first mortgage unclosed pipeline was $41 billion at September 30, 2008, $43 billion at December 31, 2007, and $45 billion at September 30, 2007.
Insurance revenue was $581 million in first quarter 2009, up 33% in third quarter 2008 from third quarter 2007,$504 million a year ago, primarily due to customer growth, higher crop insurance revenues and the fourth quarter 2007 acquisitionaddition of ABD Insurance.Wachovia.
Income from trading activities was $65 million and $684$787 million in first quarter 2009, up from $103 million a year ago, with the thirdincrease largely from Wachovia. Approximately two-thirds of the income this quarter and first nine monthswas from customer-related business, with much of 2008, respectively. Incomethe remainder from trading activities was a loss of $43 million and a gain of $482economic hedging. Trading results included $18 million in first quarter 2009 from the third quarter and first nine monthsapplication of 2007, respectively. Income from trading activities and “all other” income collectively included a $106 million charge in third quarter 2008 related to unsecured counterparty exposure on derivative contracts with Lehman Brothers. FSP FAS 157-4.
Net investment losses (debt and equity) totaled $423$276 million for thirdin first quarter 20082009 and included previously announced other-than-temporary impairment chargeswrite-downs of $646 million for Fannie Mae, Freddie Mac and Lehman Brothers, an additional $247 million of other-than-temporary write-downs and $470 million of net realized investment gains.$516 million. Net gainslosses on debt securities available for sale were $84 million and $316$119 million in the thirdfirst quarter and first nine months2009, compared with net gains of 2008, and $160$323 million and $149 million, respectively, in the same periods of the prior year.a year ago. Net gains (losses)losses from equity investments were $(507) million and $(148)$157 million in first quarter 2009, compared with net gains of $313 million a year ago, which reflected the third quarter and first nine months of 2008, respectively, and $173$334 million and $512 milliongain from our ownership interest in the same periods of 2007. (ForVisa, which completed its initial public offering in March 2008. For additional detail, see “Balance Sheet Analysis – Securities Available for Sale” in this Report.)
1617
NONINTEREST EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Quarter | | Nine months | | | | | Quarter | |
| | | ended Sept. 30 | , | | % | | ended Sept. 30 | , | | % | | | ended March 31 | , |
| (in millions) | | 2008 | | 2007 | | Change | | 2008 | | 2007 | | Change | | | 2009 | | 2008 | |
| | | | |
| | $ | 2,078 | | $ | 1,933 | | | 8 | % | | $ | 6,092 | | $ | 5,707 | | | 7 | % | | $ | 3,386 | | $ | 1,984 | |
| Incentive compensation | | 555 | | 802 | | | (31 | ) | | 2,005 | | 2,444 | | | (18 | ) | |
| Commission and incentive compensation | | | 1,824 | | 644 | |
| Employee benefits | | 486 | | 518 | | | (6 | ) | | 1,666 | | 1,764 | | | (6 | ) | | 1,284 | | 587 | |
| Equipment | | 302 | | 295 | | 2 | | 955 | | 924 | | 3 | | | 687 | | 348 | |
| Net occupancy | | 402 | | 398 | | 1 | | 1,201 | | 1,132 | | 6 | | | 796 | | 399 | |
| Operating leases | | 90 | | 136 | | | (34 | ) | | 308 | | 437 | | | (30 | ) | |
| Core deposit and other intangibles | | | 647 | | 46 | |
| FDIC and other deposit assessments | | | 338 | | 8 | |
| Outside professional services | | 206 | | 222 | | | (7 | ) | | 589 | | 649 | | | (9 | ) | | 410 | | 171 | |
| Insurance | | | 267 | | 161 | |
| Postage, stationery and supplies | | | 250 | | 141 | |
| Outside data processing | | 122 | | 123 | | | (1 | ) | | 353 | | 355 | | | (1 | ) | | 212 | | 109 | |
| Travel and entertainment | | 113 | | 113 | | — | | 330 | | 340 | | | (3 | ) | | 105 | | 105 | |
| Foreclosed assets | | | 248 | | 107 | |
| Contract services | | 88 | | 103 | | | (15 | ) | | 300 | | 334 | | | (10 | ) | | 216 | | 108 | |
| Operating losses | | 63 | | 225 | | | (72 | ) | | 46 | | 369 | | | (88 | ) | |
| Insurance | | 144 | | 81 | | 78 | | 511 | | 357 | | 43 | | |
| Operating leases | | | 70 | | 116 | |
| Advertising and promotion | | 96 | | 108 | | | (11 | ) | | 285 | | 312 | | | (9 | ) | | 125 | | 85 | |
| Postage | | 83 | | 88 | | | (6 | ) | | 256 | | 260 | | | (2 | ) | |
| Telecommunications | | 78 | | 79 | | | (1 | ) | | 238 | �� | | 241 | | | (1 | ) | | 158 | | 78 | |
| Stationery and supplies | | 53 | | 54 | | | (2 | ) | | 159 | | 159 | | — | | |
| Security | | 45 | | 42 | | 7 | | 134 | | 129 | | 4 | | |
| Core deposit intangibles | | 32 | | 28 | | 14 | | 94 | | 81 | | 16 | | |
| Operating losses (reduction in losses) | | | 172 | | | (73 | ) |
| All other | | 481 | | 323 | | 49 | | 1,317 | | 930 | | 42 | | | 623 | | 318 | |
| | | | | | | | | | | | | | | |
| | $ | 5,517 | | $ | 5,671 | | | (3 | ) | | $ | 16,839 | | $ | 16,924 | | | (1 | ) | | $ | 11,818 | | $ | 5,442 | |
| | | | | | | | | | | | | | | |
| | | | |
Noninterest expense more than doubled to $11.8 billion in thirdfirst quarter 2008 was down 3%2009 from a year ago, primarily due to the prior year, reflecting continued emphasis on expenseacquisition of Wachovia, which resulted in an expanded geographic platform and capabilities in businesses such as retail brokerage, asset management and disciplined effortsinvestment banking, which, like mortgage banking, typically include higher revenue-based incentive expense than the more traditional banking businesses. FDIC and other deposit assessments increased to restrict expenses$338 million in first quarter 2009, due to revenue-creating opportunities. Inadditional assessments related to the last 12 months, we opened 71 retail banking stores, including 12 storesFDIC Transaction Account Guarantee Program, compared with $8 million a year ago. See “Liquidity and Funding” in this Report for additional information on this program. Noninterest expense in first quarter 2009 included $122 million of additional insurance reserve at our captive mortgage reinsurance operation and converted 21 stores from acquisitions. The efficiency ratio was 53.2% in third quarter 2008, even after taking into account the other-than-temporary impairment charges on debt and equity investment securities.$206 million of merger-related costs.
INCOME TAX EXPENSE
Our effective income tax rate was 30.8% for third33.8% in first quarter 2008,2009, down from 34.0% for third34.9% in first quarter 2007,2008. The decrease is primarily dueattributable to a lower level of pre-taxhigher tax-exempt income and higher amounts of tax credits, partially offset by increased tax expense (with a comparable increase in interest income) associated with the purchase accounting for leveraged leases. Effective January 1, 2009, we adopted FAS 160, which changes the way noncontrolling interests are presented in the income statement such that the consolidated income statement includes amounts from both Wells Fargo interests and tax-exempt income in 2008. For the first nine months of 2008,noncontrolling interests. As a result, our effective tax rate was 32.9%, compared with 32.6% foris calculated by dividing income tax expense by income before income tax expense less the first nine months of 2007.net income from noncontrolling interests.
1718
OPERATING SEGMENT RESULTS
We haveWells Fargo defines its operating segments by product type and customer segment. As a result of the combination of Wells Fargo and Wachovia, management realigned its business segments into the following three lines of businessbusiness: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement Services. Our management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with other similar information for management reporting: Community Banking, Wholesale Banking and Wells Fargo Financial.other financial services companies. We revised prior period information to reflect the realignment of our operating segments; however, because the acquisition was completed on December 31, 2008, Wachovia’s results are included in segment results beginning in 2009. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 17 (Operating Segments) to Financial Statements in this Report. To reflect
Community Bankingoffers a complete line of diversified financial products and services for consumers and small businesses including investment, insurance and trust services in 39 states and D.C., and mortgage and home equity loans in all 50 states and D.C. Wachovia added expanded product capability as well as expanded channels to better serve our customers. In addition, with the realignment of our corporate trust business fromthe operating segments, Community Banking into Wholesalenow includes Wells Fargo Financial.
Community Banking net income increased to $1.84 billion in first quarter 2008, results for prior periods have been revised.
Community Banking’snet income increased 10% to $1.59 billion in third quarter 20082009 from $1.45 billion in third quarter 2007. Net income decreased 4% to $4.25 billion in the first nine months of 2008 from $4.45 billion in the first nine months of 2007. Revenue increased 14% to $7.20 billion in third quarter 2008 from $6.32$1.52 billion a year ago,ago. The growth in net income and average assets for Community Banking was largely due to the addition of Wachovia businesses, as well as double-digit growth in legacy Wells Fargo businesses driven by strong balance sheet growth and strong fee income growth in retailmortgage banking and mortgage.income. Revenue increased to $13.95 billion from $8.20 billion a year ago. Net interest income increased 27% to $4.21$8.50 billion in thirdfirst quarter 20082009 from $3.30$4.72 billion a year ago. Average loans were up 12%increased to $220.5$552.8 billion in thirdfirst quarter 20082009 from $197.4$282.7 billion a year ago. Average core deposits increased to $538.0 billion in first quarter 2009 from $246.6 billion a year ago and average core deposits were up 5%due to $254.9Wachovia, as well as double-digit growth in legacy Wells Fargo. Noninterest income increased to $5.46 billion in thirdfirst quarter 20082009 from $243.0$3.48 billion a year ago withago. Noninterest expense increased to $7.16 billion from $3.91 billion a portion of the growth due to acquisitions.year ago. The provision for credit losses increased to $1.43$4.00 billion in thirdfirst quarter 20082009 from $446$1.87 billion a year ago.
Wholesale Bankingprovides financial solutions to businesses across the United States with annual sales generally in excess of $10 million and financial institutions globally. Products include middle market banking, corporate banking, commercial real estate, treasury management, asset-based lending, insurance brokerage, foreign exchange, correspondent banking, trade services, specialized lending, equipment finance, corporate trust, investment banking, capital markets, and asset management. Wachovia added expanded product capabilities across the segment, including investment banking, mergers and acquisitions, equity trading, equity structured products, fixed-income sales and trading, and equity and fixed income research.
Wholesale Banking net income increased to $1.18 billion in first quarter 2009 from $483 million a year ago, with over half of the increase related to Home Equity. Noninterest income was $3.00 billion in third quarter 2008, flat compared with $3.02 billion a year ago, and included $486 million of other-than-temporary impairment charges. This was partially offset by strong retail banking fee revenue growth, includingago. The growth in card fees, deposit service charges and mortgage banking. Noninterest expense decreased 7% to $3.45 billion in third quarter 2008 from $3.71 billion a year ago, driven by continued expense management, partially offset by investments in technology, distribution and sales staff.
Wholesale Banking’snet income decreased 86% to $83 million in third quarter 2008 from $591 million in third quarter 2007, including other-than-temporary impairment charges on debt and equity securities. Net income decreased 40% to $1.12 billion in the first nine months of 2008 from $1.85 billion in the first nine months of 2007. Revenue decreased 17% to $1.78 billion in third quarter 2008 from $2.16 billion a year ago, including impairment charges of $407 million. Net interest income increased 15% to $1.05 billionaverage assets for third quarter 2008 from $918 million a year ago driven by strong loan and deposit growth. Average loans increased 33% to $116.2 billion in third quarter 2008 from $87.5 billion a year ago, with double-digit increases across nearly all wholesale lending businesses. Average total deposits were $84 billion, up 10% from a year ago, all in interest-bearing balances. The increase in the provision for credit losses to $294 million in third quarter 2008 from $19 million a year ago included $115 million from higher net charge-offs and an additional $178 million in credit reserve build. Noninterest income decreased 41% to $728 million in third quarter 2008 from a year ago, primarily due to impairment charges. Noninterest income from foreign exchange, loan fees, institutional brokerage and insurance all increased. Noninterest expense increased 13% to $1.39 billion in third quarter 2008 from $1.23 billion a year ago, mainly due to higher personnel-related costs, including expensesWholesale Banking was largely due to the fourth quarter 2007 acquisitionaddition of ABD Insurance and higher agent commissions in the crop insurance business dueWachovia businesses. Revenue increased to higher commodity prices.
Wells Fargo Financialreported a net loss of $33 million in third quarter 2008 compared with net income of $135 million in third quarter 2007, reflecting higher credit costs, including a $162 million credit reserve build as a result of continued softening in the real estate, auto and
18
credit card markets. For the first nine months of 2008, net income was $26 million, compared with $403 million for the same period a year ago. Revenue was $1.39record $4.91 billion in thirdfirst quarter 2008, flat2009 from $2.18 billion a year ago. Net interest income increased 6% to $1.12$2.37 billion in thirdfirst quarter 20082009 from $1.06 billion a year ago due to 3% growth in average loans to $67.5 billion in third quarter 2008 from $65.8$1.03 billion a year ago. The increaseAverage loans increased to $271.9 billion in the provision for credit losses to $770 million in third first
19
quarter 20082009 from $427 million$100.8 billion a year ago included $181 millionago. Average core deposits increased to $138.5 billion in first quarter 2009 from higher net charge-offs and an additional $162 million$68.2 billion a year ago. Noninterest income increased to $2.54 billion in credit reserve build. Noninterest expense decreased $51 million, or 7%, to $677 million in thirdfirst quarter 20082009 from $728 million$1.15 billion a year ago, primarily due to lower lease expensesWachovia, as well as strong growth in service charges on deposits and loan fees. Noninterest expense increased to $2.53 billion in first quarter 2009 from $1.34 billion a year ago. The provision for credit losses increased to $545 million in first quarter 2009, from $161 million a year ago.
Wealth, Brokerage and Retirement Servicesprovides a full range of financial advisory services to clients using a comprehensive planning approach to meet each client’s needs. The Wealth Management Group provides affluent and high net worth clients with a complete range of wealth management solutions including financial planning, private banking, credit, investment management and trust. Family Office Services meets the run offunique needs of the auto lease portfolio.ultra high net worth customers. Retail brokerage’s financial advisors serve customers’ advisory, brokerage and financial needs as part of one of the largest full-service brokerage firms in the U.S. The Retirement Group provides retirement services for individual investors and is a national leader in 401(k) and pension record keeping. The addition of Wachovia in first quarter 2009 added the following businesses to this operating segment: Wachovia Securities (retail brokerage), Wachovia Wealth Management, including its family office business and Wachovia’s retirement services and reinsurance group.
Wealth, Brokerage and Retirement Services net income was $259 million in first quarter 2009 up from $93 million a year ago. The growth in net income and average assets for the segment is due to the addition of Wachovia businesses. Revenue increased to $2.64 billion in first quarter 2009 from $637 million a year ago. Net interest income increased to $737 million in first quarter 2009 from $154 million a year ago. Average loans increased to $46.7 billion in first quarter 2009 from $13.7 billion a year ago. The provision for credit losses was $25 million in first quarter 2009. Noninterest expense increased to $2.22 billion in first quarter 2009 from $485 million a year ago. First quarter 2009 noninterest expense includes $166 million of intangible amortization expense related to the Wachovia acquisition.
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BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Our securitiesSecurities available for sale consistsconsist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily includesof very liquid, high-quality federal agency debt as well asand privately issued mortgage-backed securities. At September 30, 2008,March 31, 2009, we held $84.6$173.3 billion of debt securities available for sale, with net unrealized losses of $4.1 billion, compared with $70.2$145.4 billion at December 31, 2007,2008, including $63.7 billion acquired from Wachovia, with net unrealized gainslosses of $775 million.$9.8 billion. We also held $2.3$5.2 billion of marketable equity securities available for sale at September 30, 2008, and $2.8 billion at DecemberMarch 31, 2007,2009, with net unrealized losses of $739$646 million and $95 million forcompared with $6.1 billion at December 31, 2008, including $3.7 billion acquired from Wachovia, with net unrealized losses of $160 million. Following application of purchase accounting to the same periods, respectively. Wachovia portfolio, the net unrealized losses in cumulative other comprehensive income at December 31, 2008, related entirely to the legacy Wells Fargo portfolio.
The increasedecrease in net unrealized losses on debt securities available for the total securities available-for-sale portfoliosale to $4.9$4.1 billion at September 30, 2008,March 31, 2009, from net unrealized gains of $680 million$9.8 billion at December 31, 2007,2008, was largelypredominantly due to wider spreads on mortgage-backedthe early adoption of FSP FAS 157-4, which clarified the use of trading prices in determining fair value for securities in illiquid markets, thus moderating the need to use distressed prices in valuing these securities in illiquid markets as we had done in prior periods. The remainder of the change was due to declining interest rates and an increase in market yields in the first nine months of 2008.narrower credit spreads.
We conductanalyze securities for other-than-temporary impairment analysis(OTTI) on a quarterly basis.basis, or more often if a potential loss-triggering event occurs. We recognize OTTI when it is probable that we will be unable to collect all amounts due according to the contractual terms of the security, and the fair value of the investment security is less than its amortized cost. The initial indication of other-than-temporary impairmentOTTI for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions ofwithin its industry, and our ability and intentwhether it is more likely than not that we will be required to holdsell the investment forsecurity before a period of time sufficient to allow for any anticipated recovery. recovery in value.
For marketable equity securities, in addition to the above factors, we also consider the issuer’s financial condition, capital strength and near-term prospects. For debt securities and for certain perpetual preferred securities, thatwhich are treated as debt securities for the purpose of other-than-temporaryOTTI analysis, we also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, and any change in agencies’agency ratings at evaluation date from acquisition date and any likely imminent action.
Based on our evaluation at September 30, 2008, For asset-backed securities, we recorded other-than-temporary impairmentconsider the credit performance of $893 million in third quarter 2008,the underlying collateral, including $646 million relateddelinquency rates, cumulative losses to investments in Fannie Mae, Freddie Macdate, and Lehman Brothers. See Note 4 (Securities Available for Sale)the remaining credit enhancement compared to Financial Statements in this Report for additional information.expected credit losses of the security.
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For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we recognize OTTI in accordance with FSP FAS 115-2 and FAS 124-2, which we early adopted on January 1, 2009. Under this FSP, we separate the amount of the OTTI into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other comprehensive income.
Of the first quarter 2009 OTTI write-downs of $516 million, $269 million related to debt securities and $247 million to equity securities. Under FSP FAS 115-2 and FAS 124-2, which we adopted this quarter, total OTTI on debt securities amounted to $603 million, which includes $263 million of credit-related OTTI and $6 million related to securities we intend to sell, both of which were recorded as part of gross realized losses, and $334 million recorded directly to other comprehensive income for non-credit related impairment on securities.
At March 31, 2009, we had approximately $6 billion of securities, primarily municipal bonds, that are guaranteed against loss by bond insurers. These securities are almost exclusively investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer’s guarantee. These securities will continue to be monitored as part of our ongoing impairment analysis of our securities available for sale, but are expected to perform, even if the rating agencies reduce the credit ratings of the bond insurers.
The weighted-average expected maturity of debt securities available for sale was 6.04.9 years at September 30, 2008.March 31, 2009. Since 77% of this portfolio is mortgage-backed securities, the expected remaining maturity may differ from contractual maturity because borrowers may have the right to prepay obligations before the underlying mortgages mature. The estimated effect of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the mortgage-backed securities available for sale is shown in the following table.below.
MORTGAGE-BACKED SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Fair | | Net unrealized | | Remaining | | | Fair | | Net unrealized | | Remaining | |
| (in billions) | | value | | gain (loss) | | maturity | | | value | | gain (loss) | | maturity | |
| | | $ | 64.9 | | $ | (2.8 | ) | | 4.4 yrs. | |
At September 30, 2008, assuming a 200 basis point: | | |
| | | $ | 132.9 | | $ | (2.4 | ) | | 3.1 yrs. | |
At March 31, 2009, assuming a 200 basis point: | | |
| Increase in interest rates | | 59.2 | | | (8.5 | ) | | 6.1 yrs. | | 121.5 | | | (13.8 | ) | | 6.7 yrs. | |
| Decrease in interest rates | | 69.2 | | 1.5 | | 2.2 yrs. | | 137.9 | | 2.6 | | 2.2 yrs. | |
|
See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.
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LOAN PORTFOLIO
A discussion of average loan balances is included in “Earnings Performance – Net Interest Income” on page 14 and a comparative schedule of average loan balances is included in the table on page 12; quarter-end15.
The major categories of loans outstanding showing those subject to SOP 03-3 are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | March 31, 2009 | | | December 31, 2008 | |
| | | | | | | All | | | | | | | | | | | All | | | | |
| | | SOP 03-3 | | | other | | | | | | | SOP 03-3 | | | other | | | | |
| (in millions) | | loans | | | loans | | | Total | | | loans | | | loans | | | Total | |
| |
Commercial and commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 3,088 | | | $ | 188,623 | | | $ | 191,711 | | | $ | 4,580 | | | $ | 197,889 | | | $ | 202,469 | |
| Other real estate mortgage | | | 6,597 | | | | 98,337 | | | | 104,934 | | | | 7,762 | | | | 95,346 | | | | 103,108 | |
| Real estate construction | | | 4,507 | | | | 29,405 | | | | 33,912 | | | | 4,503 | | | | 30,173 | | | | 34,676 | |
| Lease financing | | | -- | | | | 14,792 | | | | 14,792 | | | | -- | | | | 15,829 | | | | 15,829 | |
| | | | | | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | | 14,192 | | | | 331,157 | | | | 345,349 | | | | 16,845 | | | | 339,237 | | | | 356,082 | |
| Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate 1-4 family first mortgage | | | 41,520 | | | | 201,427 | | | | 242,947 | | | | 39,214 | | | | 208,680 | | | | 247,894 | |
| Real estate 1-4 family junior lien mortgage | | | 615 | | | | 109,133 | | | | 109,748 | | | | 728 | | | | 109,436 | | | | 110,164 | |
| Credit card | | | -- | | | | 22,815 | | | | 22,815 | | | | -- | | | | 23,555 | | | | 23,555 | |
| Other revolving credit and installment | | | 32 | | | | 91,220 | | | | 91,252 | | | | 151 | | | | 93,102 | | | | 93,253 | |
| | | | | | | | | | | | | | | | | | | |
| Total consumer | | | 42,167 | | | | 424,595 | | | | 466,762 | | | | 40,093 | | | | 434,773 | | | | 474,866 | |
| Foreign | | | 1,849 | | | | 29,619 | | | | 31,468 | | | | 1,859 | | | | 32,023 | | | | 33,882 | |
| | | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 58,208 | | | $ | 785,371 | | | $ | 843,579 | | | $ | 58,797 | | | $ | 806,033 | | | $ | 864,830 | |
| | | | | | | | | | | | | | | | | | | |
| |
In first quarter 2009, we refined certain of our initial purchase accounting, which resulted in changes to the portfolio of loans subject to SOP 03-3 and updates to the December 31, 2008, fair value estimates. Based on updates to the initial purchase accounting, $95.8 billion of loans were determined to be within the scope of SOP 03-3, a net increase of $1.9 billion from initial year-end estimates, and the fair value of these loans was $59.7 billion at December 31, 2008. These adjustments are reflected in the March 31, 2009, loan balances, arealong with first quarter activity, in the table above.
For further detail on SOP 03-3 loans see Note 1 (Summary of Significant Accounting Policies – Loans) to Financial Statements in the 2008 Form 10-K and Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
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Total loans at September 30, 2008, were $411.0 billion, up $48.1 billion (13%) from $362.9 billion at September 30, 2007. Commercial and commercial real estate loans were $176.0 billion at September 30, 2008, up $36.8 billion (26%) from $139.2 billion a year ago. Consumer loans were $228.1 billion at September 30, 2008, up $12.4 billion (6%) from $215.8 billion a year ago. Mortgages held for sale were $18.7 billion at September 30, 2008, down $11.0 billion from $29.7 billion a year ago.
DEPOSITS
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , |
| (in millions) | | 2008 | | 2007 | | 2007 | | | 2009 | | 2008 | | 2008 | |
| | | |
| | $ | 89,446 | | $ | 84,348 | | $ | 82,365 | | | $ | 166,497 | | $ | 150,837 | | $ | 90,793 | |
| Interest-bearing checking | | 5,398 | | 5,277 | | 4,376 | | | 89,010 | | 72,828 | | 5,372 | |
| Market rate and other savings | | 172,542 | | 153,924 | | 153,116 | | | 315,209 | | 306,255 | | 163,230 | |
| Savings certificates | | 38,909 | | 42,708 | | 41,863 | | | 160,220 | | 182,043 | | 39,554 | |
| Foreign deposits (1) | | 27,781 | | 25,474 | | 22,133 | | | 25,247 | | 33,469 | | 28,411 | |
| | | | | | | | | | | | | | | |
| Core deposits | | 334,076 | | 311,731 | | 303,853 | | | 756,183 | | 745,432 | | 327,360 | |
| Other time deposits | | 9,052 | | 3,654 | | 2,448 | | | 23,329 | | 28,498 | | 6,033 | |
| Other foreign deposits | | 10,446 | | 29,075 | | 28,655 | | | 17,757 | | 7,472 | | 24,751 | |
| | | | | | | | | | | | | | | |
| Total deposits | | $ | 353,574 | | $ | 344,460 | | $ | 334,956 | | | $ | 797,269 | | $ | 781,402 | | $ | 358,144 | |
| | | | | | | | | | | | | | | |
|
| | |
| (1) | | Reflects Eurodollar sweep balances included in core deposits. |
Core deposits of $334.1Deposits at March 31, 2009, totaled $797.3 billion, compared with $781.4 billion at September 30, 2008, increased $30.2 billion (10%) from $303.9 billion a year ago. AverageDecember 31, 2008. A comparative detail of average deposit balances is provided on page 15. Total core deposits were $756.2 billion at March 31, 2009, up $10.8 billion from December 31, 2008. High-rate certificates of deposit (CDs) of $33.6 billion at legacy Wachovia matured in the quarter, including $13.2 billion from CD-only households. Higher-rate CDs are maturing and we are successfully retaining many of these deposits at today’s lower rates. The combination of noninterest-bearing and interest-bearing transaction and savings deposits increased $13.931% (annualized) to $570.7 billion (5%)at March 31, 2009, from $529.9 billion at December 31, 2008. Deposit performance continued to $320.1 billion in third quarter 2008benefit from third quarter 2007, predominantly duedeeper market penetration, flight to growth in market ratequality and other savings.mortgage escrow activity.
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OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different thanfrom the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital,capital. These are described below as off-balance sheet transactions with unconsolidated entities, and guarantees and certain contingent arrangements.
OFF-BALANCE SHEET TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships that are established for a limited purpose. The majority of SPEs are formed in connection with securitization transactions. In a securitization transaction, assets from our balance sheet are transferred to an SPE, which then issues to investors various forms of interests in those assets and may also enter into derivative transactions. In a securitization transaction, we typically receive cash and/or other interests in an SPE as proceeds for the assets we transfer. Also, in certain transactions, we may retain the right to service the transferred receivables and to repurchase those receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing such receivables.
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In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:
| • | | underwriting securities issued by SPEs and subsequently making markets in those securities; |
| • | | providing liquidity to support short-term obligations of SPEs issued to third party investors; |
| • | | providing credit enhancement to securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps; |
| • | | entering into other derivative contracts with SPEs; |
| • | | holding senior or subordinated interests in SPEs; |
| • | | acting as servicer or investment manager for SPEs; and |
| • | | providing administrative or trustee services to SPEs. |
The SPEs we use are primarily either qualifying SPEs (QSPEs), which are not consolidated if the criteria described below are met, or variable interest entities (VIEs). To qualify as a QSPE, an entity must be passive and must adhere to significant limitations on the types of assets and derivative instruments it may own and the extent of activities and decision making in which it may engage. For example, a QSPE’s activities are generally limited to purchasing assets, passing along the cash flows of those assets to its investors, servicing its assets and, in certain transactions, issuing liabilities. Among other restrictions on a QSPE’s activities, a QSPE may not actively manage its assets through discretionary sales or modifications.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is the entity that, through its variable interests, absorbs the majority of a VIE’s variability. A variable interest is a contractual, ownership or other interest that changes with fluctuations in the fair value of the VIE’s net assets.
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The following table presents our significant continuing involvement with QSPEs and unconsolidated VIEs.
QUALIFYING SPECIAL PURPOSE ENTITIES AND UNCONSOLIDATED VARIABLE INTEREST ENTITIES
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | March 31, 2009 | | | December 31, 2008 | |
| | | Total | | | | | | Maximum | | | Total | | | | | | Maximum | |
| | | entity | | Carrying | | exposure | | | entity | | Carrying | | exposure | |
| (in millions) | | assets | | value | | to loss | | | assets | | value | | to loss | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage loan securitizations | | $ | 1,229,211 | | | $ | 32,143 | | | $ | 34,525 | | | $ | 1,144,775 | | | $ | 29,939 | | | $ | 31,438 | |
| Commercial mortgage securitizations | | | 391,114 | | | | 2,979 | | | | 6,013 | | | | 355,267 | | | | 3,060 | | | | 6,376 | |
| Student loan securitizations | | | 2,776 | | | | 220 | | | | 220 | | | | 2,765 | | | | 133 | | | | 133 | |
| Auto loan securitizations | | | 3,580 | | | | 115 | | | | 115 | | | | 4,133 | | | | 115 | | | | 115 | |
| Other | | | 9,955 | | | | 11 | | | | 181 | | | | 11,877 | | | | 71 | | | | 1,576 | |
| | | | | | | | | | | | | | | | | | | |
| Total QSPEs | | $ | 1,636,636 | | | $ | 35,468 | | | $ | 41,054 | | | $ | 1,518,817 | | | $ | 33,318 | | | $ | 39,638 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| CDOs | | $ | 53,439 | | | $ | 15,603 | | | $ | 20,101 | | | $ | 48,802 | | | $ | 15,133 | | | $ | 20,443 | |
| Wachovia administered ABCP (1) conduit | | | 9,894 | | | | -- | | | | 10,092 | | | | 10,767 | | | | -- | | | | 15,824 | |
| Asset-based lending structures | | | 15,158 | | | | 8,939 | | | | 10,256 | | | | 11,614 | | | | 9,096 | | | | 9,482 | |
| Tax credit structures | | | 27,197 | | | | 4,162 | | | | 5,040 | | | | 22,882 | | | | 3,850 | | | | 4,926 | |
| CLOs | | | 24,691 | | | | 3,666 | | | | 4,195 | | | | 23,339 | | | | 3,326 | | | | 3,881 | |
| Investment funds | | | 96,497 | | | | 1,918 | | | | 2,541 | | | | 105,808 | | | | 3,543 | | | | 3,690 | |
| Credit-linked note structures | | | 1,578 | | | | 1,462 | | | | 2,241 | | | | 12,993 | | | | 1,522 | | | | 2,303 | |
| Money market funds | | | 33,552 | | | | (9 | ) | | | 51 | | | | 31,843 | | | | 60 | | | | 101 | |
| Other | | | 3,989 | | | | 4,242 | | | | 5,031 | | | | 1,832 | | | | 3,806 | | | | 4,699 | |
| | | | | | | | | | | | | | | | | | | |
| Total unconsolidated VIEs | | $ | 265,995 | | | $ | 39,983 | | | $ | 59,548 | | | $ | 269,880 | | | $ | 40,336 | | | $ | 65,349 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Asset-backed commercial paper. |
The table above does not include SPEs and unconsolidated VIEs where our only involvement is in the form of investments in trading securities, investments in securities available for sale or loans underwritten by third parties, or administrative or trustee services. Also not included are investments accounted for in accordance with U.S. GAAP.the AICPA Investment Company Audit Guide, investments accounted for under the cost method and investments accounted for under the equity method.
Almost allIn the table above, the column titled “Total entity assets” represents the total assets of unconsolidated SPEs. “Carrying value” is the amount in our consolidated balance sheet related to our involvement with the unconsolidated SPEs. “Maximum exposure to loss” from our involvement with off-balance sheet entities is a required disclosure under generally accepted accounting principles and represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite its extremely remote possibility, where the value of our off-balance sheet arrangements resultinterests and any associated collateral declines to zero, without any consideration of recovery or offset from securitizations. Based on market conditions, from time to time we may securitize home mortgage loans and other financial assets, including commercial mortgages. We normally structure loan securitizations as sales, in accordance with FAS 140,Accounting for Transfers and Servicingany economic hedges. Accordingly, this required disclosure is not an indication of Financial Assets and Extinguishment of Liabilities – a replacement of FASB Statement No. 125. This involves the transfer of financial assets to certain qualifying special-purpose entities (QSPEs) that we are not required to consolidate. We also enter into certain contractual obligations. expected loss.
For additionalmore information on off-balance sheet arrangementssecuritizations, including sales proceeds and other contractual obligationscash flows from securitizations, see “Financial Review – Off-Balance Sheet ArrangementsNote 7 (Securitizations and Aggregate Contractual Obligations” in our 2007 Form 10-K and Note 11 (Guarantees and Legal Actions)Variable Interest Entities) to Financial Statements in this Report.
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We also have significant involvement with SPEs where the entity holding a majority of the voting interests consolidates the SPE. Wells Fargo Home Mortgage (Home Mortgage), in the ordinary course of business, originates a portion of its mortgage loans through unconsolidated joint ventures in which we own an interest of 50% or less. Loans made by these joint ventures are funded by Wells Fargo Bank, N.A. through an established line of credit and are subject to specified underwriting criteria. The total assets of these mortgage origination joint ventures were approximately $111 million and $46 million at March 31, 2009, and December 31, 2008, respectively. We provide liquidity to these joint ventures in the form of outstanding lines of credit and, at March 31, 2009, and December 31, 2008, these liquidity commitments totaled $128 million and $135 million, respectively.
We also hold interests in other unconsolidated joint ventures formed with unrelated third parties to provide efficiencies from economies of scale. A third party manages our real estate lending services joint ventures and provides customers with title, escrow, appraisal and other real estate-related services. Our fraud prevention services partnership facilitates the exchange of information between financial services organizations to detect and prevent fraud. Total assets of our real estate lending joint ventures and fraud prevention services partnership were approximately $150 million and $132 million at March 31, 2009, and December 31, 2008, respectively.
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RISK MANAGEMENT
CREDIT RISK MANAGEMENT PROCESS
Our credit risk management process provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process. In addition, regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes. We continually evaluate and modify our credit policies to address unacceptable levels of risk as they are identified. Beginning
Real Estate 1-4 Family Mortgage Loans
As part of the Wachovia acquisition, we acquired residential first and home equity loans that are very similar to the Wells Fargo core originated portfolio. We also acquired the Pick-a-Pay option ARM first mortgage portfolio. The nature of this product creates a potential opportunity for negative amortization. As part of our purchase accounting activities, the option ARM loans with the highest probability of default were identified as SOP 03-3. See “Pick-a-Pay Portfolio” in 2007this Report for additional detail.
The deterioration in specific segments of the Home Equity portfolios required a targeted approach to managing these assets. A liquidating portfolio, consisting of home equity loans generated through third party wholesale channels not behind a Wells Fargo first mortgage, and continuinghome equity loans acquired through correspondents, was identified. While the $9.9 billion of loans in this liquidating portfolio represented about 1% of total loans outstanding at March 31, 2009, these loans represented some of the highest risk in the $128.9 billion Home Equity portfolios, with a loss rate of 9.27% compared with 2.09% for the core portfolio. The loans in the liquidating portfolio are largely concentrated in geographic markets that have experienced the most abrupt and steepest declines in housing prices. The core portfolio was $119.1 billion at March 31, 2009, of which 97% was originated through the retail channel, and approximately 16% of the outstanding balance was in a first lien position. The table on the following page includes the credit attributes of these two portfolios.
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HOME EQUITY PORTFOLIO (1)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | % of loans | | | | | | | | |
| | | | | | | | | | | | | | | two payments | | | | | | | Annualized | |
| | | Outstanding balances | | | or more past due | | | loss rate (1) | |
| | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | Dec. 31 | , |
| (in millions) | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| California | | $ | 31,784 | | | $ | 31,544 | | | | 3.56 | % | | | 2.95 | % | | | 3.97 | % | | | 3.94 | % |
| Florida | | | 12,067 | | | | 11,781 | | | | 3.73 | | | | 3.36 | | | | 2.03 | | | | 4.39 | |
| New Jersey | | | 8,086 | | | | 7,888 | | | | 1.58 | | | | 1.41 | | | | 0.45 | | | | 0.78 | |
| Virginia | | | 5,653 | | | | 5,688 | | | | 1.45 | | | | 1.50 | | | | 0.76 | | | | 1.56 | |
| Pennsylvania | | | 5,129 | | | | 5,043 | | | | 1.04 | | | | 1.10 | | | | 0.29 | | | | 0.52 | |
| Other | | | 56,342 | | | | 56,415 | | | | 2.06 | | | | 1.97 | | | | 1.59 | | | | 1.59 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 119,061 | | | | 118,359 | | | | 2.53 | | | | 2.27 | | | | 2.09 | | | | 2.39 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| California | | | 3,835 | | | | 4,008 | | | | 8.49 | | | | 6.69 | | | | 13.98 | | | | 12.32 | |
| Florida | | | 492 | | | | 513 | | | | 10.35 | | | | 8.41 | | | | 13.33 | | | | 13.60 | |
| Arizona | | | 233 | | | | 244 | | | | 8.37 | | | | 7.40 | | | | 15.04 | | | | 13.19 | |
| Texas | | | 179 | | | | 191 | | | | 1.40 | | | | 1.27 | | | | 2.66 | | | | 1.67 | |
| Minnesota | | | 122 | | | | 127 | | | | 3.88 | | | | 3.79 | | | | 6.92 | | | | 5.25 | |
| Other | | | 5,001 | | | | 5,226 | | | | 3.96 | | | | 3.28 | | | | 5.29 | | | | 4.73 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 9,862 | | | | 10,309 | | | | 6.10 | | | | 4.93 | | | | 9.27 | | | | 8.27 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total core and liquidating portfolios | | $ | 128,923 | | | $ | 128,668 | | | | 2.80 | | | | 2.48 | | | | 2.65 | | | | 2.87 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Consists of real estate 1-4 family junior lien mortgages and lines of credit secured by real estate from all groups, excluding SOP 03-3 loans. |
| (2) | | Loss rates for 2008 for the core portfolio in the table above reflect results for Wachovia (not included in the Wells Fargo reported results) and Wells Fargo. For fourth quarter 2008, the Wells Fargo core portfolio on a stand-alone basis, outstanding balances and related annualized loss rates were $29,399 million (3.81%) for California, $2,677 million (6.87%) for Florida, $1,925 million (1.29%) for New Jersey, $1,827 million (1.26%) for Virginia, $1,073 million (1.17%) for Pennsylvania, $38,934 million (1.77%) for all other states, and $75,835 million (2.71%) in total. |
| (3) | | Includes equity lines of credit and closed end second liens associated with the Pick-a-Pay portfolio totaling $2.1 billion at March 31, 2009, and December 31, 2008. Related credit losses are reported separately with the Pick-a-Pay portfolio. |
Pick-a-Pay Portfolio
We acquired the Pick-a-Pay loan portfolio from Wachovia. This is a liquidating portfolio as we stopped originating new Pick-a-Pay loans in 2008. At March 31, 2009, this portfolio, which excludes equity lines of credit, had an unpaid principal balance of $115.0 billion and a carrying value of $93.2 billion. The carrying value is net of $22.0 billion of purchase accounting net write-downs to reflect SOP 03-3 loans at fair value and a $215 million increase to reflect all other loans at a market rate of interest.
Pick-a-Pay loans are home mortgages on which the customer has the option each month to select from among four payment options: (1) a minimum payment as described below, (2) an interest-only payment, (3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment. Approximately 78% of the Pick-a-Pay portfolio has payment options calculated using a monthly adjustable interest rate; the rest of the portfolio is fixed rate.
The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The new minimum monthly payment amount usually cannot increase by more than 7.5% of the then-existing principal and interest payment amount. The minimum payment may not be sufficient to pay the monthly interest due and in those situations a loan on which the customer has made a minimum payment is subject to “negative amortization,” where unpaid interest is
29
added to the principal balance of the loan. The amount of interest that has been added to a loan balance is referred to as “deferred interest.” Our Pick-a-Pay customers have been fairly constant in their utilization of the minimum payment option. At March 31, 2009, and December 31, 2008, customers representing 51% of the loan balances with the payment options feature elected the minimum payment option.
Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a pre-defined principal cap, which is based on the percentage that the current loan balance represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to or below 85% have a cap of 125% of the original loan balance, and these loans represent substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap of 110% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest balance re-amortize (the monthly payment amount is reset or “recast”) on the earlier of the date when the loan balance reaches its principal cap, or the 10-year anniversary of the loan. There exists a small population of Pick-a-Pay loans for which recast occurs at the five-year anniversary. After a recast, the customers’ new payment terms are reset to the amount necessary to repay the balance over the remainder of the original loan term.
Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012. In first quarter 2009, the amount of loans recast based on reaching the principal cap was de minimus. In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012. A payment change recast occurred on $4 million of loans during first quarter 2009.
Included in the Pick-a-Pay portfolio were loans accounted for under SOP 03-3 with a total unpaid principal balance of $61.6 billion and a carrying value of $39.7 billion at March 31, 2009. Loans that we acquired from Wachovia with evidence of credit quality deterioration since origination and for which it was probable at the date of the Wachovia acquisition that we will be unable to collect all contractually required payments are accounted for under SOP 03-3. SOP 03-3 requires that acquired credit-impaired loans be recorded at fair value and prohibits carrying over of the related allowance in the initial accounting.
The table on the following page reflects the geographic distribution of the Pick-a-Pay portfolio broken out between SOP 03-3 loans and all other loans. In stressed housing markets with declining home prices and increasing delinquencies, the LTV ratio is a key metric in predicting future loan performance, including charge-offs. Because SOP 03-3 loans are carried at fair value, the carrying value LTV ratio for an SOP 03-3 loan will be lower as compared to the LTV based on the unpaid principal. For informational purposes, we have included the ratio of the carrying value to the current collateral value for SOP 03-3 loans in the following table.
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PICK-A-PAY PORTFOLIO
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | SOP 03-3 loans | | | All other loans | |
| | | | | | | | | | | | | | | Ratio of | | | | | | | | | | |
| | | | | | | | | | | | | | | carrying | | | | | | | | | | |
| | Unpaid | | | Current | | | | | | | value to | | Unpaid | | | Current | | | | |
| | principal | | | LTV | | Carrying | | | current | | principal | | | LTV | | Carrying | |
| (in millions) | | balance | | | ratio | (1) | | value | (2) | | value | | balance | | | ratio | (1) | | value | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 42,216 | | | | 152 | % | | $ | 26,907 | | | | 98 | % | | $ | 25,875 | | | | 90 | % | | $ | 25,979 | |
| Florida | | | 6,260 | | | | 129 | | | | 3,779 | | | | 79 | | | | 5,412 | | | | 92 | | | | 5,433 | |
| New Jersey | | | 1,750 | | | | 101 | | | | 1,271 | | | | 74 | | | | 3,358 | | | | 76 | | | | 3,372 | |
| Texas | | | 475 | | | | 76 | | | | 336 | | | | 54 | | | | 2,204 | | | | 60 | | | | 2,213 | |
| Arizona | | | 1,642 | | | | 161 | | | | 987 | | | | 99 | | | | 1,239 | | | | 104 | | | | 1,244 | |
| Other states | | | 9,306 | | | | 110 | | | | 6,397 | | | | 77 | | | | 15,282 | | | | 79 | | | | 15,324 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Pick-a-Pay loans | | $ | 61,649 | | | | | | | $ | 39,677 | | | | | | | $ | 53,370 | | | | | | | $ | 53,565 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Current LTV ratio is based on collateral values and is updated quarterly by an independent vendor. LTV ratio includes unpaid principal balance on equity lines of credit (included in the Home Equity Portfolio table on page 29 in this Report) that share common collateral and are junior to the above Pick-a-Pay loans. |
| (2) | | Carrying value, which does not reflect the allowance for loan losses, includes purchase accounting adjustments, which, for SOP 03-3 loans, are a deduction of $25.9 billion nonaccretable difference and an addition of $3.9 billion accretable yield at March 31, 2009, and for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent charge-offs. |
To maximize return and allow flexibility for customers to avoid foreclosure, we have in place several loss mitigation strategies for our credit policies relatedPick-a-Pay loan portfolio. We contact customers who are experiencing difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.
We also have in place proactive steps to residentialwork with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we will offer combinations of term extensions of up to 40 years, interest rate reductions, charge no interest on a portion of the principal for some period of time and, in geographies with substantial property value declines, we will even offer permanent principal reductions. We expect to continually reassess our loss mitigation strategies and may adopt additional strategies in the future.
Wells Fargo Financial
Wells Fargo Financial originates real estate lendingsecured debt consolidation loans, and both prime and non-prime auto secured loans, unsecured loans and credit cards.
Wells Fargo Financial had $28.8 billion and $29.1 billion in real estate secured loans at March 31, 2009, and December 31, 2008, respectively. Of this portfolio, $1.8 billion for each period is considered prime based on secondary market standards. The remaining portfolio is non-prime but has been originated with standards that effectively mitigate credit risk. It was originated through our retail channel with documented income, LTV limits based on credit quality and property characteristics, and risk-based pricing. In addition, the loans were originated without teaser rates, interest-only or negative amortization features. Credit losses in the portfolio have increased in the current economic environment compared with historical levels, but performance remained similar to reflect the deteriorating economic conditionsprime portfolios in the industry with overall credit losses in first quarter 2009 of 2.39% (annualized) on the entire portfolio. Of the portfolio, $9.5 billion at
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March 31, 2009, was originated with customer FICO scores below 620, but these loans have further restrictions on LTV and decisions were madedebt-to-income ratios to exit certain underperforming indirect channels. In addition to these steps we have made adjustments tolimit the credit criteria acrossrisk.
Wells Fargo Financial also had $21.6 billion and $23.6 billion in auto secured loans and leases at March 31, 2009, and December 31, 2008, respectively, of which $5.8 billion and $6.3 billion, respectively, were originated with customer FICO scores below 620. Net charge-offs in this portfolio in first quarter 2009 were 5.11% (annualized) for FICO scores of 620 and above, and 6.88% (annualized) for FICO scores below 620. Of this portfolio, $16.3 billion represented loans and leases originated through its indirect auto business, which Wells Fargo Financial ceased originating near the breadthend of our consumer business segments2008.
Wells Fargo Financial had $7.9 billion and $8.4 billion in unsecured loans and credit card receivables at March 31, 2009, and December 31, 2008, respectively, of which $1.2 billion and $1.3 billion, respectively, was originated with customer FICO scores below 620. Net charge-offs in this portfolio in first quarter 2009 were 12.97% (annualized) for FICO scores of 620 and above, and 19.58% (annualized) for FICO scores below 620. Wells Fargo Financial has been actively tightening credit policies and managing credit lines to eliminate originations with unacceptable levels of riskreduce exposure given the challenges and uncertainty in the credit market.current economic conditions.
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Nonaccrual Loans and Other Nonperforming Assets
The following table shows the comparative data for nonaccrual loans and other nonperforming assets. We generally place loans on nonaccrual status when:
| • | | the full and timely collection of interest or principal becomes uncertain; |
| • | | they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages and auto loans) past due for interest or principal (unless both well-secured and in the process of collection); or |
| • | | part of the principal balance has been charged off. |
21
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 20072008 Form 10-K describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | Mar. 31 | , | Dec. 31 | , | Mar. 31 | , |
| (in millions) | | 2008 | | 2007 | | 2007 | | | 2009 | (1) | | 2008 | (1) | | 2008 | |
| | | | |
| | |
| Commercial and commercial real estate: | | |
| Commercial | | $ | 846 | | $ | 432 | | $ | 399 | | | $ | 1,696 | | $ | 1,253 | | $ | 588 | |
| Other real estate mortgage | | 296 | | 128 | | 133 | | | 1,324 | | 594 | | 152 | |
| Real estate construction | | 736 | | 293 | | 188 | | | 1,371 | | 989 | | 438 | |
| Lease financing | | 69 | | 45 | | 38 | | | 114 | | 92 | | 57 | |
| | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | 1,947 | | 898 | | 758 | | | 4,505 | | 2,928 | | 1,235 | |
| Consumer: | | |
Real estate 1-4 family first mortgage (1)(2) | | 1,975 | | 1,272 | | 886 | | | 4,218 | | 2,648 | | 1,398 | |
| Real estate 1-4 family junior lien mortgage | | 780 | | 280 | | 238 | | | 1,418 | | 894 | | 381 | |
| Other revolving credit and installment | | 232 | | 184 | | 160 | | | 300 | | 273 | | 196 | |
| | | | | | | | | | | | | | | |
| Total consumer | | 2,987 | | 1,736 | | 1,284 | | | 5,936 | | 3,815 | | 1,975 | |
| Foreign | | 61 | | 45 | | 46 | | | 75 | | 57 | | 49 | |
| | | | | | | | | | | | | | | |
Total nonaccrual loans (2)(3) | | 4,995 | | 2,679 | | 2,088 | | | 10,516 | | 6,800 | | 3,259 | |
| As a percentage of total loans | | | 1.22 | % | | | 0.70 | % | | | 0.58 | % | | | 1.25 | % | | | 0.79 | % | | | 0.84 | % |
| | |
GNMA loans (3)(4) | | 596 | | 535 | | 487 | | | 768 | | 667 | | 578 | |
| Other | | 644 | | 649 | | 603 | | | 1,294 | | 1,526 | | 637 | |
Real estate and other nonaccrual investments (4)(5) | | 56 | | 5 | | 5 | | | 34 | | 16 | | 21 | |
| | | | | | | | | | | | | | | |
| Total nonaccrual loans and other assets | | $ | 6,291 | | $ | 3,868 | | $ | 3,183 | | |
| Total nonaccrual loans and other nonperforming assets | | | $ | 12,612 | | $ | 9,009 | | $ | 4,495 | |
| | | | | | | | | | | | | | | |
As a percentage of total loans | | | 1.53 | % | | | 1.01 | % | | | 0.88 | % | | | 1.50 | % | | | 1.04 | % | | | 1.16 | % |
| | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | At March 31, 2009, and December 31, 2008, nonaccrual loans exclude loans acquired from Wachovia that are accounted for under SOP 03-3. |
| (2) | | Includes nonaccrual mortgages held for sale. |
(2)(3) | | Includes impaired loans of $1,550$4,126 million, $469$3,640 million and $394$859 million at September 30, 2008,March 31, 2009, December 31, 2007,2008, and September 30, 2007,March 31, 2008, respectively. See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 20072008 Form 10-K for further information on impaired loans. |
(3)(4) | | Consistent with regulatory reporting requirements, foreclosed real estate securing GNMAGovernment National Mortgage Association (GNMA) loans is classified as nonperforming. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the FHAFederal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs. |
(4)(5) | | Includes real estate investments (contingent interest loans accounted for as investments) that would be classified as nonaccrual if these assets were recorded as loans. |
Total nonperforming assets were $12.6 billion (1.50% of total loans) at March 31, 2009, and included $10.5 billion of nonaccrual loans and $2.1 billion of foreclosed assets and repossessed real estate and vehicles. Nonaccrual loans increased $2.9$3.7 billion, or 46 basis points as a percentage of total loans, from December 31, 2008, with increases in both the commercial and retail segments. The increase included $1.5 billion related to $5.0 billionWachovia, which grew from a relatively low $97 million at September 30, 2008, from $2.1 billion at September 30, 2007, reflecting economic conditions,year end as virtually all of the associated nonaccrual loans were no
33
longer considered nonaccrual after applying required purchase accounting. Over 90% of nonaccrual loans are secured. The increases in nonaccrual loans were concentrated primarily in portfolios affectedsecured by residential real estate conditions and the associated impactor with borrowers dependent on the consumer. A portion of thehousing industry.
The $2.1 billion increase in nonaccrual consumer loans from a year ago continuedDecember 31, 2008, was due primarily to relate to our active loss mitigation strategies at Home Equity, Home Mortgage and Wells Fargo Financial as we are aggressively working with customers to keep them in their homes or find alternative solutions to their financial challenges. Home builders, mortgage service providers, contractors, suppliers and others in the residential real estate-related segments continued to be stressed during this credit cycle. Additionally, as consumers cut back on discretionary spending, we are seeing somean increase of the commercial loan portfolios dependent on their spending weaken. The $2.9 billion increase$884 million from a year ago included $681Wachovia, $405 million in Wells Fargo Financial real estate, $578$383 million in Home Mortgage and $366 million from the legacy Wells Fargo Home Equity and $333 million in Home Mortgage.Group. Nonaccrual real estate 1-4 family loans included approximately $251 million$3.5 billion of loans at September 30, 2008,March 31, 2009, that have been modified. Our policy requires six consecutive months of payments on modified loans before they are returned to accrual status. Other foreclosed assets decreased $232 million to $1.3 billion at March 31, 2009, from $1.5 billion at December 31, 2008, which included $885 million from Wachovia. Until conditions improve in the residential real estate and liquidity markets, we
22
will continue to hold more nonperforming assets on our balance sheet as it is currently the most economic option available. As a result, foreclosed asset balances increased $150 million to $1,240 million at September 30, 2008, from a year ago, including an increase of $138 million from Home Mortgage. Increases in commercial nonperforming assets were also primarily a direct result of the conditions in the residential real estate markets and general consumer economy.
We expect thatnonperforming asset balances to continue to grow, reflecting an environment where retaining these assets is the amount of nonaccrualmost viable economic option, as well as our efforts to modify more real estate loans to reduce foreclosures and keep customers in their homes. We remain focused on proactively identifying problem credits, moving them to nonperforming status and recording the loss content in a timely manner. We have increased and will change duecontinue to portfolio growth, economic conditions, portfolio seasoning, routine problem loan recognitionincrease staffing in our workout and resolution through collections, sales or charge-offs. (Seecollection organizations to ensure these troubled borrowers receive the attention and help they need. See “Financial Review – Allowance for Credit Losses” in this Report for additional discussion.) The performance of any one loan can be affected by external factors, such as economic or market conditions, or factors affecting a particular borrower.
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Loans 90 Days or More Past Due and Still Accruing
Loans included in this category are 90 days or more past due as to interest or principal and still accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4 family first mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual. Loans acquired from Wachovia that are subject to SOP 03-3 are excluded from the disclosure of loans 90 days or more past due and still accruing interest even though certain of them are 90 days or more contractually past due and they are considered to be accruing because the interest income on these loans relates to the establishment of an accretable yield in purchase accounting under the SOP and not to contractual interest payments.
The total of loans 90 days or more past due and still accruing was $8,439 million, $6,393 million and $5,526$14,736 million at September 30, 2008,March 31, 2009, $11,830 million at December 31, 2007,2008, (Wachovia and September 30, 2007, respectively.Wells Fargo combined), and $6,919 million at March 31, 2008. The total included $6,295$9,509 million, $4,834$8,184 million and $4,263$5,288 million for the same periods, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools and similar loans whose repayments are insured by the FHA or guaranteed by the Department of Veterans Affairs.
The table below reflects loans 90 days or more past due and still accruing excluding the insured/guaranteed GNMA advances.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA AND SIMILAR LOANS)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | Mar. 31 | , | Dec. 31 | , | Mar. 31 | , |
| (in millions) | | 2008 | | 2007 | | 2007 | | | 2009 | | 2008 | (2) | | 2008 | |
| | | | |
Commercial and commercial real estate: | | |
| Commercial | | $ | 46 | | $ | 32 | | $ | 14 | | | $ | 417 | | $ | 218 | | $ | 29 | |
| Other real estate mortgage | | 111 | | 10 | | 22 | | | 355 | | 88 | | 24 | |
| Real estate construction | | 146 | | 24 | | 10 | | | 624 | | 232 | | 15 | |
| | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | 303 | | 66 | | 46 | | | 1,396 | | 538 | | 68 | |
| Consumer: | | |
| Real estate 1-4 family first mortgage (1) | | 429 | | 286 | | 225 | | | 1,361 | | 883 | | 314 | |
| Real estate 1-4 family junior lien mortgage | | 257 | | 201 | | 127 | | | 598 | | 457 | | 228 | |
| Credit card | | 498 | | 402 | | 303 | | | 738 | | 687 | | 449 | |
| Other revolving credit and installment | | 617 | | 552 | | 520 | | | 1,105 | | 1,047 | | 532 | |
| | | | | | | | | | | | | | | |
| Total consumer | | 1,801 | | 1,441 | | 1,175 | | | 3,802 | | 3,074 | | 1,523 | |
| Foreign | | 40 | | 52 | | 42 | | | 29 | | 34 | | 40 | |
| | | | | | | | | | | | | | | |
| Total | | $ | 2,144 | | $ | 1,559 | | $ | 1,263 | | | $ | 5,227 | | $ | 3,646 | | $ | 1,631 | |
| | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | Includes mortgage loans held for sale 90 days or more past due and still accruing. |
| (2) | | The amount of real estate 1-4 family first and junior lien mortgage loan delinquencies as originally reported at December 31, 2008, included certain SOP 03-3 loans previously classified as nonaccrual by Wachovia. The December 31, 2008, amounts have been revised to exclude those loans. |
2335
Net Charge-offs
Net charge-offs in first quarter 2009 were $3.3 billion (1.54% of average total loans outstanding, annualized), including $371 million in the Wachovia portfolio, compared with $2.8 billion (2.69%) in fourth quarter 2008 and $1.5 billion (1.60%) in first quarter 2008. Commercial and commercial real estate losses remained at relatively low levels reflecting the historically disciplined underwriting standards applied by Wells Fargo and the customer-relationship focus in this portfolio. Losses in residential real estate and credit cards rose modestly in the quarter, in line with expectations, while other credit losses, principally indirect auto, declined due to seasonality and our risk reduction actions in indirect auto over the last two years.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $391 million in first quarter 2009. These results included $310 million from legacy Wells Fargo, which increased $117 million linked quarter. Our relatively high-quality 1-4 family first mortgage portfolio continued to reflect relatively low loss rates although until housing prices fully stabilize, these credit results will continue to deteriorate. Credit card charge-offs increased $131 million linked quarter to $582 million in first quarter 2009, including $48 million relating to the $2.4 billion Wachovia portfolio. We continued to see increases in delinquency and loss levels in the consumer unsecured loan portfolios as a result of higher unemployment. Losses in the auto portfolio decreased $47 million linked quarter reflecting improvements from seasonality and portfolio balance reduction over the past several quarters.
Net charge-offs in the real estate 1-4 family junior lien portfolio of $847 million in first quarter 2009 included $801 million in the legacy Wells Fargo portfolio, which increased $99 million linked quarter as residential real estate values continued to be depressed. These results are not solely driven by declining home values. As more customers seek to modify their first mortgages, there may be an adverse effect on the credit performance of junior lien holders behind these modifications. More information about the Home Equity portfolio is available on page 29.
Commercial and commercial real estate net charge-offs of $697 million in first quarter 2009 included $667 million in the legacy Wells Fargo portfolio, down $175 million linked quarter, which included $294 million related to the customers of the Madoff investment firm. The linked-quarter trends also reflected a $100 million increase relating to our Business Direct portfolio while other commercial losses declined and remained at relatively low levels. Wholesale credit results continued to deteriorate. Commercial lending requests slowed during first quarter 2009 as borrowers reduced their receivable and inventory levels to conserve cash.
36
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. We assume that our allowance for credit losses as a percentage of charge-offsdate and nonaccrualexcludes loans will changecarried at different points in time based on credit performance, loan mix and collateral values. The detail of the changes in the allowance for credit losses, including charge-offs and recoveries by loan category, is in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.
Net charge-offs for third quarter 2008 were $2.0 billion (1.96% of average total loans outstanding, annualized), compared with $1.5 billion (1.55%) for second quarter 2008 and $892 million (1.01%) for third quarter 2007. A significant part of the sequential increase reflected the change in the Home Equity charge-off policy in second quarter 2008, which deferred an estimated $265 million of charge-offs from second quarter 2008. Total provision expense in third quarter 2008 was $2.5 billion, including a $500 million credit reserve build, primarily related to higher projected losses in several consumer credit businesses and commercial real estate, as well as growth in the wholesale portfolios. The $1.1 billion increase in net credit losses from a year ago included $488 million in the real estate 1-4 family junior lien category. Net credit losses in the commercial category increased $213 million (a major portion from Business Direct) from a year ago.
Because of our responsible lending and risk management practices, we have largely avoided many of the products others in the mortgage industry have offered. We have not offered certain mortgage products such as negative amortizing mortgages or option ARMs. We continually evaluate and modify our credit policies to address unacceptable levels of risk as they are identified. In the past year, for example, we have tightened underwriting standards as we believed appropriate. Home Mortgage closed its nonprime wholesale channel early in third quarter 2007, after closing its nonprime correspondent channel in second quarter 2007. In addition, rates were increased for non-conforming mortgage loans during third quarter 2007 reflecting the reduced liquidity in the capital markets. As a result of these underwriting and policy changes, as well as overall market changes, Home Mortgage has shifted its loan origination production mix to significantly more government and conforming loans than a year ago, when production included a higher level of non-conforming and nonprime loans.
Although credit quality in Wells Fargo Financial’s real estate-secured lending business has deteriorated, we have not experienced the level of credit degradation that many nonprime lenders have because of our disciplined underwriting practices. Wells Fargo Financial has continued its long-standing practice not to use brokers or correspondents in its U.S. debt consolidation business. We endeavor to ensure that there is a tangible benefit to the borrower before we make a loan.
The deterioration in segments of the Home Equity portfolio required a targeted approach to managing these assets. We segregated into a liquidating portfolio all Home Equity loans generated through the wholesale channel not behind a Wells Fargo first mortgage, and all home equity loans acquired through correspondents. While the $10.7 billion of loans in this liquidating portfolio represented about 3% of total loans outstanding at September 30, 2008, these loans experienced a significant portion of the credit losses in our $83.9 billion Home Equity portfolio,
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with an annualized loss rate of 7.59% for third quarter 2008, compared with 2.43% for the remaining core portfolio. In this challenging real estate market it is necessary to have more time to work with our customers to identify ways to help resolve their financial difficulties and keep them in their homes. In order to provide this additional time to assist our customers, beginning April 1, 2008, we changed our Home Equity charge-off policy, consistent with Federal Financial Institutions Examination Council (FFIEC) guidelines. The core portfolio consisted of $73.3 billion of loans in the Home Equity portfolio at September 30, 2008. The following table includes the credit attributes of these two portfolios.
HOME EQUITY PORTFOLIO (1)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | % of loans | | | | |
| | | | | | | | | | | two payments | | | Annualized loss rate | |
| | | Outstanding balances | | | or more past due | | | Quarter ended | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | Dec. 31 | , |
| (in millions) | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | (2) |
| |
| | | | | | | | | | | | | | | | | | | | | | | | |
| California | | $ | 4,146 | | | $ | 4,387 | | | | 5.18 | % | | | 2.94 | % | | | 11.88 | % | | | 7.34 | % |
| Florida | | | 534 | | | | 582 | | | | 6.74 | | | | 4.98 | | | | 14.57 | | | | 7.08 | |
| Arizona | | | 255 | | | | 274 | | | | 5.02 | | | | 2.67 | | | | 10.45 | | | | 5.84 | |
| Texas | | | 199 | | | | 221 | | | | 0.96 | | | | 0.83 | | | | 1.64 | | | | 0.78 | |
| Minnesota | | | 130 | | | | 141 | | | | 3.29 | | | | 3.18 | | | | 6.25 | | | | 4.09 | |
| Other | | | 5,390 | | | | 6,296 | | | | 2.68 | | | | 2.00 | | | | 3.72 | | | | 2.94 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 10,654 | | | | 11,901 | | | | 3.89 | | | | 2.50 | | | | 7.59 | | | | 4.80 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| California | | | 27,640 | | | | 25,991 | | | | 2.50 | | | | 1.63 | | | | 3.61 | | | | 1.27 | |
| Florida | | | 2,536 | | | | 2,614 | | | | 5.20 | | | | 2.92 | | | | 6.28 | | | | 2.57 | |
| Arizona | | | 3,814 | | | | 3,821 | | | | 2.52 | | | | 1.54 | | | | 3.21 | | | | 0.90 | |
| Texas | | | 2,735 | | | | 2,842 | | | | 1.19 | | | | 1.03 | | | | 0.41 | | | | 0.19 | |
| Minnesota | | | 4,465 | | | | 4,668 | | | | 1.21 | | | | 1.08 | | | | 1.24 | | | | 0.88 | |
| Other | | | 32,105 | | | | 32,393 | | | | 1.55 | | | | 1.43 | | | | 1.35 | | | | 0.44 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 73,295 | | | | 72,329 | | | | 2.05 | | | | 1.52 | | | | 2.43 | | | | 0.86 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 83,949 | | | $ | 84,230 | | | | 2.29 | | | | 1.66 | | | | 3.09 | | | | 1.42 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| | |
(1) | | Reflects the impact of the April 1, 2008, change in the Home Equity charge-off policy. |
(2) | | Annualized loss rate for December 31, 2007, data is based on loss rate for month of December 2007. |
Other consumer portfolios performed as expected during the quarter. Net charge-offs in the real estate 1-4 family first mortgage portfolio increased $123 million in third quarter 2008 from third quarter 2007, including an increase of $53 million in Wells Fargo Financial’s residential real estate portfolio. The increase in mortgage loss rates was consistent with the continued decline in home prices. Credit card net charge-offs increased $185 million from a year ago due to the effect of the current economic environment on consumers. Loss levels continued to increase in this credit cycle as the impacts from lower disposable income and unemployment weigh on the consumer. Net charge-offs in the auto portfolio in third quarter 2008 were up $58 million from a year ago and up $74 million linked quarter. While we remain optimistic about the positive impacts of process improvements and underwriting changes we made in the auto business in prior quarters, as well as our robust loss mitigation efforts, the economic environment continued to stress the consumer and influence loan performance.
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Because of our Wholesale Banking business model, focused primarily on long-term relationships with business customers, we have not participated significantly in certain higher-risk activities. We have not sponsored any SIVs. On the investment side of this business, we operate within disciplined credit standards and regularly monitor and manage our securities portfolios. We have not participated in the underwriting of any of the large leveraged buyouts that were “covenant lite,” and we have minimal direct exposure to hedge funds. Similarly, we have not made a market in subprime securities.
Commercial and commercial real estate net charge-offs increased $213 million to $338 million in third quarter 2008 from $125 million in third quarter 2007. Commercial and commercial real estate charge-offs include Business Direct (primarily unsecured lines of credit to small businesses), which increased $98 million in third quarter from a year ago and decreased $7 million linked quarter.
We believe the allowance for credit losses of $8.03 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at September 30, 2008.fair value. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. It requires difficult, subjective and complex judgments, as a result of the need to make estimates about the effect of matters that are uncertain. (SeeSee “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” in our 20072008 Form 10-K.) Therefore, we cannot provide assurance that, in any particular period, we will not have sizeable10-K for additional information.
We apply a consistent methodology to determine the allowance for credit losses, using both forecasted and historical loss trends, adjusted for underlying economic and market conditions. For individually graded (typically commercial) portfolios, we generally use loan-level credit quality ratings, which require knowledge about the borrower, industry and collateral value, combined with historically-based grade specific loss factors. For statistically managed portfolios (typically consumer), we generally leverage models which use credit-related characteristics such as delinquency rates and trends, vintages, and portfolio concentrations to estimate loss content. Additionally, individual commercial impaired loans greater than $5 million and troubled debt restructurings (TDRs) are reserved for individually. The level of the allowance for credit losses is affected by credit performance, changes in relationportfolio composition, and management’s assessment of the economic environment and related impact on underlying credit risk. While the allowance is built using product/business segment estimates, it is available to absorb losses for the entire loan portfolio.
At March 31, 2009, the allowance for loan losses totaled $22.3 billion (2.64% of total loans), compared with $21.0 billion (2.43%) at December 31, 2008, and $5.8 billion (Wells Fargo only) (1.50%) at March 31, 2008. The allowance for credit losses was $22.8 billion (2.71%) at March 31, 2009, $21.7 billion (2.51%) at December 31, 2008, and $6.0 billion (1.56%)(Wells Fargo only) at March 31, 2008. The allowance for credit losses at March 31, 2009, did not include any amounts related to credit-impaired loans acquired from Wachovia accounted for under SOP 03-3. The reserve for unfunded credit commitments was $565 million at March 31, 2009, $698 million at December 31, 2008, and $210 million at March 31, 2008.
Total provision expense in first quarter 2009 was $4.6 billion and included a credit reserve build of $1.3 billion. The $1.3 billion reserve build was primarily driven by two factors: (1) deterioration in economic conditions that increased the projected losses in our statistically managed portfolios, and (2) increases in specific reserves under FAS 114 for both commercial loans and TDRs. The increase in reserves for TDRs is associated with loan modification programs designed to keep qualifying borrowers in their homes. We anticipate further increases in TDR volumes as we continue to utilize government sponsored programs and other methods to minimize foreclosures and associated credit losses.
The application of SOP 03-3 to loans acquired from Wachovia affects net charge-offs and nonaccrual loans as described in “Loans” in this Report and, therefore, the allowance ratios associated with these measures should not be relied upon as a tool for determining adequacy of the allowance and should not be used to compare our allowance to peer banks or to compare our ratios for periods that include the application of SOP 03-3 to those that do not.
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The ratio of the allowance for credit losses to total nonaccrual loans was 217%, 319% and 185% at March 31, 2009, December 31, 2008, and March 31, 2008, respectively. The decrease in this ratio from December 31, 2008, was due to the amount reserved.55% increase in nonaccrual loans. The increase in this ratio from a year ago reflects the addition of the Wachovia allowance for loan losses and the reduction of nonaccrual loans in the Wachovia portfolio resulting from the application of SOP 03-3.
The ratio of the allowance for credit losses to annualized net charge-offs was 173%, 191% and 97% for March 31, 2009, December 31, 2008, and March 31, 2008, respectively. The increase in this ratio from a year ago is largely a function of increased loss expectations. The decrease from December 31, 2008, is directly related to the addition of Wachovia charge-offs in first quarter 2009. Loan losses for the quarter excluded those losses from SOP 03-3 loans as these loans have already been reduced to their fair value, the result being significantly lower losses on the balance of the portfolio.
We believe the allowance for credit losses of $22.8 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2009. Due to the sensitivity of the allowance for credit losses to changes in the economic environment, it is possible that unanticipated economic deterioration would create incremental credit losses not anticipated as of the balance sheet date. We may need to significantly adjust the allowance for credit losses, considering current factors at the time, including economic or market conditions and ongoing internal and external examination processes. Our process for determining the adequacy of the allowance for credit losses is discussed in “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 20072008 Form 10-K.
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ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Asset/liability management involves the evaluation, monitoring and management of interest rate risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee (Corporate ALCO) – which oversees these risks and reports periodically to the Finance Committee of the Board of Directors – consists of senior financial and business executives. Each of our principal business groups has individual asset/liability management committees and processes linked to the Corporate ALCO process.
Interest Rate Risk
Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We are subject to interest rate risk because:
| • | | assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally falling, earnings will initially decline); |
| • | | assets and liabilities may reprice at the same time but by different amounts (for example, when the general level of interest rates is falling, we may reduce rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates); |
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| • | | short-term and long-term market interest rates may change by different amounts (for example, the shape of the yield curve may affect new loan yields and funding costs differently); or |
| • | | the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in the securities available-for-sale portfolio may prepay significantly earlier than anticipated – which could reduce portfolio income). |
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage origination volume, the fair value of MSRs and other financial instruments, the value of the pension liability and other items affecting earnings.
We assess interest rate risk by comparing our most likely earnings plan with various earnings simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, as of September 30, 2008,March 31, 2009, our most recent simulation indicated estimated earnings at risk of approximately 5.6%4% of our most likely earnings plan over the next 12 months using a scenario in which both the federal funds rate rises to 2.75% and the 10-year Constant Maturity Treasury bond yield riserises to 5.50%.3.45% by the end of 2009. Simulation estimates depend on, and will change with, the size and mix of our actual and projected balance sheet at the time of each simulation. Due to timing differences between the quarterly valuation of MSRs and the eventual impact of interest rates on mortgage banking volumes, earnings at risk in any particular quarter could be higher than the average earnings at risk over the 12-month simulation period, depending on the path of interest rates and on our hedging strategies for MSRs. See “Mortgage Banking Interest Rate and Market Risk” below.in this Report.
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We use exchange-traded and over-the-counter interest rate derivatives to hedge our interest rate exposures. The credit risknotional or contractual amount and estimated net fair valuevalues of these derivatives as of September 30, 2008,March 31, 2009, and December 31, 2007,2008, are presented in Note 12 (Derivatives) to Financial Statements in this Report. We use derivatives for asset/liability management in three main ways:
| • | | to convert a major portion of our long-term fixed-rate debt, which we issue to finance the Company, from fixed-rate payments to floating-rate payments by entering into receive-fixed swaps; |
| • | | to convert the cash flows from selected asset and/or liability instruments/portfolios from fixed-rate payments to floating-rate payments or vice versa; and |
| • | | to hedge our mortgage origination pipeline, funded mortgage loans MSRs and other interests heldMSRs using interest rate swaps, swaptions, futures, forwards and options. |
Mortgage Banking Interest Rate and Market Risk
We originate, fund and service mortgage loans, which subjects us to various risks, including credit, liquidity and interest rate risks. Based on market conditions and other factors, we may reduce unwanted credit and liquidity risks by selling or securitizing some or all of the long-term fixed-rate mortgage loans we originate and most of the ARMs we originate. On the other hand, we may hold originated ARMs and fixed-rate mortgage loans in our loan portfolio as an investment for our growing base of core deposits. We determine whether the loans will be held for investment or held for sale at the time of commitment. We may subsequently change our intent to hold loans for investment and sell some or all of our ARMs or fixed-rate mortgage loansmortgages as part of our corporate
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asset/liability management. We may also acquire and add to our securities available for sale a portion of the securities issued at the time we securitize mortgages held for sale.
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity in the nonconforming secondary markets, our mortgage banking revenue growth continued to be positive, reflecting the complementary origination and servicing strengths of the business. The secondary market for agency-conforming mortgages functioned well during the quarter. The mortgage warehouse and pipeline, which predominantly consists of prime mortgage loans, incurred a $39 million liquidity related write-down in first quarter 2009. In addition, we further reduced mortgage origination gains by $78 million in first quarter 2009, primarily to reflect an increase to the repurchase reserve for higher projected losses due to the continuing deterioration in the housing market.
Interest rate and market risk can be substantial in the mortgage business. Changes in interest rates may potentially impact total origination and servicing fees, the value of our residential MSRs measured at fair value, the value of mortgages held for sale (MHFS) and the associated income and loss reflected in mortgage banking noninterest income, the income and expense associated with instruments (economic hedges) used to hedge changes in the fair value of residential MSRs new prime residentialand MHFS, other interests held and the value of derivative loan commitments (interest rate “locks”) extended to mortgage applicants.
Interest rates impact the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees and may also lead to an increase in servicing fee income, depending on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time
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required for processing a new application, providing the commitment, and securitizing and selling the loan, interest rate changes will impact origination and servicing fees with a lag. The amount and timing of the impact on origination and servicing fees will depend on the magnitude, speed and duration of the change in interest rates.
Under FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, which we adopted January 1, 2007, we elected to measure MHFS at fair value prospectively for new prime MHFS originations for which an active secondary market and readily available market prices generally existexisted to reliably support fair value pricing models used for these loans. At December 31, 2008, we elected to measure at fair value similar MHFS acquired from Wachovia. Loan origination fees on these loans are recorded when earned, and related direct loan origination costs and fees are recognized when incurred. We also elected to measure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe that the election for new prime MHFS and other interests held (which are now hedged with free-standing derivatives (economic hedges) along with our MSRs) will reducereduces certain timing differences and better matchmatches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. During third2008 and in first quarter 2008,2009, in response to continued secondary market illiquidity, we continued to originate certain prime non-agency loans to be held for investment for the foreseeable future rather than to be held for sale.
Under FAS 156,Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140,we elected to use the fair value measurement method to initially measure and carry our residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are recorded at fair value at the time we sell or securitize the related mortgage loans. The carrying value of MSRs reflects changes in fair value at the end of each quarter and changes are included in net servicing income, a component of mortgage banking noninterest income. If the fair value of the MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs and periodically benchmark our estimates to independent appraisals. While theThe valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable, changesunpredictable. Changes in interest rates influence a variety of significant assumptions included in the periodic valuation of MSRs. Assumptions affected
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includeMSRs, including prepayment speed,speeds, expected returns and potential risks on the servicing asset portfolio, the value of escrow balances and other servicing valuation elements impacted by interest rates.elements.
A decline in interest rates generally increases the propensity for refinancing, reduces the expected duration of the servicing portfolio and therefore reduces the estimated fair value of MSRs. This reduction in fair value causes a charge to income (net of any gains on free-standing derivatives (economic hedges) used to hedge MSRs). We may choose not to fully hedge all of the potential decline in the value of our MSRs resulting from a decline in interest rates because the potential increase in origination/servicing fees in that scenario provides a partial “natural business hedge.” An increase in interest rates generally reduces the propensity for refinancing, increasesextends the expected duration of the servicing portfolio and therefore increases the estimated fair value of the MSRs. However, an increase in interest rates can also reduce mortgage loan demand and therefore reduce origination income. In thirdfirst quarter 2008,2009, a $546 million$2.8 billion decrease in the fair value of our MSRs and $621 million$3.7 billion of gains on the free-standing derivatives used to hedge the MSRs resulted in a net gain of $75$875 million.
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Hedging the various sources of interest rate risk in mortgage banking is a complex process that requires sophisticated modeling and constant monitoring. While we attempt to balance these various aspects of the mortgage business, there are several potential risks to earnings:
| • | | MSRs valuation changes associated with interest rate changes are recorded in earnings immediately within the accounting period in which those interest rate changes occur, whereas the impact of those same changes in interest rates on origination and servicing fees occur with a lag and over time. Thus, the mortgage business could be protected from adverse changes in interest rates over a period of time on a cumulative basis but still display large variations in income from one accounting period to the next. |
| • | | The degree to which the “natural business hedge” offsets changes in MSRs valuations is imperfect, varies at different points in the interest rate cycle, and depends not just on the direction of interest rates but on the pattern of quarterly interest rate changes. |
| • | | Origination volumes, the valuation of MSRs and hedging results and associated costs are also impacted by many factors. Such factors include the mix of new business between ARMs and fixed-rated mortgages, the relationship between short-term and long-term interest rates, the degree of volatility in interest rates, the relationship between mortgage interest rates and other interest rate markets, and other interest rate factors. Many of these factors are hard to predict and we may not be able to directly or perfectly hedge their effect. |
| • | | While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in the value of ARMs production held for sale from changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR index-based financial instruments used as economic hedges for such ARMs. |
The total carrying value of our residential and commercial MSRs was $19.6$13.6 billion at September 30, 2008,March 31, 2009, and $17.2$16.2 billion at December 31, 2007.2008. The weighted-average note rate on the owned servicing portfolio was 5.98%5.83% at September 30, 2008,March 31, 2009, and 6.01%5.92% at December 31, 2007.2008. Our total MSRs were 1.34%0.74% of mortgage loans serviced for others at September 30, 2008,March 31, 2009, compared with 1.20%0.87% at December 31, 2007.2008.
As part of our mortgage banking activities, we enter into commitments to fund residential mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate
29
lock that binds us to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. These loan commitments are derivative loan commitments if the loans that will result from the exercise of the commitments will be held for sale. These derivative loan commitments are recognized at fair value in the balance sheet with changes in their fair values recorded as part of mortgage banking noninterest income. For interest rate lock commitments issued prior to January 1, 2008, we recorded a zero fair value for the derivative loan commitment at inception consistent with SAB 105. Effective January 1, 2008, weWe were required by SABStaff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings, to include at inception and during the life of the loan commitment, the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of derivative loan commitments. The implementation of SAB 109 did not have a material impact on our results or the valuation of our loan commitments. Changes subsequent to inception are based on changes in fair value of the underlying loan resulting from the exercise of the commitment and changes in the probability that the loan will not fund within the terms of the commitment (referred to as a fall-out factor). The value of the underlying loan commitment is affected primarily by changes in interest rates and the passage of time.
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Outstanding derivative loan commitments expose us to the risk that the price of the mortgage loans underlying the commitments might decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. To minimize this risk, we utilize forwards and options, Eurodollar futures and options, and Treasury futures, forwards and optionsoption contracts as economic hedges against the potential decreases in the values of the loans. We expect that these derivative financial instruments will experience changes in fair value that will either fully or partially offset the changes in fair value of the derivative loan commitments. However, changes in investor demand, such as concerns about credit risk, can also cause changes in the spread relationships between underlying loan value and the derivative financial instruments that cannot be hedged.
Market Risk – Trading Activities
From a market risk perspective, our net income is exposed to changes in interest rates, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The primary purpose of our trading businesses is to accommodate customers in the management of their market price risks. Also, we take positions based on market expectations or to benefit from price differences between financial instruments and markets, subject to risk limits established and monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions and derivatives used in our trading businesses are carried at fair value. The Institutional Risk Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated net fair value of all customer accommodation derivatives at September 30, 2008,March 31, 2009, and December 31, 2007,2008, are included in Note 12 (Derivatives) to Financial Statements in this Report. Open “at risk” positions for all trading business are monitored by Corporate ALCO.
The standardized approach for monitoring and reporting market risk for the trading activities consists of value-at-risk (VAR) metrics complemented with factor analysis and stress testing. VAR measures the worst expected loss over a given time interval and within a given confidence interval. We measure and report daily VAR at a 99% confidence interval based on actual changes in rates and prices over the past 250 trading days. The analysis captures all financial
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instruments that are considered trading positions. The average one-day VAR throughout thirdfirst quarter 20082009 was $25$103 million, with a lower bound of $18$83 million and an upper bound of $52$130 million.
Market Risk – Equity Markets
We are directly and indirectly affected by changes in the equity markets. We make and manage direct equity investments in start-up businesses, emerging growth companies, management buy-outs, acquisitions and corporate recapitalizations. We also invest in non-affiliated funds that make similar private equity investments. These private equity investments are made within capital allocations approved by management and the Board of Directors (the Board). The Board’s policy is to review business developments, key risks and historical returns for the private equity investment portfolio at least annually. Management reviews the valuations of these investments at least quarterly and assesses them for possible other-than-temporary impairment. For nonmarketable investments, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment’s cash flows and capital needs, the viability of its business model and our exit strategy. Nonmarketable investments included private
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equity investments of $2.59 billion and $2.71 billion and principal investments of $1.27 billion and $1.28 billion at March 31, 2009, and December 31, 2008, respectively. Private equity investments totaled $2.21 billionare carried at September 30, 2008,cost subject to other-than-temporary impairment. Principal investments are carried at fair value with net unrealized gains and $2.02 billion at December 31, 2007.losses reported in noninterest income.
We also have marketable equity securities in the securities available-for-sale portfolio, including common stock, perpetual preferred securities, and securities relating to our venture capital activities. We manage these securitiesinvestments within investmentcapital risk limits approved by management and the Board and monitored by Corporate ALCO. Gains and losses on these securities are recognized in net income when realized and periodically include other-than-temporary impairment charges, which are recorded when determined.charges. The fair value of marketable equity securities was $2.31$5.18 billion and cost was $3.05$5.83 billion at September 30, 2008,March 31, 2009, and $2.78$6.14 billion and $2.88$6.30 billion, respectively, at December 31, 2007. (For additional detail, see “Balance Sheet Analysis – Securities Available for Sale” in this Report.)2008.
Changes in equity market prices may also indirectly affect our net income by affecting (1) the value of third party assets under management and, hence, fee income, (2) particular borrowers whose ability to repay principal and/or interest may be affected by the stock market, or (3) brokerage activity, related commission income and other business activities. Each business line monitors and manages these indirect risks.
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Liquidity and Funding
The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under unpredictable circumstances of industry or market stress. To achieve this objective, Corporate ALCO 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. We set these guidelines for both the consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.
Debt securities in the securities available-for-sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks and federal funds sold, securities
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purchased under resale agreements and other short-term investments. Asset liquidity is further enhanced by our ability to sell or securitize loans in secondary markets and to pledge loans to access secured borrowing facilities through the Federal Home Loan Banks, the Federal Reserve Board or the U.S. Treasury.United States Department of the Treasury (Treasury Department).
Core customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. Additional funding is provided by long-term debt (including trust preferred securities), other foreign deposits and short-term borrowings (federal funds purchased, securities sold under repurchase agreements, commercial paper and other short-term borrowings).
Liquidity is also available through our ability to raise funds in a variety of domestic and international money and capital markets. We access capital markets for long-term funding through issuances of registered debt securities, private placements and asset-backed secured funding. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, and level and quality of earnings. Moody’s Investors Service rates Wells Fargo Bank, N.A. as “Aaa,” its highest investment grade, and rates the Company’s seniorMaterial changes in these factors could result in a different debt as “Aa1.” Standard & Poor’s Ratings Services rates Wells Fargo Bank, N.A. as “AAA” and the Company’s seniorrating; however, a change in debt rating as “AA+.”would not cause us to violate any of our debt covenants. Wells Fargo Bank, N.A. is rated “Aa2,” by Moody’s Investors Service, and “AA+,” by Standard & Poor’s Rating Services.
Wells Fargo is participating in the only U.S. bankFederal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program (TLGP). The TLGP has two components: the Debt Guarantee Program, which provides a temporary guarantee of newly issued senior unsecured debt issued by eligible entities; and the Transaction Account Guarantee Program, which provides a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC insured institutions. Under the Debt Guarantee Program, we had $88.2 billion of remaining capacity to have
issue guaranteed debt as of March 31, 2009. Eligible entities are assessed fees payable to the highest possible credit rating from both Moody’sFDIC for coverage under the program. This assessment is in addition to risk-based deposit insurance assessments currently imposed under FDIC rules and S&P.regulations.
Federal Home Loan Bank Membership
We are a member of the Federal Home Loan Bank of Atlanta, the Federal Home Loan Bank of Dallas, the Federal Home Loan Bank of Des Moines and the Federal Home Loan Bank of San Francisco (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a
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minimum investment in capital stock of the applicable FHLB. The Board of Directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.
Parent. Under SEC rules, the Parent is classified as a “well-known seasoned issuer,” which allows it to file a registration statement that does not have a limit on issuance capacity. “Well-known seasoned issuers” generally include those companies with a public float of common equity of at least $700 million or those companies that have issued at least $1 billion in aggregate principal amount of non-convertible securities, other than common equity, in the last three years. In June 2006, the Parent’s registration statement with the SEC for issuance of senior and subordinated notes, preferred stock and other securities became effective. However, theThe Parent’s ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. The Parent is currently authorized by the Board to issue $30$60 billion in outstanding short-term debt and $105$170 billion in outstanding long-term debt, subject to a total outstanding debt limit of $135$230 billion. At March 31, 2009, the Parent had outstanding debt under these authorities of $15.7 billion, $133.9 billion and $149.6 billion, respectively. During the first nine months of 2008,quarter 2009, the Parent issued a total of $6.8$3.5 billion in registered senior notes. The Parent also issued capital securities in the form of $6.5 billion in junior subordinated debt to statutory business trusts formednotes guaranteed by the Parent, which, in turn, issued trust preferred and perpetual preferred purchase securities.FDIC. We used the proceeds from securities issued in the first nine months of 2008quarter 2009 for general corporate purposes and expect that the proceeds from securities issued in the future will also be used for general corporate purposes. The Parent also issues commercial paper from time to time, subject to its short-term debt limit.
Wells Fargo Bank, N.A.Wells Fargo Bank, N.A. is authorized by its board of directors to issue $100 billion in outstanding short-term debt and $50 billion in outstanding long-term debt. In December 2007, Wells Fargo Bank, N.A. established a $100 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $50 billion in outstanding short-term senior notes and $50 billion in long-term senior or subordinated notes. During first quarter 2009, Wells Fargo Bank, N.A. issued $7.5 billion in short-term notes. At March 31, 2009, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $45.7 billion in short-term senior notes and $46.4 billion in long-term senior or subordinated notes, respectively. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations. In the first nine months of 2008, Wells Fargo
Wachovia Bank, N.A.Wachovia Bank, N.A. issued $43.1had $49.0 billion available for issuance under a global note program at March 31, 2009. Wachovia Bank, N.A. also has a $25 billion Euro medium-term note program (EMTN) under which it may issue senior and subordinated debt securities. These securities are not registered with the SEC and may not be offered in short-termthe U.S. without applicable exemptions from registration. Under the EMTN, Wachovia Bank, N.A. had up to $22.4 billion available for issuance at March 31, 2009. In addition, Wachovia Bank, N.A. has an A$10 billion Australian medium-term note program (AMTN), under which it may issue senior and long-term senior notes.subordinated debt securities. These securities are not registered with the SEC and may not be offered in the U.S. without applicable exemptions from registration. Up to A$8.5 billion was available for issuance at March 31, 2009.
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Wells Fargo Financial. In February 2008, Wells Fargo Financial Canada Corporation (WFFCC), an indirect wholly-owned Canadian subsidiary of the Parent, qualified with the Canadian provincial securities commissions CAD$7.0 billion in medium-term notes for distribution from time to time in Canada. In the first nine months of 2008, WFFCC issued CAD$500 million in medium-term notes, leavingAt March 31, 2009, CAD$6.5 billion remained available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.
CAPITAL MANAGEMENT
We have an active program for managing stockholder capital. We use capital to fund organic growth, acquire banks and other financial services companies, pay dividends and repurchase our shares. Our objective is to produce above-market long-term returns by opportunistically using capital when returns are perceived to be high and issuing/accumulating capital when such costs are perceived to be low.
From time to time the Board of Directors authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for acquisitions and employee benefit plans, market conditions (including the trading price of our stock), and legal considerations. These factors can change at any time, and there can be no assurance as to the number of shares we will repurchase or when we will repurchase them.
In 2007, the Board authorized the repurchase of up to 200 million additional shares of our outstanding common stock and, in September 2008, the repurchase of up to 25 million additional shares. During first quarter 2009, we repurchased approximately 2 million shares of our common stock. At March 31, 2009, the total remaining common stock repurchase authority was approximately 12 million shares. For additional information regarding share repurchases and repurchase authorizations, see Part II Item 2 of this Report.
Historically, our policy has been to repurchase shares under the “safe harbor” conditions of Rule 10b-18 of the Securities Exchange Act including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.
Our potential sources of capital include retained earnings and issuances of common and preferred stock. In 2007, the Board authorized the repurchasefirst quarter 2009, retained earnings increased $406 million, a major portion from Wells Fargo net income of up to 200 million additional shares$3.05 billion, less common and preferred dividends and accretion of our outstanding common stock and, in September 2008, the repurchase of up to 25 million additional shares. During the$2.10 billion. In first nine months of 2008, we repurchased approximately 37 million shares of our common stock, all from our employee benefit plans. In the first nine months of 2008,quarter 2009, we issued approximately 6135 million shares, or $543 million, of common stock (including shares issued for our ESOP plan) under various employee benefit and director plans and under our dividend reinvestment and direct stock repurchase programs. At September 30, 2008, the total remaining common stock repurchase authority was approximately 29 million shares. (For additional information regarding share repurchases and repurchase authorizations, see Part II Item 2 of this Report.)
The Board of Directors approved a 10% increase in our common stock dividend to $0.34 per share for third quarter 2008 from $0.31 per share for second quarter 2008.
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Our potential sources of capital include retained earnings and issuances of common and preferred stock. In the first nine months of 2008, retained earnings increased $1.9 billion, predominantly resulting from net income of $5.4 billion, less dividends of $3.2 billion. In the first nine months of 2008, we issued $1.6 billion of common stock under various employee benefit and director plans.
The Emergency Economic Stabilization Act of 2008 authorizes the United States Treasury Department (Treasury Department) to use appropriated funds to restore liquidity and stability to the U.S. financial system. As part of this authority, onOn October 28, 2008, at the request of the Treasury Department and pursuant to a Letter Agreement and related Securities Purchase Agreement dated October 26, 2008 (the “SecuritiesSecurities Purchase Agreements”)Agreements), we issued to the Treasury Department 25,000 shares of a new class of Wells Fargo’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value, having a liquidation amount per share equal to $1,000,000, for a total price of $25 billion. The shares of these preferred securities may be evidenced by depositary shares, with each depositary share representing 1/1,000 interest in one share of preferred stock. The preferred securitiesWe pay cumulative dividends on the preferred securities at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. WeUnless permitted under the provisions of the American Recovery and Reinvestment Act of 2009, we may not redeem the preferred securities during the first three years except with the proceeds from a “qualifying equity offering.” After three years, we may, at our option, redeem the preferred securities at par value plus accrued and unpaid dividends. The preferred securities are generally non-voting. Prior to October 28, 2011, unless we have redeemed the preferred securities or the Treasury Department has transferred the preferred securities to a third party, the consent of the Treasury Department will be required for us to increase our common stock dividend or repurchase our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreements. A consequenceThe terms of the Treasury Department’s purchase of the preferred securities purchase includesinclude certain restrictions on certain forms of executive compensation that could limitand limits on the tax deductibility of compensation we pay to executive management. As part of its purchase of the preferred securities, the Treasury Department also received warrants to purchase 110,261,688 shares of our common stock at an initial per share exercise price of $34.01. The warrants provide for the adjustment of the exercise price and the number of shares of our common stock issuable upon exercise pursuant$34.01, subject to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of our common stock, and upon certain issuances of our common stock at or below a specified price relative to the initial exercise price.provisions. The warrants expire ten years from the issuance date. Both the preferred securities and warrants will beare accounted for as components of Tier 1 capital.
In March 2009, we reduced our common stock dividend by 85% to $0.05 per share, enhancing our ability to build capital.
At September 30, 2008,March 31, 2009, the Company and each of our subsidiary banks were “well capitalized” under the applicable regulatory capital adequacy guidelines. Our Tier 1 capital ratio was 8.59%, up 100 basis points from year end 2007. For additional information see Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.
On May 7, 2009, the Federal Reserve confirmed that under its adverse stress test scenario the Company’s Tier 1 capital exceeded the minimum level needed for well-capitalized institutions. In conjunction with the stress test, the Company has agreed with the Federal Reserve to increase common equity by $13.7 billion by November 9, 2009. On May 8, 2009, the Company agreed to issue 341 million shares of its common stock at a price of $22 per share. Also on May 8, 2009, the underwriters in the offering exercised their option to purchase up to an additional 51.15 million shares of common stock from the Company at $22 per share to cover over-allotments. The Company will receive net proceeds of $8.4 billion from the offering including the exercise of the over-allotment option. The Company expects to satisfy the remainder of the capital requirement through profits and other internally generated sources. The Company can satisfy any part of the capital requirement by exchanging up to $13.7 billion of its $25 billion of Capital Purchase Program (CPP) funds for the Treasury’s Capital Assistance Program (CAP) on a dollar-for-dollar basis.
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LEGAL PROCEEDINGSTangible Common Equity
For information regarding legal proceedings, referWe strengthened our capital position in first quarter 2009. Tangible common equity (TCE) was $41.1 billion at quarter end, an increase of $4.5 billion. The ratio of TCE to Note 11 (Guaranteestangible assets was 3.28%, up from 2.86% at December 31, 2008. TCE was 3.84% of risk-weighted assets. At March 31, 2009, Tier 1 capital was $89.0 billion and Legal Actions) to Financial Statements in this Report.the Tier 1 capital ratio was 8.30%, up from 7.84% at December 31, 2008.
| | | | | | | | | | | | | | | | | | | |
| | |
| | | | | Quarter ended | |
| | | | | | | | | Mar. 31 | , | | | | | | Dec. 31 | , |
| (in billions) | | | | | | | | 2009 | | | | | | | 2008 | |
| | |
| | | | | | | | $ | 107.1 | | | | | | | $ | 102.3 | |
| Less: Preferred equity | | | | | | | | | (30.9 | ) | | | | | | | (30.8 | ) |
| Goodwill and intangible assets (other than MSRs) | | | | $ | (38.5 | ) | | | | | | $ | (38.1 | ) | | | | |
| Applicable deferred taxes | | | | | 5.7 | | | | | | | | 5.6 | | | | | |
| | | | | | | | | | | | | | | | | |
| Goodwill and intangible assets, net of deferred taxes | | | | | | | | | (32.8 | ) | | | | | | | (32.5 | ) |
| Noncontrolling interests | | | | | | | | | (2.3 | ) | | | | | | | (2.4 | ) |
| | | | | | | | | | | | | | | | | |
| Tangible common equity (1) | | (A) | | | | | | $ | 41.1 | | | | | | | $ | 36.6 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | $ | 1,285.9 | | | | | | | $ | 1,309.6 | |
| Less: Goodwill and intangible assets, net of deferred taxes | | | | | | | | | (32.8 | ) | | | | | | | (32.5 | ) |
| | | | | | | | | | | | | | | | | |
| Tangible assets | | (B) | | | | | | $ | 1,253.1 | | | | | | | $ | 1,277.1 | |
| | | | | | | | | | | | | | | | | |
Tangible common equity ratio | | (A)/(B) | | | | | | | 3.28 | % | | | | | | | 2.86 | % |
| | | | | | | | | | | | | | | | | |
Total risk-weighted assets (2) | | (C) | | | | | | $ | 1,071.5 | | | | | | | $ | 1,101.3 | |
| | | | | | | | | | | | | | | | | |
Tangible common equity to total risk-weighted assets | | (A)/(C) | | | | | | | 3.84 | % | | | | | | | 3.32 | % |
| | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Tangible common equity, a non-GAAP financial measure, includes total equity, less preferred equity, goodwill and intangible assets (excluding MSRs), net of related deferred taxes, and the portion of noncontrolling interests accounted for under FAS 160 that does not have risk sharing attributes similar to common equity. Management reviews tangible common equity along with other measures of capital as part of its financial analyses and has included this information because of current interest on the part of market participants in tangible common equity as a measure of capital. The methodology of determining tangible common equity may differ among companies. |
| (2) | | Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets. |
RISK FACTORS
An investment in the Company has risk. 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 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 the Company. 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, to the “Risk Factors” and “Regulation and Supervision” sections and Note 15 (Guarantees and Legal Actions) to Financial Statements in our 2008 Form 10-K for a detailed discussion of risk factors, and to the discussion below that supplements the “Risk Factors” section of the 2008 Form 10-K. Any factor described in this Report or in our 2008 Form 10-K could by itself, or together with other factors, adversely affect our financial results and condition. There are factors not discussed below or elsewhere in this Report that could adversely affect our financial results and condition.
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In addition, in accordance with the Private Securities Litigation Reform Act of 1995, we caution you that one or more of these same risk factors could cause actual results mayto differ significantly from forward-looking statements aboutprojections or forecasts of our future financial results and condition and expectations for our operations and business performance containedthat we make in forward-looking statements in this Report and other reports we file with the SECin presentations and in other Company communications. We make forward-looking statements when we use words such as “believe,” “expect,” “anticipate,” “estimate,” “project,” “forecast,” “will,” “may,” “can” and similar expressions. Do not unduly rely on forward-looking statements. Actualstatements, as actual results maycould differ significantly from expectations.significantly. Forward-looking statements speak only as of the date made. Wemade, and we do not undertake to update them to reflect changes or events that occur after that date.date that may affect whether those forecasts and expectations continue to reflect management’s beliefs or the likelihood that the forecasts and expectations will be realized.
In this Report we make forward-looking statements that:
• | | we expect the pending merger with Wachovia to be completed by the end of this year; |
• | | until residential real estate values stabilize, the Home Equity portfolio is expected to produce higher than normal loss levels; |
• | | until conditions improve in the residential real estate and liquidity markets, we will continue to hold more nonperforming assets on our balance sheet; |
• | | the adoption of FAS 161, Staff Position No. 133-1 and FIN 45-4 will not affect our consolidated financial results; |
• | | we expect the amount of nonaccrual loans will change due to portfolio growth, portfolio seasoning, routine problem loan recognition and resolution through collections, sales or charge-offs; |
• | | we believe the election to measure at fair value new prime MHFS and other interests held will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives used to hedge these assets; |
• | | we expect changes in the fair value of derivative financial instruments used to hedge derivative loan commitments will fully or partially offset changes in the fair value of such commitments; |
• | | we expect the proceeds of securities issued in the future will be used for general corporate purposes; |
• | | three pending business combination transactions, in addition to the pending merger with Wachovia, will close in fourth quarter 2008; |
• | | we expect to recover our investments in entities formed to invest in affordable housing and sustainable energy projects over time through realization of federal tax credits; |
• | | the amount of any additional consideration that may be payable in connection with previous acquisitions will not be significant to our financial statements; and |
• | | we expect $39 million of deferred net gains on derivatives in other comprehensive income at September 30, 2008, will be reclassified as earnings in the next 12 months. |
we believe our allowance for credit losses at March 31, 2009, was adequate to cover expected consumer losses for at least the next 12 months and to provide approximately 24 months of anticipated loss coverage for the commercial and commercial real estate portfolios;
we expect to generate $5 billion of annual merger-related expense savings, which will begin to emerge in the second quarter and are expected to be fully realized upon completion of the integration;
we expect total integration expense to be substantially less than our original estimate of $7.9 billion and to be spread over the integration period rather than all by year-end 2009;
we expect additional efficiency initiatives to lower expenses over the remainder of 2009;
we expect to satisfy the remaining capital requirement relating to the recently completed stress test through profits and other internally generated sources;
losses on the combined Wells Fargo and Wachovia loan portfolios will increase as long as the U.S. economy remains weak;
we believe actions described in this Report that we have taken to reduce credit risk better position us for continued deterioration and economic headwinds;
to the extent the market does not recover, the residential mortgage business could continue to have increased loss severity on repurchases, causing future increases in the repurchase reserve;
we could have significant losses on unsaleable loans until the housing market recovers;
we will continue to hold more nonperforming assets on our balance sheet until conditions improve in the residential real estate and liquidity markets;
we expect nonperforming asset balances to continue to grow;
charge-offs on Wachovia loans accounted for under SOP 03-3 are not expected to reduce income in future periods to the extent the original estimates used to determine the purchase accounting adjustments continue to be accurate;
we expect changes in the fair value of derivative financial instruments used to hedge outstanding derivative loan commitments will fully or partially offset the changes in fair value of the commitments;
we expect that $34 million of deferred net loss on derivatives in other comprehensive income at March 31, 2009, will be reclassified as earnings during the next twelve months;
we do not expect that we will be required to make a minimum contribution in 2009 for the Cash Balance Plan; and
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This Report includes various statements aboutwe expect actions taken with respect to the estimated impactWells Fargo qualified and supplemental Cash Balance Plans and the Wachovia Pension Plan will reduce pension cost by approximately $330 million in 2009.
Several factors could cause actual results to differ significantly from expectations including:
current economic and market conditions;
our capital requirements and ability to raise capital on favorable terms;
the terms of capital investments or other financial assistance provided by the U.S. government;
legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications;
our earnings from simulatedability to successfully integrate the Wachovia merger and realize the expected cost savings and other benefits;
our ability to realize the recently announced efficiency initiatives to lower expenses when and in the amount expected;
the adequacy of our allowance for credit losses;
recognition of other-than-temporary impairment on securities held in our available-for-sale portfolio;
the effect of changes in interest rates on our net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;
hedging gains or losses; disruptions in the capital markets and reduced investor demand for mortgages loans;
our ability to sell more products to our customers;
the effect of the economic recession on expected lossesthe demand for our products and services;
the effect of the fall in stock market prices on fee income from our brokerage, asset and wealth management businesses;
our election to provide support to our mutual funds for structured credit products they may hold;
changes in the value of our venture capital investments;
changes in our loan portfolioaccounting policies or in accounting standards or in how accounting standards are to be applied;
mergers and acquisitions;
federal and state regulations;
reputational damage from assumed changes in loan credit quality. This Report also includes negative publicity, fines, penalties and other negative consequences from regulatory violations;
the statement that we believeloss of checking and saving account deposits to other investments such as the allowance for credit losses at September 30, 2008, was adequate to cover credit losses inherent instock market; and
fiscal and monetary policies of the loan portfolio, including unfunded credit commitments. Federal Reserve Board.
There is no assurance that our allowance for credit losses at September 30, 2008, will be sufficientadequate to cover future credit losses. As described belowlosses, especially if credit markets, housing prices and elsewhere in this Report and in our 2007 Form 10-K, increasesunemployment do not stabilize. Increases in loan charge-offs changesor in the allowance for credit losses or theand related provision expense or other effects of credit deterioration after September 30, 2008, could materially adversely affect our financial results of operations and financial condition.
This Report also includes various statements about the evaluation for other-than-temporary impairment of securities held in our available-for-sale portfolio, including certain perpetual preferred securities. We may be required to recognize other-than-temporary impairment in future periods with respect to these and other securities held in our available-for-sale portfolio. For more information, refer to “Overview — Current Accounting Developments,” “Balance Sheet Analysis – Securities Available for Sale” and Note 4 (Securities Available for Sale) to Financial Statements in this Report.
As discussed elsewhere in this Report, we have agreed to acquire Wachovia in a stock-for-stock transaction that is expected to close by the end of 2008. In the merger, Wells Fargo will acquire all of the assets and liabilities (including loan portfolios) of Wachovia and its subsidiaries. Some of these assets could become nonperforming or could default, increasing our credit costs and requiring us to write-down the value of the assets. This could materially adversely affect our results of operations and financial condition. We are not receiving any loan guarantees or other financial assistance from the government, thus after the merger we will be fully responsible for all credit losses, write-downs and impairments relating to Wachovia’s assets and liabilities acquired in the merger.
Our results of operations and financial condition could also be materially adversely affected if we fail to realize the expected benefits of the merger or it takes longer than expected to realize the benefits. The merger will involve the integration of the businesses of Wachovia and Wells Fargo. It is possible that the integration process could result in the loss of key Wachovia employees, the disruption of Wachovia’s ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect Wachovia’s ability to maintain relationships with customers and employees. As with any financial institution merger, there also may be disruptions that cause Wachovia to lose customers or cause customers to take deposits out of Wachovia’s banks. The integration of the two companies may also divert management attention and resources away from other operations and limit Wells Fargo’s ability to pursue other acquisitions.
Also, as discussed under “Capital Management” in this Report, on October 28, 2008, at the request of the Treasury Department we issued certain preferred securities and common stock warrants to the Treasury Department. Prior to October 28, 2011, unless we have redeemed the preferred securities or the Treasury Department has transferred the preferred securities to a third party, the consent of the Treasury Department will be required for us to, among other actions, increase our common stock dividend or repurchase our common stock other than in connection with benefit plans consistent with past practice. The warrants provide for the adjustment of the
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exercise priceThe following risk factors supplement the discussion under “Risk Factors” contained in our 2008 Form 10-K.
The Company’s participation in government programs to modify first and second lien mortgage loans could adversely affect the amount and timing of the Company’s earnings and credit losses relating to those loans.
The Treasury Department recently announced guidelines for its first and second lien modification programs under its Making Home Affordable Program. Participation in the programs could result in a reduction in the principal balances of real estate 1-4 family first and second lien mortgage loans held by the Company and the acceleration of loss recognition on those loans. In addition to the principal reduction aspect of the programs, loan modification efforts can impact the interest rate and term of these loans which would have a correlated impact to total return on those assets and timing of those returns. Participation in the programs as a servicer could reduce servicing income to the extent the principal balance of a serviced loan is reduced or because it increases the cost of servicing a loan.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
As described under “Capital Management,” in connection with the completion of the Supervisory Capital Assessment Program, we have agreed with our federal banking regulators to increase our Tier 1 common equity by $13.7 billion by November 9, 2009. In addition to the 392.15 million shares of our common stock sold on May 8, 2009, we currently expect to increase our Tier 1 common equity through profits and other internally generated sources. Although not currently contemplated, we could also achieve any portion of the required increase in our Tier 1 common equity by exchanging (with the approval of the Department of the Treasury) a number of shares of the Series D Preferred Stock we issued to the Department of the Treasury under the Capital Purchase Program for shares of our mandatory convertible preferred stock under the Department of the Treasury’s Capital Assistance Program, or for common stock or another common equivalent security that the Department of the Treasury otherwise agrees to purchase, directly or indirectly. Such an exchange could also involve the issuance of warrants to the Department of the Treasury to purchase additional shares of our common stock as contemplated by the published terms of the Capital Assistance Program. The issuance of additional shares of common stock or common equivalent securities in future equity offerings, to the Department of the Treasury under the Capital Assistance Program or otherwise will dilute the ownership interest of our existing common stockholders. There can be no assurances that we will not in the future determine that it is advisable, or that we will not encounter circumstances where we determine it is necessary, to issue additional shares of common stock or common equivalent securities to fund strategic initiatives or other business needs or to build additional capital. The market price of our common stock could decline as a result of such offerings, as well as other sales of a large block of shares of our common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions ofsimilar securities, or other assets to holders of our common stock, and upon certain issuances of our common stock at or below a specified price relative to the initial exercise price.
For a discussion of certain risk factors that could cause our financial results and condition to vary materially from period to period or cause actual results to differ from our expectations for our future financial and business performance, refer to our 2007 Form 10-K, including the “Risk Factors” and “Regulation and Supervision” sections, and to the Financial Review section and Financial Statements and related Notes included in this Report. Additional factors are described below:
• | | lower or negative revenue growth because of our inability to cross-sell more products to our existing customers; |
• | | decreased demand for our products and services and lower revenue and earnings because of an economic recession; |
• | | reduced fee income from our brokerage and asset management businesses because of a fall in stock market prices; |
• | | lower net interest margin, decreased mortgage loan originations and reductions in the value of our MSRs and MHFS because of changes in interest rates; |
• | | increased funding costs due to market illiquidity and increased competition for funding; |
• | | the election to provide capital support to our mutual funds relating to investments in credit products; |
• | | reduced earnings due to higher credit losses generally and specifically because: |
| o | | losses in our residential real estate loan portfolio (including home equity) are greater than expected due to economic factors, including declining home values, increasing interest rates, increasing unemployment, or changes in payment behavior, or other factors; and/or |
| o | | our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral; |
• | | higher credit losses because of federal or state legislation or regulatory action that reduces the amount that our borrowers are required to pay us; |
• | | higher credit losses because of federal or state legislation or regulatory action that limits our ability to foreclose on properties or other collateral or makes foreclosure less economically feasible; |
• | | changes to our allowance for credit losses following periodic examinations by our banking regulators; |
• | | negative effect on our servicing and investment portfolios because of financial difficulties or credit downgrades of mortgage and bond issuers; |
• | | reduced earnings because we write-down the carrying value of securities held in our securities available-for-sale portfolio following a determination that the securities are other-than-temporarily impaired; |
• | | reduced earnings because of changes in the value of our venture capital investments; |
• | | changes in our accounting policies or in accounting standards, and changes in how accounting standards are interpreted or applied; |
• | | reduced earnings because actual returns on our pension plan assets are lower than expected, resulting in an increase in future net periodic benefit expense; |
• | | reduced earnings from not realizing the expected benefits of acquisitions or from unexpected difficulties integrating acquisitions; |
37
• | | reduced earnings because of the inability or unwillingness of counterparties to perform their obligations with respect to derivative financial instruments; |
• | | federal and state regulations; |
• | | reputational damage from negative publicity; |
• | | fines, penalties and other negative consequences from regulatory violations, even inadvertent or unintentional violations; |
• | | the loss of checking and savings account deposits to alternative investments such as the stock market and higher-yielding fixed income investments; and |
• | | fiscal and monetary policies of the Federal Reserve Board. |
As described in our 2007 Form 10-K under “Regulation and Supervision – Deposit Insurance Assessments,” our bank subsidiaries, including Wells Fargo Bank, N.A., are members of the Deposit Insurance Fund (DIF). The Federal Deposit Insurance Corporation (FDIC) uses the DIF to cover insured depositswarrants, in the event of a bank failure, and maintainsmarket thereafter, or the fund by assessing member banks an insurance premium. Recent failures have caused the DIF to fall below the minimum balance required by law, forcing the FDIC to consider action to rebuild the fund by raising the insurance premiums assessed member banks. Depending on the frequency and severity of bank failures, the increase in premiumsperception that such sales could be significant and negatively affect our earnings.occur.
3852
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of September 30, 2008,March 31, 2009, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2008.March 31, 2009.
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, the company’sCompany’s principal executive and principal financial officers and effected by the company’sCompany’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 U.S. generally accepted accounting principles (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 the company;Company; |
| • | | 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 the companyCompany are being made only in accordance with authorizations of management and directors of the company;Company; and |
| • | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’sCompany’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
On December 31, 2008, the Company completed its acquisition of Wachovia. The Company considers the acquisition reasonably likely to materially affect its internal control over financial reporting. The Company has extended its internal control oversight and monitoring processes to include Wachovia. Except as described above for the Wachovia acquisition, no change occurred during thirdfirst quarter 20082009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
3953
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Quarter ended Sept. 30 | , | | Nine months ended Sept. 30 | , | | Quarter ended March 31 | , |
| (in millions, except per share amounts) | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | | |
| | |
| Trading assets | | $ | 41 | | $ | 37 | | $ | 126 | | $ | 137 | | | $ | 266 | | $ | 47 | |
| Securities available for sale | | 1,397 | | 1,032 | | 3,753 | | 2,470 | | | 2,709 | | 1,132 | |
| Mortgages held for sale | | 394 | | 586 | | 1,211 | | 1,694 | | | 415 | | 394 | |
| Loans held for sale | | 12 | | 19 | | 34 | | 51 | | | 67 | | 12 | |
| Loans | | 6,888 | | 7,477 | | 20,906 | | 21,341 | | | 10,765 | | 7,212 | |
| Other interest income | | 42 | | 72 | | 140 | | 242 | | | 91 | | 52 | |
| | | | | | | | | | | | | | | |
| Total interest income | | 8,774 | | 9,223 | | 26,170 | | 25,935 | | | 14,313 | | 8,849 | |
| | | | | | | | | | | | | | | |
| | |
| Deposits | | 1,019 | | 2,218 | | 3,676 | | 6,016 | | | 999 | | 1,594 | |
| Short-term borrowings | | 492 | | 464 | | 1,274 | | 865 | | | 123 | | 425 | |
| Long-term debt | | 882 | | 1,261 | | 2,801 | | 3,568 | | | 1,779 | | 1,070 | |
| Other interest expense | | | 36 | | -- | |
| | | | | | | | | | | | | | | |
| Total interest expense | | 2,393 | | 3,943 | | 7,751 | | 10,449 | | | 2,937 | | 3,089 | |
| | | | | | | | | | | | | | | |
| | 6,381 | | 5,280 | | 18,419 | | 15,486 | | | 11,376 | | 5,760 | |
| Provision for credit losses | | 2,495 | | 892 | | 7,535 | | 2,327 | | | 4,558 | | 2,028 | |
| | | | | | | | | | | | | | | |
| Net interest income after provision for credit losses | | 3,886 | | 4,388 | | 10,884 | | 13,159 | | | 6,818 | | 3,732 | |
| | | | | | | | | | | | | | | |
| | |
| Service charges on deposit accounts | | 839 | | 837 | | 2,387 | | 2,262 | | | 1,394 | | 748 | |
| Trust and investment fees | | 738 | | 777 | | 2,263 | | 2,347 | | | 2,215 | | 763 | |
| Card fees | | 601 | | 561 | | 1,747 | | 1,548 | | | 853 | | 558 | |
| Other fees | | 552 | | 566 | | 1,562 | | 1,715 | | | 901 | | 499 | |
| Mortgage banking | | 892 | | 823 | | 2,720 | | 2,302 | | | 2,504 | | 631 | |
| Operating leases | | 102 | | 171 | | 365 | | 550 | | |
| Insurance | | 439 | | 329 | | 1,493 | | 1,160 | | | 581 | | 504 | |
| Net gains on debt securities available for sale | | 84 | | 160 | | 316 | | 149 | | |
| Net gains (losses) on debt securities available for sale (includes impairment losses of $269, consisting of $603 of total other-than-temporary impairment losses, net of $334 recognized in other comprehensive income, for the quarter ended March 31, 2009) | | | | (119 | ) | | 323 | |
| Net gains (losses) from equity investments | | | (507 | ) | | 173 | | | (148 | ) | | 512 | | | | (157 | ) | | 313 | |
| Other | | 258 | | 176 | | 1,277 | | 1,154 | | | 1,469 | | 464 | |
| | | | | | | | | | | | | | | |
| Total noninterest income | | 3,998 | �� | | 4,573 | | 13,982 | | 13,699 | | | 9,641 | | 4,803 | |
| | | | | | | | | | | | | | | |
| | |
| Salaries | | 2,078 | | 1,933 | | 6,092 | | 5,707 | | | 3,386 | | 1,984 | |
| Incentive compensation | | 555 | | 802 | | 2,005 | | 2,444 | | |
| Commission and incentive compensation | | | 1,824 | | 644 | |
| Employee benefits | | 486 | | 518 | | 1,666 | | 1,764 | | | 1,284 | | 587 | |
| Equipment | | 302 | | 295 | | 955 | | 924 | | | 687 | | 348 | |
| Net occupancy | | 402 | | 398 | | 1,201 | | 1,132 | | | 796 | | 399 | |
| Operating leases | | 90 | | 136 | | 308 | | 437 | | |
| Core deposit and other intangibles | | | 647 | | 46 | |
| FDIC and other deposit assessments | | | 338 | | 8 | |
| Other | | 1,604 | | 1,589 | | 4,612 | | 4,516 | | | 2,856 | | 1,426 | |
| | | | | | | | | | | | | | | |
| Total noninterest expense | | 5,517 | | 5,671 | | 16,839 | | 16,924 | | | 11,818 | | 5,442 | |
| | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAX EXPENSE | | 2,367 | | 3,290 | | 8,027 | | 9,934 | | | 4,641 | | 3,093 | |
| Income tax expense | | 730 | | 1,117 | | 2,638 | | 3,238 | | | 1,552 | | 1,074 | |
| | | | | | | | | | | | | | | |
| | $ | 1,637 | | $ | 2,173 | | $ | 5,389 | | $ | 6,696 | | |
NET INCOME BEFORE NONCONTROLLING INTERESTS | | | 3,089 | | 2,019 | |
| Less: Net income from noncontrolling interests | | | 44 | | 20 | |
| | | | | | | |
| | | $ | 3,045 | | $ | 1,999 | |
| | | | | | | |
WELLS FARGO NET INCOME APPLICABLE TO COMMON STOCK | | | $ | 2,384 | | $ | 1,999 | |
| | | | | | | | | | | | | | | |
EARNINGS PER COMMON SHARE | | $ | 0.49 | | $ | 0.65 | | $ | 1.63 | | $ | 1.99 | | | $ | 0.56 | | $ | 0.61 | |
DILUTED EARNINGS PER COMMON SHARE | | $ | 0.49 | | $ | 0.64 | | $ | 1.62 | | $ | 1.97 | | | $ | 0.56 | | $ | 0.60 | |
DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.34 | | $ | 0.31 | | $ | 0.96 | | $ | 0.87 | | | $ | 0.34 | | $ | 0.31 | |
Average common shares outstanding | | 3,316.4 | | 3,339.6 | | 3,309.6 | | 3,355.5 | | | 4,247.4 | | 3,302.4 | |
| Diluted average common shares outstanding | | 3,331.0 | | 3,374.0 | | 3,323.4 | | 3,392.9 | | | 4,249.3 | | 3,317.9 | |
| | | | |
The accompanying notes are an integral part of these statements.
4054
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | September 30 | , | | December 31 | , | | September 30 | , | | March 31 | , | | December 31 | , | | March 31 | , |
| (in millions, except shares) | | 2008 | | 2007 | | 2007 | | | 2009 | | 2008 | | 2008 | |
| | | | |
| | |
| Cash and due from banks | | $ | 12,861 | | $ | 14,757 | | $ | 12,200 | | | $ | 22,186 | | $ | 23,763 | | $ | 13,146 | |
| Federal funds sold, securities purchased under resale agreements and other short-term investments | | 8,093 | | 2,754 | | 4,546 | | | 18,625 | | 49,433 | | 4,171 | |
| Trading assets | | 9,097 | | 7,727 | | 7,298 | | | 46,497 | | 54,884 | | 8,893 | |
| Securities available for sale | | 86,882 | | 72,951 | | 57,440 | | | 178,468 | | 151,569 | | 81,787 | |
| Mortgages held for sale (includes $17,290, $24,998 and $26,714 carried at fair value) | | 18,739 | | 26,815 | | 29,699 | | |
| Loans held for sale | | 635 | | 948 | | 1,011 | | |
| Mortgages held for sale (includes $35,205, $18,754 and $27,927 carried at fair value) | | | 36,807 | | 20,088 | | 29,708 | |
| Loans held for sale (includes $114 and $398 carried at fair value at March 31, 2009, and December 31, 2008) | | | 8,306 | | 6,228 | | 813 | |
| | 411,049 | | 382,195 | | 362,922 | | | 843,579 | | 864,830 | | 386,333 | |
| Allowance for loan losses | | | (7,865 | ) | | | (5,307 | ) | | | (3,829 | ) | | | (22,281 | ) | | | (21,013 | ) | | | (5,803 | ) |
| | | | | | | | | | | | | | | |
| Net loans | | 403,184 | | 376,888 | | 359,093 | | | 821,298 | | 843,817 | | 380,530 | |
| | | | | | | | | | | | | | | |
Mortgage servicing rights: | | |
| Measured at fair value (residential MSRs) | | 19,184 | | 16,763 | | 18,223 | | | 12,391 | | 14,714 | | 14,956 | |
| Amortized | | 433 | | 466 | | 460 | | | 1,257 | | 1,446 | | 455 | |
| Premises and equipment, net | | 5,054 | | 5,122 | | 5,002 | | | 11,215 | | 11,269 | | 5,056 | |
| Goodwill | | 13,520 | | 13,106 | | 12,018 | | | 23,825 | | 22,627 | | 13,148 | |
| Other assets | | 44,679 | | 37,145 | | 41,737 | | | 105,016 | | 109,801 | | 42,558 | |
| | | | | | | | | | | | | | | |
| | $ | 622,361 | | $ | 575,442 | | $ | 548,727 | | | $ | 1,285,891 | | $ | 1,309,639 | | $ | 595,221 | |
| | | | | | | | | | | | | | | |
| | |
| Noninterest-bearing deposits | | $ | 89,446 | | $ | 84,348 | | $ | 82,365 | | | $ | 166,497 | | $ | 150,837 | | $ | 90,793 | |
| Interest-bearing deposits | | 264,128 | | 260,112 | | 252,591 | | | 630,772 | | 630,565 | | 267,351 | |
| | | | | | | | | | | | | | | |
| Total deposits | | 353,574 | | 344,460 | | 334,956 | | | 797,269 | | 781,402 | | 358,144 | |
| Short-term borrowings | | 85,187 | | 53,255 | | 41,729 | | | 72,084 | | 108,074 | | 53,983 | |
| Accrued expenses and other liabilities | | 29,293 | | 30,706 | | 28,884 | | | 58,831 | | 50,689 | | 31,480 | |
| Long-term debt | | 107,350 | | 99,393 | | 95,592 | | | 250,650 | | 267,158 | | 103,175 | |
| | | | | | | | | | | | | | | |
| | 575,404 | | 527,814 | | 501,161 | | | 1,178,834 | | 1,207,323 | | 546,782 | |
| | | | | | | | | | | | | | | |
| | |
| | |
| Wells Fargo stockholders’ equity: | | |
| Preferred stock | | 625 | | 450 | | 545 | | | 31,411 | | 31,332 | | 837 | |
| Common stock – $1-2/3 par value, authorized 6,000,000,000 shares; issued 3,472,762,050 shares | | 5,788 | | 5,788 | | 5,788 | | |
| Common stock – $1-2/3 par value, authorized 6,000,000,000 shares; issued 4,363,921,429 shares, 4,363,921,429 shares and 3,472,762,050 shares | | | 7,273 | | 7,273 | | 5,788 | |
| Additional paid-in capital | | 8,348 | | 8,212 | | 8,089 | | | 32,414 | | 36,026 | | 8,259 | |
| Retained earnings | | 40,853 | | 38,970 | | 38,645 | | | 36,949 | | 36,543 | | 39,896 | |
| Cumulative other comprehensive income (loss) | | | (2,783 | ) | | 725 | | 291 | | | | (3,624 | ) | | | (6,869 | ) | | 120 | |
| Treasury stock – 151,543,421 shares, 175,659,842 shares and 147,535,970 shares | | | (5,207 | ) | | | (6,035 | ) | | | (5,209 | ) | |
| Treasury stock – 102,524,177 shares, 135,290,540 shares and 170,411,704 shares | | | | (3,593 | ) | | | (4,666 | ) | | | (5,850 | ) |
| Unearned ESOP shares | | | (667 | ) | | | (482 | ) | | | (583 | ) | | | (535 | ) | | | (555 | ) | | | (891 | ) |
| | | | | | | | | | | | | | | |
Total stockholders’ equity | | 46,957 | | 47,628 | | 47,566 | | |
| Total Wells Fargo stockholders’ equity | | | 100,295 | | 99,084 | | 48,159 | |
| | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 622,361 | | $ | 575,442 | | $ | 548,727 | | |
| | | 6,762 | | 3,232 | | 280 | |
| | | | | | | | | |
| | | 107,057 | | 102,316 | | 48,439 | |
| | | | | | | | | |
Total liabilities and equity | | | $ | 1,285,891 | | $ | 1,309,639 | | $ | 595,221 | |
| | | | | | | | | | | | | | | |
| | | | |
The accompanying notes are an integral part of these statements.
4155
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Cumulative | | | | | | | | |
| | | Additional | | other | | Unearned | | Total | | | | |
| | | Number of | | Preferred | | Common | | paid-in | | Retained | | comprehensive | | Treasury | | ESOP | | stockholders’ | | | Preferred stock | | Common stock | |
| (in millions, except shares) | | common shares | | stock | | stock | | capital | | earnings | | income | | stock | | shares | | equity | | | Shares | | Amount | | Shares | | Amount | |
| | |
BALANCE DECEMBER 31, 2006 | | 3,377,149,861 | | $ | 384 | | $ | 5,788 | | $ | 7,739 | | $ | 35,215 | | $ | 302 | | $ | (3,203 | ) | | $ | (411 | ) | | $ | 45,814 | | |
| | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect of adoption of FSP13-2 | | | (71 | ) | | | (71 | ) | |
| | | | | | | |
| BALANCE JANUARY 1, 2007 | | 3,377,149,861 | | 384 | | 5,788 | | 7,739 | | 35,144 | | 302 | | | (3,203 | ) | | | (411 | ) | | 45,743 | | |
| | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income: | | |
| Net income | | 6,696 | | 6,696 | | |
| Other comprehensive income, net of tax: | | |
| Translation adjustments | | 24 | | 24 | | |
| Net unrealized losses on securities available for sale and other interests held, net of reclassification of $133 million of net gains included in net income | | | (226 | ) | | | (226 | ) | |
| Net unrealized gains on derivatives and hedging activities, net of reclassification of $61 million of net gains on cash flow hedges included in net income | | 174 | | 174 | | |
| Defined benefit pension plans: | | |
| Amortization of actuarial loss and prior service cost included in net income | | 17 | | 17 | | |
| | | | | |
| Total comprehensive income | | 6,685 | | |
| Common stock issued | | 58,568,656 | | | (99 | ) | | | (276 | ) | | 1,906 | | 1,531 | | |
| Common stock issued for acquisitions | | 17,705,418 | | 68 | | 581 | | 649 | | |
| Common stock repurchased | | | (137,404,390 | ) | | | (4,765 | ) | | | (4,765 | ) | |
| Preferred stock (484,000) issued to ESOP | | 484 | | 34 | | | (518 | ) | | — | | |
| Preferred stock released to ESOP | | | (23 | ) | | 346 | | 323 | | |
| Preferred stock (323,069) converted to common shares | | 9,206,535 | | | (323 | ) | | 20 | | 303 | | — | | |
| Common stock dividends | | | (2,919 | ) | | | (2,919 | ) | |
| Tax benefit upon exercise of stock options | | 199 | | 199 | | |
| Stock option compensation expense | | 107 | | 107 | | |
| Net change in deferred compensation and related plans | | 44 | | | (31 | ) | | 13 | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net change | | | (51,923,781 | ) | | 161 | | — | | 350 | | 3,501 | | | (11 | ) | | | (2,006 | ) | | | (172 | ) | | 1,823 | | |
| | | | | | | | | | | | | | | | | | | | | |
BALANCE SEPTEMBER 30, 2007 | | 3,325,226,080 | | $ | 545 | | $ | 5,788 | | $ | 8,089 | | $ | 38,645 | | $ | 291 | | $ | (5,209 | ) | | $ | (583 | ) | | $ | 47,566 | | |
| | | | | | | | | | | | | | | | | | | | | | |
BALANCE DECEMBER 31, 2007 | | 3,297,102,208 | | $ | 450 | | $ | 5,788 | | $ | 8,212 | | $ | 38,970 | | $ | 725 | | $ | (6,035 | ) | | $ | (482 | ) | | $ | 47,628 | | | 449,804 | | $ | 450 | | 3,297,102,208 | | $ | 5,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect of adoption of EITF 06-4 and EITF 06-10 | | | (20 | ) | | | (20 | ) | |
FAS 158 change of measurement date | | | (8 | ) | | | (8 | ) | |
| | | | | | | |
BALANCE JANUARY 1, 2008 | | 3,297,102,208 | | 450 | | 5,788 | | 8,212 | | 38,942 | | 725 | | | (6,035 | ) | | | (482 | ) | | 47,600 | | | 449,804 | | 450 | | 3,297,102,208 | | 5,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | |
| Comprehensive income: | | |
Net income | | 5,389 | | 5,389 | | |
Other comprehensive income, net of tax: | | |
Translation adjustments | | | (20 | ) | | | (20 | ) | |
Net unrealized losses on securities available for sale and other interests held, net of reclassification of $107 million of net losses included in net income | | | (3,485 | ) | | | (3,485 | ) | |
Net unrealized losses on derivatives and hedging activities, net of reclassification of $115 million of net gains on cash flow hedges included in net income | | | (6 | ) | | | (6 | ) | |
Defined benefit pension plans: | | |
Amortization of net actuarial loss and prior service cost included in net income | | 3 | | 3 | | |
| Net unrealized gains (losses) on securities available for sale, net of reclassification of $180 million of net gains included in net income | | |
| Net unrealized gains on derivatives and hedging activities, net of reclassification of $30 million of net gains on cash flow hedges included in net income | | |
| Unamortized gains under defined benefit plans, net of amortization | | |
| | | | | |
Total comprehensive income | | 1,881 | | |
| Noncontrolling interests | | |
Common stock issued | | 49,454,756 | | | (41 | ) | | | (300 | ) | | 1,610 | | 1,269 | | | 12,053,786 | |
Common stock repurchased | | | (37,327,260 | ) | | | (1,162 | ) | | | (1,162 | ) | | | (11,404,468 | ) | |
Preferred stock (520,500) issued to ESOP | | 521 | | 30 | | | (551 | ) | | — | | |
| Preferred stock issued to ESOP | | | 520,500 | | 521 | |
Preferred stock released to ESOP | | | (20 | ) | | 366 | | 346 | | |
Preferred stock (344,860) converted to common shares | | 11,988,925 | | | (346 | ) | | | (46 | ) | | 392 | | — | | |
| Preferred stock converted to common shares | | | | (133,756 | ) | | | (134 | ) | | 4,598,820 | |
Common stock dividends | | | (3,178 | ) | | | (3,178 | ) | |
Tax benefit upon exercise of stock options | | 106 | | 106 | | |
Stock option compensation expense | | 134 | | 134 | | |
Net change in deferred compensation and related plans | | 32 | | | (12 | ) | | 20 | | |
Other | | | (59 | ) | | | (59 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net change | | 24,116,421 | | 175 | | — | | 136 | | 1,911 | | | (3,508 | ) | | 828 | | | (185 | ) | | | (643 | ) | | 386,744 | | 387 | | 5,248,138 | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE SEPTEMBER 30, 2008 | | 3,321,218,629 | | $ | 625 | | $ | 5,788 | | $ | 8,348 | | $ | 40,853 | | $ | (2,783 | ) | | $ | (5,207 | ) | | $ | (667 | ) | | $ | 46,957 | | |
| | | 836,548 | | $ | 837 | | 3,302,350,346 | | $ | 5,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BALANCE DECEMBER 31, 2008 | | | 10,111,821 | | $ | 31,332 | | 4,228,630,889 | | $ | 7,273 | |
| | | | | | | | | | | |
Cumulative effect of adoption of FSP FAS 115-2 and FAS 124-2 | | |
Effect of adoption of FAS 160, as amended and interpreted | | |
BALANCE JANUARY 1, 2009 | | | 10,111,821 | | 31,332 | | 4,228,630,889 | | 7,273 | |
| | | | | | | | | | | |
Comprehensive income: | | |
Net income | | |
Other comprehensive income, net of tax: | | |
Translation adjustments | | |
Securities available for sale: | | |
Unrealized losses related to factors other than credit | | |
All other net unrealized gains, net of reclassification of $48 million of net losses included in net income | | |
Net unrealized losses on derivatives and hedging activities, net of reclassification of $84 million of net gains on cash flow hedges included in net income | | |
Unamortized gains under defined benefit plans, net of amortization | | |
| | | |
Total comprehensive income | | |
Noncontrolling interests | | |
Common stock issued | | | 33,346,822 | |
Common stock repurchased | | | | (2,294,746 | ) | |
Preferred stock discount accretion | | | 98 | |
Preferred stock released to ESOP | | |
Preferred stock converted to common shares | | | | (18,830 | ) | | | (19 | ) | | 1,714,287 | |
Common stock dividends | | |
Preferred stock dividends and accretion | | |
Stock option compensation expense | | |
Net change in deferred compensation and related plans | | |
| | | | | | | | | | | |
Net change | | | | (18,830 | ) | | 79 | | 32,766,363 | | -- | |
| | | | | | | | | | | |
| | | 10,092,991 | | $ | 31,411 | | 4,261,397,252 | | $ | 7,273 | |
| | | | | | | | | | | |
| | | | |
The accompanying notes are an integral part of these statements.
4256
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| Wells Fargo stockholders' equity | | | | | | | |
| | | | | | | | | | Cumulative | | | | | | | | | | | Total | | | | | | | |
| | Additional | | | | | | | other | | | | | | Unearned | | Wells Fargo | | | | | | | |
| | | paid-in | | | Retained | | comprehensive | | Treasury | | | ESOP | | stockholders’ | | Noncontrolling | | | Total | |
| | | capital | | | earnings | | | income | | | stock | | | shares | | | equity | | interests | | | equity | |
| | |
| | $ | 8,212 | | | $ | 38,970 | | | $ | 725 | | | $ | (6,035 | ) | | $ | (482 | ) | | $ | 47,628 | | | $ | 286 | | | $ | 47,914 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | (20 | ) | | | | | | | | | | | | | | | (20 | ) | | | | | | | (20 | ) |
| | | | | | | | (8 | ) | | | | | | | | | | | | | | | (8 | ) | | | | | | | (8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 8,212 | | | | 38,942 | | | | 725 | | | | (6,035 | ) | | | (482 | ) | | | 47,600 | | | | 286 | | | | 47,886 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 1,999 | | | | | | | | | | | | | | | | 1,999 | | | | 20 | | | | 2,019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | (7 | ) | | | | | | | | | | | (7 | ) | | | | | | | (7 | ) |
| | | | | | | | | | | (783 | ) | | | | | | | | | | | (783 | ) | | | | | | | (783 | ) |
| | | | | | | | | | | 184 | | | | | | | | | | | | 184 | | | | | | | | 184 | |
| | | | | | | | | | | | 1 | | | | | | | | | | | | 1 | | | | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | 1,394 | | | | 20 | | | | 1,414 | |
| | | | | | | | | | | | | | | | | | | | | | | | -- | | | | (26 | ) | | | (26 | ) |
| | | | (58 | ) | | | (21 | ) | | | | | | | 396 | | | | | | | | 317 | | | | | | | | 317 | |
| | | | | | | | | | | | | | | | (351 | ) | | | | | | | (351 | ) | | | | | | | (351 | ) |
| | | | 30 | | | | | | | | | | | | | | | | (551 | ) | | | -- | | | | | | | | -- | |
| | | | (8 | ) | | | | | | | | | | | | | | | 142 | | | | 134 | | | | | | | | 134 | |
| | | | (16 | ) | | | | | | | | | | | 150 | | | | | | | | -- | | | | | | | | -- | |
| | | | | | | | (1,024 | ) | | | | | | | | | | | | | | | (1,024 | ) | | | | | | | (1,024 | ) |
| | | | 15 | | | | | | | | | | | | | | | | | | | | 15 | | | | | | | | 15 | |
| | | | 71 | | | | | | | | | | | | | | | | | | | | 71 | | | | | | | | 71 | |
| | | | 13 | | | | | | | | | | | | (10 | ) | | | | | | | 3 | | | | | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 47 | | | | 954 | | | | (605 | ) | | | 185 | | | | (409 | ) | | | 559 | | | | (6 | ) | | | 553 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 8,259 | | | $ | 39,896 | | | $ | 120 | | | $ | (5,850 | ) | | $ | (891 | ) | | $ | 48,159 | | | $ | 280 | | | $ | 48,439 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 36,026 | | | $ | 36,543 | | | $ | (6,869 | ) | | $ | (4,666 | ) | | $ | (555 | ) | | $ | 99,084 | | | $ | 3,232 | | | $ | 102,316 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 53 | | | | (53 | ) | | | | | | | | | | | -- | | | | | | | | -- | |
| | | | (3,716 | ) | | | -- | | | | -- | | | | | | | | | | | | (3,716 | ) | | | 3,716 | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 32,310 | | | | 36,596 | | | | (6,922 | ) | | | (4,666 | ) | | | (555 | ) | | | 95,368 | | | | 6,948 | | | | 102,316 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 3,045 | | | | | | | | | | | | | | | | 3,045 | | | | 44 | | | | 3,089 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | (18 | ) | | | | | | | | | | | (18 | ) | | | (5 | ) | | | (23 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | (210 | ) | | | | | | | | | | | (210 | ) | | | | | | | (210 | ) |
| | | | | | | | | | | 3,473 | | | | | | | | | | | | 3,473 | | | | 12 | | | | 3,485 | |
| | | | | | | | | | | (16 | ) | | | | | | | | | | | (16 | ) | | | | | | | (16 | ) |
| | | | | | | | | | | | 69 | | | | | | | | | | | | 69 | | | | | | | | 69 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | 6,343 | | | | 51 | | | | 6,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | -- | | | | (237 | ) | | | (237 | ) |
| | | | 35 | | | | (588 | ) | | | | | | | 1,077 | | | | | | | | 524 | | | | | | | | 524 | |
| | | | | | | | | | | | | | | | (54 | ) | | | | | | | (54 | ) | | | | | | | (54 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | 98 | | | | | | | | 98 | |
| | | | (1 | ) | | | | | | | | | | | | | | | 20 | | | | 19 | | | | | | | | 19 | |
| | | | (36 | ) | | | | | | | | | | | 55 | | | | | | | | -- | | | | | | | | -- | |
| | | | | | | | (1,443 | ) | | | | | | | | | | | | | | | (1,443 | ) | | | | | | | (1,443 | ) |
| | | | | | | | (661 | ) | | | | | | | | | | | | | | | (661 | ) | | | | | | | (661 | ) |
| | | | 95 | | | | | | | | | | | | | | | | | | | | 95 | | | | | | | | 95 | |
| | | | 11 | | | | | | | | | | | | (5 | ) | | | | | | | 6 | | | | | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 104 | | | | 353 | | | | 3,298 | | | | 1,073 | | | | 20 | | | | 4,927 | | | | (186 | ) | | | 4,741 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 32,414 | | | $ | 36,949 | | | $ | (3,624 | ) | | $ | (3,593 | ) | | $ | (535 | ) | | $ | 100,295 | | | $ | 6,762 | | | $ | 107,057 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
57
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| | | | |
| | | Nine months ended September 30 | , | | Quarter ended March 31 | , |
| (in millions) | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | | |
Cash flows from operating activities: | | |
| Net income | | $ | 5,389 | | $ | 6,696 | | |
| Wells Fargo net income | | | $ | 3,045 | | $ | 1,999 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Provision for credit losses | | 7,535 | | 2,327 | | | 4,558 | | 2,028 | |
| Changes in fair value of MSRs (residential) and MHFS carried at fair value | | | (1,301 | ) | | 474 | | | 2,141 | | 1,812 | |
| Depreciation and amortization | | 1,154 | | 1,141 | | | 981 | | 368 | |
| Other net gains | | | (999 | ) | | | (1,337 | ) | | | (383 | ) | | | (158 | ) |
| Preferred stock released to ESOP | | 346 | | 323 | | |
| Preferred shares released to ESOP | | | 19 | | 134 | |
| Stock option compensation expense | | 134 | | 107 | | | 95 | | 71 | |
| Excess tax benefits related to stock option payments | | | (104 | ) | | | (185 | ) | | -- | | | (15 | ) |
| Originations of MHFS | | | (163,797 | ) | | | (176,135 | ) | | | (98,613 | ) | | | (59,146 | ) |
| Proceeds from sales of and principal collected on mortgages originated for sale | | 171,809 | | 172,905 | | | 83,262 | | 56,737 | |
| Originations of LHFS | | | | (1,494 | ) | | -- | |
| Proceeds from sales of LHFS | | | 26,100 | | -- | |
| Purchases of LHFS | | | | (26,167 | ) | | -- | |
| Net change in: | | |
| Trading assets | | | (1,360 | ) | | | (2,959 | ) | | 7,821 | | | (1,166 | ) |
| Loans originated for sale | | | (361 | ) | | | (285 | ) | |
| Deferred income taxes | | 1,146 | | 632 | | | 2,373 | | | (200 | ) |
| Accrued interest receivable | | 63 | | | (446 | ) | | 674 | | 142 | |
| Accrued interest payable | | | (176 | ) | | | (59 | ) | | | (767 | ) | | | (63 | ) |
| Other assets, net | | | (7,958 | ) | | | (5,516 | ) | | 6,372 | | | (4,356 | ) |
| Other accrued expenses and liabilities, net | | 631 | | 3,169 | | | 5,818 | | 1,423 | |
| | | | | | | | | | | |
Net cash provided by operating activities | | 12,151 | | 852 | | |
| Net cash provided (used) by operating activities | | | 15,835 | | | (390 | ) |
| | | | | | | | | | | |
Cash flows from investing activities: | | |
| Net change in: | | |
| Federal funds sold, securities purchased under resale agreements and other short-term investments | | | (5,301 | ) | | 1,539 | | | 30,808 | | | (1,417 | ) |
| Securities available for sale: | | |
| Sales proceeds | | 39,698 | | 37,297 | | | 10,760 | | 16,213 | |
| Prepayments and maturities | | 15,879 | | 6,868 | | | 7,343 | | 5,466 | |
| Purchases | | | (74,381 | ) | | | (54,192 | ) | | | (39,173 | ) | | | (30,947 | ) |
| Loans: | | |
| Increase in banking subsidiaries’ loan originations, net of collections | | | (32,006 | ) | | | (34,020 | ) | |
| Decrease (increase) in banking subsidiaries’ loan originations, net of collections | | | 10,908 | | | (3,519 | ) |
| Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries | | 1,843 | | 2,611 | | | 419 | | 325 | |
| Purchases (including participations) of loans by banking subsidiaries | | | (4,329 | ) | | | (7,543 | ) | | | (301 | ) | | | (2,656 | ) |
| Principal collected on nonbank entities’ loans | | 15,462 | | 16,461 | | | 3,175 | | 5,015 | |
| Loans originated by nonbank entities | | | (13,880 | ) | | | (19,190 | ) | | | (1,995 | ) | | | (5,273 | ) |
| Net cash paid for acquisitions | | | (590 | ) | | | (2,862 | ) | | | (123 | ) | | | (46 | ) |
| Proceeds from sales of foreclosed assets | | 1,299 | | 1,014 | | | 1,001 | | 438 | |
| Changes in MSRs from purchases and sales | | 71 | | 1,124 | | | | (4 | ) | | 37 | |
| Net change in noncontrolling interests | | | | (186 | ) | | 6 | |
| Other, net | | | (1,325 | ) | | | (5,662 | ) | | | (4,117 | ) | | | (2,062 | ) |
| | | | | | | | | | | |
Net cash used by investing activities | | | (57,560 | ) | | | (56,555 | ) | |
| Net cash provided (used) by investing activities | | | 18,515 | | | (18,420 | ) |
| | | | | | | | | | | |
Cash flows from financing activities: | | |
| Net change in: | | |
| Deposits | | 7,370 | | 22,954 | | | 15,725 | | 13,684 | |
| Short-term borrowings | | 31,798 | | 28,760 | | | | (35,990 | ) | | 728 | |
| Long-term debt: | | |
| Proceeds from issuance | | 22,751 | | 22,569 | | | 3,811 | | 8,137 | |
| Repayment | | | (15,439 | ) | | | (14,846 | ) | | | (17,877 | ) | | | (7,569 | ) |
| Preferred stock: | | |
| Cash dividends paid and accretion | | | | (623 | ) | | -- | |
| Common stock: | | |
| Proceeds from issuance | | 1,269 | | 1,531 | | | 524 | | 317 | |
| Repurchased | | | (1,162 | ) | | | (4,765 | ) | | | (54 | ) | | | (351 | ) |
| Cash dividends paid | | | (3,178 | ) | | | (2,919 | ) | | | (1,443 | ) | | | (1,024 | ) |
| Excess tax benefits related to stock option payments | | 104 | | 185 | | | -- | | 15 | |
| Other, net | | — | | | (594 | ) | | -- | | 3,262 | |
| | | | | | | | | | | |
Net cash provided by financing activities | | 43,513 | | 52,875 | | |
| Net cash provided (used) by financing activities | | | | (35,927 | ) | | 17,199 | |
| | | | | | | | | | | |
Net change in cash and due from banks | | | (1,896 | ) | | | (2,828 | ) | | | (1,577 | ) | | | (1,611 | ) |
Cash and due from banks at beginning of period | | 14,757 | | 15,028 | | |
| Cash and due from banks at beginning of quarter | | | 23,763 | | 14,757 | |
| | | | | | | | | | | |
Cash and due from banks at end of period | | $ | 12,861 | | $ | 12,200 | | |
Cash and due from banks at end of quarter | | | $ | 22,186 | | $ | 13,146 | |
| | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | |
| Cash paid during the period for: | | |
| Cash paid during the quarter for: | | |
| Interest | | $ | 7,927 | | $ | 10,508 | | | $ | 3,704 | | $ | 3,152 | |
| Income taxes | | 2,431 | | 2,613 | | | 249 | | 259 | |
| Noncash investing and financing activities: | | |
| Net transfers from loans held for sale to loans | | $ | 677 | | $ | — | | |
| Transfers from trading assets to securities available for sale | | | $ | 786 | | $ | -- | |
| Transfers from MHFS to trading assets | | | 220 | | -- | |
| Transfers from MHFS to securities available for sale | | 544 | | — | | | -- | | 268 | |
| Transfers from trading assets to securities available for sale | | — | | 1,268 | | |
| Transfers from MHFS to loans | | 507 | | 1,522 | | | 32 | | 55 | |
| Transfers from MHFS to MSRs | | 2,659 | | 2,841 | | | 1,451 | | 802 | |
| Transfers from MHFS to foreclosed assets | | 105 | | 69 | | | 33 | | -- | |
| Net transfers from LHFS to loans | | | -- | | 176 | |
| Transfers from loans to foreclosed assets | | 2,203 | | 1,978 | | | 1,479 | | 775 | |
| | | | |
The accompanying notes are an integral part of these statements.
4358
NOTES TO FINANCIAL STATEMENTS
| | |
1. | | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESWells Fargo & Company is a diversified financial services company. We provide banking, insurance, investments, mortgage banking, investment banking, retail banking, brokerage, and consumer finance through banking stores, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of the U.S.Columbia, and in other countries. When we refer to “Wells Fargo,” “the Company,” “we,” “our” or “us” in this Form 10-Q, we mean Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company. We also hold a majority interest in a retail brokerage subsidiary and a real estate investment trust, which has publicly traded preferred stock outstanding.
Our accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and assumptionsmarket conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period.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 in 2009 actual 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 in several areas, including the evaluation of other-than-temporary impairment on investment securities (Note 4), allowance for credit losses and loans accounted for under American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3) (Note 5), valuing residential mortgage servicing rights (MSRs) (Notes 7 and 8) and financial instruments (Note 13), pension accounting (Note 15) and income taxes. Actual results could differ from those estimates. Among other effects, such changes could result in future impairments of investment securities, increases to the allowance for loan losses, as well as increased future pension expense.
On December 31, 2008, Wells Fargo acquired Wachovia Corporation (Wachovia). Because the acquisition was completed at the end of 2008, Wachovia’s results of operations are included in the income statement and average balances beginning in 2009. Wachovia’s assets and liabilities are included in the consolidated balance sheet beginning on December 31, 2008. The accounting policies of Wachovia have been conformed to those of Wells Fargo as described herein.
On January 1, 2009, the Company adopted Statement of Financial Accounting Standards (FAS) No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,on a retrospective basis for disclosure and, accordingly, prior period information reflects the adoption. FAS 160 requires that noncontrolling interests be reported as a component of total equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts attributable to both Wells Fargo interests and the noncontrolling interests.
59
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 Annual Report on Form 10-K for the year ended December 31, 2007 (20072008 (2008 Form 10-K).
On January 1, 2008,Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
| • | | FSP FIN 39-1FAS 161,Disclosures about Derivative Instruments and Hedging Activities – Financial Accounting Standards Board (FASB) Staff Position on Interpretation No. 39,Amendmentan amendment of FASB InterpretationStatement No. 39;133; |
| • | | EITF 06-4FAS 160,Noncontrolling Interests in Consolidated Financial Statements – Emerging Issues Task Force (EITF) Issuean amendment of ARB No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements;51; |
| • | | EITF 06-10 – EITF Issue No. 06-10,FAS 141R (revised 2007),Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements;Business Combinationsand; |
• | | SAB 109 – Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings. |
On July 1, 2008, we adopted the following new accounting pronouncement:
| • | | FSP FAS 157-3 – FASB Staff Position No. FAS 157-3,157-4,Determining the Fair Value of a Financial Asset When the MarketVolume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Asset IsAre Not ActiveOrderly; |
| • | | FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments; and |
| • | | FASB Emerging Issues Task Force (EITF) No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. |
On April 30, 2007,FAS 161 changes the FASB issued FSP FIN 39-1, which amends Interpretation No. 39 to permit a reporting entity to offset the right to reclaim cash collateral (a receivable), or the obligation to return cash collateral (a payable), againstdisclosure requirements for derivative instruments executedand hedging activities. It requires enhanced disclosures about how and why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and hedged items affect an entity’s financial position, performance and cash flows. We adopted FAS 161 for first quarter 2009 reporting. See Note 12 for complete disclosures under FAS 161. Because FAS 161 amends only the disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 does not affect our consolidated financial results.
FAS 160 requires that noncontrolling interests (previously referred to as minority interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160, they were classified outside of equity. This new standard also changes the way a noncontrolling interest is presented in the income statement such that a parent’s consolidated income statement includes amounts attributable to both the parent’s interest and the noncontrolling interest. FAS 160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The remaining interest is initially recorded at fair value. Other changes in ownership interest where the parent continues to have a majority ownership interest in the subsidiary are accounted for as capital transactions. FAS 160 was effective for us on January 1, 2009. Adoption is applied prospectively to all noncontrolling interests including those that arose prior to the adoption of FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of the adoption date.
We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). In connection with the same counterpartyadoption of FAS 160 on January 1, 2009, we reclassified Prudential’s noncontrolling interest to equity. Under the terms of the original agreement under which the joint
60
venture was established between Wachovia and Prudential, each party has certain rights such that changes in our ownership interest can occur. Prudential has stated its intention to exercise its option to put its noncontrolling interest to us at a date in the future, but has not yet done so. As a result of the issuance of FAS 160 and related interpretive guidance, along with this stated intention, on January 1, 2009, we increased the carrying value of Prudential’s noncontrolling interest in the joint venture to the estimated maximum redemption amount, with the offset recorded to additional paid-in capital.
FAS 141R requires an acquirer in a business combination to recognize the assets acquired (including loan receivables), the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for loans and other assets acquired in a business combination. The revised statement requires acquisition-related costs to be expensed separately from the acquisition. It also requires restructuring costs that the acquirer expected but was not obligated to incur, to be expensed separately from the business combination. FAS 141R is applicable prospectively to business combinations completed on or after January 1, 2009. We will account for business combinations with acquisition dates on or after January 1, 2009, under FAS 141R.
FSP FAS 157-4 addresses measuring fair value under FAS 157 in situations where markets are inactive and transactions are not orderly. The FSP acknowledges that in these circumstances quoted prices may not be determinative of fair value. The FSP emphasizes, however, that even if there has been a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement has not changed. Prior to issuance of this FSP, FAS 157 had been interpreted by many companies, including Wells Fargo, to emphasize that fair value must be measured based on the most recently available quoted market prices, even for markets that have experienced a significant decline in the volume and level of activity relative to normal conditions and therefore could have increased frequency of transactions that are not orderly. Under the provisions of the FSP, price quotes for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly. For inactive markets, we note there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring. The FSP does not prescribe a specific method for adjusting transaction or quoted prices, however, it does provide guidance for determining how much weight to give transaction or quoted prices. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and should be given little, if any, weight in measuring fair value. Price quotes based upon transactions that are orderly shall be considered in determining fair value and the weight given is based upon the facts and circumstances. If sufficient information is not available to determine if price quotes are based upon orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly.
The provisions of FSP FAS 157-4 are effective in second quarter 2009; however, as permitted under the same master netting arrangement.pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted in an increase in the valuation of securities available for sale of $4.5 billion ($2.8 billion after tax), which is included in other comprehensive income, and trading assets of $18 million, which is reflected in earnings.
61
The following table provides the detail of the first quarter 2009 $4.5 billion (pre tax) increase in fair value of securities available for sale under FSP FAS 157-4.
| | | | | |
| | |
| (in millions) | | | | |
| | |
Mortgage-backed securities: | | | | |
| Residential | | $ | 2,311 | |
| Commercial | | | 1,329 | |
| Collateralized debt obligations | | | 492 | |
| Other (1) | | | 394 | |
| | | | |
| | $ | 4,526 | |
| | | | |
| | |
| | |
| (1) | | Primarily consists of home equity asset-backed securities and credit card-backed securities. |
FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment (OTTI) write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective forin second quarter 2009; however, as permitted under the year beginningpronouncement, we early adopted on January 1, 2008,2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with earlya corresponding adjustment to accumulated other comprehensive income for OTTI recorded in previous periods on securities in our portfolio at January 1, 2009, that would not have been required had the FSP been effective for those periods. As a result of the adoption permitted. We adoptedof the FSP, FIN 39-1$334 million of OTTI remained in other comprehensive income that would have been reported in the income statement under the prior guidance.
EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents be treated as participating securities and, therefore, included in the computation of earnings per share under the two-class method described in FAS 128,Earnings per Share. This pronouncement is effective on January 1, 2008, and it2009, with retrospective adoption required. The adoption of EITF 03-6-1 did not have a material effect on our consolidated financial statements.
4462
On September 20, 2006, the FASB ratified the consensus reached by the EITF at its September 7, 2006, meeting with respect to EITF 06-4. On March 28, 2007, the FASB ratified the consensus reached by the EITF at its March 15, 2007, meeting with respect to EITF 06-10. These pronouncements require that for endorsement split-dollar life insurance arrangements and collateral split-dollar life insurance arrangements where the employee is provided benefits in postretirement periods, the employer should recognize the cost of providing that insurance over the employee’s service period by accruing a liability for the benefit obligation. Additionally, for collateral assignment split-dollar life insurance arrangements, an employer is required to recognize and measure an asset based upon the nature and substance of the agreement. EITF 06-4 and EITF 06-10 are effective for the year beginning on January 1, 2008, with early adoption permitted. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008, and reduced beginning retained earnings for 2008 by $20 million (after tax), primarily related to split-dollar life insurance arrangements from the acquisition of Greater Bay Bancorp.
On November 5, 2007, the Securities and Exchange Commission (SEC) issued SAB 109, which provides the staff’s views on the accounting for written loan commitments recorded at fair value under GAAP. To make the staff’s views consistent with current authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB 105,Application of Accounting Principles to Loan Commitments. Specifically, SAB 109 states the expected net future cash flows associated with the servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB 109, which we adopted on January 1, 2008, are applicable to written loan commitments recorded at fair value that are entered into beginning on or after January 1, 2008. The implementation of SAB 109 did not have a material impact on our results or the valuation of our loan commitments.
On October 10, 2008, the FASB issued Staff Position No. 157-3, which clarifies the application of FAS 157,Fair Value Measurements, in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The FSP states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable. The FSP also indicates that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. In weighing a broker quote as an input to a fair value measurement, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (for example, whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence. The FSP is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. Accordingly, we adopted the FSP prospectively, beginning July 1, 2008. The adoption of the FSP did not have a material impact on our financial results or fair value determinations.
45
Statement of Cash Flows
In the first nine months of 2007, our consolidated statement of cash flows reflected mortgage servicing rights (MSRs) from securitizations and asset transfers, as separately detailed in Note 8 in this Report, of $2,841 million as an increase to cash flows from operating activities with a corresponding decrease to cash flows from investing activities. Upon filing our 2007 Form 10-K we revised our consolidated statement of cash flows to appropriately reflect the proceeds from sales of mortgages held for sale (MHFS) and the related investment in MSRs as noncash transfers from MHFS to MSRs. The impact of the adjustments on the consolidated statement of cash flows for the first nine months of 2007 was to decrease net cash provided by operating activities from $3,693 million to $852 million and decrease net cash used by investing activities from $59,396 million to $56,555 million. These revisions to the historical financial statements were not considered to be material.
Descriptions of our significant accounting policies are included in Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2007 Form 10-K.
We regularly explore opportunities to acquire financial services companies and businesses. Generally, we do not make a public announcement about an acquisition opportunity until a definitive agreement has been signed.
At September 30, 2008,In first quarter 2009, we had three pendingcompleted the acquisitions of a factoring business combinations with total assets of approximately $1.6 billion. Transactions completed in the first nine months$74 million and an insurance brokerage business with total assets of 2008 were:$23 million.
| | | | | | | | | |
| |
| (in millions) | | Date | | | Assets | |
| |
Flatiron Credit Company, Inc., Denver, Colorado | | April 30 | | | $ | 332 | |
| Transcap Associates, Inc., Chicago, Illinois | | June 27 | | | | 22 | |
| United Bancorporation of Wyoming, Inc., Jackson, Wyoming (1) | | July 1 | | | | 2,110 | |
| Other (2) | | | | | | | 12 | |
| | | | | | | | |
| | | | | | | $ | 2,476 | |
| | | | | | | | |
| |
| | |
(1) | | Consists of five affiliated banks of United Bancorporation of Wyoming, Inc., located in Wyoming and Idaho, and certain assets and liabilities of United Bancorporation of Wyoming, Inc. |
(2) | | Consists of nine acquisitions of insurance brokerage businesses. |
At March 31, 2009, we had no pending business combinations.On October 3,December 31, 2008, we announced that we had signed a definitive agreement to acquireacquired all outstanding shares of Wachovia Corporation (Wachovia)common stock in a stock-for-stock transaction. Wachovia, based in Charlotte, North Carolina, had total assets of $764 billion at September 30, 2008, and is oneBecause the transaction closed on the last day of the nation’s largest diversified financial services companies, providingannual reporting period, certain fair value purchase accounting adjustments were based on data as of an interim period with estimates through year end. Accordingly, we have re-validated and, where necessary, have refined our purchase accounting adjustments. We will continue to update the fair value of net assets acquired for a broad rangeperiod of retail banking and brokerage, asset and wealth management, and corporate and investment banking products and servicesup to customers through 3,300 financial centers in 21 statesone year from Connecticut to Florida and west to Texas and California, and nationwide retail brokerage, mortgage lending and auto finance businesses. Under termsthe date of the agreement, Wachovia shareholders will receive 0.1991 sharesacquisition as we further refine acquisition date fair values. The impact of Wells Fargo common stockthe first quarter 2009 refinements were recorded to goodwill and increased goodwill by $1.14 billion in exchange for each sharefirst quarter 2009. The refined allocation of Wachovia common stock. The agreementthe purchase price at December 31, 2008, is subject to approval of Wachovia shareholderspresented in the following table.
Purchase Price and the merger is expected to be completed by the end of 2008.Goodwill
| | | | | | | | | | | | | |
| | |
| | | Dec. 31 | , | | | | | | | |
| | | 2008 | | | | | | | Dec. 31 | , |
| (in millions) | | (refined) | | Refinements | | | 2008 | |
| | |
| | | | | | | | | | | | |
| Value of common shares | | $ | 14,621 | | | $ | -- | | | $ | 14,621 | |
| Value of preferred shares | | | 8,409 | | | | -- | | | | 8,409 | |
| Other (value of share-based awards and direct acquisition costs) | | | 62 | | | | -- | | | | 62 | |
| | | | | | | | | | |
| Total purchase price | | | 23,092 | | | | -- | | | | 23,092 | |
| Allocation of the purchase price: | | | | | | | | | | | | |
| Wachovia tangible stockholders’ equity, less prior purchase accounting adjustments and other basis adjustments eliminated in purchase accounting | | | 19,319 | | | | (75 | ) | | | 19,394 | |
| Adjustments to reflect assets acquired and liabilities assumed at fair value: | | | | | | | | | | | | |
| Loans and leases, net | | | (17,139 | ) | | | (742 | ) | | | (16,397 | ) |
| Premises and equipment, net | | | (656 | ) | | | (200 | ) | | | (456 | ) |
| Intangible assets | | | 14,590 | | | | (150 | ) | | | 14,740 | |
| Other assets | | | (3,675 | ) | | | (231 | ) | | | (3,444 | ) |
| Deposits | | | (4,576 | ) | | | (142 | ) | | | (4,434 | ) |
| Accrued expenses and other liabilities (exit, termination and other liabilities) | | | (2,153 | ) | | | (554 | ) | | | (1,599 | ) |
| Long-term debt | | | (199 | ) | | | (9 | ) | | | (190 | ) |
| Deferred taxes | | | 7,635 | | | | 959 | | | | 6,676 | |
| | | | | | | | | | |
| Fair value of net assets acquired | | | 13,146 | | | | (1,144 | ) | | | 14,290 | |
| | | | | | | | | | |
| Goodwill resulting from the merger | | $ | 9,946 | | | $ | 1,144 | | | $ | 8,802 | |
| | | | | | | | | | |
| | |
4663
The increase in goodwill includes the recognition of additional costs associated with involuntary employee termination, contract terminations and closing duplicate facilities and have been allocated to the purchase price. These costs will be recorded throughout 2009 as part of the further integration of Wachovia’s employees, locations and operations with Wells Fargo as management finalizes integration plans. The following table summarizes exit reserves associated with the Wachovia acquisition:
| | | | | | | | | | | | | | | | | |
| | |
| | Employee | | Contract | | Facilities | | | | |
| (in millions) | termination | | termination | | related | | Total | |
| | |
Balance, December 31, 2008 | | $ | 57 | | | $ | 13 | | | $ | 129 | | | $ | 199 | |
| Purchase accounting adjustments | | | 100 | | | | 200 | | | | 60 | | | | 360 | |
| Cash payments | | | (50 | ) | | | -- | | | | (8 | ) | | | (58 | ) |
| | | | | | | | | | | | | |
| Balance, March 31, 2009 | | $ | 107 | | | $ | 213 | | | $ | 181 | | | $ | 501 | |
| | | | | | | | | | | | | |
| | |
| | |
3. | | FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS |
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTSThe following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , |
| (in millions) | | 2008 | | 2007 | | 2007 | | | 2009 | | 2008 | | 2008 | |
| | | | |
Federal funds sold and securities purchased under resale agreements | | $ | 5,562 | | $ | 1,700 | | $ | 3,436 | | | $ | 4,114 | | $ | 8,439 | | $ | 2,209 | |
| Interest-earning deposits | | 1,775 | | 460 | | 499 | | | 13,359 | | 39,890 | | 994 | |
| Other short-term investments | | 756 | | 594 | | 611 | | | 1,152 | | 1,104 | | 968 | |
| | | | | | | | | | | | | | | |
| Total | | $ | 8,093 | | $ | 2,754 | | $ | 4,546 | | | $ | 18,625 | | $ | 49,433 | | $ | 4,171 | |
| | | | | | | | | | | | | | | |
| | | | |
64
| | |
4. | | SECURITIES AVAILABLE FOR SALE |
4. SECURITIES AVAILABLE FOR SALEThe following table provides the cost and fair value for the major categories of securities available for sale carried at fair value. The net unrealized gains (losses) are reported on an after-tax basis as a component of cumulative other comprehensive income. There were no securities classified as held to maturity as of the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Sept. 30, 2008 | | Dec. 31, 2007 | | Sept. 30, 2007 | | | Gross | | Gross | | | |
| | | Fair | | Fair | | Fair | | | unrealized | | unrealized | | Fair | |
| (in millions) | | Cost | | value | | Cost | | value | | Cost | | value | | | Cost | | gains | | losses | | value | |
| | | | |
| | |
Securities of U.S. Treasury and federal agencies | | $ | 1,162 | | $ | 1,170 | | $ | 962 | | $ | 982 | | $ | 859 | | $ | 860 | | | $ | 983 | | $ | 33 | | $ | -- | | $ | 1,016 | |
| Securities of U.S. states and political subdivisions | | 8,011 | | 7,336 | | 6,128 | | 6,152 | | 5,698 | | 5,786 | | | 7,453 | | 109 | | | (382 | ) | | 7,180 | |
| Mortgage-backed securities: | | |
| Federal agencies | | 43,074 | | 43,904 | | 34,092 | | 34,987 | | 29,470 | | 29,902 | | | 37,468 | | 1,145 | | | (36 | ) | | 38,577 | |
| Private collateralized mortgage obligations (1) | | 24,582 | | 21,033 | | 20,026 | | 19,982 | | 12,083 | | 12,086 | | |
| Residential | | | 15,625 | | 55 | | | (217 | ) | | 15,463 | |
| Commercial | | | 7,755 | | 85 | | | (718 | ) | | 7,122 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | 67,656 | | 64,937 | | 54,118 | | 54,969 | | 41,553 | | 41,988 | | | 60,848 | | 1,285 | | | (971 | ) | | 61,162 | |
| Other | | 11,883 | | 11,131 | | 8,185 | | 8,065 | | 6,377 | | 6,312 | | |
| Corporate debt securities | | | 2,045 | | 24 | | | (162 | ) | | 1,907 | |
| Collateralized debt obligations | | | 1,086 | | 4 | | | (273 | ) | | 817 | |
| Other (1) | | | 6,711 | | 57 | | | (28 | ) | | 6,740 | |
| | | | | | | | | | | |
| Total debt securities | | | 79,126 | | 1,512 | | | (1,816 | ) | | 78,822 | |
| Marketable equity securities: | | |
| Perpetual preferred securities | | | 2,533 | | 3 | | | (386 | ) | | 2,150 | |
| Other marketable equity securities | | | 726 | | 115 | | | (26 | ) | | 815 | |
| | | | | | | | | | | |
| Total marketable equity securities | | | 3,259 | | 118 | | | (412 | ) | | 2,965 | |
| | | | | | | | | | | |
| Total | | | $ | 82,385 | | $ | 1,630 | | $ | (2,228 | ) | | $ | 81,787 | |
| | | | | | | | | | | |
| | |
Securities of U.S. Treasury and federal agencies | | | $ | 3,187 | | $ | 62 | | $ | -- | | $ | 3,249 | |
| Securities of U.S. states and political subdivisions | | | 14,062 | | 116 | | | (1,520 | ) | | 12,658 | |
| Mortgage-backed securities: | | |
| Federal agencies | | | 64,726 | | 1,711 | | | (3 | ) | | 66,434 | |
| Residential | | | 29,536 | | 11 | | | (4,717 | ) | | 24,830 | |
| Commercial | | | 12,305 | | 51 | | | (3,878 | ) | | 8,478 | |
| | | | | | | | | | | |
| Total mortgage-backed securities | | | 106,567 | | 1,773 | | | (8,598 | ) | | 99,742 | |
| Corporate debt securities | | | 7,382 | | 81 | | | (539 | ) | | 6,924 | |
| Collateralized debt obligations | | | 2,634 | | 21 | | | (570 | ) | | 2,085 | |
| Other (1) (2) | | | 21,363 | | 14 | | | (602 | ) | | 20,775 | |
| | | | | | | | | | | |
| Total debt securities | | | 155,195 | | 2,067 | | | (11,829 | ) | | 145,433 | |
| Marketable equity securities: | | |
| Perpetual preferred securities | | | 5,040 | | 13 | | | (327 | ) | | 4,726 | |
| Other marketable equity securities | | | 1,256 | | 181 | | | (27 | ) | | 1,410 | |
| | | | | | | | | | | |
| Total marketable equity securities | | | 6,296 | | 194 | | | (354 | ) | | 6,136 | |
| | | | | | | | | | | |
| Total | | | $ | 161,491 | | $ | 2,261 | | $ | (12,183 | ) | | $ | 151,569 | |
| | | | | | | | | | | |
| | |
Securities of U.S. Treasury and federal agencies | | | $ | 2,837 | | $ | 68 | | $ | (2 | ) | | $ | 2,903 | |
Securities of U.S. states and political subdivisions | | | 12,738 | | 281 | | | (1,173 | ) | | 11,846 | |
Mortgage-backed securities: | | |
Federal agencies | | | 87,721 | | 2,931 | | | (4 | ) | | 90,648 | |
Residential (2) | | | 34,853 | | 1,287 | | | (3,658 | ) | | 32,482 | |
Commercial | | | 12,762 | | 280 | | | (3,267 | ) | | 9,775 | |
| | | | | | | | | | | |
Total mortgage-backed securities | | | 135,336 | | 4,498 | | | (6,929 | ) | | 132,905 | |
Corporate debt securities | | | 7,531 | | 157 | | | (702 | ) | | 6,986 | |
Collateralized debt obligations | | | 2,761 | | 221 | | | (596 | ) | | 2,386 | |
Other (1) | | | 16,159 | | 660 | | | (556 | ) | | 16,263 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total debt securities | | 88,712 | | 84,574 | | 69,393 | | 70,168 | | 54,487 | | 54,946 | | | 177,362 | | 5,885 | | | (9,958 | ) | | 173,289 | |
| Marketable equity securities: | | |
| Perpetual preferred securities | | 2,531 | | 1,653 | | 2,082 | | 1,852 | | 1,605 | | 1,525 | | | 4,483 | | 41 | | | (754 | ) | | 3,770 | |
| Other marketable equity securities | | 516 | | 655 | | 796 | | 931 | | 767 | | 969 | | | 1,342 | | 190 | | | (123 | ) | | 1,409 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total marketable equity securities | | 3,047 | | 2,308 | | 2,878 | | 2,783 | | 2,372 | | 2,494 | | | 5,825 | | 231 | | | (877 | ) | | 5,179 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 91,759 | | $ | 86,882 | | $ | 72,271 | | $ | 72,951 | | $ | 56,859 | | $ | 57,440 | | | $ | 183,187 | | $ | 6,116 | | $ | (10,835 | ) | | $ | 178,468 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | A majority of the private collateralized mortgage obligations are AAA-rated bondsThe “Other” category includes certain asset-backed securities collateralized by 1-4 familyauto leases with a cost basis and fair value of $8,407 million and $8,309 million, respectively, at March 31, 2009, $8,310 million and $7,852 million at December 31, 2008, and $5,909 million and $5,941 million at March 31, 2008. |
| (2) | | Foreign residential first mortgages.mortgage-backed securities with a fair value of $6.0 billion are included in residential mortgage-backed securities at March 31, 2009. These instruments were included in other debt securities at December 31, 2008, and had a fair value of $6.3 billion. |
The following table provides the components of the net unrealized gains (losses) on securities available for sale. The net unrealized gains and losses on securities available for sale are reported on an after-tax basis as a component of cumulative other comprehensive income.
| | | | | | | | | | | | | |
| |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , |
| (in millions) | | 2008 | | | 2007 | | | 2007 | |
| |
Gross unrealized gains | | $ | 1,176 | | | $ | 1,352 | | | $ | 857 | |
| Gross unrealized losses | | | (6,053 | ) | | | (672 | ) | | | (276 | ) |
| | | | | | | | | | |
| Net unrealized gains (losses) | | $ | (4,877 | ) | | $ | 680 | | | $ | 581 | |
| | | | | | | | | | |
| |
4765
Net unrealized losses were $4,877 million at September 30, 2008, compared with net unrealized gains of $680 million at December 31, 2007. The increase in net unrealized losses was largely due to wider spreads on mortgage-backed securitiesGross Unrealized Losses and an increase in market yields for the first nine months of 2008.
Fair Value
The following table shows the gross unrealized losses and fair value of securities available for sale at September 30, 2008, and December 31, 2007,in the securities available-for-sale portfolio by length of time that individual securities in each category had been in a continuous loss position.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Less than 12 months | | | 12 months or more | | | Total | |
| | | Gross | | | | | | | Gross | | | | | | | Gross | | | | |
| | | unrealized | | | Fair | | | unrealized | | | Fair | | | unrealized | | | Fair | |
| (in millions) | | losses | | | value | | | losses | | | value | | | losses | | | value | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Securities of U.S. states and political subdivisions | | | (98 | ) | | | 1,957 | | | | (13 | ) | | | 70 | | | | (111 | ) | | | 2,027 | |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal agencies | | | (1 | ) | | | 39 | | | | (2 | ) | | | 150 | | | | (3 | ) | | | 189 | |
| Private collateralized mortgage obligations | | | (124 | ) | | | 7,722 | | | | (2 | ) | | | 54 | | | | (126 | ) | | | 7,776 | |
| | | | | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | | (125 | ) | | | 7,761 | | | | (4 | ) | | | 204 | | | | (129 | ) | | | 7,965 | |
| Other | | | (140 | ) | | | 2,425 | | | | (25 | ) | | | 491 | | | | (165 | ) | | | 2,916 | |
| | | | | | | | | | | | | | | | | | | |
| Total debt securities | | | (363 | ) | | | 12,143 | | | | (42 | ) | | | 765 | | | | (405 | ) | | | 12,908 | |
| Marketable equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Perpetual preferred securities | | | (236 | ) | | | 1,404 | | | | — | | | | 9 | | | | (236 | ) | | | 1,413 | |
| Other marketable equity securities | | | (30 | ) | | | 284 | | | | (1 | ) | | | 27 | | | | (31 | ) | | | 311 | |
| | | | | | | | | | | | | | | | | | | |
| Total marketable equity securities | | | (266 | ) | | | 1,688 | | | | (1 | ) | | | 36 | | | | (267 | ) | | | 1,724 | |
| | | | | | | | | | | | | | | | | | | |
| | $ | (629 | ) | | $ | 13,831 | | | $ | (43 | ) | | $ | 801 | | | $ | (672 | ) | | $ | 14,632 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | (7 | ) | | $ | 514 | | | $ | — | | | $ | — | | | $ | (7 | ) | | $ | 514 | |
Securities of U.S. states and political subdivisions | | | (384 | ) | | | 4,186 | | | | (345 | ) | | | 1,367 | | | | (729 | ) | | | 5,553 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | (29 | ) | | | 3,568 | | | | (1 | ) | | | 31 | | | | (30 | ) | | | 3,599 | |
Private collateralized mortgage obligations | | | (3,529 | ) | | | 20,331 | | | | (42 | ) | | | 145 | | | | (3,571 | ) | | | 20,476 | |
| | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | | (3,558 | ) | | | 23,899 | | | | (43 | ) | | | 176 | | | | (3,601 | ) | | | 24,075 | |
Other | | | (509 | ) | | | 7,885 | | | | (280 | ) | | | 531 | | | | (789 | ) | | | 8,416 | |
| | | | | | | | | | | | | | | | | | | |
Total debt securities | | | (4,458 | ) | | | 36,484 | | | | (668 | ) | | | 2,074 | | | | (5,126 | ) | | | 38,558 | |
Marketable equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Perpetual preferred securities | | | (452 | ) | | | 1,137 | | | | (428 | ) | | | 426 | | | | (880 | ) | | | 1,563 | |
Other marketable equity securities | | | (46 | ) | | | 212 | | | | (1 | ) | | | 2 | | | | (47 | ) | | | 214 | |
| | | | | | | | | | | | | | | | | | | |
Total marketable equity securities | | | (498 | ) | | | 1,349 | | | | (429 | ) | | | 428 | | | | (927 | ) | | | 1,777 | |
| | | | | | | | | | | | | | | | | | | |
| | $ | (4,956 | ) | | $ | 37,833 | | | $ | (1,097 | ) | | $ | 2,502 | | | $ | (6,053 | ) | | $ | 40,335 | |
| | | | | | | | | | | | | | | | | | | |
| |
The change in the debt Debt securities that had beenon which we have taken only credit-related OTTI write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position for 12 months or more at September 30, 2008, was duebased on the point in time that the fair value declined to below the cost basis and not the period of time since the OTTI write-down.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | Less than 12 months | | | 12 months or more | | | Total | |
| | | Gross | | | | | | | Gross | | | | | | | Gross | | | | |
| | unrealized | | | Fair | | unrealized | | | Fair | | | unrealized | | | Fair | |
| (in millions) | | losses | | | value | | | losses | | | value | | | losses | | | value | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | |
| Securities of U.S. states and political subdivisions | | | (745 | ) | | | 3,483 | | | | (775 | ) | | | 1,702 | | | | (1,520 | ) | | | 5,185 | |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal agencies | | | (3 | ) | | | 83 | | | | -- | | | | -- | | | | (3 | ) | | | 83 | |
| Residential | | | (4,471 | ) | | | 9,960 | | | | (246 | ) | | | 238 | | | | (4,717 | ) | | | 10,198 | |
| Commercial | | | (1,726 | ) | | | 4,152 | | | | (2,152 | ) | | | 2,302 | | | | (3,878 | ) | | | 6,454 | |
| | | | | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | | (6,200 | ) | | | 14,195 | | | | (2,398 | ) | | | 2,540 | | | | (8,598 | ) | | | 16,735 | |
| Corporate debt securities | | | (285 | ) | | | 1,056 | | | | (254 | ) | | | 469 | | | | (539 | ) | | | 1,525 | |
| Collateralized debt obligations | | | (113 | ) | | | 215 | | | | (457 | ) | | | 180 | | | | (570 | ) | | | 395 | |
| Other | | | (554 | ) | | | 8,638 | | | | (48 | ) | | | 38 | | | | (602 | ) | | | 8,676 | |
| | | | | | | | | | | | | | | | | | | |
| Total debt securities | | | (7,897 | ) | | | 27,587 | | | | (3,932 | ) | | | 4,929 | | | | (11,829 | ) | | | 32,516 | |
| Marketable equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Perpetual preferred securities | | | (75 | ) | | | 265 | | | | (252 | ) | | | 360 | | | | (327 | ) | | | 625 | |
| Other marketable equity securities | | | (23 | ) | | | 72 | | | | (4 | ) | | | 9 | | | | (27 | ) | | | 81 | |
| | | | | | | | | | | | | | | | | | | |
| Total marketable equity securities | | | (98 | ) | | | 337 | | | | (256 | ) | | | 369 | | | | (354 | ) | | | 706 | |
| | | | | | | | | | | | | | | | | | | |
| | $ | (7,995 | ) | | $ | 27,924 | | | $ | (4,188 | ) | | $ | 5,298 | | | $ | (12,183 | ) | | $ | 33,222 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | (2 | ) | | $ | 1,300 | | | $ | -- | | | $ | -- | | | $ | (2 | ) | | $ | 1,300 | |
Securities of U.S. states and political subdivisions | | | (504 | ) | | | 3,821 | | | | (669 | ) | | | 2,222 | | | | (1,173 | ) | | | 6,043 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | (4 | ) | | | 279 | | | | -- | | | | 20 | | | | (4 | ) | | | 299 | |
Residential | | | (1,723 | ) | | | 12,707 | | | | (1,935 | ) | | | 4,823 | | | | (3,658 | ) | | | 17,530 | |
Commercial | | | (1,077 | ) | | | 4,228 | | | | (2,190 | ) | | | 3,037 | | | | (3,267 | ) | | | 7,265 | |
| | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | | (2,804 | ) | | | 17,214 | | | | (4,125 | ) | | | 7,880 | | | | (6,929 | ) | | | 25,094 | |
Corporate debt securities | | | (442 | ) | | | 2,863 | | | | (260 | ) | | | 531 | | | | (702 | ) | | | 3,394 | |
Collateralized debt obligations | | | (195 | ) | | | 853 | | | | (401 | ) | | | 285 | | | | (596 | ) | | | 1,138 | |
Other | | | (384 | ) | | | 6,982 | | | | (172 | ) | | | 1,430 | | | | (556 | ) | | | 8,412 | |
| | | | | | | | | | | | | | | | | | | |
Total debt securities | | | (4,331 | ) | | | 33,033 | | | | (5,627 | ) | | | 12,348 | | | | (9,958 | ) | | | 45,381 | |
Marketable equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Perpetual preferred securities | | | (405 | ) | | | 807 | | | | (349 | ) | | | 366 | | | | (754 | ) | | | 1,173 | |
Other marketable equity securities | | | (123 | ) | | | 387 | | | | -- | | | | -- | | | | (123 | ) | | | 387 | |
| | | | | | | | | | | | | | | | | | | |
Total marketable equity securities | | | (528 | ) | | | 1,194 | | | | (349 | ) | | | 366 | | | | (877 | ) | | | 1,560 | |
| | | | | | | | | | | | | | | | | | | |
| | $ | (4,859 | ) | | $ | 34,227 | | | $ | (5,976 | ) | | $ | 12,714 | | | $ | (10,835 | ) | | $ | 46,941 | |
| | | | | | | | | | | | | | | | | | | |
| | |
The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in market interest rates and spreads and not due to the credit quality of the securities. As of September 30, 2008, we have received all principalThese investments are almost exclusively investment grade and interest payments, we believe that the principal and interest on these securities are fully collectible and we have the intent and ability to retain our investment for a period of time to allow for any anticipated recovery in market value. We evaluated these securities for impairmentwere generally underwritten in accordance with our policy and determined that they were not other-than-temporarily impairedown investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision. These securities will continue to be monitored as part of September 30, 2008.our ongoing impairment analysis, but are expected to perform, even if
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the rating agencies reduce the credit rating of the bond insurers. As a result, we concluded that these securities were not other-than-temporarily impaired at March 31, 2009.
The unrealized losses associated with private collateralized mortgage obligations are primarily related to securities backed by commercial mortgages and residential mortgages. Approximately 75% of the securities were AAA-rated by at least one major rating agency. We estimate loss projections for each security by assessing loans collateralizing the security and determining expected default rates and loss severities. Based upon our assessment of expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we concluded that these securities were not other-than-temporarily impaired at March 31, 2009.
The unrealized losses associated with other securities are primarily related to securities backed by commercial loans and individual issuer companies. For securities with commercial loans as the underlying collateral, we have evaluated the expected credit losses in the security and concluded that we have sufficient credit enhancement when compared with our estimate of credit losses for the individual security. For individual issuers, we evaluate the financial performance of the issuer on a quarterly basis to determine if it is probable that the issuer can make all contractual principal and interest payments.
Our marketable equity securities included approximately $1.7$3.8 billion of investments in perpetual preferred securities at September 30, 2008.March 31, 2009. These securities were issued by credit-worthy companies and underwent an extensive credit evaluation at purchase. They provide very attractive tax-equivalent yields and were current as to periodic distributions in accordance with their respective terms as of September 30, 2008. We have opportunistically increased our holdings in these securities over the past 12 months in response to increased yields available in the marketplace, driven by a significant widening in credit spreads caused by the “mortgage and credit crises.” The market value of our holdings in these securities declined during this period in direct correlation with the continued widening of credit spreads. Unlike common stock whose return is mostly in the form of price appreciation, these securities were purchased for their high yields, with purchase decisions underwritten like bonds and debt securities.March 31, 2009. We evaluated these hybrid financial instruments with investment-grade ratings for impairment in accordance with our policy and consistent with our impairment modelusing an evaluation methodology similar to that used for debt securities. We determined that thesePerpetual preferred securities were not other-than-temporarily impaired as of September 30, 2008, becauseat March 31, 2009, if there was no evidence of credit deterioration or investment rating downgrades of any issuers to below investment grade, and it was probable we would continue to receive full contractual payments. We will continue to evaluate the prospects for these securities for recovery in their market value in accordance with our policy for estimating OTTI. We have recorded impairment write-downs on perpetual preferred securities where there was evidence of credit deterioration.
The fair values of our investment securities could decline in the future if the underlying performance of the collateral for the private collateralized mortgage obligations or other securities deteriorate and our credit enhancement levels do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that significant OTTI may occur in the future given the current economic environment.
Other-Than-Temporarily Impaired Debt Securities
We recognize OTTI for debt securities classified as available for sale in accordance with FSP FAS 115-2 and FAS 124-2. As required by this FSP, we assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference
67
between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.
The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that we have written down for OTTI and the credit component of the loss is recognized in earnings (referred to as “credit-impaired” debt securities). The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2009. OTTI recognized in earnings in first quarter 2009 for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written down. Changes in the credit loss component of credit-impaired debt securities were:
| | | | | |
| | |
| | Quarter ended | |
| (in millions) | March 31, 2009 | |
| | |
Balance, beginning of period | | $ | 471 | |
| | | | |
| Initial credit impairments | | | 197 | |
| Subsequent credit impairments | | | 66 | |
| | | | |
| For securities sold | | | (7 | ) |
| | | | |
| | $ | 727 | |
| | | | |
| | |
| | |
| (1) | | Excludes $6 million of OTTI on debt securities we intend to sell. |
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For asset-backed securities (e.g., residential mortgage-backed securities), we estimated expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordination interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which considers current delinquencies and nonperforming assets, future expected default rates and collateral value by vintage and geographic region) and prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. The following table presents a summary of the significant inputs considered in determining other-than-temporary impairment.the measurement of the credit loss component recognized in earnings for asset-backed securities as of March 31, 2009.
| | | | |
| |
| | Residential MBS | |
| |
Expected remaining life of loan losses (1): | | | | |
| Range (2) | | | 0.28 to 34.32% | |
| Weighted average (3) | | | 11.69% | |
Current subordination levels (4): | | | | |
| Range (2) | | | 0 to 19.68% | |
| Weighted average (3) | | | 6.93% | |
Prepayment speed (annual CPR (5)): | | | | |
| Range (2) | | | 7.27 to 24.64% | |
| Weighted average (3) | | | 15.76% | |
| |
| | |
| (1) | | Represents future expected credit losses on underlying pool of loans expressed as a percentage of total current outstanding loan balance. |
| (2) | | Represents the range of inputs/assumptions based upon the individual securities within each category. |
| (3) | | Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security. |
| (4) | | Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance. |
| (5) | | Constant prepayment rate. |
Realized Gains and Losses
The following table shows the netgross realized gains (losses)and losses on the sales of securities from the securities available-for-sale portfolio, including marketable equity securities. GrossOf the first quarter 2009 OTTI write-downs of $516 million, $269 million related to debt securities and $247 million to equity securities. Under FSP FAS 115-2 and FAS 124-2, which we adopted this quarter, total OTTI on debt securities amounted to $603 million, which included $263 million of credit-related OTTI and $6 million related to securities we intend to sell, both of which were recorded as part of gross realized losses, include other-than-temporaryand $334 million recorded directly to other comprehensive income for non-credit related impairment on securities. We believe that we will fully collect the carrying value of $893 millionsecurities on which we have recorded a non-credit-related impairment in other comprehensive income.
| | | | | | | | | |
| | |
| | | Quarter ended March 31 | , |
| (in millions) | | 2009 | | | 2008 | |
| | |
| | $ | 294 | | | $ | 378 | |
| Gross realized losses | | | (370 | ) | | | (88 | ) |
| | | | | | | |
| Net realized gains (losses) | | $ | (76 | ) | | $ | 290 | |
| | | | | | | |
| | |
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Contractual Maturities
The following table shows the remaining contractual principal maturities and $1,095 millioncontractual yields of debt securities available for sale. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the third quarter and first nine months of 2008, respectively, and $3 million and $7 million forright to prepay obligations before the third quarter and first nine months of 2007. Other-than-temporary impairment for the third quarter and first nine months of 2008 included $594 million and $627 million, respectively, related to perpetual preferred securities that were either downgraded to less than investment grade or evidenced other significant credit deterioration events.underlying mortgages mature.
| | | | | | | | | | | | | | | | | |
| |
| | | Quarter | | | Nine months | |
| | | ended Sept. 30 | , | | ended Sept. 30 | , |
| (in millions) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
| | $ | 549 | | | $ | 212 | | | $ | 1,003 | | | $ | 292 | |
| Gross realized losses | | | (948 | ) | | | (23 | ) | | | (1,175 | ) | | | (77 | ) |
| | | | | | | | | | | | | |
| Net realized gains (losses) | | $ | (399 | ) | | $ | 189 | | | $ | (172 | ) | | $ | 215 | |
| | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | Remaining contractual principal maturity | |
| | | | | | | Weighted- | | | | | | | | | | | After one year | | | After five years | | | | |
| | | Total | | | average | | | Within one year | | | through five years | | | through ten years | | | After ten years | |
| (in millions) | | Amount | | | yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | 3,249 | | | | 1.54 | % | | $ | 1,719 | | | | 0.02 | % | | $ | 1,127 | | | | 3.15 | % | | $ | 388 | | | | 3.40 | % | | $ | 15 | | | | 4.79 | % |
| Securities of U.S. states and political subdivisions | | | 12,658 | | | | 7.54 | | | | 210 | | | | 5.54 | | | | 784 | | | | 7.36 | | | | 1,163 | | | | 7.39 | | | | 10,501 | | | | 7.61 | |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal agencies | | | 66,434 | | | | 5.73 | | | | 42 | | | | 4.23 | | | | 122 | | | | 4.98 | | | | 353 | | | | 6.02 | | | | 65,917 | | | | 5.73 | |
| Residential | | | 24,830 | | | | 6.73 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 34 | | | | 8.15 | | | | 24,796 | | | | 6.73 | |
| Commercial | | | 8,478 | | | | 7.95 | | | | -- | | | | -- | | | | 5 | | | | 1.57 | | | | 135 | | | | 8.64 | | | | 8,338 | | | | 7.94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | | 99,742 | | | | 6.17 | | | | 42 | | | | 4.23 | | | | 127 | | | | 4.87 | | | | 522 | | | | 6.83 | | | | 99,051 | | | | 6.17 | |
| Corporate debt securities | | | 6,924 | | | | 5.81 | | | | 432 | | | | 5.49 | | | | 3,697 | | | | 4.76 | | | | 2,212 | | | | 7.48 | | | | 583 | | | | 6.31 | |
| Collateralized debt obligations | | | 2,085 | | | | 4.52 | | | | -- | | | | -- | | | | 120 | | | | 7.83 | | | | 809 | | | | 3.65 | | | | 1,156 | | | | 4.77 | |
| Other | | | 20,775 | | | | 5.17 | | | | 43 | | | | 3.82 | | | | 8,057 | | | | 7.41 | | | | 1,346 | | | | 4.86 | | | | 11,329 | | | | 3.61 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities at fair value (1) | | $ | 145,433 | | | | 6.00 | % | | $ | 2,446 | | | | 1.60 | % | | $ | 13,912 | | | | 6.34 | % | | $ | 6,440 | | | | 6.14 | % | | $ | 122,635 | | | | 6.04 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | 2,903 | | | | 1.72 | % | | $ | 1,380 | | | | 0.11 | % | | $ | 918 | | | | 3.01 | % | | $ | 586 | | | | 3.41 | % | | $ | 19 | | | | 5.36 | % |
Securities of U.S. states and political subdivisions | | | 11,846 | | | | 6.48 | | | | 117 | | | | 6.19 | | | | 621 | | | | 7.43 | | | | 976 | | | | 6.90 | | | | 10,132 | | | | 6.38 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | 90,648 | | | | 5.62 | | | | 6 | | | | 4.80 | | | | 97 | | | | 5.50 | | | | 329 | | | | 5.57 | | | | 90,216 | | | | 5.62 | |
Residential | | | 32,482 | | | | 5.41 | | | | 8 | | | | 4.42 | | | | 131 | | | | 0.80 | | | | 91 | | | | 6.31 | | | | 32,252 | | | | 5.43 | |
Commercial | | | 9,775 | | | | 5.20 | | | | 79 | | | | 1.46 | | | | 72 | | | | 5.31 | | | | 158 | | | | 7.67 | | | | 9,466 | | | | 5.19 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | | 132,905 | | | | 5.54 | | | | 93 | | | | 1.94 | | | | 300 | | | | 3.40 | | | | 578 | | | | 6.26 | | | | 131,934 | | | | 5.54 | |
Corporate debt securities | | | 6,986 | | | | 5.85 | | | | 715 | | | | 5.48 | | | | 3,092 | | | | 4.95 | | | | 2,643 | | | | 7.03 | | | | 536 | | | | 5.42 | |
Collateralized debt obligations | | | 2,386 | | | | 2.53 | | | | -- | | | | -- | | | | 168 | | | | 5.87 | | | | 1,025 | | | | 2.94 | | | | 1,193 | | | | 1.69 | |
Other | | | 16,263 | | | | 4.59 | | | | 35 | | | | 3.47 | | | | 9,414 | | | | 6.65 | | | | 766 | | | | 1.62 | | | | 6,048 | | | | 1.76 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities at fair value (1) | | $ | 173,289 | | | | 5.42 | % | | $ | 2,340 | | | | 2.18 | % | | $ | 14,513 | | | | 6.01 | % | | $ | 6,574 | | | | 5.35 | % | | $ | 149,862 | | | | 5.41 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | The weighted-average yield is computed using the contractual life amortization method. |
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| | |
5. | | LOANS AND ALLOWANCE FOR CREDIT LOSSES |
5. LOANS AND ALLOWANCE FOR CREDIT LOSSESA summary of theThe major categories of loans outstanding is shownshowing those subject to SOP 03-3 are presented in the following table. Certain loans acquired in the Wachovia acquisition are subject to SOP 03-3. These include loans where it is probable that we will not collect all contractual principal and interest. Loans within the scope of SOP 03-3 are initially recorded at fair value, and no allowance is carried over or initially recorded. Outstanding loan balances reflectof all other loans are presented net of unearned income, net deferred loan fees, and unamortized discount and premium totaling $4,528$21,173 million, $4,083$16,891 million and $3,562$4,172 million, at September 30, 2008,March 31, 2009, December 31, 2007,2008, and September 30, 2007,March 31, 2008, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | March 31, 2009 | | December 31, 2008 | | | |
| | | | All | | All | | | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | SOP 03-3 | | other | | SOP 03-3 | | other | | Mar. 31 | , |
| (in millions) | | 2008 | | 2007 | | 2007 | | | loans | | loans | | Total | | loans | | loans | | Total | | 2008 | |
| | | | |
Commercial and commercial real estate: | | |
| Commercial | | $ | 104,281 | | $ | 90,468 | | $ | 82,598 | | | $ | 3,088 | | $ | 188,623 | | $ | 191,711 | | $ | 4,580 | | $ | 197,889 | | $ | 202,469 | | $ | 92,589 | |
| Other real estate mortgage | | 44,741 | | 36,747 | | 33,227 | | | 6,597 | | 98,337 | | 104,934 | | 7,762 | | 95,346 | | 103,108 | | 38,415 | |
| Real estate construction | | 19,681 | | 18,854 | | 17,301 | | | 4,507 | | 29,405 | | 33,912 | | 4,503 | | 30,173 | | 34,676 | | 18,885 | |
| Lease financing | | 7,271 | | 6,772 | | 6,089 | | | -- | | 14,792 | | 14,792 | | -- | | 15,829 | | 15,829 | | 6,885 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | 175,974 | | 152,841 | | 139,215 | | | 14,192 | | 331,157 | | 345,349 | | 16,845 | | 339,237 | | 356,082 | | 156,774 | |
| Consumer: | | |
| Real estate 1-4 family first mortgage | | 77,870 | | 71,415 | | 66,877 | | | 41,520 | | 201,427 | | 242,947 | | 39,214 | | 208,680 | | 247,894 | | 73,321 | |
| Real estate 1-4 family junior lien mortgage | | 75,617 | | 75,565 | | 74,632 | | | 615 | | 109,133 | | 109,748 | | 728 | | 109,436 | | 110,164 | | 74,840 | |
| Credit card | | 20,358 | | 18,762 | | 17,129 | | | -- | | 22,815 | | 22,815 | | -- | | 23,555 | | 23,555 | | 18,677 | |
| Other revolving credit and installment | | 54,327 | | 56,171 | | 57,180 | | | 32 | | 91,220 | | 91,252 | | 151 | | 93,102 | | 93,253 | | 55,505 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer | | 228,172 | | 221,913 | | 215,818 | | | 42,167 | | 424,595 | | 466,762 | | 40,093 | | 434,773 | | 474,866 | | 222,343 | |
| Foreign | | 6,903 | | 7,441 | | 7,889 | | | 1,849 | | 29,619 | | 31,468 | | 1,859 | | 32,023 | | 33,882 | | 7,216 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 411,049 | | $ | 382,195 | | $ | 362,922 | | | $ | 58,208 | | $ | 785,371 | | $ | 843,579 | | $ | 58,797 | | $ | 806,033 | | $ | 864,830 | | $ | 386,333 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
We consider a loan to be impaired under FAS 114,Accounting by Creditors for Impairment of a Loan – an amendment of FASB Statement No. 5 and 15, when, based on current information and events, we determine that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. We assess and account for as impaired certain nonaccrual commercial and commercial real estate loans that are over $3$5 million and certain consumer, commercial and commercial real estate loans whose terms have been modified in a troubled debt restructuring. The recorded investment in impaired loans and the methodology used to measure impairment was:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | Mar. 31 | , | | Dec. 31 | , | Mar. 31 | , |
| (in millions) | | 2008 | | 2007 | | 2007 | | | 2009 | | 2008 | | 2008 | |
| | | | |
Impairment measurement based on: | | |
| Collateral value method | | $ | 49 | | $ | 285 | | $ | 267 | | | $ | 345 | | | $ 88 | | | $ 14 | |
Discounted cash flow method | | 2,159 | | 184 | | 127 | | | 6,445 | | 3,552 | | 909 | |
| | | | | | | | | | | | | | | |
Total (1)(2) | | $ | 2,208 | | $ | 469 | | $ | 394 | | | $ | 6,790 | | | $3,640 | | | $ 923 | |
| | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | The March 31, 2009, balance includes $474 million of Government National Mortgage Association (GNMA) loans that are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs. Although both principal and interest are insured, the insured interest rate may be different than the original contractual interest rate prior to modification, resulting in interest impairment under a discounted cash flow methodology. |
| (2) | | Includes $2,097$6,206 million, $369$3,468 million and $221$828 million of impaired loans with a related allowance of $415$1,571 million, $50$816 million and $24$111 million at September 30, 2008,March 31, 2009, December 31, 2007,2008, and September 30, 2007,March 31, 2008, respectively. |
The average recorded investment in impaired loans was $1,826 million and $308$5,795 million in thirdfirst quarter 20082009 and 2007, respectively, and $1,414 million and $273$678 million in the first nine months of 2008 and 2007, respectively.quarter 2008.
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The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded credit commitments. Changes in the allowance for credit losses were:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Quarter | | Nine months | | | |
| | | ended Sept. 30 | , | | ended Sept. 30 | , | | Quarter ended March 31 | , |
| (in millions) | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | | |
Balance, beginning of period | | $ | 7,517 | | $ | 4,007 | | $ | 5,518 | | $ | 3,964 | | | $ | 21,711 | | $ | 5,518 | |
Provision for credit losses | | 2,495 | | 892 | | 7,535 | | 2,327 | | | 4,558 | | 2,028 | |
| | |
| Commercial and commercial real estate: | | |
| Commercial | | | (305 | ) | | | (155 | ) | | | (897 | ) | | | (408 | ) | | | (596 | ) | | | (259 | ) |
| Other real estate mortgage | | | (9 | ) | | — | | | (19 | ) | | | (2 | ) | | | (31 | ) | | | (4 | ) |
| Real estate construction | | | (36 | ) | | | (3 | ) | | | (93 | ) | | | (5 | ) | | | (105 | ) | | | (29 | ) |
| Lease financing | | | (19 | ) | | | (8 | ) | | | (44 | ) | | | (24 | ) | | | (20 | ) | | | (12 | ) |
| | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | | (369 | ) | | | (166 | ) | | | (1,053 | ) | | | (439 | ) | | | (752 | ) | | | (304 | ) |
| Consumer: | | |
| Real estate 1-4 family first mortgage | | | (146 | ) | | | (22 | ) | | | (330 | ) | | | (71 | ) | | | (424 | ) | | | (81 | ) |
| Real estate 1-4 family junior lien mortgage | | | (669 | ) | | | (167 | ) | | | (1,476 | ) | | | (357 | ) | | | (873 | ) | | | (455 | ) |
| Credit card | | | (396 | ) | | | (205 | ) | | | (1,078 | ) | | | (579 | ) | | | (622 | ) | | | (313 | ) |
| Other revolving credit and installment | | | (586 | ) | | | (473 | ) | | | (1,617 | ) | | | (1,381 | ) | | | (900 | ) | | | (543 | ) |
| | | | | | | | | | | | | | | |
| Total consumer | | | (1,797 | ) | | | (867 | ) | | | (4,501 | ) | | | (2,388 | ) | | | (2,819 | ) | | | (1,392 | ) |
| Foreign | | | (59 | ) | | | (69 | ) | | | (185 | ) | | | (195 | ) | | | (54 | ) | | | (68 | ) |
| | | | | | | | | | | | | | | |
| Total loan charge-offs | | | (2,225 | ) | | | (1,102 | ) | | | (5,739 | ) | | | (3,022 | ) | | | (3,625 | ) | | | (1,764 | ) |
| | | | | | | | | | | | | | | |
| | |
| Commercial and commercial real estate: | | |
| Commercial | | 27 | | 35 | | 90 | | 84 | | | 40 | | 31 | |
| Other real estate mortgage | | 1 | | 2 | | 4 | | 7 | | | 10 | | 1 | |
| Real estate construction | | — | | 1 | | 2 | | 2 | | | 2 | | 1 | |
| Lease financing | | 3 | | 3 | | 9 | | 12 | | | 3 | | 3 | |
| | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | 31 | | 41 | | 105 | | 105 | | | 55 | | 36 | |
| Consumer: | | |
| Real estate 1-4 family first mortgage | | 7 | | 6 | | 20 | | 18 | | | 33 | | 6 | |
| Real estate 1-4 family junior lien mortgage | | 28 | | 14 | | 63 | | 39 | | | 26 | | 17 | |
| Credit card | | 35 | | 29 | | 113 | | 90 | | | 40 | | 38 | |
| Other revolving credit and installment | | 117 | | 105 | | 363 | | 393 | | | 204 | | 125 | |
| | | | | | | | | | | | | | | |
| Total consumer | | 187 | | 154 | | 559 | | 540 | | | 303 | | 186 | |
| Foreign | | 12 | | 15 | | 40 | | 50 | | | 9 | | 14 | |
| | | | | | | | | | | | | | | |
| Total loan recoveries | | 230 | | 210 | | 704 | | 695 | | | 367 | | 236 | |
| | | | | | | | | | | | | | | |
| Net loan charge-offs | | | (1,995 | ) | | | (892 | ) | | | (5,035 | ) | | | (2,327 | ) | |
| Net loan charge-offs (1) | | | | (3,258 | ) | | | (1,528 | ) |
| | | | | | | | | | | | | | | |
Allowances related to business combinations/other | | 10 | | 11 | | 9 | | 54 | | | | (165 | ) | | | (5 | ) |
| | | | | | | | | | | | | | | |
| | $ | 8,027 | | $ | 4,018 | | $ | 8,027 | | $ | 4,018 | | | $ | 22,846 | | $ | 6,013 | |
| | | | | | | | | | | | | | | |
| | |
| Allowance for loan losses | | $ | 7,865 | | $ | 3,829 | | $ | 7,865 | | $ | 3,829 | | | $ | 22,281 | | $ | 5,803 | |
| Reserve for unfunded credit commitments | | 162 | | 189 | | 162 | | 189 | | | 565 | | 210 | |
| | | | | | | | | | | | | | | |
| Allowance for credit losses | | $ | 8,027 | | $ | 4,018 | | $ | 8,027 | | $ | 4,018 | | | $ | 22,846 | | $ | 6,013 | |
| | | | | | | | | | | | | | | |
| Net loan charge-offs (annualized) as a percentage of average total loans | | | 1.96 | % | | | 1.01 | % | | | 1.71 | % | | | 0.93 | % | | | 1.54 | % | | | 1.60 | % |
Allowance for loan losses as a percentage of total loans | | | 1.91 | % | | | 1.06 | % | | | 1.91 | % | | | 1.06 | % | |
| Allowance for credit losses as a percentage of total loans | | 1.95 | | 1.11 | | 1.95 | | 1.11 | | |
Allowance for loan losses as a percentage of total loans (2) | | | | 2.64 | % | | | 1.50 | % |
| Allowance for credit losses as a percentage of total loans (2) | | | 2.71 | | 1.56 | |
| | | | |
| | |
| (1) | | Loans accounted for under SOP 03-3 were recorded in purchase accounting at fair value and, accordingly, charge-offs do not include losses on such loans. |
| (2) | | The allowance for loan losses and the allowance for credit losses do not include any amounts related to loans acquired from Wachovia that are accounted for under SOP 03-3. Loans acquired from Wachovia are included in total loans net of related purchase accounting net write-downs. |
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SOP 03-3
At December 31, 2008, and March 31, 2009, loans within the scope of SOP 03-3 had an unpaid principal balance of $95.8 billion and $93.0 billion, respectively, and a carrying value of $59.7 billion and $58.2 billion, respectively. The following table provides details on the SOP 03-3 loans acquired from Wachovia.
| | | | |
| |
| | December 31, 2008 | |
| (in millions) | | (refined) | |
| |
Contractually required payments including interest | | | $114,565 | |
| Nonaccretable difference (1) | | | (44,274 | ) |
| | | | |
| Cash flows expected to be collected (2) | | | 70,291 | |
| Accretable yield | | | (10,547 | ) |
| | | | |
| Fair value of loans acquired | | | $ 59,744 | |
| | | | |
| |
| | |
| (1) | | Includes $40.0 billion in principal cash flows (purchase accounting adjustments) not expected to be collected, $2.0 billion of pre-acquisition charge-offs and $2.3 billion of future interest not expected to be collected. |
| (2) | | Represents undiscounted expected principal and interest cash flows. |
The change in the accretable yield related to SOP 03-3 loans is presented in the following table.
| | | | |
| |
| (in millions) | | Quarter ended March 31, 2009 | |
| |
Balance, beginning of quarter (refined) | | | $ (10,547 | ) |
| Disposals | | | 4 | |
| Accretion | | | 561 | |
| | | | |
| Balance, end of quarter | | | $ (9,982 | ) |
| | | | |
| |
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The components of other assets were:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , |
| (in millions) | | 2008 | | 2007 | | 2007 | | | 2009 | | 2008 | | 2008 | |
| | | | |
Nonmarketable equity investments: | | |
| Cost method: | | |
| Private equity investments | | $ | 2,210 | | $ | 2,024 | | $ | 1,982 | | | $ | 2,588 | | $ | 2,706 | | $ | 2,078 | |
| Federal bank stock | | 2,556 | | 1,925 | | 1,637 | | | 6,080 | | 6,106 | | 2,110 | |
| All other | | 3,437 | | 2,981 | | 2,672 | | |
| Other | | | 2,306 | | 2,292 | | 1,939 | |
| | | | | | | | | |
| Total cost method | | | 10,974 | | 11,104 | | 6,127 | |
| Equity method | | | 4,151 | | 4,400 | | 1,107 | |
| Principal investments (1) | | | 1,270 | | 1,278 | | -- | |
| | | | | | | | | | | | | | | |
| Total nonmarketable equity investments | | 8,203 | | 6,930 | | 6,291 | | | 16,395 | | 16,782 | | 7,234 | |
| | 1,442 | | 2,218 | | 2,526 | | | 2,866 | | 2,251 | | 1,955 | |
| Accounts receivable | | 14,650 | | 10,913 | | 16,750 | | | 16,471 | | 22,493 | | 14,547 | |
| Interest receivable | | 2,914 | | 2,977 | | 3,016 | | | 5,009 | | 5,746 | | 2,835 | |
| Core deposit intangibles | | 395 | | 435 | | 362 | | | 12,026 | | 11,999 | | 403 | |
| Credit card and other intangibles | | 283 | | 319 | | 260 | | |
| Customer relationship and other intangibles | | | 2,700 | | 3,516 | | 306 | |
| Foreclosed assets: | | |
| GNMA loans (1) | | 596 | | 535 | | 487 | | |
| GNMA loans (2) | | | 768 | | 667 | | 578 | |
| Other | | 644 | | 649 | | 603 | | | 1,294 | | 1,526 | | 637 | |
| Due from customers on acceptances | | 111 | | 62 | | 83 | | | 188 | | 615 | | 66 | |
| Other | | 15,441 | | 12,107 | | 11,359 | | | 47,299 | | 44,206 | | 13,997 | |
| | | | | | | | | | | | | | | |
| Total other assets | | $ | 44,679 | | $ | 37,145 | | $ | 41,737 | | | $ | 105,016 | | $ | 109,801 | | $ | 42,558 | |
| | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | Principal investments are recorded at fair value with realized and unrealized gains (losses) included in net gains (losses) from equity investments in the income statement. |
| (2) | | Consistent with regulatory reporting requirements, foreclosed assets include foreclosed real estate securing Government National Mortgage Association (GNMA)GNMA loans. Both principal and interest for GNMA loans secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. |
Income related to nonmarketable equity investments was:
| | | | | | | | | | | | | | | | | |
| |
| | | Quarter | | | Nine months | |
| | | ended Sept. 30 | , | | ended Sept. 30 | , |
| (in millions) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
Net gains (losses) from private equity investments | | $ | (24 | ) | | $ | 144 | | | $ | 340 | (1) | | $ | 446 | |
| Net gains (losses) from all other nonmarketable equity investments | | | 26 | | | | (7 | ) | | | 36 | | | | (24 | ) |
| | | | | | | | | | | | | |
| Net gains from nonmarketable equity investments | | $ | 2 | | | $ | 137 | | | $ | 376 | | | $ | 422 | |
| | | | | | | | | | | | | |
| |
| | | | | | | | | |
| | |
| | | Quarter ended March 31 | , |
| (in millions) | | 2009 | | | 2008 | |
| | |
Net gains (losses) from private equity investments (1) | | $ | (220 | ) | | $ | 346 | |
| Net losses from principal investments | | | (8 | ) | | | -- | |
| Net losses from all other nonmarketable equity investments | | | (49 | ) | | | (39 | ) |
| | | | | | | |
| Net gains (losses) from nonmarketable equity investments | | $ | (277 | ) | | $ | 307 | |
| | | | | | | |
| | |
| | |
| (1) | | IncludesNet gains from first quarter 2008 include $334 million gain for first quarter 2008 from our ownership in Visa, which completed its initial public offering in March 2008. See Note 11 in this Report for additional information. |
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7. SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
Involvement with SPEs
We enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs) in the normal course of business. SPEs are corporations, trusts or partnerships that are established for a limited purpose. We use SPEs to create sources of financing, liquidity and regulatory capital capacity for the Company, as well as sources of financing and liquidity, and investment products for our clients. Our use of SPEs generally consists of various securitization activities with SPEs whereby financial assets are transferred to an SPE and repackaged as securities or similar interests that are sold to investors. In connection with our securitization activities, we have various forms of ongoing involvement with SPEs, which may include:
| • | | underwriting securities issued by SPEs and subsequently making markets in those securities; |
| • | | providing liquidity facilities to support short-term obligations of SPEs issued to third party investors; |
| • | | providing credit enhancement on securities issued by SPEs or market value guarantees of assets held by SPEs through the use of letters of credit, financial guarantees, credit default swaps and total return swaps; |
| • | | entering into other derivative contracts with SPEs; |
| • | | holding senior or subordinated interests in SPEs; |
| • | | acting as servicer or investment manager for SPEs; and |
| • | | providing administrative or trustee services to SPEs. |
The SPEs we use are primarily either qualifying SPEs (QSPEs), which are not consolidated if the criteria described below are met, or variable interest entities (VIEs). To qualify as a QSPE, an entity must be passive and must adhere to significant limitations on the types of assets and derivative instruments it may own and the extent of activities and decision making in which it may engage. For example, a QSPE’s activities are generally limited to purchasing assets, passing along the cash flows of those assets to its investors, servicing its assets and, in certain transactions, issuing liabilities. Among other restrictions on a QSPE’s activities, a QSPE may not actively manage its assets through discretionary sales or modifications.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is the entity that, through its variable interests, absorbs the majority of a VIE’s variability. A variable interest is a contractual, ownership or other interest that changes with changes in the fair value of the VIE’s net assets.
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The classifications of assets and liabilities in our balance sheet associated with our transactions with QSPEs and VIEs are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | Transfers that | | | | |
| | | | | | VIEs that we | | | | | | we account | | | | |
| | | | | | | do not | | VIEs that we | | for as secured | | | | |
| (in millions) | | QSPEs | | consolidate | | consolidate | | borrowings | | | Total | |
| | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | -- | | | $ | -- | | | $ | 117 | | | $ | 287 | | | $ | 404 | |
| Trading account assets | | | 1,261 | | | | 5,241 | | | | 71 | | | | 141 | | | | 6,714 | |
| Securities (1) | | | 18,078 | | | | 15,168 | | | | 922 | | | | 6,094 | | | | 40,262 | |
| Mortgages held for sale | | | 56 | | | | -- | | | | -- | | | | -- | | | | 56 | |
| Loans (2) | | | -- | | | | 16,882 | | | | 217 | | | | 4,126 | | | | 21,225 | |
| MSRs | | | 14,106 | | | | -- | | | | -- | | | | -- | | | | 14,106 | |
| Other assets | | | 345 | | | | 5,022 | | | | 2,416 | | | | 55 | | | | 7,838 | |
| | | | | | | | | | | | | | | | |
Total assets | | | 33,846 | | | | 42,313 | | | | 3,743 | | | | 10,703 | | | | 90,605 | |
| | | | | | | | | | | | | | | | |
| | | -- | | | | -- | | | | 307 | | | | 1,440 | | | | 1,747 | |
| Accrued expenses and other liabilities | | | 528 | | | | 1,976 | | | | 330 | | | | 26 | | | | 2,860 | |
| Long term debt | | | -- | | | | -- | | | | 1,773 | | | | 7,125 | | | | 8,898 | |
| Noncontrolling interests | | | -- | | | | -- | | | | 121 | | | | -- | | | | 121 | |
| | | | | | | | | | | | | | | | |
Total liabilities and noncontrolling interests | | | 528 | | | | 1,976 | | | | 2,531 | | | | 8,591 | | | | 13,626 | |
| | | | | | | | | | | | | | | | |
| | $ | 33,318 | | | $ | 40,337 | | | $ | 1,212 | | | $ | 2,112 | | | $ | 76,979 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | -- | | | $ | -- | | | $ | 166 | | | $ | 288 | | | $ | 454 | |
Trading account assets | | | 2,097 | | | | 5,183 | | | | 55 | | | | 135 | | | | 7,470 | |
Securities (1) | | | 21,766 | | | | 14,633 | | | | 1,627 | | | | 5,849 | | | | 43,875 | |
Loans (2) | | | -- | | | | 16,852 | | | | 312 | | | | 3,284 | | | | 20,448 | |
MSRs | | | 11,969 | | | | 18 | | | | -- | | | | -- | | | | 11,987 | |
Other assets | | | 258 | | | | 5,648 | | | | 2,616 | | | | 167 | | | | 8,689 | |
| | | | | | | | | | | | | | | | |
Total assets | | | 36,090 | | | | 42,334 | | | | 4,776 | | | | 9,723 | | | | 92,923 | |
| | | | | | | | | | | | | | | | |
| | | -- | | | | -- | | | | 306 | | | | 2,307 | | | | 2,613 | |
Accrued expenses and other liabilities | | | 622 | | | | 2,351 | | | | 517 | | | | 90 | | | | 3,580 | |
Long term debt | | | -- | | | | -- | | | | 1,807 | | | | 6,529 | | | | 8,336 | |
Noncontrolling interests | | | -- | | | | -- | | | | 138 | | | | -- | | | | 138 | |
| | | | | | | | | | | | | | | | |
Total liabilities and noncontrolling interests | | | 622 | | | | 2,351 | | | | 2,768 | | | | 8,926 | | | | 14,667 | |
| | | | | | | | | | | | | | | | |
| | $ | 35,468 | | | $ | 39,983 | | | $ | 2,008 | | | $ | 797 | | | $ | 78,256 | |
| | | | | | | | | | | | | | | | |
| | |
| | |
7.(1) | | VARIABLE INTEREST ENTITIESExcludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA). |
| (2) | | Excludes related allowance for loan losses. |
The following disclosures regarding our significant continuing involvement with QSPEs and unconsolidated VIEs exclude entities where our only involvement is in the form of: (1) investments in trading securities, (2) investments in securities or loans underwritten by third parties, (3) certain derivatives such as interest rate swaps or cross currency swaps that have customary terms, and (4) administrative or trustee services. We have also excluded investments accounted for in accordance with the AICPA Investment Company Audit Guide, investments accounted for under the cost method, and investments accounted for under the equity method.
Transactions with QSPEs
We use QSPEs to securitize consumer and commercial real estate loans and other types of financial assets, including student loans, auto loans and municipal bonds. We typically retain the servicing rights from these sales and may continue to hold other beneficial interests in QSPEs. We may also provide liquidity to investors in the beneficial interests and credit enhancements in
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the form of standby letters of credit. Through these securitizations we may be exposed to liability under limited amounts of recourse as well as standard representations and warranties we make to purchasers and issuers. The amount recorded for this liability is included in other commitments and guarantees in the following table.
A summary of our involvements with QSPEs is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | Other | | | | |
| | | Total | | | Debt and | | | | | | | | | | commitments | | | | |
| | | QSPE | | | equity | | Servicing | | | | | | | and | | | Net | |
| (in millions) | | assets (1) | | interests (2) | | | assets | | Derivatives | | guarantees | | | assets | |
| | | | | | | | |
| December 31, 2008 | | | | | | Carrying value – asset (liability) | |
Residential mortgage loan securitizations | | $ | 1,144,775 | | | $ | 17,469 | | | $ | 12,951 | | | $ | 30 | | | $ | (511 | ) | | $ | 29,939 | |
| Commercial mortgage securitizations | | | 355,267 | | | | 1,452 | | | | 1,098 | | | | 524 | | | | (14 | ) | | | 3,060 | |
| Auto loan securitizations | | | 4,133 | | | | 72 | | | | -- | | | | 43 | | | | -- | | | | 115 | |
| Student loan securitizations | | | 2,765 | | | | 76 | | | | 57 | | | | -- | | | | -- | | | | 133 | |
| Other | | | 11,877 | | | | 74 | | | | -- | | | | (3 | ) | | | -- | | | | 71 | |
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 1,518,817 | | | $ | 19,143 | | | $ | 14,106 | | | $ | 594 | | | $ | (525 | ) | | $ | 33,318 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Maximum exposure to loss | |
Residential mortgage loan securitizations | | | | | | $ | 17,469 | | | $ | 12,951 | | | $ | 300 | | | $ | 718 | | | $ | 31,438 | |
| Commercial mortgage securitizations | | | | | | | 1,452 | | | | 1,098 | | | | 524 | | | | 3,302 | | | | 6,376 | |
| Auto loan securitizations | | | | | | | 72 | | | | -- | | | | 43 | | | | -- | | | | 115 | |
| Student loan securitizations | | | | | | | 76 | | | | 57 | | | | -- | | | | -- | | | | 133 | |
| Other | | | | | | | 74 | | | | -- | | | | 1,465 | | | | 37 | | | | 1,576 | |
| | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 19,143 | | | $ | 14,106 | | | $ | 2,332 | | | $ | 4,057 | | | $ | 39,638 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2009 | | | | | | Carrying value – asset (liability) | |
Residential mortgage loan securitizations | | $ | 1,229,211 | | | $ | 21,763 | | | $ | 10,961 | | | $ | 24 | | | $ | (605 | ) | | $ | 32,143 | |
Commercial mortgage securitizations | | | 391,114 | | | | 1,561 | | | | 953 | | | | 482 | | | | (17 | ) | | | 2,979 | |
Auto loan securitizations | | | 3,580 | | | | 76 | | | | -- | | | | 39 | | | | -- | | | | 115 | |
Student loan securitizations | | | 2,776 | | | | 165 | | | | 55 | | | | -- | | | | -- | | | | 220 | |
Other | | | 9,955 | | | | 11 | | | | -- | | | | -- | | | | -- | | | | 11 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,636,636 | | | $ | 23,576 | | | $ | 11,969 | | | $ | 545 | | | $ | (622 | ) | | $ | 35,468 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Maximum exposure to loss | |
Residential mortgage loan securitizations | | | | | | $ | 21,763 | | | $ | 10,961 | | | $ | 276 | | | $ | 1,525 | | | $ | 34,525 | |
Commercial mortgage securitizations | | | | | | | 1,561 | | | | 953 | | | | 482 | | | | 3,017 | | | | 6,013 | |
Auto loan securitizations | | | | | | | 76 | | | | -- | | | | 39 | | | | -- | | | | 115 | |
Student loan securitizations | | | | | | | 165 | | | | 55 | | | | -- | | | | -- | | | | 220 | |
Other | | | | | | | 11 | | | | -- | | | | 133 | | | | 37 | | | | 181 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 23,576 | | | $ | 11,969 | | | $ | 930 | | | $ | 4,579 | | | $ | 41,054 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Represents the remaining principal balance of assets held by QSPEs using the most current information available. |
| (2) | | Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA. |
“Maximum exposure to loss” represents the carrying value of our involvement with off-balance sheet QSPEs plus remaining undrawn liquidity and lending commitments, notional amount of net written derivative contracts, and notional amount of other commitments and guarantees. Maximum exposure to loss is a required disclosure under generally accepted accounting principles and represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite its extremely remote possibility, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.
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We recognized net losses of $4 million from sales of financial assets in securitizations in first quarter 2009. Additionally, we had the following cash flows with our securitization trusts.
| | | | | | | | | |
| | |
| | | Quarter ended March 31, 2009 | , |
| | | | | | | Other | |
| | | Mortgage | | | financial | |
| (in millions) | | loans | | | assets | |
| | |
Sales proceeds from securitizations (1) | | | $81,178 | | | | $ -- | |
| Servicing fees | | | 1,000 | | | | 18 | |
| Other interests held | | | 495 | | | | 79 | |
| Purchases of delinquent assets | | | 13 | | | | -- | |
| Net servicing advances | | | 62 | | | | -- | |
| | |
| | |
| (1) | | Represents cash flow data for all loans securitized in first quarter 2009. |
For securitizations completed in first quarter 2009, we used the following assumptions to determine the fair value of mortgage servicing rights at the date of securitization.
| | | | |
| |
| | March 31, 2009 | |
| | Mortgage | |
| | servicing rights | |
| |
Prepayment speed (annual CPR (1)) | | | 12.6 | % |
| Life (in years) | | | 5.9 | |
| Discount rate | | | 9.1 | % |
| |
| | |
| (1) | | Constant prepayment rate. |
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Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at March 31, 2009, for residential and commercial mortgage servicing rights, and other interests held related to residential mortgage loan securitizations are presented in the following table.
| | | | | | | | | | | | | |
| |
| | | Mortgage | | | Other | | | Other interests held – | |
| ($ in millions) | | servicing rights | | | interests held | | | subordinate bonds | |
| |
| Fair value of interests held | | $ | 12,932 | | | $ | 265 | | | $ | 176 | |
| Expected weighted-average life (in years) | | | 3.6 | | | | 4.2 | | | | 5.4 | |
| | | | | | | | | | | | | |
| Prepayment speed assumption (annual CPR) | | | 19.6 | % | | | 17.6 | % | | | 14.0 | % |
| Decrease in fair value from: | | | | | | | | | | | | |
| 10% increase | | $ | 650 | | | $ | 17 | | | $ | - -- | |
| 25% increase | | | 1,482 | | | | 38 | | | | - -- | |
| | | | | | | | | | | | | |
| Discount rate assumption | | | 10.0 | % | | | 12.6 | % | | | 13.6 | % |
| MSRs and other interests held | | | | | | | | | | | | |
| Decrease in fair value from: | | | | | | | | | | | | |
| 100 basis point increase | | $ | 448 | | | $ | 8 | | | | | |
| 200 basis point increase | | | 861 | | | | 15 | | | | | |
| | | | | | | | | | | | | |
| Other interests held – subordinate bonds | | | | | | | | | | | | |
| Decrease in fair value from: | | | | | | | | | | | | |
| 50 basis point increase | | | | | | | | | | $ | 4 | |
| 100 basis point increase | | | | | | | | | | | 9 | |
| | | | | | | | | | | | | |
| Credit loss assumption | | | | | | | | | | | 3.4 | % |
| Decrease in fair value from: | | | | | | | | | | | | |
| 10% higher losses | | | | | | | | | | $ | 16 | |
| 25% higher losses | | | | | | | | | | | 36 | |
| | |
Adverse changes in key economic assumptions used to measure the fair value of retained interests in securitizations that we acquired in the Wachovia acquisition were analyzed. The price sensitivity to these adverse changes was not significant and, accordingly, is not included in the table above.
The sensitivities in the table above are hypothetical and caution should be exercised when relying on this data. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the other interests held is calculated independently without changing any other assumptions. In reality, changes in one factor may result in changes in others (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.
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We also retained some AAA-rated fixed-rate and adjustable rate mortgage-backed securities. The fair value of the securities was $5,623 million at March 31, 2009, and $5,147 million at December 31, 2008, and was determined using an independent third party pricing service.
The table below presents information about the principal balances of owned and securitized loans.
| | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | Delinquent | | | Net charge-offs | |
| | | Total loans (1) | | | loans (2)(3) | | | (recoveries) (3) | |
| | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | Dec. 31 | , | | Quarter ended | |
| (in millions) | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | March 31, 2009 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Commercial and commercial real estate: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 193,236 | | | $ | 204,113 | | | $ | 2,113 | | | $ | 1,471 | | | $ | 556 | |
| Other real estate mortgage | | | 312,211 | | | | 310,480 | | | | 2,912 | | | | 1,058 | | | | 25 | |
| Real estate construction | | | 33,912 | | | | 34,676 | | | | 1,995 | | | | 1,221 | | | | 103 | |
| Lease financing | | | 14,792 | | | | 15,829 | | | | 114 | | | | 92 | | | | 17 | |
| | | | | | | | | | | | | | | | |
| Total commercial and commercial real estate | | | 554,151 | | | | 565,098 | | | | 7,134 | | | | 3,842 | | | | 701 | |
| Consumer: | | | | | | | | | | | | | | | | | | | | |
| Real estate 1-4 family first mortgage | | | 1,211,050 | | | | 1,165,456 | | | | 10,213 | | | | 6,849 | | | | 593 | |
| Real estate 1-4 family junior lien mortgage | | | 114,845 | | | | 115,308 | | | | 2,096 | | | | 1,421 | | | | 880 | |
| Credit card | | | 22,815 | | | | 23,555 | | | | 738 | | | | 687 | | | | 582 | |
| Other revolving credit and installment | | | 104,469 | | | | 104,886 | | | | 1,504 | | | | 1,427 | | | | 737 | |
| | | | | | | | | | | | | | | | |
| Total consumer | | | 1,453,179 | | | | 1,409,205 | | | | 14,551 | | | | 10,384 | | | | 2,792 | |
| Foreign | | | 31,468 | | | | 33,882 | | | | 104 | | | | 91 | | | | 45 | |
| | | | | | | | | | | | | | | | |
| Total loans owned and securitized | | | 2,038,798 | | | | 2,008,185 | | | $ | 21,789 | | | $ | 14,317 | | | $ | 3,538 | |
| | | | | | | | | | | | | | | | |
| Less: | | | | | | | | | | | | | | | | | | | | |
| Securitized loans | | | 1,150,106 | | | | 1,117,039 | | | | | | | | | | | | | |
| Mortgages held for sale | | | 36,807 | | | | 20,088 | | | | | | | | | | | | | |
| Loans held for sale | | | 8,306 | | | | 6,228 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total loans held | | $ | 843,579 | | | $ | 864,830 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Represents loans in the balance sheet or that have been securitized and includes residential mortgages sold to FNMA and FHLMC and securitizations where servicing is our only form of continuing involvement. |
|
| (2) | | Delinquent loans are 90 days or more past due and still accruing interest as well as nonaccrual loans. |
|
| (3) | | Delinquent loans and net charge-offs exclude loans sold to FNMA and FHLMC. We continue to service the loans and would only experience a loss if required to repurchase a delinquent loan due to a breach in original representations and warranties associated with our underwriting standards. |
Transactions with VIEs
Our transactions with VIEs include securitization, investment and financing activities involving collateralized debt obligations (CDOs) backed by asset-backed and commercial real estate securities, collateralized loan obligations (CLOs) backed by corporate loans or bonds, and other types of structured financing. We have various forms of involvement with VIEs, including holding senior or subordinated interests, entering into liquidity arrangements, credit default swaps and other derivative contracts.
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A summary of our involvements with off-balance sheet (unconsolidated) VIEs is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | Other | | | | |
| | | Total | | | Debt and | | | | | | | commitments | | | | |
| | | VIE | | | equity | | | | | | | and | | | Net | |
| (in millions) | | assets (1) | | | interests | | | Derivatives | | | guarantees | | | assets | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | | | | Carrying value – asset (liability)
|
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| CDOs | | $ | 48,802 | | | $ | 14,080 | | | $ | 1,053 | | | $ | - -- | | | $ | 15,133 | |
| Wachovia administered ABCP conduit | | | 10,767 | | | | - -- | | | | - -- | | | | - -- | | | | - -- | |
| Asset-based lending structures | | | 11,614 | | | | 9,232 | | | | (136 | ) | | | - -- | | | | 9,096 | |
| Tax credit structures | | | 22,882 | | | | 4,366 | | | | - -- | | | | (516 | ) | | | 3,850 | |
| CLOs | | | 23,339 | | | | 3,217 | | | | 109 | | | | - -- | | | | 3,326 | |
| Investment funds | | | 105,808 | | | | 3,543 | | | | - -- | | | | - -- | | | | 3,543 | |
| Credit-linked note structures | | | 12,993 | | | | 50 | | | | 1,472 | | | | - -- | | | | 1,522 | |
| Money market funds | | | 31,843 | | | | 50 | | | | 10 | | | | - -- | | | | 60 | |
| Other (2) | | | 1,832 | | | | 3,983 | | | | (36 | ) | | | (141 | ) | | | 3,806 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 269,880 | | | $ | 38,521 | | | $ | 2,472 | | | $ | (657 | ) | | $ | 40,336 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Maximum exposure to loss
|
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| CDOs | | | | | | $ | 14,080 | | | $ | 4,849 | | | $ | 1,514 | | | $ | 20,443 | |
| Wachovia administered ABCP conduit | | | | | | | - -- | | | | 15,824 | | | | - -- | | | | 15,824 | |
| Asset-based lending structures | | | | | | | 9,346 | | | | 136 | | | | - -- | | | | 9,482 | |
| Tax credit structures | | | | | | | 4,366 | | | | - -- | | | | 560 | | | | 4,926 | |
| CLOs | | | | | | | 3,217 | | | | 109 | | | | 555 | | | | 3,881 | |
| Investment funds | | | | | | | 3,550 | | | | - -- | | | | 140 | | | | 3,690 | |
| Credit-linked note structures | | | | | | | 50 | | | | 2,253 | | | | - -- | | | | 2,303 | |
| Money market funds | | | | | | | 50 | | | | 51 | | | | - -- | | | | 101 | |
| Other (2) | | | | | | | 3,991 | | | | 130 | | | | 578 | | | | 4,699 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 38,650 | | | $ | 23,352 | | | $ | 3,347 | | | $ | 65,349 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| March 31, 2009 | | | | | | Carrying value – asset (liability)
|
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
CDOs | | $ | 53,439 | | | $ | 14,595 | | | $ | 1,008 | | | $ | - -- | | | $ | 15,603 | |
Wachovia administered ABCP conduit | | | 9,894 | | | | - -- | | | | - -- | | | | - -- | | | | -- | |
Asset-based lending structures | | | 15,158 | | | | 9,061 | | | | (122 | ) | | | - -- | | | | 8,939 | |
Tax credit structures | | | 27,197 | | | | 5,025 | | | | - -- | | | | (863 | ) | | | 4,162 | |
CLOs | | | 24,691 | | | | 3,547 | | | | 119 | | | | - -- | | | | 3,666 | |
Investment funds | | | 96,497 | | | | 1,918 | | | | - -- | | | | - -- | | | | 1,918 | |
Credit-linked note structures | | | 1,578 | | | | 52 | | | | 1,410 | | | | - -- | | | | 1,462 | |
Money market funds | | | 33,552 | | | | - -- | | | | (9 | ) | | | - -- | | | | (9 | ) |
Other (2) | | | 3,989 | | | | 4,336 | | | | (8 | ) | | | (86 | ) | | | 4,242 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 265,995 | | | $ | 38,534 | | | $ | 2,398 | | | $ | (949 | ) | | $ | 39,983 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Maximum exposure to loss
|
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
CDOs | | | | | | $ | 14,595 | | | $ | 4,414 | | | $ | 1,092 | | | $ | 20,101 | |
Wachovia administered ABCP conduit | | | | | | | - -- | | | | 10,092 | | | | - -- | | | | 10,092 | |
Asset-based lending structures | | | | | | | 9,061 | | | | 122 | | | | 1,073 | | | | 10,256 | |
Tax credit structures | | | | | | | 5,025 | | | | - -- | | | | 15 | | | | 5,040 | |
CLOs | | | | | | | 3,547 | | | | 119 | | | | 529 | | | | 4,195 | |
Investment funds | | | | | | | 1,918 | | | | 500 | | | | 123 | | | | 2,541 | |
Credit-linked note structures | | | | | | | 52 | | | | 2,189 | | | | - -- | | | | 2,241 | |
Money market funds | | | | | | | - -- | | | | 39 | | | | 12 | | | | 51 | |
Other (2) | | | | | | | 4,336 | | | | 160 | | | | 535 | | | | 5,031 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 38,534 | | | $ | 17,635 | | | $ | 3,379 | | | $ | 59,548 | |
| | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Represents the remaining principal balance of assets held by unconsolidated VIEs using the most current information available. For VIEs that obtain exposure to assets synthetically through derivative instruments, the remaining notional amount of the derivative is included in the asset balance. |
|
| (2) | | Contains investments in auction rate securities issued by VIEs that we do not sponsor and, accordingly, are unable to obtain the total assets of the entity. |
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“Maximum exposure to loss” represents the carrying value of our involvement with off-balance sheet (unconsolidated) VIEs plus remaining undrawn liquidity and lending commitments, notional amount of net written derivative contracts, and notional amount of other commitments and guarantees. Maximum exposure to loss is a required disclosure under generally accepted accounting principles and represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite its extremely remote possibility, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss.
Collateralized debt obligations and collateralized loan obligations
A CDO or CLO is a securitization where an SPE purchases a pool of assets consisting of asset-backed securities or loans and issues multiple tranches of equity or notes to investors. In some transactions a portion of the assets are obtained synthetically through the use of derivatives such as credit default swaps or total return swaps. Generally, CDOs and CLOs are structured on behalf of a third party asset manager that typically selects and manages the assets for the term of the CDO or CLO. Typically, the asset manager has some discretion to manage the sale of assets of, or derivatives used by the CDOs and CLOs.
Prior to the securitization, we may provide all or substantially all of the warehouse financing to the asset manager. The asset manager uses this financing to purchase the assets into a bankruptcy remote SPE during the warehouse period. At the completion of the warehouse period, the assets are sold to the CDO or CLO and the warehouse financing is repaid with the proceeds received from the securitization’s investors. The warehousing period is generally less than 12 months in duration. In the event the securitization does not take place, the assets in the warehouse are liquidated. We consolidate the warehouse SPEs when we are the primary beneficiary. We are athe primary beneficiary when we provide substantially all of the financing and therefore absorb the majority of the variability. Sometimes we have loss sharing arrangements whereby a third party asset manager agrees to absorb the credit and market risk during the warehousing period or upon liquidation of the collateral in the event a securitization does not take place. In those circumstances we do not consolidate the warehouse SPE because the third party asset manager absorbs the majority of the variability through the loss sharing arrangement.
In addition to our role as arranger and warehouse financing provider, we may have other forms of involvement with these transactions. Such involvements may include underwriter, liquidity provider, derivative counterparty, secondary market maker or investor. For certain special-purpose entitiestransactions, we may also act as the collateral manager or servicer. We receive fees in connection with our role as collateral manager or servicer. We also earn fees for arranging these transactions and distributing the securities.
We assess whether we are the primary beneficiary of CDOs and CLOs at inception of the transactions based on our expectation of the variability associated with our continuing involvement. Subsequently, we monitor our ongoing involvement in these transactions to determine if a more frequent assessment of variability is necessary. Variability in these transactions may be created by credit risk, market risk, interest rate risk or liquidity risk associated with the CDO’s or CLO’s assets. Our assessment of the variability is performed qualitatively because our continuing involvement is typically senior in priority to the third party investors in transactions. In most cases, we are not the primary beneficiary of these transactions
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because we do not retain the subordinate interests in these transactions and, accordingly, do not absorb the majority of the variability.
Multi-seller commercial paper conduit
We administer a multi-seller asset-backed commercial paper (ABCP) conduit that arranges financing for certain client transactions. We acquired the relationship with this conduit in the Wachovia merger. This conduit is a bankruptcy remote entity that makes loans to, or purchases certificated interests from SPEs established by our clients (sellers) and which are secured by pools of financial assets. The conduit funds itself through the issuance of highly rated commercial paper to third party investors. The primary source of repayment of the commercial paper is the cash flows from the conduit’s assets or the re-issuance of commercial paper upon maturity. The conduit’s assets are structured with deal-specific credit enhancements generally in the form of overcollateralization provided by the seller, but also may include subordinated interests, cash reserve accounts, third party credit support facilities and excess spread capture. The weighted average life of the conduit’s assets was 2.8 years and 3.0 years at March 31, 2009, and December 31, 2008, respectively.
The composition of the conduit’s assets was as follows:
| | | | | | | | | | | | | | | | | |
| |
| | | March 31, 2009 | | | December 31, 2008 | |
| | | Funded | | | Total | | | Funded | | | Total | |
| | | asset | | | committed | | | asset | | | committed | |
| | | composition | | | exposure | | | composition | | | exposure | |
| |
| | | | | | | | | | | | | | | | | |
| Auto loans | | | 34.1 | % | | | 27.8 | % | | | 34.1 | % | | | 26.7 | % |
| Commercial and middle market loans | | | 28.9 | | | | 31.1 | | | | 27.6 | | | | 32.6 | |
| Equipment loans | | | 14.8 | | | | 11.8 | | | | 14.4 | | | | 11.4 | |
| Trade receivables | | | 5.8 | | | | 10.3 | | | | 8.8 | | | | 10.9 | |
| Credit cards | | | 7.2 | | | | 8.8 | | | | 7.0 | | | | 7.9 | |
| Leases | | | 7.0 | | | | 6.2 | | | | 6.1 | | | | 7.0 | |
| Other | | | 2.2 | | | | 4.0 | | | | 2.0 | | | | 3.5 | |
| | | | | | | | | | | | | |
| Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | |
| | |
The table below summarizes the weighted-average credit rating equivalents of the conduit’s assets. These ratings are based on internal rating criteria.
| | | | | | | | | | | | | | | | | |
| |
| | | March 31, 2009 | | | December 31, 2008 | |
| | | Funded | | | Total | | | Funded | | | Total | |
| | | asset | | | committed | | | asset | | | committed | |
| | | composition | | | exposure | | | composition | | | exposure | |
| |
| | | | | | | | | | | | | | | | | |
| AAA | | | 7.0 | % | | | 8.9 | % | | | 9.4 | % | | | 10.4 | % |
| AA | | | 8.5 | | | | 9.4 | | | | 8.3 | | | | 11.7 | |
| A | | | 47.9 | | | | 50.7 | | | | 52.2 | | | | 51.5 | |
| BBB/BB | | | 36.6 | | | | 31.0 | | | | 30.1 | | | | 26.4 | |
| | | | | | | | | | | | | |
| Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | |
| | |
The timely repayment of the commercial paper is further supported by asset-specific liquidity facilities in the form of asset purchase agreements that we provide. Each facility is equal to 102% of the conduit’s funding commitments to a client. The aggregate amount of liquidity must
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be equal to or greater than all the commercial paper issued by the conduit. At the discretion of the administrator, we may be required to purchase assets from the conduit at par value plus interest, including situations where the conduit is unable to issue commercial paper. Par value may be different from fair value.
We receive fees in connection with our role as administrator and liquidity provider. We may also receive fees related to the structuring of the conduit’s transactions.
The weighted-average life of the commercial paper was 27.2 days in 2009 and the average yield on the commercial paper was 0.59%. The ability of the conduit to issue commercial paper is a function of general market conditions and the credit rating of the liquidity provider. At March 31, 2009, we did not hold any of the commercial paper issued by the conduit.
The conduit has issued a subordinated note to a third party investor. The subordinated note is designed to absorb the expected variability associated with the credit risk in the conduit’s assets as well as assets that may be funded by us as a result of a purchase under the provisions of the liquidity purchase agreements. Actual credit losses incurred on the conduit’s assets or assets purchased under the liquidity facilities are absorbed first by the subordinated note prior to any allocation to us as the liquidity provider. At March 31, 2009, the balance of the subordinated note was $60 million and it matures in 2017.
At least quarterly, or more often if circumstances dictate, we assess whether we are the primary beneficiary of the conduit based on our expectation of the variability associated with our liquidity facility and administrative fee arrangement. Such circumstances may include changes to deal-specific liquidity arrangements, changes to the terms of the conduit’s assets or the purchase of the conduit’s commercial paper. We assess variability using a quantitative expected loss model. The key inputs to the model include internally generated risk ratings that are consolidatedmapped to third party rating agency loss-given-default assumptions. We do not consolidate the conduit because our expected loss model indicates that the holder of the subordinated note absorbs the majority of the variability of the conduits’ assets. Although we are not required to consolidate the conduit, consolidation of the conduit would not have a material effect on our leverage ratio or Tier 1 capital.
Asset-based lending structures
We engage in various forms of structured lending arrangements with VIEs that are collateralized by various asset classes including energy contracts, auto and other transportation leases, intellectual property, equipment and general corporate credit. We typically provide senior financing, and may act as an interest rate swap or commodity derivative counterparty when necessary. In most cases, we are not the primary beneficiary of these structures because we absorbdo not retain a majority of each entity’s expected losses, receive a majority of each entity’s expected returns, or both. We do not hold a majority voting interestthe variability in these entities. Our consolidated variable interest entities, substantially alltransactions.
For example, we had investments in asset backed securities that were collateralized by auto leases and cash reserves. These fixed-rate securities have been structured as single-tranche, fully amortizing, unrated bonds that are equivalent to investment-grade securities due to their significant overcollateralization. The securities are issued by SPEs that have been formed and sponsored by third party auto financing institutions primarily because they require a source of which were formedliquidity to invest in securities and to securitize real estate investment trust securities, had approximately $4.3 billion and $3.5 billion in total assets at September 30, 2008, and December 31, 2007, respectively. The primary activities of these entities consist of acquiring and disposing of, and investing and reinvesting in securities, and issuing beneficial interests secured by those securities to investors. The creditors of substantially all of these consolidated entities have recourse against us.fund ongoing vehicle sales operations.
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Tax credit structures
We also hold variable interests greater than 20% but less than 50% in certain special-purpose entities predominantly formed to investmake passive investments in affordable housing and sustainable energy projects andthat are designed to securitize corporate debt that had approximately $8.0 billion and $5.8 billion in total assets at September 30, 2008, and December 31, 2007, respectively. We are not required to consolidate these entities. Our maximum exposure to loss asgenerate a result of our involvement with these unconsolidated variable interest entities was approximately $2.8 billion and $2.0 billion at September 30, 2008, and December 31, 2007, respectively,return primarily representing investments in entities formed to invest in affordable housing and sustainable energy projects. However, we expect to recover our investment in these entities over time, primarily through the realization of federal tax credits. In some instances, our investments in these structures may require that we fund future capital commitments at the discretion of the project sponsors. While the size of our investment in a single entity may at times exceed 50% of the outstanding equity interests, we do not consolidate these structures due to performance guarantees provided by the project sponsors giving them a majority of the variability.
Investment funds
At March 31, 2009, we had investments of $1.2 billion and lending arrangements of $88 million with certain funds managed by one of our majority owned subsidiaries, compared with investments of $2.1 billion and lending arrangements of $349 million at December 31, 2008. In addition, we also provide a default protection agreement to a third party lender to one of these funds. Our involvements in these funds are either senior or of equal priority to third party investors. We do not consolidate the investment funds because we do not absorb the majority of the expected future variability associated with the funds’ assets, including variability associated with credit, interest rate and liquidity risks.
We are also a passive investor in various investment funds that invest directly in private equity and mezzanine securities as well as funds sponsored by select private equity and venture capital groups. We also invest in hedge funds on behalf of clients. In these transactions, we use various derivative contracts that are designed to provide our clients with the returns of the underlying hedge fund investments. We do not consolidate these funds because we do not hold a majority of the subordinate interests in these funds.
Money market funds
We entered into a capital support agreement in first quarter 2008 for up to $130 million related to an investment in a structured investment vehicle (SIV) held by our AAA-rated non-government money market funds. In third quarter 2008, we fulfilled our obligation under this agreement by purchasing the SIV investment from the funds. At December 31, 2008, the SIV investment was recorded as a debt security in our securities available-for-sale portfolio. In addition, at March 31, 2009, we had remaining outstanding support agreements of $51 million to certain other funds to support the value of certain investments held by those funds. We recorded a loss of $50 million and a liability of $9 million in asset-backedfirst quarter 2009 in connection with these support agreements. We do not consolidate these funds because we are generally not responsible for investment losses incurred by our funds, and we do not have a contractual or implicit obligation to indemnify such losses or provide additional support to the funds. While we elected to enter into the capital support agreements for the funds, we are not obligated and may elect not to provide additional support to these funds or other funds in the future.
Credit-linked note structures
We structure transactions for clients designed to provide investors with specified returns based on the returns of an underlying security, loan or index. To generate regulatory capital for the Company, we also structure similar transactions that are indexed to the returns of a pool of underlying securities or loans that we own. These transactions result in the issuance of approximately $7.3 billioncredit-linked notes. These transactions typically involve a bankruptcy remote SPE that synthetically obtains exposure to the underlying through a derivative instrument such as a written credit default swap or total return swap. The SPE issues notes to investors based on the referenced
85
underlying. Proceeds received from the issuance of these notes are usually invested in investment grade financial assets. We are typically the derivative counterparty to these transactions and $4.7 billion collateralizedadministrator responsible for investing the note proceeds. We do not consolidate these SPEs because we typically do not hold any of the notes that they issue.
Other transactions with VIEs
In August 2008, Wachovia reached an agreement to purchase at par auction rate securities (ARS) that were sold to third party investors by auto leases and cash reservestwo of $10.6 billion and $6.4 billion at September 30, 2008,its subsidiaries. ARS are debt instruments with long-term maturities, but which reprice more frequently. Certain of these securities were issued by VIEs. At March 31, 2009, and December 31, 2007, respectively,2008, we held in our securities available-for-sale portfolio $3.7 billion of ARS issued by VIEs that we redeemed pursuant to this agreement. At March 31, 2009, and December 31, 2008, we had a liability in our balance sheet of $42 million and $91 million, respectively, for additional losses on anticipated future redemptions of ARS issued by VIEs. Were we to redeem all remaining ARS issued by VIEs that are subject to the agreement, our estimated maximum exposure to loss would have been $468 million and $620 million at March 31, 2009, and December 31, 2008, respectively; however, certain special-purpose entities whereof these securities may be repaid in full by the third-party issuer prior to redemption. We do not consolidate the VIEs that issued the ARS because we do not expect to absorb the majority of the expected future variability associated with the VIEs’ assets.
Trust preferred securities
In addition to the involvements disclosed in the following table, we had $19.0 billion of debt financing through the issuance of trust preferred securities at March 31, 2009. In these transactions, VIEs that we wholly own issue preferred equity or debt securities to third party investors. All of the proceeds of the issuance are invested in debt securities that we issue to the VIEs. In certain instances, we may provide liquidity to third party investors that purchase long-term securities that reprice frequently issued by VIEs. The VIEs’ operations and cash flows relate only to the issuance, administration and repayment of the securities held by third parties. We do not consolidate these VIEs because the VIEs’ sole assets are receivables from us. This is the case even though we own all of the VIEs’ voting equity shares, have fully guaranteed the VIEs’ obligations and may have the right to redeem the third party securities under certain circumstances. We report the debt securities that we issue to the VIEs as long-term debt in our consolidated balance sheet.
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A summary of our transactions with VIEs accounted for as secured borrowings and involvements with consolidated VIEs is as follows:
| | | | | | | | | | | | | | | | | |
| |
| | | | | | | Carrying value (1) | |
| | | Total | | | | | | | Third | | | | |
| | | VIE | | | Consolidated | | | party | | | Noncontrolling | |
| (in millions) | | assets | | | assets | | | liabilities | | | interests | |
| |
| | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Secured borrowings: | | | | | | | | | | | | | | | | |
| Municipal tender option bond securitizations | | $ | 6,358 | | | $ | 6,280 | | | $ | 4,765 | | | $ | - -- | |
| Auto loan securitizations | | | 2,134 | | | | 2,134 | | | | 1,869 | | | | - -- | |
| Commercial real estate loans | | | 1,294 | | | | 1,294 | | | | 1,258 | | | | - -- | |
| Residential mortgage securitizations | | | 1,124 | | | | 995 | | | | 699 | | | | - -- | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total secured borrowings | | | 10,910 | | | | 10,703 | | | | 8,591 | | | | - -- | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Consolidated VIEs: | | | | | | | | | | | | | | | | |
| Structured asset finance | | | 3,491 | | | | 1,666 | | | | 1,481 | | | | 13 | |
| Investment funds | | | 1,119 | | | | 1,070 | | | | 155 | | | | 97 | |
| Other | | | 1,007 | | | | 1,007 | | | | 774 | | | | 11 | |
| | | | | | | | | | | | | |
| Total consolidated VIEs | | | 5,617 | | | | 3,743 | | | | 2,410 | | | | 121 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total secured borrowings and consolidated VIEs | | $ | 16,527 | | | $ | 14,446 | | | $ | 11,001 | | | $ | 121 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
March 31, 2009 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Secured borrowings: | | | | | | | | | | | | | | | | |
Municipal tender option bond securitizations | | $ | 6,081 | | | $ | 6,010 | | | $ | 5,822 | | | $ | -- | |
Auto loan securitizations | | | 1,702 | | | | 1,702 | | | | 1,441 | | | | -- | |
Commercial real estate loans | | | 1,112 | | | | 1,112 | | | | 1,049 | | | | -- | |
Residential mortgage securitizations | | | 1,025 | | | | 899 | | | | 614 | | | | -- | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total secured borrowings | | | 9,920 | | | | 9,723 | | | | 8,926 | | | | -- | |
| | | | | | | | | | | | | |
| |
Consolidated VIEs: | | | | | | | | | | | | | | | | |
Structured asset finance | | | 3,476 | | | | 1,723 | | | | 1,556 | | | | 16 | |
Investment funds | | | 1,946 | | | | 1,946 | | | | 242 | | | | 105 | |
Other | | | 1,108 | | | | 1,107 | | | | 832 | | | | 17 | |
| | | | | | | | | | | | | |
Total consolidated VIEs | | | 6,530 | | | | 4,776 | | | | 2,630 | | | | 138 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total secured borrowings and consolidated VIEs | | $ | 16,450 | | | $ | 14,499 | | | $ | 11,556 | | | $ | 138 | |
| | | | | | | | | | | | | |
| | |
| | |
| (1) | | Amounts exclude loan loss reserves, and total assets may differ from consolidated assets due to the different measurement methods used depending on the assets’ classifications. |
We have raised financing through the securitization of certain financial assets in transactions with VIEs accounted for as secured borrowings. We also consolidate VIEs where we are the primary beneficiary. In certain transactions we provide contractual support in the form of limited recourse and liquidity to facilitate the remarketing of short-term securities issued to third party investors. Other than this limited contractual support, the assets of the VIEs are the sole source of repayment of the securities held by third parties.
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| | |
8. | | MORTGAGE BANKING ACTIVITIES |
8. MORTGAGE BANKING ACTIVITIESMortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, consist of residential and commercial mortgage originations and servicing.
The changes in residential MSRs measured using the fair value method were:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Quarter ended Sept. 30 | , | | Nine months ended Sept. 30 | , | | Quarter ended March 31 | , |
| (in millions) | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | |
| Fair value, beginning of period | | $ | 19,333 | | $ | 18,733 | | $ | 16,763 | | $ | 17,591 | | |
| | | |
| Fair value, beginning of quarter | | | $ | 14,714 | | $ | 16,763 | |
| Purchases | | 57 | | 188 | | 191 | | 489 | | | - -- | | 52 | |
| Acquired from Wachovia (1) | | | 34 | | - -- | |
| Servicing from securitizations or asset transfers | | 851 | | 951 | | 2,642 | | 2,808 | | | 1,447 | | 797 | |
| Sales | | — | | | (292 | ) | | | (269 | ) | | | (1,714 | ) | | - -- | | | (92 | ) |
| | | | | | | | | | | | | | | |
| Net additions | | 908 | | 847 | | 2,564 | | 1,583 | | | 1,481 | | 757 | |
| | | |
| | |
| Due to changes in valuation model inputs or assumptions (1) | | | (546 | ) | | | (638 | ) | | 1,788 | | 1,364 | | |
| Other changes in fair value (2) | | | (511 | ) | | | (719 | ) | | | (1,931 | ) | | | (2,315 | ) | |
| Due to changes in valuation model inputs or assumptions (2) | | | | (2,824 | ) | | | (1,798 | ) |
| Other changes in fair value (3) | | | | (980 | ) | | | (766 | ) |
| | | | | | | | | | | | | | | |
| Total changes in fair value | | | (1,057 | ) | | | (1,357 | ) | | | (143 | ) | | | (951 | ) | | | (3,804 | ) | | | (2,564 | ) |
| | | | | | | | | | | |
Fair value, end of period | | $ | 19,184 | | $ | 18,223 | | $ | 19,184 | | $ | 18,223 | | |
| Fair value, end of quarter | | | $ | 12,391 | | $ | 14,956 | |
| | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | First quarter 2009 reflects refinements to initial purchase accounting adjustments. |
|
| (2) | | Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates. |
(2) |
| (3) | | Represents changes due to collection/realization of expected cash flows over time. |
The changes in amortized commercial MSRs were:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Quarter ended Sept. 30 | , | | Nine months ended Sept. 30 | , | | Quarter ended March 31 | , |
| (in millions) | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | |
| Balance, beginning of period | | $ | 442 | | $ | 418 | | $ | 466 | | $ | 377 | | |
| | | |
| Balance, beginning of quarter | | | $ | 1,446 | | $ | 466 | |
| Purchases (1) | | 2 | | 46 | | 7 | | 101 | | | 4 | | 3 | |
| Acquired from Wachovia (2) | | | | (127 | ) | | - -- | |
| Servicing from securitizations or asset transfers (1) | | 8 | | 12 | | 17 | | 33 | | | 4 | | 5 | |
| Amortization | | | (19 | ) | | | (16 | ) | | | (57 | ) | | | (51 | ) | | | (70 | ) | | | (19 | ) |
| | | | | | | | | | | | | | | |
| Balance, end of period (2) | | $ | 433 | | $ | 460 | | $ | 433 | | $ | 460 | | |
| Balance, end of quarter (3) | | | $ | 1,257 | | $ | 455 | |
| | | | | | | |
| | | | | | | | | | | |
Fair value of amortized MSRs: | | |
| Beginning of period | | $ | 595 | | $ | 561 | | $ | 573 | | $ | 457 | | |
| End of period | | 622 | | 602 | | 622 | | 602 | | |
| Beginning of quarter | | | $ | 1,555 | | $ | 573 | |
| End of quarter | | | 1,392 | | 601 | |
| | | | |
| | |
| (1) | | Based on September 30, 2008,March 31, 2009, assumptions, the weighted-average amortization period for MSRs added during the third quarter and the first nine months of 2008 was approximately 18.3 years and 17.1 years, respectively.16.7 years. |
|
| (2) | | First quarter 2009 reflects refinements to initial purchase accounting adjustments. |
|
| (3) | | There was no valuation allowance recorded for the periods presented. |
5488
The components of our managed servicing portfolio were:
| | | | | | | | | | | | | | | | | | | | | |
| | | | September 30 | , | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , |
| (in billions) | | 2008 | | 2007 | | | 2009 | | 2008 | | 2008 | |
| Loans serviced for others (1) | | $ | 1,464 | | $ | 1,380 | | |
| | | |
| Residential mortgage loans serviced for others (1) | | | $ | 1,379 | | $ | 1,388 | | $ | 1,288 | |
| Owned loans serviced (2) | | 97 | | 97 | | | 267 | | 268 | | 102 | |
| | | | | | | | | | | | | |
| Total owned servicing | | 1,561 | | 1,477 | | |
| Total owned residential mortgage loans serviced | | | 1,646 | | 1,656 | | 1,390 | |
| Commercial mortgage loans serviced for others | | | 474 | | 472 | | 144 | |
| | | | | | | | | |
| Total owned loans serviced | | | 2,120 | | 2,128 | | 1,534 | |
| Sub-servicing | | 19 | | 22 | | | 23 | | 26 | | 21 | |
| | | | | | | | | |
| | | | | | | |
Total managed servicing portfolio | | $ | 1,580 | | $ | 1,499 | | | $ | 2,143 | | $ | 2,154 | | $ | 1,555 | |
| | | | | | | | | | | | | |
| Ratio of MSRs to related loans serviced for others | | | 1.34 | % | | | 1.35 | % | | | 0.74 | % | | | 0.87 | % | | | 1.08 | % |
| | | | |
| | |
| (1) | | Consists of 1-4 family first mortgage and commercial mortgage loans.
|
|
| (2) | | Consists of mortgages held for sale and 1-4 family first mortgage loans. |
The components of mortgage banking noninterest income were:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Quarter ended Sept. 30 | , | | Nine months ended Sept. 30 | , | | Quarter ended March 31 | , |
| (in millions) | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | |
| | | |
| | |
| Servicing fees (1) | | $ | 980 | | $ | 970 | | $ | 2,903 | | $ | 3,031 | | | $ | 1,018 | | $ | 964 | |
| Changes in fair value of residential MSRs: | | |
| Due to changes in valuation model inputs or assumptions (2) | | | (546 | ) | | | (638 | ) | | 1,788 | | 1,364 | | | | (2,824 | ) | | | (1,798 | ) |
| Other changes in fair value (3) | | | (511 | ) | | | (719 | ) | | | (1,931 | ) | | | (2,315 | ) | | | (980 | ) | | | (766 | ) |
| | | | | | | | | | | | | | | |
| Total changes in fair value of residential MSRs | | | (1,057 | ) | | | (1,357 | ) | | | (143 | ) | | | (951 | ) | | | (3,804 | ) | | | (2,564 | ) |
| | | (19 | ) | | | (16 | ) | | | (57 | ) | | | (51 | ) | | | (70 | ) | | | (19 | ) |
| Net derivative gains (losses) from economic hedges (4) | | 621 | | 1,200 | | | (1,684 | ) | | | (1,061 | ) | |
| Net derivative gains from economic hedges (4) | | | 3,699 | | 1,892 | |
| | | | | | | | | | | | | | | |
| Total servicing income, net | | 525 | | 797 | | 1,019 | | 968 | | | 843 | | 273 | |
Net gains (losses) on mortgage loan origination/sales activities | | 276 | | | (61 | ) | | 1,419 | | 1,069 | | |
| Net gains on mortgage loan origination/sales activities | | | 1,582 | | 267 | |
| All other | | 91 | | 87 | | 282 | | 265 | | | 79 | | 91 | |
| | | | | | | | | | | | | | | |
| Total mortgage banking noninterest income | | $ | 892 | | $ | 823 | | $ | 2,720 | | $ | 2,302 | | | $ | 2,504 | | $ | 631 | |
| | | | | | | | | | | | | | | |
Market-related valuation changes to MSRs, net of economic hedge results (2) + (4) | | $ | 75 | | $ | 562 | | $ | 104 | | $ | 303 | | |
| | | |
| Market-related valuation changes to MSRs, net of hedge results (2) + (4) | | | $ | 875 | | $ | 94 | |
| | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | Includes contractually specified servicing fees, late charges and other ancillary revenues. |
|
| (2) | | Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates. |
|
| (3) | | Represents changes due to collection/realization of expected cash flows over time. |
|
| (4) | | Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 12 —– Free-Standing Derivatives in this Report for additional information.discussion and detail. |
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The gross carrying amountvalue of intangible assets and accumulated amortization was:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | March 31 | , | | December 31 | , | | March 31 | , |
| | | September 30 | , | | 2009 | | 2008 | | 2008 | |
| | | 2008 | | 2007 | | | Gross | | Gross | | Gross | | | |
| | | Gross | | Accumulated | | Gross | | Accumulated | | | carrying | | Accumulated | | carrying | | Accumulated | | carrying | | Accumulated | |
| (in millions) | | carrying amount | | amortization | | carrying amount | | amortization | | | value | | amortization | | value | | amortization | | value | | amortization | |
| | | | |
Amortized intangible assets: | | |
| MSRs (1) | | $ | 641 | | $ | 208 | | $ | 592 | | $ | 132 | | | $ | 1,553 | | $ | 296 | | $ | 1,672 | | $ | 226 | | $ | 625 | | $ | 170 | |
| Core deposit intangibles | | 2,558 | | 2,163 | | 2,434 | | 2,072 | | | 14,746 | | 2,720 | | 14,188 | | 2,189 | | 2,503 | | 2,100 | |
| Credit card and other intangibles | | 740 | | 471 | | 656 | | 410 | | |
| Customer relationship and other intangibles | | | 3,287 | | 601 | | 3,988 | | 486 | | 733 | | 441 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets | | $ | 3,939 | | $ | 2,842 | | $ | 3,682 | | $ | 2,614 | | |
| Total amortized intangible assets | | | $ | 19,586 | | $ | 3,617 | | $ | 19,848 | | $ | 2,901 | | $ | 3,861 | | $ | 2,711 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | $ | 19,184 | | $ | 18,223 | | | $ | 12,391 | | $ | 14,714 | | $ | 14,956 | |
| Trademark | | 14 | | 14 | | | 14 | | 14 | | 14 | |
| | | | |
| | |
| (1) | | See Note 8 in this Report for additional information on MSRs. |
The current year and estimated future amortization expense for intangible assets as of September 30, 2008,March 31, 2009, follows:
| | | | | | | | | | | | | |
| |
| | | Core | | | | | | | |
| | | deposit | | | | | | | |
| (in millions) | | intangibles | | | Other | (1) | | Total | |
| |
Nine months ended September 30, 2008 (actual) | | $ | 94 | | | $ | 103 | | | $ | 197 | |
| | | | | | | | | | |
Estimate for year ended December 31, | | | | | | | | | | | | |
| 2008 | | $ | 126 | | | $ | 132 | | | $ | 258 | |
| 2009 | | | 120 | | | | 118 | | | | 238 | |
| 2010 | | | 106 | | | | 106 | | | | 212 | |
| 2011 | | | 44 | | | | 92 | | | | 136 | |
| 2012 | | | 23 | | | | 82 | | | | 105 | |
| 2013 | | | 20 | | | | 71 | | | | 91 | |
| |
| | |
(1) | | Includes amortized MSRs, and credit card and other intangibles. |
| | | | | | | | | | | | | | | | | |
| |
| | | | | | | Customer | | | | | | | |
| | | Core | | | relationship | | | Amortized | | | | |
| | | deposit | | | and other | | | commercial | | | | |
| (in millions) | | intangibles | | | intangibles | | | MSRs | | | Total | |
| |
| | | | | | | | | | | | | | | | | |
Three months ended March 31, 2009 (actual) | | $ | 532 | | | $ | 115 | | | $ | 70 | | | $ | 717 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Estimate for year ended December 31, 2009 | | $ | 2,121 | | | $ | 466 | | | $ | 259 | | | $ | 2,846 | |
| 2010 | | | 1,813 | | | | 370 | | | | 213 | | | | 2,396 | |
| 2011 | | | 1,544 | | | | 309 | | | | 188 | | | | 2,041 | |
| 2012 | | | 1,352 | | | | 290 | | | | 151 | | | | 1,793 | |
| 2013 | | | 1,202 | | | | 271 | | | | 118 | | | | 1,591 | |
| 2014 | | | 1,078 | | | | 253 | | | | 103 | | | | 1,434 | |
| | |
We based our projections of amortization expense shown above on existing asset balances at September 30, 2008.March 31, 2009. Future amortization expense willmay vary based on additional core deposit or other intangiblesamortized intangible assets acquired through business combinations.
5690
The changes in the carrying amount of goodwill as allocated to our operating segments for goodwill impairment analysis were:
| | | | | | | | | | | | | | | | | |
| |
| | | Community | | | Wholesale | | | Wells Fargo | | | Consolidated | |
| (in millions) | | Banking | (1) | | Banking | (1) | | Financial | | | Company | |
| |
| | $ | 7,357 | | | $ | 3,552 | | | $ | 366 | | | $ | 11,275 | |
| Goodwill from business combinations | | | 473 | | | | 262 | | | | — | | | | 735 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | 8 | | | | 8 | |
| | | | | | | | | | | | | |
| September 30, 2007 | | $ | 7,830 | | | $ | 3,814 | | | $ | 374 | | | $ | 12,018 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
December 31, 2007 | | $ | 8,581 | | | $ | 4,102 | | | $ | 423 | | | $ | 13,106 | |
Reduction in goodwill related to divested businesses | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
Goodwill from business combinations | | | 322 | | | | 97 | | | | — | | | | 419 | |
Foreign currency translation adjustments | | | — | | | | — | | | | (4 | ) | | | (4 | ) |
| | | | | | | | | | | | | |
September 30, 2008 | | $ | 8,903 | | | $ | 4,198 | | | $ | 419 | | | $ | 13,520 | |
| | | | | | | | | | | | | |
| |
| | |
(1) | | To reflect the realignment of our corporate trust business from Community Banking into Wholesale Banking in first quarter 2008, balances for prior periods have been revised. |
10. GOODWILLFor our goodwill impairment analysis, we allocate all of the goodwill to the individual operating segments. For management reporting we do not allocate allAs a result of the goodwillcombination of Wells Fargo and Wachovia, management realigned its operating segments. We have revised prior period information to the individual operating segments; some is allocated at the enterprise level.reflect this realignment. See Note 17 in this Report for further information on management reporting. The balancesfollowing table shows the allocation of goodwill to our operating segments for management reporting were:purposes of goodwill impairment testing. The additions in first quarter 2009 relate to additional goodwill recorded in connection with refinements to our initial acquisition date purchase accounting.
| | | | | | | | | | | | | | | | | | | | | |
| |
| | | Community | | | Wholesale | | | Wells Fargo | | | | | | | Consolidated | |
| (in millions) | | Banking | (1) | | Banking | (1) | | Financial | | | Enterprise | | | Company | |
| |
| | $ | 3,983 | | | $ | 1,864 | | | $ | 374 | | | $ | 5,797 | | | $ | 12,018 | |
| | | 5,056 | | | | 2,248 | | | | 419 | | | | 5,797 | | | | 13,520 | |
| |
| | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | Wealth, | | | | |
| | | | | | | | | | | Brokerage and | | | | |
| | | Community | | | Wholesale | | | Retirement | | | Consolidated | |
| (in millions) | | Banking | | | Banking | | | Services | | | Company | |
| |
| | | | | | | | | | | | | | | | | |
| December 31, 2007 | | $ | 10,591 | | | $ | 2,136 | | | $ | 379 | | | $ | 13,106 | |
| | | | | | | | | | | | | | | | | |
| Goodwill from business combinations | | | - -- | | | | 44 | | | | - -- | | | | 44 | |
| Foreign currency translation adjustments | | | (2 | ) | | | - -- | | | | - -- | | | | (2 | ) |
| | | | | | | | | | | | | |
| March 31, 2008 | | $ | 10,589 | | | $ | 2,180 | | | $ | 379 | | | $ | 13,148 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2008 | | $ | 16,810 | | | $ | 5,438 | | | $ | 379 | | | $ | 22,627 | |
| | | | | | | | | | | | | | | | | |
Goodwill from business combinations | | | 732 | | | | 467 | | | | -- | | | | 1,199 | |
Foreign currency translation adjustments | | | (1 | ) | | | - -- | | | | - -- | | | | (1 | ) |
| | | | | | | | | | | | | |
March 31, 2009 | | $ | 17,541 | | | $ | 5,905 | | | $ | 379 | | | $ | 23,825 | |
| | | | | | | | | | | | | |
| | |
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| | |
(1) | | To reflect the realignment of our corporate trust business from Community Banking into Wholesale Banking in first quarter 2008, balances for prior periods have been revised. |
11. GUARANTEES AND LEGAL ACTIONS
Guarantees
The guarantees we provide
Guarantees are contracts that contingently require us to third parties primarily includemake payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of securities lending indemnifications, standby letters of credit, various indemnificationliquidity agreements, written put options, recourse obligations, residual value guarantees, accounted for as derivatives, additional consideration related to business combinations and contingent consideration. The following table shows carrying value, maximum exposure to loss on our guarantees and the amount with a higher risk of performance.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | March 31 | , | | December 31 | , |
| | | 2009 | | | 2008 | |
| | | | | | | Maximum | | | Higher | | | | | | | Maximum | | | Higher | |
| | | Carrying | | | exposure | | | performance | | | Carrying | | | exposure | | | performance | |
| (in millions) | | value | | | to loss | | | risk | | | value | | | to loss | | | risk | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Standby letters of credit | | $ | 318 | | | $ | 50,325 | | | $ | 10,157 | | | $ | 130 | | | $ | 47,191 | | | $ | 17,293 | |
| Securities and other lending indemnifications | | | 51 | | | | 28,611 | | | | 3,859 | | | | - -- | | | | 30,120 | | | | 1,907 | |
| Liquidity agreements (1) | | | 41 | | | | 14,514 | | | | - -- | | | | 30 | | | | 17,602 | | | | - -- | |
| Written put options (1) | | | 1,558 | | | | 7,423 | | | | 3,109 | | | | 1,376 | | | | 10,182 | | | | 5,314 | |
| Loans sold with recourse | | | 192 | | | | 6,288 | | | | 2,169 | | | | 53 | | | | 6,126 | | | | 2,038 | |
| Residual value guarantees | | | - -- | | | | 197 | | | | - -- | | | | - -- | | | | 1,121 | | | | - -- | |
| Contingent consideration | | | - -- | | | | 134 | | | | - -- | | | | 11 | | | | 187 | | | | - -- | |
| Other guarantees | | | - -- | | | | 73 | | | | - -- | | | | - -- | | | | 38 | | | | - -- | |
| | | | | | | | | | | | | | | | | | | |
| Total guarantees | | $ | 2,160 | | | $ | 107,565 | | | $ | 19,294 | | | $ | 1,600 | | | $ | 112,567 | | | $ | 26,552 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Liquidity agreements and written put options that are in the form of derivatives are excluded from this disclosure and included in the derivative disclosures in Note 12. Certain of these agreements included in this table are related to off-balance sheet entities and, accordingly, are also disclosed in Note 7. |
“Maximum exposure to loss” and “higher performance guarantees.risk” are required disclosures under generally accepted accounting principles. Higher performance risk represents those guarantees on which we have a higher risk of being required to perform under the terms of the guarantee. We consider the risk of performance to be high if the underlying assets under the guarantee have an external rating that is below investment grade or an internal credit default grade that is equivalent thereto. Maximum exposure to loss represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite its extremely remote possibility, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss. We believe the carrying value, which is either fair value or cost adjusted for incurred credit losses, is more representative of our exposure to loss than either higher performance risk or maximum exposure to loss.
We issue standby letters of credit, which include performance and financial guarantees, for customers in connection with contracts between theour customers and third parties. Standby letters of credit assure thatare agreements where we are obligated to make payment to a third party on behalf of a customer in the third parties will receive specified funds if customers failevent the customer fails to meet their contractual obligations. We are obligated to make payment if a customer defaults. Standby letters of credit were $15.3 billion at September 30, 2008, and $12.5 billion at December 31, 2007,
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including financial guarantees of $8.9 billion and $6.5 billion, respectively, that we had issued or purchased participations in. Standby letters of credit are net of participations sold to other institutions of $2.5 billion at September 30, 2008, and $1.4 billion at December 31, 2007. We also had commitments for commercial and similar letters of credit of $1.0 billion at September 30, 2008, and $955 million at December 31, 2007. We consider the credit risk in standby letters of credit and commercial and similar letters of credit in determining the allowance for credit losses.
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As a securities lending agent, we loan client securities, on a fully collateralized basis, to third party borrowers. We indemnify our clients against borrower default of a return of those securities and, in certain cases, against collateral losses. We support these guarantees with collateral, generally in the form of cash or highly liquid securities, that is marked to market daily. At March 31, 2009, and December 31, 2008, respectively, there was $29.2 billion and $31.0 billion in collateral supporting loaned securities with values of $28.6 billion and $30.1 billion.
We enter into other types of indemnification agreements in the ordinary course of business under which we agree to indemnify third parties against any damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with us. These relationships or transactions include those arising from service as a director or officer of the Company, underwriting agreements relating to our securities, securities lending, acquisition agreements and various other business transactions or arrangements. Because the extent of our obligations under these agreements depends entirely upon the occurrence of future events, our potential future liability under these agreements is not determinable.
We writeprovide liquidity facilities on all commercial paper issued by the conduit we administer. We also provide liquidity to certain off-balance sheet entities that hold securitized fixed rate municipal bonds and consumer or commercial assets that are partially funded with the issuance of money market and other short-term notes. See Note 7 in this Report for additional information on these arrangements.
Written put options are contracts that give the counterparty the right to sell to us an underlying instrument held by the counterparty at a specified price, and include options, floors, caps and caps. Periodic settlements occur on floors and caps based on market conditions. The fair valuecredit default swaps. These written put option contracts generally permit net settlement. While these derivative transactions expose us to risk in the event the option is exercised, we manage this risk by entering into offsetting trades or by taking short positions in the underlying instrument. We offset substantially all put options written to customers with purchased options. Additionally, for certain of these contracts, we require the written options liability in our balance sheet was $1,522 million at September 30, 2008, and $700 million at December 31, 2007. The aggregate fair value ofcounterparty to pledge the written floors and caps liability was $474 million and $280 millionunderlying instrument as collateral for the same periods, respectively.transaction. Our ultimate obligation under written put options floors and caps is based on future market conditions and is only quantifiable at settlement. See Note 7 in this Report for additional information regarding transactions with VIEs and Note 12 in this Report for additional information regarding written derivative contracts.
In certain loan sales or securitizations, we provide recourse to the buyer whereby we are required to repurchase loans at par value plus accrued interest on the occurrence of certain credit-related events within a certain period of time. The notionalmaximum exposure to loss represents the outstanding principal balance of the loans sold or securitized that are subject to recourse provisions, but the likelihood of the repurchase of the entire balance is remote and amounts paid can be recovered in whole or in part from the sale of collateral. In first quarter 2009, we did not repurchase a significant amount of loans associated with these agreements.
We have provided residual value guarantees as part of certain leasing transactions of corporate assets. At March 31, 2009, the only remaining residual value guarantee related to written options was $78.5 billion at September 30, 2008, and $30.7 billion ata leasing transaction on certain corporate buildings. At December 31, 2007, and2008, the aggregate notionalresidual value guarantees also included leasing transactions related to written floors and caps was $24.9 billion and $26.5 billion forrailcars, which were unwound in first quarter 2009. The lessors in these leases are generally large financial institutions or their leasing subsidiaries. These guarantees protect the same periods, respectively. We offset substantially all options written to customers with purchased options.
We also enter into credit default swaps under which we buylessor from loss protection from or sell loss protection to a counterparty in the event of default of a reference obligation. The fair valueon sale of the contracts sold wasrelated asset at the end of the lease term. To
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the extent that a liabilitysale of $42 million at September 30, 2008, and $20 million at December 31, 2007. The maximum amountthe leased assets results in proceeds less than a stated percent (generally 80% to 89%) of the asset’s cost less depreciation, we would be required to payreimburse the lessor under the swaps in which we sold protection, assuming all reference obligations default at a total loss, without recoveries, was $712 million and $873 million, based on notional value, at September 30, 2008 and December 31, 2007, respectively. We purchased credit default swaps of comparable notional amounts to mitigate the exposure of the written credit default swaps at September 30, 2008 and December 31, 2007. These purchased credit default swaps had terms (i.e., the same reference obligation and maturity) that would offset our exposure from the written default swap contracts in which we are providing protection to a counterparty.guarantee.
In connection with certain brokerage, asset management, insurance agency and other acquisitions we have made, the terms of the acquisition agreements provide for deferred payments or additional consideration, based on certain performance targets. At September 30, 2008, and December 31, 2007, the amount of additional consideration we expected to pay was not significant to our financial statements.
We have entered into various contingent performance guarantees through credit risk participation arrangements with remaining terms up to 21 years. We will be required to make payments under
58
arrangements. Under these guaranteesagreements, if a customer defaults on its obligation to perform under certain credit agreements with third parties. The extent of our obligations under these guarantees depends entirely on future events and was contractually limited to an aggregate liability of approximately $30 million at September 30, 2008, and $50 million at December 31, 2007.
Wells Fargo is a Class B common shareholder of Visa Inc. (Visa). Based on agreements previously executed among Wells Fargo, Visa and its predecessors and certain member banks of the Visa USA network,parties, we maywill be required to indemnify Visa with respect to certain covered litigation. In conjunction with its initial public offering, Visa deposited $3 billion of the proceeds of the offering into a litigation escrow account to be used to satisfy settlement obligations with respect to prior litigation and to make payments with respect to the future resolution of the covered litigation. The extent of our future obligations, if any, under these arrangements depends on the ultimate resolution of the covered litigation. In October of 2008, Visa entered into an agreement in principle to settle with Discover Financial Services (Discover). We had previously established a reserve to reflect the fair value of our possible indemnification obligation to Visa for the Discover litigation.third parties.
To maintain a credit rating of “AAA” for certain funds, we entered into a capital support agreement in first quarter 2008 for up to $130 million related to one structured investment vehicle (SIV) held by our AAA-rated non-government money market mutual funds. In third quarter 2008 we fulfilled our obligation under this agreement by purchasing the SIV from the funds. At September 30, 2008, the SIV was recorded as a debt security in our securities available-for-sale portfolio. We are generally not responsible for investment losses incurred by our funds, and we do not have a contractual or implicit obligation to indemnify such losses or provide additional support to the funds. While we elected to enter into the capital support agreement for the AAA-rated funds, we are not obligated and may elect not to provide additional support to these funds or other funds in the future.
Legal Actions
The following supplements and amends our discussion of certain matters previously reported in Note 15 (Guarantees and Legal Actions)Item 3 (Legal Proceedings) of our 20072008 Form 10-K for events occurring in the most recent quarter.
Citigroup Litigation.On or about October 4, 2008, Citigroup, Inc. (Citigroup) commenced an actionMunicipal Derivatives Bid Practices All state and federal purported class actions have now been consolidated in New York state court against Wells Fargo, Wachovia, and their respective directors alleging, in part, that our agreement to merge with Wachovia constitutes tortious interference by Wells Fargo of an agreement between Citigroup and Wachovia. The complaint has been removed to the United StatesU.S. District Court for the Southern District of New York. AfterOn April 30, 2009, the case was removed, Citigroup purported to amend the complaint to seek $20 billion in compensatory damages, $20 billion in restitutionaryCourt granted a motion filed by Wachovia and unjust enrichment damages,certain other defendants and $40 billion in punitive damages. We believe that we have valid defenses with respect to Citigroup’sdismissed all claims for any damages and will vigorously defend our position.against Wachovia. Plaintiffs may replead their claims.
Auction Rate Securities.We are engagedSecurities On April 23, 2009, the Attorney General of the State of California filed a complaint in discussions with regulators concerning investigations into the saleSuperior Court of the State of California for the County of San Francisco alleging that certain Wells Fargo affiliates improperly sold auction rate securities to customers. The Attorney General seeks an injunction against those affiliates, enjoining them from violating certain California statutes, civil penalties, disgorgement of profits, restitution and damages.
Merger-Related Litigation On March 20, 2009, the U.S. District Court for the Southern District of New York remanded theCitigroup, Inc. v. Wachovia Corp., et al.case to the Supreme Court of the State of New York for the County of Manhattan.
Golden West and Related Litigation On March 19, 2009, the defendants filed a motion to dismiss the amended class action complaint in theLipetzcase, which has now been re-captioned asIn re Wachovia Equity Securities Litigation. Briefing is scheduled to be complete by Wells Fargo Investments,June 26, 2009.
Le-Nature’s, Inc. On March 2, 2009, the Wachovia defendants moved to dismiss the case filed by the liquidation trust, which was formed in Le-Nature’s bankruptcy. On April 3, 2009, after a number of procedural motions in various courts, theCalifornia Public Employees Retirement System, et al. v. Wachovia Capital Markets, LLC Wells Fargo Brokerage Services, LLC, and Wells Fargo Institutional Securities, LLC, and liquidity solutionscase was remanded to the Superior Court of the State of California for purchasers.the County of Los Angeles.
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Taking into considerationOutlook Based on information currently available, advice of counsel, available insurance coverage and established reserves, we believeWells Fargo believes that the eventual outcome of pending and threatened legalthe actions against Wells Fargo and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material adverse effect on theWells Fargo’s consolidated
94
financial position or results of operations or stockholders’ equity.operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to ourWells Fargo’s results of operations and financial condition for any particular period.
12. DERIVATIVES
We use derivatives to manage exposure to market risk, interest rate risk, credit risk and foreign currency risk, to generate profits from proprietary trading and to assist customers with their risk management objectives. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged, but is used only as the basis on which interest and other payments are determined. Our approach to managing interest rate risk includes the use of derivatives. This helps minimize significant, unplanned fluctuations in earnings, fair values of assets and liabilities, and cash flows caused by interest rate volatility. This approach involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on the net interest margin and cash flows. As a result of interest rate fluctuations, hedged assets and liabilities will gain or lose market value. In a fair value hedging strategy, the effect of this unrealized gain or loss will generally be offset by the gain or loss on the derivatives linked to the hedged assets and liabilities. In a cash flow hedging strategy, we manage the variability of cash payments due to interest rate fluctuations by the effective use of derivatives linked to hedged assets and liabilities.
We use derivatives as part of our interest rate and foreign currency risk management, including interest rate swaps, caps and floors, futures and forward contracts, and options. We also offer various derivatives, including interest rate, commodity, equity, credit and foreign exchange contracts, to our customers but usually offset our exposure from such contracts by purchasing other financial contracts. The customer accommodations and any offsetting financial contracts are treated as free-standing derivatives. Free-standing derivatives also include derivatives we enter into for risk management that do not otherwise qualify for hedge accounting, including economic hedge derivatives. To a lesser extent, we take positions based on market expectations or to benefit from price differentials between financial instruments and markets. Additionally, free-standing derivatives include embedded derivatives that are required to be separately accounted for from their host contracts.
Our derivative activities are monitored by Corporate ALCO. Our Treasury function, which includes asset/liability management, is responsible for various hedging strategies developed through analysis of data from financial models and other internal and industry sources. We incorporate the resulting hedging strategies into our overall interest rate risk management and trading strategies.
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The total notional or contractual amounts and fair values for derivatives were:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | March 31, 2009 | | | December 31, 2008 | |
| | | Notional or | | | Fair value | | | Notional or | | | Fair value | |
| | | contractual | | | Asset | | | Liability | | | contractual | | | Asset | | | Liability | |
| (in millions) | | amount | | | derivatives | | | derivatives | | | amount | | | derivatives | | | derivatives | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Qualifying hedge contracts accounted for under FAS 133 (1) | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate contracts | | $ | 176,593 | | | $ | 10,269 | | | $ | 2,847 | | | $ | 191,972 | | | $ | 11,511 | | | $ | 3,287 | |
| Foreign exchange contracts | | | 42,308 | | | | 1,119 | | | | 1,344 | | | | 38,386 | | | | 1,138 | | | | 1,198 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total derivatives designated as hedging instruments under FAS 133 | | | | | | | 11,388 | | | | 4,191 | | | | | | | | 12,649 | | | | 4,485 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments under FAS 133 | | | | | | | | | | | | | | | | | | | | | | | | |
Free-standing derivatives (economic hedges) (1): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate contracts (2) | | | 946,991 | | | | 11,014 | | | | 8,933 | | | | 750,728 | | | | 12,635 | | | | 9,708 | |
| Equity contracts | | | 39 | | | | -- | | | | 9 | | | | - -- | | | | - -- | | | | - -- | |
| Foreign exchange contracts | | | 4,435 | | | | 370 | | | | 131 | | | | 4,208 | | | | 150 | | | | 325 | |
| Credit contracts | | | 2,644 | | | | 473 | | | | -- | | | | 644 | | | | 528 | | | | -- | |
| Other derivatives | | | 951 | | | | 3 | | | | 139 | | | | 4,458 | | | | 108 | | | | 71 | |
| | | | | | | | | | | | | | | | | | | | | |
| Subtotal | | | | | | | 11,860 | | | | 9,212 | | | | | | | | 13,421 | | | | 10,104 | |
| | | | | | | | | | | | | | | | | | | | | |
Customer accommodation, trading and other free-standing derivatives (3): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate contracts | | | 3,399,331 | | | | 115,111 | | | | 113,609 | | | | 3,752,656 | | | | 142,739 | | | | 141,508 | |
| Commodity contracts | | | 58,421 | | | | 6,035 | | | | 6,203 | | | | 86,360 | | | | 6,117 | | | | 6,068 | |
| Equity contracts | | | 35,511 | | | | 2,276 | | | | 2,664 | | | | 37,136 | | | | 3,088 | | | | 2,678 | |
| Foreign exchange contracts | | | 267,361 | | | | 4,791 | | | | 4,595 | | | | 273,437 | | | | 7,562 | | | | 7,419 | |
| Credit contracts | | | 278,620 | | | | 24,986 | | | | 24,493 | | | | 272,722 | | | | 21,953 | | | | 21,787 | |
| Other derivatives | | | 4,323 | | | | 882 | | | | 133 | | | | 6,322 | | | | 524 | | | | 524 | |
| | | | | | | | | | | | | | | | | | | | | |
| Subtotal | | | | | | | 154,081 | | | | 151,697 | | | | | | | | 181,983 | | | | 179,984 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total derivatives not designated as hedging instruments under FAS 133 | | | | | | | 165,941 | | | | 160,909 | | | | | | | | 195,404 | | | | 190,088 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal | | | | | | | 177,329 | | | | 165,100 | | | | | | | | 208,053 | | | | 194,573 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Netting (4) | | | | | | | (140,124 | ) | | | (152,208 | ) | | | | | | | (168,690 | ) | | | (182,435 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 37,205 | | | $ | 12,892 | | | | | | | $ | 39,363 | | | $ | 12,138 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Represents asset/liability management hedges, which are included in other assets or other liabilities. |
|
| (2) | | Includes free-standing derivatives (economic hedges) used to hedge the risk of changes in the fair value of residential MSRs, MHFS, interest rate lock commitments and other interests held. |
|
| (3) | | Customer accommodation, trading and other free-standing derivatives are included in trading assets or other liabilities. |
|
| (4) | | Represents netting of derivative asset and liability balances, and related cash collateral, with the same counterparty subject to master netting arrangements under FIN 39. The amount of cash collateral netted against derivative assets and liabilities was $19.5 billion and $6.8 billion, respectively, at March 31, 2009, and $17.7 billion and $22.2 billion, respectively, at December 31, 2008. |
Fair Value Hedges
We use interest rate swaps to convert certain of our fixed-rate long-term debt and certificates of deposit to floating rates to hedge our exposure to interest rate risk. We also enter into cross-currency swaps, and cross-currency interest rate swaps and forward contracts to hedge our exposure to foreign currency risk and interest rate risk associated with the issuance of non-U.S. dollar denominated long-term debt.debt and repurchase agreements. The ineffective portion of these aforementioned fair value hedges is recorded as part of noninterest income. Consistent with our asset/liability management strategy of converting fixed-rate debt to floating-rates, we believe interest expense should reflect only the current contractual interest cash flows on the liabilities and the related swaps. In addition, we use derivatives, such as Treasury futures and LIBOR swaps, to hedge changes in fair value due to changes in interest rates of our commercial real estate mortgage loans held for sale. Finally, we use interest rate swaps to hedge against changes in fair value of certain municipal debt securities that are classified as securities available for sale, and, beginning infourth quarter 2007, commercial mortgage-backed securities, due to changes in interest rates.rates, foreign currency rates, or both. The ineffective portion of these fair value hedges
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is recorded in “Net gains (losses) on debt securities available for sale” in the income statement. For fair value hedges of long-term debt, and certificates of deposit, commercial real estate loans, franchise loansrepurchase agreements and debt securities, all parts of each derivative’s gain or loss due to the hedged risk are included in the assessment of hedge effectiveness.
From timeFor certain fair value hedging relationships, we use statistical analysis to time, we enter into equity collars to lock in share prices between specified levels for certain equity securities. As permitted, we include the intrinsic value only (excluding time value) when assessing hedge effectiveness. We assess hedge effectiveness, based on a dollar-offset ratio,both at inception of the hedging relationship and on an ongoing basis, by comparing cumulative changes in the intrinsic valuebasis. Such analysis may include regression analysis or analysis of the equity collar with changesprice sensitivity of the hedging instrument relative to that of the hedged item. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in fair value of the asset or liability being hedged equity securities.due to changes in the hedged risk(s). The net derivative gain or loss relatedassessment includes an evaluation of the quantitative measures of the regression results used to validate the equity collars is recorded inconclusion of high effectiveness. Additionally, for other noninterest incomefair value hedging relationships, we use the cumulative dollar-offset approach to validate the effectiveness of the hedge on a retrospective basis.
The following table shows the gains (losses) recognized in the income statement.
At September 30, 2008, all designatedstatement related to derivatives in FAS 133 fair value hedges continued to qualify as fair value hedges.hedging relationships.
| | | | | | | | | | | | | | | | | |
| |
| | | Quarter ended March 31, 2009 | |
| | | Gains (losses) | | | | |
| | | recorded in net | | | | |
| | | interest income | | | Gains (losses) recorded in noninterest income | |
| | | | | | | | | | | | | | | Recognized on | |
| | | | | | | | | | | | | | | fair value | |
| | | | | | | | | | | | | | | hedges | |
| | | Recognized | | | Recognized | | | Recognized | | | (ineffective | |
| (in millions) | | on derivatives | | | on derivatives | | | on hedged item | | | portion) | |
| |
| | | | | | | | (A) | | | | (B) | | | | (A) + (B) | |
| | | | | | | | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | | | | | | |
| Hedging: | | | | | | | | | | | | | | | | |
| Securities available for sale | | $ | (41 | ) | | $ | 82 | | | $ | (93 | ) | | $ | (11 | ) |
| Long-term debt | | | 264 | | | | (789 | ) | | | 798 | | | | 9 | |
| | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | | | | | | | | | | | | | | | | |
| Hedging: | | | | | | | | | | | | | | | | |
| Securities available for sale | | | (28 | ) | | | 2 | | | | (2 | ) | | | - -- | |
| Short-term borrowings | | | 16 | | | | (1 | ) | | | 1 | | | | - -- | |
| Long-term debt | | | 76 | | | | (262 | ) | | | 330 | | | | 68 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 287 | | | $ | (968 | ) | | $ | 1,034 | | | $ | 66 | (1) |
| | | | | | | | | | | | | |
| | |
| | |
| (1) | | None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness. |
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Cash Flow Hedges
We hedge floating-rate senior debt against future interest rate increases by using interest rate swaps to convert floating-rate senior debt to fixed rates and by using interest rate caps, floors and floorsfutures to limit variability of rates. We also use interest rate swaps and floors to hedge the variability in interest payments received on certain floating-rate commercial loans, due to changes in the benchmark interest rates.rate. Gains and losses on derivatives that are reclassified from cumulative other comprehensive income to current period earnings, are included in the line item in which the hedged item’s effect inon earnings is recorded. All parts of gain or loss on these derivatives are included in the assessment of hedge effectiveness. As of September 30, 2008,For all designated cash flow hedges, continuedwe assess hedge effectiveness using regression analysis, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic changes in cash flows of the hedging instrument against the periodic changes in cash flows of the forecasted transaction being hedged due to qualify as cash flow hedges.changes in the hedged risk(s). The assessment includes an evaluation of the quantitative measures of the regression results used to validate the conclusion of high effectiveness.
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We expect that $39$34 million of deferred net gainslosses on derivatives in other comprehensive income at September 30, 2008,March 31, 2009, will be reclassified as earnings during the next twelve months, compared with $34$60 million of net deferred net gainslosses at September 30, 2007.December 31, 2008. We are hedging our exposure to the variability of future cash flows for all forecasted transactions for a maximum of six17 years for both hedges of both floating-rate senior debt and floating-rate commercial loans.
The following table provides net derivativeshows the gains and losses(losses) recognized related to fair value andderivatives in FAS 133 cash flow hedges resulting from the change in value of the derivatives excluded from the assessment of hedge effectiveness and the change in value of the ineffective portion of the derivatives.hedging relationships.
| | | | | | | | | | | | | | | | | |
| |
| | | Quarter ended Sept. 30 | , | | Nine months ended Sept. 30 | , |
| (in millions) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
Net gains from fair value hedges from: | | | | | | | | | | | | | | | | |
| Change in value of derivatives excluded from the assessment of hedge effectiveness | | $ | — | | | $ | 1 | | | $ | — | | | $ | 8 | |
| Ineffective portion of change in value of derivatives | | | 73 | | | | 12 | | | | 116 | | | | 13 | |
Net gains (losses) from ineffective portion of change in the value of cash flow hedges | | | (3 | ) | | | — | | | | (6 | ) | | | 25 | |
| |
| | | | | | | | | | | | | |
| |
| (in millions) | | Quarter ended March 31, 2009 | |
| | | | | | | | | | | Gains (pre tax) | |
| | | | | | | Gains (pre tax) | | | recognized in | |
| | | Gains (after tax) | | | reclassified from | | | noninterest | |
| | | recognized in | | | cumulative OCI | | | income on | |
| | | OCI on | | | into net | | | derivatives | |
| | | derivatives | | | interest income | | | (ineffective | |
| | | (effective portion) | | | (effective portion) | | | portion) | |
| |
| | | | | | | | | | | | | |
| Interest rate contracts | | $ | 68 | | | $ | 135 | | | $ | 6 | (1) |
| | | | | | | | | | | | |
| | |
| | |
| (1) | | None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness. |
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Free-Standing Derivatives
We use free-standing derivatives (economic hedges), in addition to debt securities available for sale, to hedge the risk of changes in the fair value of residential MSRs, new prime residential MHFS, derivative loan commitments and other interests held, with the resulting gain or loss reflected in income.
The derivatives used to hedge residential MSRs include swaps, swaptions, forwards, Eurodollar and Treasury futures and options contracts. Netcontracts resulted in net derivative gains (losses) of $621$3,699 million in first quarter 2009 and $(1,684)$1,892 million for the thirdin first quarter and first nine months of 2008 respectively, and $1,200 million and $(1,061) million for the third quarter and first nine months of 2007, respectively, from economic hedges related to our mortgage servicing activities and are included in mortgage banking noninterest income. The aggregate fair value of these derivatives used as economic hedges was a net asset of $685$2,845 million at September 30, 2008, $1,652March 31, 2009, and $3,610 million at December 31, 2007, and $596 million at September 30, 2007.2008. Changes in fair value of debt securities available for sale (unrealized gains and losses) are not included in servicing income, but are reported in cumulative other comprehensive income (net of tax) or, upon sale, are reported in net gains (losses) on debt securities available for sale.
Interest rate lock commitments for residential mortgage loans that we intend to sell are considered free-standing derivatives. Our interest rate exposure on these derivative loan commitments, as well as most new prime residential MHFS carried at fair value under FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115(FAS 159), is hedged with free-standing derivatives (economic hedges) such as forwards and options, Eurodollar futures and options, and Treasury futures, forwards and options contracts. The commitments, free-standing derivatives and residential MHFS are carried at fair value with changes in fair value included in mortgage banking noninterest income. For interest rate lock commitments issued prior to January 1, 2008, we recorded a zero fair value for the derivative loan commitment at inception consistent with SAB 105. Effective January 1, 2008,
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we were required by SAB 109 to include, at inception and during the life of the loan commitment, the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of derivative loan commitments. The implementation of SAB 109 did not have a material impact on our results or the valuation of our loan commitments. Changes subsequent to inception are based on changes in fair value of the underlying loan resulting from the exercise of the commitment and changes in the probability that the loan will not fund within the terms of the commitment (referred to as a fall-out factor). The value of the underlying loan is affected primarily by changes in interest rates and the passage of time. However, changes in investor demand, such as concerns about credit risk, can also cause changes in the spread relationships between underlying loan value and the derivative financial instruments that cannot be hedged. The aggregate fair value of derivative loan commitments in the balance sheet was a net liability of $114 million at September 30,March 31, 2009, and December 31, 2008, was a net asset of $6$474 million at December 31, 2007, and a net liability of $26$125 million, at September 30, 2007,respectively, and is included in the caption “Interest rate contracts” under Customer Accommodation, Trading“Customer accommodation, trading and Other Free-Standing Derivativesother free-standing derivatives” in the following table.table on page 96.
We also enter into various derivatives primarily to provide derivative products to customers. To a lesser extent, we take positions based on market expectations or to benefit from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities in the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. We also enter into free-standing derivatives for risk management that do not otherwise qualify for hedge accounting. They are carried at fair value with changes in fair value recorded as part of other noninterest income.
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Additionally, free-standing derivatives include embedded derivatives that are required to be accounted for separate from their host contract. We periodically issue hybrid long-term notes and certificates of deposit where the performance of the hybrid instrument notes is linked to an equity, commodity or currency index, or basket of such indices. These notes contain explicit terms that affect some or all of the cash flows or the value of the note in a manner similar to a derivative instrument and therefore are considered to contain an “embedded” derivative instrument. The indices on which the performance of the hybrid instrument is calculated are not clearly and closely related to the host debt instrument. In accordance with FAS 133, the “embedded” derivative is separated from the host contract and accounted for as a free-standing derivative.
The following table shows the gains (losses) recognized in the income statement related to derivatives not designated as hedging instruments under FAS 133.
| | | | | |
| |
| | Quarter ended March 31, 2009 | |
| | Gains (losses) recognized | |
| | in noninterest income | |
| (in millions) | on derivatives | |
| |
Free-standing derivatives (economic hedges) | | | | |
| Interest rate contracts (1) | | | | |
| Recognized in noninterest income: | | | | |
| Mortgage banking | | $ | 2,364 | |
| Other | | | (5 | ) |
| | | | | |
| Foreign exchange contracts | | | 80 | |
| | | | | |
| Equity contracts | | | 2 | |
| Credit contracts | | | (58 | ) |
| | | | |
| Subtotal | | | 2,383 | |
| | | | |
| | | | | |
Customer accommodation, trading and other free-standing derivatives | | | | |
| Interest rate contracts (2) | | | | |
| Recognized in noninterest income: | | | | |
| Mortgage banking | | | 1,013 | |
| Other | | | 313 | |
| | | | | |
| Commodity contracts | | | (12 | ) |
| Equity contracts | | | (123 | ) |
| Foreign exchange contracts | | | 113 | |
| Credit contracts | | | 254 | |
| Other | | | (163 | ) |
| | | | |
| Subtotal | | | 1,395 | |
| | | | |
| Total | | $ | 3,778 | |
| | | | |
| |
| | |
| (1) | | Predominantly mortgage banking noninterest income including gains (losses) on the derivatives used as economic hedges of MSRs, interest rate lock commitments, loans held for sale and mortgages held for sale. |
| (2) | | Predominantly mortgage banking noninterest income including gains (losses) on interest rate lock commitments. |
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Credit Derivatives
We use credit derivatives to manage exposure to credit risk related to proprietary trading and to assist customers with their risk management objectives. This may include protection sold to offset purchased protection in structured product transactions, as well as liquidity agreements written to special purpose vehicles. The maximum exposure of sold credit derivatives is managed through posted collateral, purchased credit derivatives and similar products in order to achieve our desired credit risk profile. This credit risk management provides an ability to recover a significant portion of any amounts that would be paid under the sold credit derivatives. We would be required to perform under the noted credit derivatives in the event of default by the referenced obligors. Events of default include events such as bankruptcy, capital restructuring or lack of principal and/or interest payment. In certain cases, other triggers may exist, such as the credit downgrade of the referenced obligors or the inability of the special purpose vehicle for which we have provided liquidity to obtain funding.
The following table provides details of sold credit derivatives.
| | | | | | | | | | | | | | | | | |
| |
| | | | | | | Maximum | | | Higher | | | | |
| | | Fair value | | | exposure | | | performance | | | Range of | |
| (in millions) | | liability | | | to loss | | | risk | | | maturities | |
| |
December 31, 2008 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Credit default swaps on corporate bonds | | $ | 9,643 | | | $ | 83,446 | | | $ | 39,987 | | | | 2009-2018 | |
| Credit default swaps on structured products | | | 4,940 | | | | 7,451 | | | | 5,824 | | | | 2009-2056 | |
| Credit protection on credit default swap index | | | 2,611 | | | | 35,943 | | | | 6,364 | | | | 2009-2017 | |
| Credit protection on commercial mortgage-backed securities index | | | 2,231 | | | | 7,291 | | | | 2,938 | | | | 2009-2052 | |
| Credit protection on asset-backed securities index | | | 1,331 | | | | 1,526 | | | | 1,116 | | | | 2037-2046 | |
| Loan deliverable credit default swaps | | | 106 | | | | 611 | | | | 592 | | | | 2009-2014 | |
| Other | | | 18 | | | | 845 | | | | 150 | | | | 2009-2020 | |
| | | | | | | | | | | | | | |
| Total credit derivatives | | $ | 20,880 | | | $ | 137,113 | | | $ | 56,971 | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
March 31, 2009 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Credit default swaps on corporate bonds | | $ | 10,168 | | | $ | 82,468 | | | $ | 41,124 | | | | 2009-2018 | |
Credit default swaps on structured products | | | 5,300 | | | | 7,005 | | | | 5,558 | | | | 2009-2056 | |
Credit protection on credit default swap index | | | 3,803 | | | | 39,166 | | | | 6,240 | | | | 2009-2017 | |
Credit protection on commercial mortgage-backed securities index | | | 2,631 | | | | 4,888 | | | | 313 | | | | 2009-2052 | |
Credit protection on asset-backed securities index | | | 1,112 | | | | 1,197 | | | | 814 | | | | 2037-2046 | |
Loan deliverable credit default swaps | | | 114 | | | | 536 | | | | 515 | | | | 2009-2014 | |
Other | | | 18 | | | | 1,629 | | | | 940 | | | | 2009-2020 | |
| | | | | | | | | | | | | | |
Total credit derivatives | | $ | 23,146 | | | $ | 136,889 | | | $ | 55,504 | | | | | |
| | | | | | | | | | | | | | |
| |
“Maximum exposure to loss” and “higher performance risk” are required disclosures under generally accepted accounting principles. Higher performance risk represents those credit derivatives on which we have a higher risk of being required to perform under the terms of the credit derivative. We consider the risk of performance to be high if the underlying assets under the credit derivative have an external rating that is below investment grade or an internal credit default grade that is equivalent thereto. Maximum exposure to loss represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite its extremely remote possibility, where the value of our interests and any associated collateral declines to zero, without any consideration of recovery or offset from any economic hedges. Accordingly, this required disclosure is not an indication of expected loss. We believe the carrying value, which is either fair value or cost adjusted for incurred credit losses, is more representative of our exposure to loss than either higher performance risk or maximum exposure to loss.
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Credit-Risk Contingent Features
Certain of our derivative contracts contain provisions whereby if the credit rating of our debt, based on certain major credit rating agencies indicated in the relevant contracts, were to fall below investment grade, the counterparty could demand additional collateral or require termination or replacement of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a net liability position on March 31, 2009, was $18.9 billion for which we have posted $15.9 billion collateral in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2009, we would be required to post additional collateral of $1.0 billion or potentially settle the contract in an amount equal to its fair value.
Counterparty Credit Risk
By using derivatives, we are exposed to credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is equal to the amount reported as a derivative asset in our balance sheet. The amountamounts reported as a derivative asset are derivative contracts in a gain position, and to the extent subject to master netting arrangements, net of derivatives in a loss position with the same counterparty and cash collateral received. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. To the extent the master netting arrangements and other criteria meet the requirements of FASB Interpretation No. 39,Offsetting of Amounts Related to Certain Contracts, as amended by FSP FIN 39-1, derivatives balances and related cash collateral amounts are shown net in the balance sheet. Counterparty credit risk related to derivatives is considered and, if material, provided for separately.
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In connection with the bankruptcy filing by Lehman Brothers in September 2008, we recognized a $106 million charge in noninterest income related to unsecured counterparty exposure on our derivative contracts with Lehman Brothers. The bankruptcy filing triggered an early termination of the derivative contracts that after consideration of the master netting arrangement and posted cash collateral, resulted in a net amount due to us of $106 million. We assessed the collectability of this receivable and determined it was not realizable. We took appropriate actions to replace, as necessary, the terminated derivative contracts in order to maintain our various risk management strategies that previously involved the Lehman Brothers derivative contracts.
Derivative Financial Instruments – Summary Information
The gross positive fair value and net fair value for derivatives at September 30, 2008, and December 31, 2007, were:
| | | | | | | | | | | | | | | | | |
| |
| | | September 30, 2008 | | | December 31, 2007 | |
| | | Gross | | | | | | Gross | | | |
| | | positive | | Net fair | | | positive | | Net fair | |
| (in millions) | | fair value(2 | ) | | value | | fair value(2 | ) | | value | |
| |
ASSET/LIABILITY MANAGEMENT HEDGES | | | | | | | | | | | | | | | | |
Qualifying hedge contracts accounted for under FAS 133 | | | | | | | | | | | | | | | | |
| Interest rate contracts | | | $ | 1,311 | | $ | 747 | | | | $ | 1,419 | | $ | 1,147 | |
| Equity contracts | | | | — | | | — | | | | | — | | | (3 | ) |
| Foreign exchange contracts | | | | 862 | | | 629 | | | | | 1,399 | | | 1,376 | |
Free-standing derivatives (economic hedges) | | | | | | | | | | | | | | | | |
| Interest rate contracts (1) | | | | 4,007 | | | 622 | | | | | 2,183 | | | 1,455 | |
| Equity contracts | | | | 1 | | | 1 | | | | | — | | | — | |
| Foreign exchange contracts | | | | 150 | | | 150 | | | | | 202 | | | 202 | |
CUSTOMER ACCOMMODATION, TRADING AND OTHER FREE-STANDING DERIVATIVES | | | | | | | | | | | | | | | | |
| Interest rate contracts | | | | 5,192 | | | 673 | | | | | 3,893 | | | 444 | |
| Commodity contracts | | | | 1,399 | | | 127 | | | | | 731 | | | 116 | |
| Equity contracts | | | | 771 | | | 63 | | | | | 571 | | | 86 | |
| Foreign exchange contracts | | | | 1,062 | | | 58 | | | | | 726 | | | 72 | |
| Credit contracts | | | | 117 | | | 67 | | | | | 75 | | | 51 | |
| |
| | |
(1) | | Includes free-standing derivatives (economic hedges) used to hedge the risk of changes in the fair value of residential MSRs, MHFS, interest rate lock commitments and other interests held. |
(2) | | Gross positive fair value represents those derivatives in a gain position prior to the consideration of derivatives in a loss position under master netting agreements, and related cash collateral. Including these effects, our net derivative assets (or amount of credit risk) at September 30,2008, totaled $5.7 billion. Cash collateral netted under the master netting arrangements totaled $2.5 billion. |
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13. FAIR VALUES OF ASSETS AND LIABILITIES
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Trading assets, securities available for sale, derivatives, prime residential mortgages held for sale (MHFS), certain commercial loans held for sale (LHFS), residential MSRs, principal investments and residential MSRssecurities sold but not yet purchased (short sale liabilities) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as nonprime residential and commercial MHFS, loans held for sale,certain LHFS, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. For the impact of adoption of FSP FAS 157-4, see Note 1 in this Report.
We adopted FSP FAS 157-4 effective January 1, 2009. The FSP addresses measuring fair value under FAS 157 in situations where markets are inactive and transactions are not orderly. Under the provisions of the FSP, transaction or quoted prices for assets or liabilities in inactive markets may require adjustment due to the uncertainty whether the underlying transactions are orderly. Prior to adoption of the FSP, we used independent vendor or broker quoted prices (unadjusted) to measure fair value for substantially all of its securities available for sale. In connection with the adoption of this FSP, we developed policies and procedures to determine when the level and volume of activity for our assets and liabilities requiring fair value measurements has significantly declined relative to normal conditions. For such items that use price quotes, such as certain security classes within securities available for sale, the degree of market inactivity and distressed transactions was analyzed to determine the appropriate adjustment to the price quotes. The security classes where we considered the market to be less active included non-agency residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations, home equity asset-backed securities and credit card-backed securities. The methodology used to adjust the quotes involved weighting the price quotes and results of internal pricing techniques such as the net present value of future expected cash flows (with observable inputs, where available) discounted at a rate of return market participants require. The significant inputs utilized in the internal pricing techniques, which were estimated by type of underlying collateral, included credit loss assumptions, estimated prepayment speeds and appropriate discount rates. The more active and orderly markets for particular security classes were determined to be, the more weighting assigned to price quotes. The less active and orderly markets were determined to be, the less weighting assigned to price quotes. For the impact of adoption of FSP FAS 157-4, see Note 1 in this Report.
Under FAS 159, we elected to measure MHFS at fair value prospectively for new prime residential MHFS originations, for which an active secondary market and readily available market prices generally existexisted to reliably support fair value pricing models used for these loans. On December 31, 2008, we elected to measure at fair value prime residential MHFS acquired from Wachovia. We also elected to remeasure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe the election for MHFS and other interests held (which are now hedged with free-standing derivatives (economic hedges) along with our MSRs) will reducereduces certain timing differences and better matchmatches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets.
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Under FAS 159, we were also required to adopt FAS 157,Fair Value Measurements(FAS 157). FAS 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements for fair value measurements. The disclosures required under FAS 159 and FAS 157 are included in this Note.
Fair Value Hierarchy
Under FAS 157, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
| • | | Level 1 –— Valuation is based upon quoted prices for identical instruments traded in active markets. |
| • | | Level 2 –— Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
| • | | Level 3 –— Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. |
64
Upon the acquisition of Wachovia, we elected to measure at fair value certain portfolios of LHFS that we intend to hold for trading purposes and that may be economically hedged with derivative instruments. In addition, we elected to measure at fair value certain letters of credit that are hedged with derivative instruments to better reflect the economics of the transactions. These letters of credit are included in trading account assets or liabilities.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | |
| |
| (in millions) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| |
Balance at September 30, 2007 | | | | | | | | | | | | | | | | |
| | $ | 7,298 | | | $ | 1,403 | | | $ | 5,385 | | | $ | 510 | |
| Securities available for sale | | | 57,440 | | | | 32,734 | | | | 20,969 | | | | 3,737 | (2) |
| Mortgages held for sale | | | 26,714 | | | | — | | | | 26,636 | | | | 78 | |
| Mortgage servicing rights (residential) | | | 18,223 | | | | — | | | | — | | | | 18,223 | |
| Other assets (1) | | | 1,060 | | | | 791 | | | | 249 | | | | 20 | |
| | | | | | | | | | | | | |
| Total | | $ | 110,735 | | | $ | 34,928 | | | $ | 53,239 | | | $ | 22,568 | |
| | | | | | | | | | | | | |
| | $ | (3,079 | ) | | $ | (1,936 | ) | | $ | (822 | ) | | $ | (321 | ) |
| | | | | | | | | | | | | |
Balance at September 30, 2008 | | | | | | | | | | | | | | | | |
| | $ | 9,097 | | | $ | 1,492 | | | $ | 7,150 | | | $ | 455 | |
Securities available for sale | | | 86,882 | | | | 46,545 | | | | 30,385 | | | | 9,952 | (2) |
Mortgages held for sale | | | 17,290 | | | | — | | | | 12,135 | | | | 5,155 | |
Mortgage servicing rights (residential) | | | 19,184 | | | | — | | | | — | | | | 19,184 | |
Other assets (1) | | | 2,259 | | | | 1,940 | | | | 294 | | | | 25 | |
| | | | | | | | | | | | | |
Total | | $ | 134,712 | | | $ | 49,977 | | | $ | 49,964 | | | $ | 34,771 | |
| | | | | | | | | | | | | |
| | $ | (10,767 | ) | | $ | (7,455 | ) | | $ | (2,762 | ) | | $ | (550 | ) |
| | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| |
| (in millions) | | Level 1 | | | Level 2 | | | Level 3 | | | Netting (1) | | | Total | |
| |
Balance at March 31, 2008 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Trading assets (excluding derivatives) | | $ | 1,047 | | | $ | 3,266 | | | $ | 362 | | | $ | - -- | | | $ | 4,675 | |
| Derivatives (trading assets) | | | 77 | | | | 10,186 | | | | - -- | | | | (6,045 | ) | | | 4,218 | |
| | | | | | | | | | | | | | | | | | | | | |
| Securities of U.S. Treasury and federal agencies | | | 1,016 | | | | - -- | | | | - -- | | | | - -- | | | | 1,016 | |
| Securities of U.S. states and political subdivisions | | | - -- | | | | 7,014 | | | | 166 | | | | - -- | | | | 7,180 | |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
| Federal agencies | | | 38,577 | | | | - -- | | | | - -- | | | | - -- | | | | 38,577 | |
| Residential | | | - -- | | | | 14,907 | | | | 556 | | | | - -- | | | | 15,463 | |
| Commercial | | | - -- | | | | 7,122 | | | | - -- | | | | - -- | | | | 7,122 | |
| | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | | 38,577 | | | | 22,029 | | | | 556 | | | | - -- | | | | 61,162 | |
| Corporate debt securities | | | - -- | | | | 1,907 | | | | - -- | | | | - -- | | | | 1,907 | |
| Collateralized debt obligations | | | - -- | | | | 817 | | | | - -- | | | | - -- | | | | 817 | |
| Other | | | - -- | | | | 779 | | | | 5,961 | | | | - -- | | | | 6,740 | |
| | | | | | | | | | | | | | | | |
| Total debt securities | | | 39,593 | | | | 32,546 | | | | 6,683 | | | | - -- | | | | 78,822 | |
| Marketable equity securities: | | | | | | | | | | | | | | | | | | | | |
| Perpetual preferred securities | | | 1,539 | | | | 611 | | | | - -- | | | | - -- | | | | 2,150 | |
| Other marketable equity securities | | | 780 | | | | 34 | | | | 1 | | | | - -- | | | | 815 | |
| | | | | | | | | | | | | | | | |
| Total marketable equity securities | | | 2,319 | | | | 645 | | | | 1 | | | | - -- | | | | 2,965 | |
| | | | | | | | | | | | | | | | |
| Total | | | 41,912 | | | | 33,191 | | | | 6,684 | | | | - -- | | | | 81,787 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Mortgages held for sale | | | - -- | | | | 26,667 | | | | 1,260 | | | | - -- | | | | 27,927 | |
| Mortgage servicing rights (residential) | | | - -- | | | | - -- | | | | 14,956 | | | | - -- | | | | 14,956 | |
| Other assets (2) | | | 2,226 | | | | 7,888 | | | | 48 | | | | (6,995 | ) | | | 3,167 | |
| | | | | | | | | | | | | | | | |
| Total | | $ | 45,262 | | | $ | 81,198 | | | $ | 23,310 | | | $ | (13,040 | ) | | $ | 136,730 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities (3) | | $ | (3,597 | ) | | $ | (11,597 | ) | | $ | (408 | ) | | $ | 9,367 | | | $ | (6,235 | ) |
| | | | | | | | | | | | | | | | |
| |
(continued on following page)
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(continued from previous page)
| | | | | | | | | | | | | | | | | | | | | |
| |
| (in millions) | | Level 1 | | | Level 2 | | | Level 3 | | | Netting (1) | | | Total | |
| |
Balance at December 31, 2008 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Trading assets (excluding derivatives) | | $ | 911 | | | $ | 16,045 | | | $ | 3,495 | | | $ | - -- | | | $ | 20,451 | |
| Derivatives (trading assets) | | | 331 | | | | 174,355 | | | | 7,897 | | | | (148,150 | ) | | | 34,433 | |
| | | | | | | | | | | | | | | | | | | | | |
| Securities of U.S. Treasury and federal agencies | | | 3,177 | | | | 72 | | | | - -- | | | | - -- | | | | 3,249 | |
| Securities of U.S. states and political subdivisions | | | 1 | | | | 11,754 | | | | 903 | | | | - -- | | | | 12,658 | |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
| Federal agencies | | | - -- | | | | 66,430 | | | | 4 | | | | - -- | | | | 66,434 | |
| Residential | | | - -- | | | | 21,320 | | | | 3,510 | | | | - -- | | | | 24,830 | |
| Commercial | | | - -- | | | | 8,192 | | | | 286 | | | | - -- | | | | 8,478 | |
| | | | | | | | | | | | | | | | |
| Total mortgage-backed securities | | | - -- | | | | 95,942 | | | | 3,800 | | | | - -- | | | | 99,742 | |
| Corporate debt securities | | | - -- | | | | 6,642 | | | | 282 | | | | - -- | | | | 6,924 | |
| Collateralized debt obligations | | | - -- | | | | 2 | | | | 2,083 | | | | - -- | | | | 2,085 | |
| Other | | | - -- | | | | 7,976 | | | | 12,799 | | | | - -- | | | | 20,775 | |
| | | | | | | | | | | | | | | | |
| Total debt securities | | | 3,178 | | | | 122,388 | | | | 19,867 | | | | - -- | | | | 145,433 | |
| Marketable equity securities: | | | | | | | | | | | | | | | | | | | | |
| Perpetual preferred securities | | | 886 | | | | 1,065 | | | | 2,775 | | | | - -- | | | | 4,726 | |
| Other marketable equity securities | | | 1,099 | | | | 261 | | | | 50 | | | | - -- | | | | 1,410 | |
| | | | | | | | | | | | | | | | |
| Total marketable equity securities | | | 1,985 | | | | 1,326 | | | | 2,825 | | | | - -- | | | | 6,136 | |
| | | | | | | | | | | | | | | | |
| Total | | | 5,163 | | | | 123,714 | | | | 22,692 | | | | - -- | | | | 151,569 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Mortgages held for sale | | | - -- | | | | 14,036 | | | | 4,718 | | | | - -- | | | | 18,754 | |
| Loans held for sale | | | - -- | | | | 398 | | | | - -- | | | | - -- | | | | 398 | |
| Mortgage servicing rights (residential) | | | - -- | | | | - -- | | | | 14,714 | | | | - -- | | | | 14,714 | |
| Other assets (2) | | | 3,975 | | | | 21,751 | | | | 2,041 | | | | (20,540 | ) | | | 7,227 | |
| | | | | | | | | | | | | | | | |
| Total | | $ | 10,380 | | | $ | 350,299 | | | $ | 55,557 | | | $ | (168,690 | ) | | $ | 247,546 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities (3) | | $ | (4,815 | ) | | $ | (187,098 | ) | | $ | (9,308 | ) | | $ | 182,435 | | | $ | (18,786 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2009 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Trading assets (excluding derivatives) | | $ | 2,396 | | | $ | 13,637 | | | $ | 3,258 | | | $ | - -- | | | $ | 19,291 | |
Derivatives (trading assets) | | | 1,420 | | | | 145,193 | | | | 7,810 | | | | (127,217 | ) | | | 27,206 | |
| | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | | 2,800 | | | | 103 | | | | - -- | | | | - -- | | | | 2,903 | |
Securities of U.S. states and political subdivisions | | | 1 | | | | 11,024 | | | | 821 | | | | - -- | | | | 11,846 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | - -- | | | | 90,648 | | | | - -- | | | | - -- | | | | 90,648 | |
Residential | | | - -- | | | | 24,825 | | | | 7,657 | | | | - -- | | | | 32,482 | |
Commercial | | | - -- | | | | 7,278 | | | | 2,497 | | | | - -- | | | | 9,775 | |
| | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | | - -- | | | | 122,751 | | | | 10,154 | | | | - -- | | | | 132,905 | |
Corporate debt securities | | | - -- | | | | 6,725 | | | | 261 | | | | - -- | | | | 6,986 | |
Collateralized debt obligations | | | - -- | | | | 57 | | | | 2,329 | | | | - -- | | | | 2,386 | |
Other | | | - -- | | | | 996 | | | | 15,267 | | | | - -- | | | | 16,263 | |
| | | | | | | | | | | | | | | | |
Total debt securities | | | 2,801 | | | | 141,656 | | | | 28,832 | | | | - -- | | | | 173,289 | |
Marketable equity securities: | | | | | | | | | | | | | | | | | | | | |
Perpetual preferred securities | | | 574 | | | | 639 | | | | 2,557 | | | | - -- | | | | 3,770 | |
Other marketable equity securities | | | 1,072 | | | | 293 | | | | 44 | | | | - -- | | | | 1,409 | |
| | | | | | | | | | | | | | | | |
Total marketable equity securities | | | 1,646 | | | | 932 | | | | 2,601 | | | | - -- | | | | 5,179 | |
| | | | | | | | | | | | | | | | |
Total | | | 4,447 | | | | 142,588 | | | | 31,433 | | | | - -- | | | | 178,468 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Mortgages held for sale | | | - -- | | | | 30,689 | | | | 4,516 | | | | - -- | | | | 35,205 | |
Loans held for sale | | | - -- | | | | 114 | | | | - -- | | | | - -- | | | | 114 | |
Mortgage servicing rights (residential) | | | - -- | | | | - -- | | | | 12,391 | | | | - -- | | | | 12,391 | |
Other assets (2) | | | 4,070 | | | | 19,129 | | | | 2,285 | | | | (12,907 | ) | | | 12,577 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 12,333 | | | $ | 351,350 | | | $ | 61,693 | | | $ | (140,124 | ) | | $ | 285,252 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Other liabilities (3) | | $ | (6,313 | ) | | $ | (157,898 | ) | | $ | (8,567 | ) | | $ | 152,208 | | | $ | (20,570 | ) |
| | | | | | | | | | | | | | | | |
| |
| | |
| (1) | | Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of FIN 39 are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement. |
| (2) | | Derivative assets other than trading and principal investments are included in this category. |
| (3) | | Derivative liabilities other than trading are included in this category. |
105
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | Total net gains | | | | | | | | | | | | | | | Net unrealized | |
| | | | | | | (losses) included in | | | Purchases, | | | | | | | | | | | gains (losses) | |
| | | | | | | | | | | | | | | sales, | | | Net | | | | | | | included in net | |
| | | | | | | | | | | Other | | | issuances | | | transfers | | | | | | | income relating | |
| | | Balance, | | | | | | | compre- | | | and | | | into and/ | | | Balance, | | | to assets and | |
| | | beginning | | | Net | | | hensive | | | settlements, | | | or out of | | | end of | | | liabilities held | |
| (in millions) | | of period | | | income | | | income | | | net | | | Level 3 | (1) | | period | | | at period end | (2) |
| | |
Quarter ended March 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading assets (excluding derivatives) | | $ | 418 | | | $ | (68 | ) | | $ | - -- | | | $ | 12 | | | $ | - -- | | | $ | 362 | | | $ | (40 | )(3) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities of U.S. states and political subdivisions | | | 168 | | | | - -- | | | | (8 | ) | | | 6 | | | | - -- | | | | 166 | | | | - -- | |
| Mortgage-backed securities - residential | | | 486 | | | | (8 | ) | | | 18 | | | | 60 | | | | - -- | | | | 556 | | | | (4 | ) |
| Other | | | 4,726 | | | | -- | | | | 32 | | | | 1,203 | | | | -- | | | | 5,961 | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total debt securities | | | 5,380 | | | | (8 | ) | | | 42 | | | | 1,269 | | | | - -- | | | | 6,683 | | | | (4 | ) |
| Marketable equity securities - other | | | 1 | | | | - -- | | | | - -- | | | | - -- | | | | - -- | | | | 1 | | | | - -- | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total securities available for sale | | $ | 5,381 | | | $ | (8 | ) | | $ | 42 | | | $ | 1,269 | | | $ | - -- | | | $ | 6,684 | | | $ | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgages held for sale | | $ | 146 | | | $ | (5 | ) | | $ | - -- | | | $ | 27 | | | $ | 1,092 | | | $ | 1,260 | | | $ | (5 | )(4) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage servicing rights (residential) | | | 16,763 | | | | (2,564 | ) | | | - -- | | | | 757 | | | | - -- | | | | 14,956 | | | | (1,794 | )(4)(5) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net derivative assets and liabilities | | | 6 | | | | (179 | ) | | | - -- | | | | 142 | | | | - -- | | | | (31 | ) | | | (27 | )(4) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other liabilities (excluding derivatives) | | | (280 | ) | | | (66 | ) | | | - -- | | | | 17 | | | | - -- | | | | (329 | ) | | | (66 | )(4) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter ended March 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading assets (excluding derivatives) | | $ | 3,495 | | | $ | (38 | ) | | $ | - -- | | | $ | (523 | ) | | $ | 324 | | | $ | 3,258 | | | $ | 2 | (3) |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. states and political subdivisions | | | 903 | | | | (2 | ) | | | 2 | | | | (7 | ) | | | (75 | ) | | | 821 | | | | -- | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | 4 | | | | - -- | | | | - -- | | | | - -- | | | | (4 | ) | | | - -- | | | | -- | |
Residential | | | 3,510 | | | | (29 | ) | | | 711 | | | | (170 | ) | | | 3,635 | | | | 7,657 | | | | (95 | ) |
Commercial | | | 286 | | | | (8 | ) | | | 501 | | | | 51 | | | | 1,667 | | | | 2,497 | | | | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | | 3,800 | | | | (37 | ) | | | 1,212 | | | | (119 | ) | | | 5,298 | | | | 10,154 | | | | (104 | ) |
Corporate debt securities | | | 282 | | | | (2 | ) | | | 10 | | | | (17 | ) | | | (12 | ) | | | 261 | | | | -- | |
Collateralized debt obligations | | | 2,083 | | | | 70 | | | | 172 | | | | 2 | | | | 2 | | | | 2,329 | | | | -- | |
Other | | | 12,799 | | | | (20 | ) | | | 637 | | | | 1,471 | | | | 380 | | | | 15,267 | | | | (31 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Total debt securities | | | 19,867 | | | | 9 | | | | 2,033 | | | | 1,330 | | | | 5,593 | | | | 28,832 | | | | (135 | ) |
Marketable equity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Perpetual preferred securities | | | 2,775 | | | | 70 | | | | 26 | | | | (311 | ) | | | (3 | ) | | | 2,557 | | | | -- | |
Other marketable equity securities | | | 50 | | | | - -- | | | | (18 | ) | | | 60 | | | | (48 | ) | | | 44 | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | |
Total marketable equity securities | | | 2,825 | | | | 70 | | | | 8 | | | | (251 | ) | | | (51 | ) | | | 2,601 | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | |
Total securities available for sale | | $ | 22,692 | | | $ | 79 | | | $ | 2,041 | | | $ | 1,079 | | | $ | 5,542 | | | $ | 31,433 | | | $ | (135 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgages held for sale | | $ | 4,718 | | | $ | 2 | | | $ | - -- | | | $ | (110 | ) | | $ | (94 | ) | | $ | 4,516 | | | $ | (1 | )(4) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage servicing rights (residential) | | | 14,714 | | | | (3,804 | ) | | | - -- | | | | 1,481 | | | | - -- | | | | 12,391 | | | | (2,824 | )(4)(5) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net derivative assets and liabilities | | | 37 | | | | 848 | | | | - -- | | | | (89 | ) | | | 240 | | | | 1,036 | | | | 616 | (4) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other assets (excluding derivatives) | | | 1,231 | | | | (9 | ) | | | - -- | | | | (1 | ) | | | - -- | | | | 1,221 | | | | (12 | )(4) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other liabilities (excluding derivatives) | | | (638 | ) | | | (76 | ) | | | - -- | | | | (15 | ) | | | - -- | | | | (729 | ) | | | (76 | ) |
| | |
| | |
| (1) | | The amounts presented as transfers into and out of Level 3 represent fair value as of the beginning of the period presented. |
| (2) | | Non-rated asset-backed securities collateralized by auto leasesRepresents only net losses that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash reserves represent mostflows over time. |
| (3) | | Included in other noninterest income in the income statement.
|
| (4) | | Included in mortgage banking in the income statement. |
| (5) | | Represents total unrealized losses of this balance.$2,824 million and $1,798 million, net of losses of nil and $4 million related to sales, in first quarter 2009 and 2008, respectively. |
106
We continue to invest in asset-backed securities collateralized by auto leases and cash reserves that provide attractive yields and are structured equivalent to investment-grade securities. Based on our experience with underwriting auto leases and the significant overcollateralization of our interests, which results in retention by the counterparty of a significant amount of the primary risks of the investments (credit risk and residual value risk of the autos), we consider these assets to be of high credit quality. The securities are relatively short duration, therefore not as sensitive to market interest rate movements.
At September 30, 2008, tradingFor certain assets included securities of $1,091 million and $1,058 million in Level 1 and Level 2, respectively, and securities available for sale included $45,075 million, $29,824 million and $1,726 million in Level 1, Level 2 and Level 3, respectively, for which theliabilities, we obtain fair value measurement is obtainedmeasurements from independent brokers or independent third party pricing services. The detail by level is shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Independent brokers | | | Third party pricing services | |
| (in millions) | | Level 1 | | | Level 2 | | Level 3 | | | Level 1 | | | Level 2 | | Level 3 | |
| |
December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading assets (excluding derivatives) | | $ | 190 | | | $ | 3,272 | | | $ | 12 | | | $ | 917 | | | $ | 1,944 | | | $ | 110 | |
| Derivatives (trading and other assets) | | | 3,419 | | | | 106 | | | | 106 | | | | 605 | | | | 4,635 | | | | - -- | |
| Securities available for sale | | | 181 | | | | 8,916 | | | | 1,681 | | | | 3,944 | | | | 109,170 | | | | 8 | |
| Loans held for sale | | | - -- | | | | 1 | | | | - -- | | | | - -- | | | | 353 | | | | - -- | |
| Other liabilities | | | 1,105 | | | | 175 | | | | 128 | | | | 2,208 | | | | 5,171 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Trading assets (excluding derivatives) | | $ | 422 | | | $ | 3,600 | | | $ | 20 | | | $ | 22 | | | $ | 1,551 | | | $ | 2 | |
Derivatives (trading and other assets) | | | 3,527 | | | | 2,215 | | | | 52 | | | | - -- | | | | 4,268 | | | | 8 | |
Securities available for sale | | | 400 | | | | 1,956 | | | | 256 | | | | 3,297 | | | | 113,274 | | | | 11 | |
Loans held for sale | | | - -- | | | | - -- | | | | - -- | | | | - -- | | | | 78 | | | | -- | |
Derivatives (liabilities) | | | 699 | | | | 1,976 | | | | 71 | | | | - -- | | | | 4,133 | | | | 2 | |
Other liabilities | | | 74 | | | | 175 | | | | - -- | | | | 6 | | | | 518 | | | | -- | |
| |
65
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Trading | | | | | | | | | | | Mortgage | | | Net | | | Other | |
| | | assets | | | Securities | | | Mortgages | | | servicing | | | derivative | | | liabilities | |
| | | (excluding | | | available | | | held for | | | rights | | | assets and | | | (excluding | |
| (in millions) | | derivatives) | | | for sale | | | sale | | | (residential) | | | liabilities | | | derivatives) | |
| |
Quarter ended September 30, 2007 | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of quarter | | $ | 466 | | | $ | 2,014 | | | $ | — | | | $ | 18,733 | | | $ | (79 | ) | | $ | (277 | ) |
Total net gains (losses) for the quarter included in: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | (52 | ) | | | — | | | | (1 | ) | | | (1,357 | ) | | | 124 | | | | (19 | ) |
| Other comprehensive income | | | — | | | | (8 | ) | | | — | | | | — | | | | — | | | | — | |
| Purchases, sales, issuances and settlements, net | | | 96 | | | | 1,731 | | | | 16 | | | | 847 | | | | (71 | ) | | | 21 | |
| Transfer into Level 3 | | | — | | | | — | | | | 63 | (3) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Balance, end of quarter | | $ | 510 | | | $ | 3,737 | | | $ | 78 | | | $ | 18,223 | | | $ | (26 | ) | | $ | (275 | ) |
| | | | | | | | | | | | | | | | | | | |
Net unrealized losses included in net income for the quarter relating to assets and liabilities held at September 30, 2007 (1) | | $ | (37 | )(2) | | $ | — | | | $ | (1 | )(4) | | $ | (603 | )(4)(5) | | $ | (17 | )(4) | | $ | (20 | )(4) |
| | | | | | | | | | | | | | | | | | | |
Quarter ended September 30, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of quarter | | $ | 547 | | | $ | 8,604 | | | $ | 5,276 | | | $ | 19,333 | | | $ | (47 | ) | | $ | (357 | ) |
Total net gains (losses) for the quarter included in: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | (90 | ) | | | (181 | ) | | | 14 | | | | (1,057 | ) | | | (41 | ) | | | (83 | ) |
Other comprehensive income | | | — | | | | (19 | ) | | | — | | | | — | | | | 1 | | | | — | |
Purchases, sales, issuances and settlements, net | | | (4 | ) | | | 1,092 | | | | (76 | ) | | | 908 | | | | (24 | ) | | | 28 | |
Transfers into (out of) Level 3 | | | — | | | | 456 | (3) | | | (59 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
Balance, end of quarter | | $ | 453 | | | $ | 9,952 | | | $ | 5,155 | | | $ | 19,184 | | | $ | (111 | ) | | $ | (412 | ) |
| | | | | | | | | | | | | | | | | | | |
Net unrealized gains (losses) included in net income for the quarter relating to assets and liabilities held at September 30, 2008 (1) | | $ | (72 | )(2) | | $ | (26 | ) | | $ | 12 | (4) | | $ | (546 | )(4)(5) | | $ | (105 | )(4) | | $ | (82 | )(4) |
| | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2007 | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | $ | 360 | | | $ | 3,447 | | | $ | — | | | $ | 17,591 | | | $ | (68 | ) | | $ | (282 | ) |
Total net losses for the period included in: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | (31 | ) | | | — | | | | (1 | ) | | | (951 | ) | | | (259 | ) | | | (47 | ) |
| Other comprehensive income | | | — | | | | (8 | ) | | | — | | | | — | | | | — | | | | — | |
| Purchases, sales, issuances and settlements, net | | | 181 | | | | 298 | | | | 16 | | | | 1,583 | | | | 297 | | | | 54 | |
| Transfers into Level 3 | | | — | | | | — | | | | 63 | (3) | | | — | | | | 4 | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Balance, end of period | | $ | 510 | | | $ | 3,737 | | | $ | 78 | | | $ | 18,223 | | | $ | (26 | ) | | $ | (275 | ) |
| | | | | | | | | | | | | | | | | | | |
Net unrealized gains (losses) included in net income for the period relating to assets and liabilities held at September 30, 2007 (1) | | $ | 15 | (2) | | $ | — | | | $ | (1 | )(4) | | $ | 1,341 | (4)(5) | | $ | (22 | )(4) | | $ | (48 | )(4) |
| | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | $ | 418 | | | $ | 5,381 | | | $ | 146 | | | $ | 16,763 | | | $ | 6 | | | $ | (280 | ) |
Total net gains (losses) for the period included in: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | 23 | | | | (258 | ) | | | (34 | ) | | | (143 | ) | | | (531 | ) | | | (184 | ) |
Other comprehensive income | | | — | | | | (359 | ) | | | — | | | | — | | | | 1 | | | | — | |
Purchases, sales, issuances and settlements, net | | | 12 | | | | 2,999 | | | | 714 | | | | 2,564 | | | | 413 | | | | 52 | |
Transfers into Level 3 | | | — | | | | 2,189 | (3) | | | 4,329 | (3) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
Balance, end of period | | $ | 453 | | | $ | 9,952 | | | $ | 5,155 | | | $ | 19,184 | | | $ | (111 | ) | | $ | (412 | ) |
| | | | | | | | | | | | | | | | | | | |
Net unrealized gains (losses) included in net income for the period relating to assets and liabilities held at September 30, 2008 (1) | | $ | 93 | (2) | | $ | (94 | ) | | $ | (33 | )(4) | | $ | 1,796 | (4)(5) | | $ | (113 | )(4) | | $ | (184 | )(4) |
| | | | | | | | | | | | | | | | | | | |
| |
| | |
(1) | | Represents only net losses that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the collection/realization of cash flows over time. |
(2) | | Included in other noninterest income. |
(3) | | Represents transfers from Level 2 of residential mortgages held for sale and debt securities (including collateralized debt obligations) for which significant inputs to the valuation became unobservable, largely due to reduced levels of market liquidity. Related gains and losses for the period are included in above table. |
(4) | | Included in mortgage banking noninterest income. |
(5) | | Represents total unrealized losses of $546 million and $638 million, net of losses of nil and $35 million related to sales, for third quarter 2008 and 2007, respectively, and total unrealized gains of $1,788 million and $1,364 million, net of gains (losses) of $(8) million and $23 million related to sales, for the nine months ended September 30, 2008 and 2007, respectively. These unrealized gains/losses relating to MSRs are substantially offset by losses/gains on derivatives economically hedging the risk in fair value changes of residential MSRs, as discussed further in Note 8 in this Report. |
66107
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at quarter end.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Total losses | | | Total gains | |
| | | Carrying value at quarter end | | for nine | | | Carrying value at quarter end | | (losses) for | |
| (in millions) | | Total | | Level 1 | | Level 2 | | Level 3 | | months ended | | Level 1 | | Level 2 | | Level 3 | | Total | | quarter ended | |
| | | |
March 31, 2008 | | |
| | | |
| | $ | 2,984 | | $ | — | | $ | 2,984 | | $ | — | | $ | (131 | ) | | $ | - -- | | $ | 1,678 | | $ | 103 | | $ | 1,781 | | $ | (78 | ) |
| Loans held for sale | | 668 | | — | | 668 | | — | | | (20 | ) | | - -- | | 360 | | - -- | | 360 | | | (11 | ) |
| Loans (1) | | 602 | | — | | 583 | | 19 | | | (2,134 | ) | | - -- | | 540 | | 6 | | 546 | | | (1,297 | ) |
| Private equity investments | | 37 | | — | | — | | 37 | | | (31 | ) | | 16 | | - -- | | 3 | | 19 | | | (14 | ) |
| Foreclosed assets (2) | | 362 | | — | | 362 | | — | | | (142 | ) | | - -- | | 384 | | - -- | | 384 | | | (104 | ) |
| Operating lease assets | | 46 | | — | | 46 | | — | | | (2 | ) | | - -- | | 19 | | - -- | | 19 | | - -- | |
| | | | | | | |
| ` | | $ | (2,460 | ) | |
| | | | | | $ | (1,504 | ) |
| | |
| | | | | |
March 31, 2009 | | |
| | | |
| | $ | 1,393 | | $ | — | | $ | 1,220 | | $ | 173 | | $ | (153 | ) | | $ | - -- | | $ | 668 | | $ | 676 | | $ | 1,344 | | $ | 4 | |
Loans held for sale | | 400 | | — | | 400 | | — | | | (25 | ) | | - -- | | 1,002 | | - -- | | 1,002 | | 48 | |
Loans (1) | | 1,118 | | — | | 1,054 | | 64 | | | (4,167 | ) | | - -- | | 1,459 | | 111 | | 1,570 | | | (2,604 | ) |
Private equity investments | | 25 | | 19 | | — | | 6 | | | (29 | ) | | - -- | | - -- | | 31 | | 31 | | | (50 | ) |
Foreclosed assets (2) | | 298 | | — | | 241 | | 57 | | | (136 | ) | | - -- | | 387 | | 40 | | 427 | | | (112 | ) |
Operating lease assets | | 69 | | — | | 69 | | — | | | (6 | ) | | - -- | | 181 | | - -- | | 181 | | | (11 | ) |
| | | | | | | |
| | | $ | (4,516 | ) | | $ | (2,725 | ) |
| | | | | | | |
|
| | |
| (1) | | Represents carrying value and related write-downs of loans for which adjustments are predominantly based on the appraised value of the collateral. The carrying value of loans fully charged-off, which includes unsecured lines and loans, is zero. |
| (2) | | Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets. |
67108
Fair Value Option
The following table reflects the differences between fair value carrying amount of mortgages held for sale measured at fair value under FAS 159 and the aggregate unpaid principal amount we are contractually entitled to receive at maturity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | March 31, 2009 | | December 31, 2008 | | March 31, 2008 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | Fair value | | Fair value | |
| | | | carrying | | carrying | | carrying | |
| | | September 30, 2008 | | September 30, 2007 | | | amount | | amount | | amount | |
| | | Fair value | | Fair value | | | less | | less | | less | |
| | | Fair value | | Aggregate | | carrying amount | | Fair value | | Aggregate | | carrying amount | | Fair value | | Aggregate | | aggregate | | Fair value | | Aggregate | | aggregate | | Fair value | | Aggregate | | aggregate | |
| | | carrying | | unpaid | | less aggregate | | carrying | | unpaid | | less aggregate | | carrying | | unpaid | | unpaid | | carrying | | unpaid | | unpaid | | carrying | | unpaid | | unpaid | |
| (in millions) | | amount | | principal | | unpaid principal | | amount | | principal | | unpaid principal | | amount | | principal | | principal | | amount | | principal | | principal | | amount | | principal | | principal | |
| Mortgages held for sale reported at fair value: | | |
| Total loans | | $ | 17,290 | | $ | 17,305 | | $ | (15 | )(1) | | $ | 26,714 | | $ | 26,403 | | $ | 311 | (1) | | $ | 35,205 | | $ | 34,955 | | $ | 250 | (1) | | $ | 18,754 | | $ | 18,862 | | $ | (108 | )(1) | | $ | 27,927 | | $ | 27,705 | | $ | 222 | (1) |
| Nonaccrual loans | | 104 | | 216 | | | (112 | ) | | 21 | | 29 | | | (8 | ) | | 211 | | 491 | | | (280 | ) | | 152 | | 344 | | | (192 | ) | | 48 | | 86 | | | (38 | ) |
| Loans 90 days or more past due and still accruing | | 41 | | 48 | | | (7 | ) | | 11 | | 11 | | — | | | 71 | | 79 | | | (8 | ) | | 58 | | 63 | | | (5 | ) | | 30 | | 31 | | | (1 | ) |
| | | |
| Loans held for sale reported at fair value: | | |
| Total loans | | | 114 | | 197 | | | (83 | ) | | 398 | | 760 | | | (362 | ) | | - -- | | - -- | | - -- | |
| Loans 90 days or more past due and still accruing | | | | (4 | ) | | 3 | | | (7 | ) | | 1 | | 17 | | | (16 | ) | | - -- | | - -- | | - -- | |
| | | |
| | |
| (1) | | The difference between fair value carrying amount and aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on the related loan commitment prior to funding, and premiums on acquired loans. |
The assets accounted for under FAS 159 are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The changes in fair values related to initial measurement and subsequent changes in fair value included in earnings for these assets measured at fair value are shown, by income statement line item, below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Quarter ended September 30 | , | | Nine months ended September 30 | , | | Quarter ended March 31 | , |
| | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | Mortgages | | Other | | Mortgages | | Other | | Mortgages | | Other | | Mortgages | | Other | | | Loans | | Mortgages | | Other | | Mortgages | | Other | |
| | | held | | interests | | held | | interests | | held | | interests | | held | | interests | | | held | | held | | interests | | held | | interests | |
| (in millions) | | for sale | | held | | for sale | | held | | for sale | | held | | for sale | | held | | for sale | | for sale | | held | | for sale | | held | |
| Changes in fair value included in net income: | | |
| Mortgage banking noninterest income: | | |
| Net gains on mortgage loan origination/sales activities (1) | | $ | 595 | | $ | — | | $ | 355 | | $ | — | | $ | 1,444 | | $ | — | | $ | 477 | | $ | — | | | $ | - -- | | $ | 1,663 | | $ | - -- | | $ | 752 | | $ | - -- | |
| Other noninterest income | | — | | | (88 | ) | | — | | | (52 | ) | | — | | 27 | | — | | | (32 | ) | | 44 | | - -- | | | (17 | ) | | - -- | | | (67 | ) |
|
| | |
| (1) | | Includes changes in fair value of servicing associated with MHFS. |
Interest income on mortgages held for sale measured at fair value is calculated based on the note rate of the loan and is recorded in interest income.income in the income statement.
68109
We are authorized to issue 20 million shares of preferred stock and 4 million shares of preference stock, both without par value. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but have no general voting rights. We have not issued any preference shares under this authorization.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Shares issued and outstanding | | | Carrying amount (in millions) | | | Adjustable | |
| | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | Sept. 30 | , | | Dec. 31 | , | | Sept. 30 | , | | dividends rate | |
| | | 2008 | | | 2007 | | | 2007 | | | 2008 | | | 2007 | | | 2007 | | | Minimum | | | Maximum | |
| |
ESOP Preferred Stock (1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 198,708 | | | | — | | | | — | | | $ | 198 | | | $ | — | | | $ | — | | | | 10.50 | % | | | 11.50 | % |
| | | 122,659 | | | | 135,124 | | | | 181,016 | | | | 122 | | | | 135 | | | | 181 | | | | 10.75 | | | | 11.75 | |
| | | 92,749 | | | | 95,866 | | | | 104,966 | | | | 93 | | | | 96 | | | | 105 | | | | 10.75 | | | | 11.75 | |
| | | 70,834 | | | | 73,434 | | | | 81,134 | | | | 71 | | | | 73 | | | | 81 | | | | 9.75 | | | | 10.75 | |
| | | 53,750 | | | | 55,610 | | | | 62,960 | | | | 54 | | | | 56 | | | | 63 | | | | 8.50 | | | | 9.50 | |
| | | 35,718 | | | | 37,043 | | | | 43,143 | | | | 36 | | | | 37 | | | | 43 | | | | 8.50 | | | | 9.50 | |
| | | 24,889 | | | | 25,779 | | | | 31,679 | | | | 25 | | | | 26 | | | | 32 | | | | 10.50 | | | | 11.50 | |
| | | 16,073 | | | | 16,593 | | | | 21,593 | | | | 16 | | | | 17 | | | | 21 | | | | 10.50 | | | | 11.50 | |
| | | 8,844 | | | | 9,094 | | | | 13,744 | | | | 9 | | | | 9 | | | | 14 | | | | 11.50 | | | | 12.50 | |
| | | 1,220 | | | | 1,261 | | | | 3,961 | | | | 1 | | | | 1 | | | | 4 | | | | 10.30 | | | | 11.30 | |
| | | — | | | | — | | | | 539 | | | | — | | | | — | | | | 1 | | | | 10.75 | | | | 11.75 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total ESOP Preferred Stock | | | 625,444 | | | | 449,804 | | | | 544,735 | | | $ | 625 | | | $ | 450 | | | $ | 545 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | (667 | ) | | $ | (482 | ) | | $ | (583 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | March 31, 2009 | | | December 31, 2008 | |
| | | Shares | | | | | | | | | | | | | | | | | | |
| | | issued and | | | | | | Carrying | | | | | | Carrying | | | | |
| (in millions, except shares) | | outstanding | | Par value | | | value | | Discount | | | value | | Discount | |
| |
Series D(1) | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rate Cumulative Perpetual Preferred Stock, Series D, $1,000,000 liquidation preference per share, 25,000 shares authorized | | | 25,000 | | | $ | 25,000 | | | $ | 22,839 | | | $ | 2,161 | | | $ | 22,741 | | | $ | 2,259 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
DEP Shares | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividend Equalization Preferred Shares, $10 liquidation preference per share, 97,000 shares authorized | | | 96,546 | | | | - -- | | | | - -- | | | | - -- | | | | - -- | | | | - -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Series J(1)(2) | | | | | | | | | | | | | | | | | | | | | | | | |
| 8.00% Non-Cumulative Perpetual Class A Preferred Stock, Series J, $1,000 liquidation preference per share, 2,300,000 shares authorized | | | 2,150,375 | | | | 2,150 | | | | 1,995 | | | | 155 | | | | 1,995 | | | | 155 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Series K(1)(2) | | | | | | | | | | | | | | | | | | | | | | | | |
| 7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock, Series K, $1,000 liquidation preference per share, 3,500,000 shares authorized | | | 3,352,000 | | | | 3,352 | | | | 2,876 | | | | 476 | | | | 2,876 | | | | 476 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Series L(1)(2) | | | | | | | | | | | | | | | | | | | | | | | | |
| 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L, $1,000 liquidation preference per share, 4,025,000 shares authorized | | | 3,968,000 | | | | 3,968 | | | | 3,200 | | | | 768 | | | | 3,200 | | | | 768 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL | | | 9,591,921 | | | $ | 34,470 | | | $ | 30,910 | | | $ | 3,560 | | | $ | 30,812 | | | $ | 3,658 | |
| | | | | | | | | | | | | | | | | | | |
| |
| | |
| (1) | | Series D, J, K and L preferred shares qualify as Tier 1 capital. |
| (2) | | In conjunction with the acquisition of Wachovia, at December 31, 2008, shares of Series J, K and L perpetual preferred stock were converted into shares of a corresponding series of Wells Fargo preferred stock having substantially the same rights and preferences. The carrying value is par value adjusted to fair value in purchase accounting. |
In addition to the preferred stock issued and outstanding described in the table above, we have the following preferred stock authorized with no shares issued and outstanding:
| • | | Series A – Non-Cumulative Perpetual Preferred Stock, Series A, $100,000 liquidation preference per share, 25,001 shares authorized |
| • | | Series B – Non-Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation preference per share, 17,501 shares authorized |
| • | | Series G – 7.25% Class A Preferred Stock, Series G, $15,000 liquidation preference per share, 50,000 shares authorized |
| • | | Series H – Floating Class A Preferred Stock, Series H, $20,000 liquidation preference per share, 50,000 shares authorized |
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Series I – 5.80% Fixed to Floating Class A Preferred Stock, Series I, $100,000 liquidation preference per share, 25,010 shares authorized
In addition, we hold shares of our ESOP (Employee Stock Ownership Plan) Cumulative Convertible Preferred Stock (ESOP Preferred Stock) that were issued to a trustee acting on behalf of the Wells Fargo & Company 401(k) Plan. The following table provides detail of our ESOP Preferred Stock.
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| |
| | | Shares issued and outstanding | | | Carrying value (in millions) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Adjustable | |
| | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | dividends rate | |
| | | 2009 | | | 2008 | | | 2008 | | | 2009 | | | 2008 | | | 2008 | | | Minimum | | | Maximum | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ESOP Preferred Stock (1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2008 | | | 138,108 | | | | 156,914 | | | | 395,494 | | | $ | 138 | | | $ | 157 | | | $ | 396 | | | | 10.50 | % | | | 11.50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2007 | | | 110,159 | | | | 110,159 | | | | 126,374 | | | | 110 | | | | 110 | | | | 126 | | | | 10.75 | | | | 11.75 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2006 | | | 83,249 | | | | 83,249 | | | | 95,866 | | | | 83 | | | | 83 | | | | 96 | | | | 10.75 | | | | 11.75 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2005 | | | 62,484 | | | | 62,484 | | | | 73,434 | | | | 63 | | | | 63 | | | | 73 | | | | 9.75 | | | | 10.75 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 | | | 45,950 | | | | 45,950 | | | | 55,610 | | | | 46 | | | | 46 | | | | 56 | | | | 8.50 | | | | 9.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 | | | 29,218 | | | | 29,218 | | | | 37,043 | | | | 29 | | | | 29 | | | | 37 | | | | 8.50 | | | | 9.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2002 | | | 18,889 | | | | 18,889 | | | | 25,779 | | | | 19 | | | | 19 | | | | 26 | | | | 10.50 | | | | 11.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2001 | | | 10,393 | | | | 10,393 | | | | 16,593 | | | | 10 | | | | 10 | | | | 17 | | | | 10.50 | | | | 11.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2000 | | | 2,620 | | | | 2,644 | | | | 9,094 | | | | 3 | | | | 3 | | | | 9 | | | | 11.50 | | | | 12.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1999 | | | - -- | | | | - -- | | | | 1,261 | | | | - -- | | | | - -- | | | | 1 | | | | 10.30 | | | | 11.30 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total ESOP Preferred Stock | | | 501,070 | | | | 519,900 | | | | 836,548 | | | $ | 501 | | | $ | 520 | | | $ | 837 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unearned ESOP shares (2) | | | | | | | | | | | | | | $ | (535 | ) | | $ | (555 | ) | | $ | (891 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| (1) | | Liquidation preference $1,000. At September 30, 2008,March 31, 2009, December 31, 2007,2008, and September 30, 2007,March 31, 2008, additional paid-in capital included $42$34 million, $32$35 million and $38$54 million, respectively, related to preferred stock. |
| (2) | | In accordance with the American Institute of Certified Public Accountants (AICPA)AICPA Statement of Position 93-6,Employers’ Accounting for Employee Stock Ownership Plans, we recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock are committed to be released. |
The Emergency Economic Stabilization Act of 2008 authorizes the United States Treasury Department (Treasury Department) to use appropriated funds to restore liquidity and stability to the U.S. financial system. As part of this authority, on October 28, 2008, at the request of the Treasury Department and pursuant to a Letter Agreement and related Securities Purchase Agreement dated October 26, 2008, we issued 25,000 shares of Wells Fargo’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value, having a liquidation amount per share equal to $1,000,000, for a total price of $25 billion. The shares of these preferred securities may be evidenced by depositary shares, with each depositary share representing 1/1,000 interest in one share of preferred stock. The preferred securities pay cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. We may not redeem the preferred securities during the first three years except with the proceeds from a “qualifying equity offering.” After three years, we may, at our option, redeem the preferred securities at par value plus accrued and unpaid dividends. The preferred securities are generally non-voting. The preferred securities will be accounted for as a component of Tier 1 capital.
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We sponsor noncontributory qualified defined benefit retirement plans including the Cash Balance Plan. TheWells Fargo & Company Cash Balance Plan is an active(Cash Balance Plan), which covers eligible employees of the legacy Wells Fargo and the Wachovia Corporation Pension Plan (Pension Plan), a cash balance plan that covers eligible employees (except employees of certain subsidiaries).the Wachovia Corporation.
AlthoughWe do not expect that we will not be required to make a minimum contribution in 20082009 for the Cash Balance Plan. The maximum we can contribute in 2009 for the Cash Balance Plan ourdepends on several factors, including the finalization of participant data. Our decision on how much to contribute, if any, will be baseddepends on the maximum deductible contribution under the Internal Revenue Code and other factors, including the actual investment performance of plan assets during 2008.assets. Given these uncertainties, we cannot estimate at this time reliably estimate the maximum deductible contribution or the amount if any, that we will contribute in 20082009 to the Cash Balance Plan.
Under FAS 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans –an amendment of FASB Statements No. 87, 88, 106, and 132(R), we are required to change our measurement date for our pension and postretirement plan assets and benefit obligations from November 30 to December 31 beginning in 2008. To reflect this change, we recorded an $8 million (after tax) adjustment to the 2008 beginning balance of retained earnings.
The net periodic benefit cost was:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter ended March 31 | , |
| | | | | 2009 | | 2008 | |
| | | Pension benefits | | Pension benefits | | | | | Pension benefits | | Pension benefits | | | |
| | | Non- | | Other | | Non- | | Other | | | Non- | | Other | | Non- | | Other | |
| (in millions) | | Qualified | | qualified | | benefits | | Qualified | | qualified | | benefits | | | Qualified | | qualified | | benefits | | Qualified | | qualified | | benefits | |
| Quarter ended September 30, | | 2008 | | 2007 | | |
| | $ | 73 | | $ | 4 | | $ | 3 | | $ | 71 | | $ | 4 | | $ | 4 | | |
| Interest cost | | 69 | | 5 | | 10 | | 60 | | 4 | | 10 | | |
| Expected return on plan assets | | | (119 | ) | | — | | | (10 | ) | | | (112 | ) | | — | | | (9 | ) | |
| Amortization of net actuarial loss (1) | | — | | 3 | | — | | 8 | | 4 | | 1 | | |
| Amortization of prior service cost | | — | | | (1 | ) | | | (1 | ) | | — | | | (1 | ) | | | (1 | ) | |
| | | | | | | | | | | | | | | |
| Net periodic benefit cost | | $ | 23 | | $ | 11 | | $ | 2 | | $ | 27 | | $ | 11 | | $ | 5 | | |
| | | | | | | | | | | | | | | |
Nine months ended September 30, | | |
| | $ | 219 | | $ | 11 | | $ | 10 | | $ | 211 | | $ | 12 | | $ | 12 | | | $ | 107 | | $ | 4 | | $ | 3 | | $ | 73 | | $ | 4 | | $ | 3 | |
| Interest cost | | 207 | | 16 | | 30 | | 182 | | 12 | | 30 | | | 145 | | 19 | | 21 | | 69 | | 5 | | 10 | |
| Expected return on plan assets | | | (358 | ) | | — | | | (30 | ) | | | (337 | ) | | — | | | (27 | ) | | | (163 | ) | | - -- | | | (7 | ) | | | (120 | ) | | - -- | | | (10 | ) |
| Amortization of net actuarial loss (1) | | — | | 10 | | — | | 24 | | 10 | | 4 | | | 106 | | 2 | | 1 | | - -- | | 3 | | - -- | |
| Amortization of prior service cost | | — | | | (4 | ) | | | (3 | ) | | — | | | (2 | ) | | | (3 | ) | | - -- | | | (1 | ) | | | (1 | ) | | - -- | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net periodic benefit cost | | $ | 68 | | $ | 33 | | $ | 7 | | $ | 80 | | $ | 32 | | $ | 16 | | | $ | 195 | | $ | 24 | | $ | 17 | | $ | 22 | | $ | 11 | | $ | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | |
| (1) | | Net actuarial loss is generally amortized over five years. |
On April 28, 2009, the Board of Directors approved amendments to freeze the Wells Fargo qualified and supplemental Cash Balance Plans and the Wachovia Pension Plan, and to merge the Pension Plan into the qualified Cash Balance Plan. These actions are expected to be effective July 1, 2009, and to reduce pension cost by approximately $330 million in 2009.
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| | |
16. | | EARNINGS PER COMMON SHARE |
16. EARNINGS PER COMMON SHAREThe table below shows earnings per common share and diluted earnings per common share and reconciles the numerator and denominator of both earnings per common share calculations.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | Quarter | | Nine months | | |
| | | ended September 30 | , | | ended September 30 | , | | Quarter ended March 31 | , |
| (in millions, except per share amounts) | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | |
| | | | |
| | $ | 1,637 | | $ | 2,173 | | $ | 5,389 | | $ | 6,696 | | |
Wells Fargo net income (numerator) | | | $ | 3,045 | | $ | 1,999 | |
| | | |
| Less: Preferred stock dividends and accretion | | | 661 | | - -- | |
| | | | | | | |
| | | |
| Wells Fargo net income applicable to common stock (numerator) | | | $ | 2,384 | | $ | 1,999 | |
| | | | | | | |
| | | | | | | | | | | |
EARNINGS PER COMMON SHARE | | |
| Average common shares outstanding (denominator) | | 3,316.4 | | 3,339.6 | | 3,309.6 | | 3,355.5 | | | 4,247.4 | | 3,302.4 | |
| | | | | | | | | | | | | | | |
| | | |
| | $ | 0.49 | | $ | 0.65 | | $ | 1.63 | | $ | 1.99 | | | $ | 0.56 | | $ | 0.61 | |
| | | | | | | |
| | | | | | | | | | | |
DILUTED EARNINGS PER COMMON SHARE | | |
| Average common shares outstanding | | 3,316.4 | | 3,339.6 | | 3,309.6 | | 3,355.5 | | | 4,247.4 | | 3,302.4 | |
| Add: Stock options | | 14.5 | | 34.3 | | 13.7 | | 37.3 | | | 1.8 | | 15.4 | |
| Restricted share rights | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | | 0.1 | | 0.1 | |
| | | | | | | | | | | | | | | |
| Diluted average common shares outstanding (denominator) | | 3,331.0 | | 3,374.0 | | 3,323.4 | | 3,392.9 | | | 4,249.3 | | 3,317.9 | |
| | | | | | | | | | | | | | | |
| | | |
| | $ | 0.49 | | $ | 0.64 | | $ | 1.62 | | $ | 1.97 | | | $ | 0.56 | | $ | 0.60 | |
| | | | | | | | | | | | | | | |
| | | | |
At September 30, 2008March 31, 2009, options and 2007, optionswarrants to purchase 173.7290.2 million and 8.9110.3 million shares, respectively, were outstanding but not included in the calculation of diluted earnings per common share because the exercise price was higher than the market price, and therefore theywere antidilutive. At March 31, 2008, options to purchase 175.7 million shares were antidilutive.
71113
We haveAs a result of the combination of Wells Fargo and Wachovia, management realigned its segments into the following three lines of business for management reporting: Community Banking, Wholesale Banking, and Wells Fargo Financial.Wealth, Brokerage and Retirement Services. The results for these lines of business are based on our management accounting process, which assigns balance sheet and income statement items to each responsible operating segment. This process is dynamic and, unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on our management structure and is not necessarily comparable with similar information for other financial services companies. We define our operating segments by product type and customer segments.segment. If the management structure and/or the allocation process changes, allocations, transfers and assignments may change. ToWe revised prior period information to reflect the realignment of our corporate trust business from operating segments; however, because the acquisition was completed on December 31, 2008, Wachovia’s results are included in the income statement and average balances beginning in 2009.
Community Banking into Wholesale Banking in first quarter 2008, balances for prior periods have been revised.
The Community Banking Groupoffers a complete line of diversified financial products and services to consumers and small businesses with annual sales generally up to $20 million in which the owner generally is the financial decision maker. Community Banking also offers investment management and other services to retail customers and high net worth individuals, securities brokerage through affiliates and venture capital financing. These products and services include theWells Fargo Advantage FundsSM, a family of mutual funds, as well as personal trust and agency assets. Loan products include lines of credit, equity lines and loans, equipment and transportation (recreational vehicle and marine) loans, education loans, origination and purchase of residential mortgage loans and servicing of mortgage loans and credit cards. Other credit products and financial services available to small businesses and their owners include receivables and inventory financing, equipment leases, real estate financing, Small Business Administration financing, venture capital financing, cash management, payroll services, retirement plans, Health Savings Accounts and merchant payment processing. Consumer and business deposit products include checking accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs), time deposits and debit cards.
Community Banking serves customers through a wide range of channels, which include traditional banking stores, in-store banking centers, business centers and ATMs. Also,Phone BankSM centers and the National Business Banking Center provide 24-hour telephone service. Online banking services include single sign-on to online banking, bill pay and brokerage, as well as online banking for small business.
Community Banking also includes Wells Fargo Financial consumer finance and auto finance operations. Consumer finance operations make direct consumer and real estate loans to individuals and purchase sales finance contracts from retail merchants from offices throughout the United States, and in Canada and the Pacific Rim. Auto finance operations specialize in purchasing sales finance contracts directly from auto dealers in Puerto Rico and making loans secured by autos in the United States, Canada and Puerto Rico. Wells Fargo Financial also provides credit cards, lease and other commercial financing.
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The Wholesale Banking Groupservesprovides financial solutions to businesses across the United States with annual sales generally in excess of $10 million.million and to financial institutions globally. Wholesale Banking provides a complete line of commercial, corporate, capital markets, cash management and real estate banking products and services. These include traditional commercial loans and lines of credit, letters of credit, asset-based lending, equipment leasing, mezzanine financing, high-yield debt, international trade facilities, foreign exchange services, treasury management, investment management, institutional fixed-income sales, interest rate, commodity and equity risk management, online/electronic products such as theCommercial Electronic Office® (CEO®) portal, insurance, corporate trust fiduciary and agency services, and investment banking services. Wholesale Banking manages and administers institutional investments employee benefit trusts and mutual funds, including theWells Fargo Advantage Funds. Wholesale Banking includes the majority ownership interest in the Wells Fargo HSBC Trade
72
Bank, which provides trade financing, letters of credit and collection services and is sometimes supported by the Export-Import Bank of the United States (a public agency of the United States offering export finance support for American-made products). Wholesale Banking also supports the commercial real estate market with products and services such as construction loans for commercial and residential development, land acquisition and development loans, secured and unsecured lines of credit, interim financing arrangements for completed structures, rehabilitation loans, affordable housing loans and letters of credit, permanent loans for securitization, commercial real estate loan servicing and real estate and mortgage brokerage services.
Wealth, Brokerage and Retirement Servicesprovides private banking, investment management, trust, estate planning, brokerage, insurance and retirement services to clients using a comprehensive planning approach to meet each client’s needs. First quarter 2009 results include Wachovia, which added the following businesses to this segment: Wachovia Securities (retail brokerage), Wachovia Wealth Management, including its family office business, Calibre, and Wachovia’s retirement services and reinsurance businesses. Prior to the Wachovia acquisition, the segment contained the following Wells Fargo Financiallines of business: Wealth Management Group, including the family office services business; bank-channel brokerage; online brokerage (Wells Trade); and HD Vest. It also included institutional trust and institutional retirement services. The following describes the combined lines of business now included in the segment. The Wealth Management Group uses an integrated model to provide affluent and high-net-worth customers with a complete range of wealth management solutions and services. Family Office Services meets the unique needs of ultra-high net worth customers managing multi-generational assets – those with at least $50 million in assets. Retail Brokerage’s financial advisors serve customers’ advisory, brokerage and financial needs, including investment management, retirement and estate planning as part of one of the largest full-service brokerage firms in the U.S. They also offer access to banking products, insurance, and investment banking services. First Clearing, our correspondent clearing firm, provides technology, product and other business support to broker-dealers across the U.S. The Retirement Group supports individual investors’ retirement needs and is a leader in 401(k) and pension recordkeeping, investment services, trust and custody solutions for U.S. companies and their employees. The division also provides reinsurance to global insurance companies.
Otherincludes consumer finance and auto finance operations. Consumer finance operations make direct consumer and real estate loans to individuals and purchase sales finance contracts from retail merchants from offices throughout the United States, and in Canadaintegration expenses and the Pacific Rim. Auto finance operations specializeelimination of items that are included in purchasing sales finance contracts directly from auto dealersboth Community Banking and making loans secured by autosWealth, Brokerage and Retirement Services, largely representing wealth management customers serviced and products sold in the United States, Canada and Puerto Rico. Wells Fargo Financial also provides credit cards and lease and other commercial financing.stores.
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The Consolidated Companytotal of average assets includes unallocated goodwill balances held at the enterprise level.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Wealth, | | | |
| | | | | Brokerage | | | |
| (income/expense in millions, | | Community | | Wholesale | | Wells Fargo | | Consolidated | | | Community | | Wholesale | | and Retirement | | Consolidated | |
| average balances in billions) | | Banking | | Banking | | Financial | | Company | | | Banking | | Banking | | Services | | Other | | Company | |
| Quarter ended September 30, | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | |
| | | |
Quarter ended March 31, | | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | |
| | $ | 4,205 | | $ | 3,303 | | $ | 1,054 | | $ | 918 | | $ | 1,122 | | $ | 1,059 | | $ | 6,381 | | $ | 5,280 | | | $ | 8,497 | | $ | 4,718 | | $ | 2,367 | | $ | 1,026 | | $ | 737 | | $ | 154 | | $ | (225 | ) | | $ | (138 | ) | | $ | 11,376 | | $ | 5,760 | |
| Provision for credit losses | | 1,431 | | 446 | | 294 | | 19 | | 770 | | 427 | | 2,495 | | 892 | | | 4,004 | | 1,865 | | 545 | | 161 | | 25 | | 2 | | | (16 | ) | | - -- | | 4,558 | | 2,028 | |
| Noninterest income | | 2,998 | | 3,020 | | 728 | | 1,239 | | 272 | | 314 | | 3,998 | | 4,573 | | | 5,456 | | 3,482 | | 2,540 | | 1,151 | | 1,902 | | 483 | | | (257 | ) | | | (313 | ) | | 9,641 | | 4,803 | |
| Noninterest expense | | 3,447 | | 3,713 | | 1,393 | | 1,230 | | 677 | | 728 | | 5,517 | | 5,671 | | | 7,158 | | 3,905 | | 2,531 | | 1,344 | | 2,219 | | 485 | | | (90 | ) | | | (292 | ) | | 11,818 | | 5,442 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income tax expense (benefit) | | 2,325 | | 2,164 | | 95 | | 908 | | | (53 | ) | | 218 | | 2,367 | | 3,290 | | | 2,791 | | 2,430 | | 1,831 | | 672 | | 395 | | 150 | | | (376 | ) | | | (159 | ) | | 4,641 | | 3,093 | |
| Income tax expense (benefit) | | 738 | | 717 | | 12 | | 317 | | | (20 | ) | | 83 | | 730 | | 1,117 | | | 890 | | 897 | | 647 | | 180 | | 158 | | 57 | | | (143 | ) | | | (60 | ) | | 1,552 | | 1,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 1,587 | | $ | 1,447 | | $ | 83 | | $ | 591 | | $ | (33 | ) | | $ | 135 | | $ | 1,637 | | $ | 2,173 | | |
| Net income (loss) before noncontrolling interests | | | 1,901 | | 1,533 | | 1,184 | | 492 | | 237 | | 93 | | | (233 | ) | | | (99 | ) | | 3,089 | | 2,019 | |
| Less: Net income (loss) from noncontrolling interests | | | 62 | | 11 | | 4 | | 9 | | | (22 | ) | | - -- | | - -- | | - -- | | 44 | | 20 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Segment net income (loss) | | | $ | 1,839 | | $ | 1,522 | | $ | 1,180 | | $ | 483 | | $ | 259 | | $ | 93 | | $ | (233 | ) | | $ | (99 | ) | | $ | 3,045 | | $ | 1,999 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | $ | 220.5 | | $ | 197.4 | | $ | 116.2 | | $ | 87.5 | | $ | 67.5 | | $ | 65.8 | | $ | 404.2 | | $ | 350.7 | | | $ | 552.8 | | $ | 282.7 | | $ | 271.9 | | $ | 100.8 | | $ | 46.7 | | $ | 13.7 | | $ | (15.8 | ) | | $ | (13.3 | ) | | $ | 855.6 | | $ | 383.9 | |
| Average assets (2) | | 380.4 | | 348.1 | | 156.6 | | 115.9 | | 71.4 | | 71.7 | | 614.2 | | 541.5 | | |
| Average core deposits | | 254.9 | | 243.0 | | 65.2 | | 63.1 | | — | | — | | 320.1 | | 306.1 | | |
Nine months ended September 30, | | |
| | $ | 11,977 | | $ | 9,678 | | $ | 3,106 | | $ | 2,661 | | $ | 3,336 | | $ | 3,147 | | $ | 18,419 | | $ | 15,486 | | |
| Provision for credit losses | | 4,739 | | 1,105 | | 700 | | 33 | | 2,096 | | 1,189 | | 7,535 | | 2,327 | | |
| Noninterest income | | 9,632 | | 8,731 | | 3,458 | | 4,007 | | 892 | | 961 | | 13,982 | | 13,699 | | |
| Noninterest expense | | 10,520 | | 10,873 | | 4,228 | | 3,783 | | 2,091 | | 2,268 | | 16,839 | | 16,924 | | |
| | | | | | | | | | | | | | | | | | | |
| Income before income tax expense | | 6,350 | | 6,431 | | 1,636 | | 2,852 | | 41 | | 651 | | 8,027 | | 9,934 | | |
| Income tax expense | | 2,102 | | 1,983 | | 521 | | 1,007 | | 15 | | 248 | | 2,638 | | 3,238 | | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 4,248 | | $ | 4,448 | | $ | 1,115 | | $ | 1,845 | | $ | 26 | | $ | 403 | | $ | 5,389 | | $ | 6,696 | | |
| | | | | | | | | | | | | | | | | | | |
| | $ | 217.1 | | $ | 188.2 | | $ | 108.2 | | $ | 82.4 | | $ | 68.0 | | $ | 64.2 | | $ | 393.3 | | $ | 334.8 | | |
| Average assets (2) | | 367.7 | | 324.9 | | 148.4 | | 108.3 | | 72.8 | | 70.0 | | 594.7 | | 509.0 | | |
| Average assets | | | 797.9 | | 431.8 | | 403.8 | | 140.0 | | 104.0 | | 16.7 | | | (16.0 | ) | | | (13.5 | ) | | 1,289.7 | | 575.0 | |
| Average core deposits | | 251.9 | | 241.1 | | 66.7 | | 58.0 | | — | | — | | 318.6 | | 299.1 | | | 538.0 | | 246.6 | | 138.5 | | 68.2 | | 102.6 | | 21.0 | | | (25.2 | ) | | | (18.5 | ) | | 753.9 | | 317.3 | |
| | | | |
| | |
| (1) | | Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to other segments. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment. In general, Community Banking has excess liabilities and receives interest credits for the funding it provides to other segments. |
(2) | | The Consolidated Company balance includes unallocated goodwill held at the enterprise level of $5.8 billion for all periods presented. |
73116
| | |
18. | | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
18. CONDENSED CONSOLIDATING FINANCIAL STATEMENTSFollowing are the condensed consolidating financial statements of the Parent and Wells Fargo Financial, Inc. and its wholly-owned subsidiaries (WFFI). The Wells Fargo Financial business segment for management reporting (see Note 17 in this Report) consists of WFFI and other affiliated finance entities managed by WFFI that are included within other consolidating subsidiaries in the following tables.
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Quarter ended September 30, 2008 | | | Quarter ended March 31, 2009 | |
| | | Other | | | | | Other | | | |
| | | consolidating | | Consolidated | | | consolidating | | Consolidated | |
| (in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
| Dividends from subsidiaries: | | |
| Bank | | $ | 501 | | $ | — | | $ | — | | $ | (501 | ) | | $ | — | | | $ | 716 | | $ | - -- | | $ | - -- | | $ | (716 | ) | | $ | - -- | |
| Nonbank | | — | | — | | — | | — | | — | | | - -- | | - -- | | - -- | | - -- | | - -- | |
| Interest income from loans | | — | | 1,312 | | 5,590 | | | (14 | ) | | 6,888 | | | - -- | | 985 | | 9,785 | | | (5 | ) | | 10,765 | |
| Interest income from subsidiaries | | 716 | | — | | — | | | (716 | ) | | — | | | 651 | | - -- | | - -- | | | (651 | ) | | - -- | |
| Other interest income | | 69 | | 26 | | 1,823 | | | (32 | ) | | 1,886 | | | 113 | | 26 | | 3,412 | | | (3 | ) | | 3,548 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | 1,286 | | 1,338 | | 7,413 | | | (1,263 | ) | | 8,774 | | | 1,480 | | 1,011 | | 13,197 | | | (1,375 | ) | | 14,313 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | — | | — | | 1,128 | | | (109 | ) | | 1,019 | | | - -- | | - -- | | 1,007 | | | (8 | ) | | 999 | |
| Short-term borrowings | | 141 | | 58 | | 542 | | | (249 | ) | | 492 | | | 64 | | 9 | | 336 | | | (286 | ) | | 123 | |
| Long-term debt | | 686 | | 443 | | 157 | | | (404 | ) | | 882 | | | 1,029 | | 368 | | 783 | | | (401 | ) | | 1,779 | |
| Other interest-expense | | | - -- | | - -- | | 36 | | - -- | | 36 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total interest expense | | 827 | | 501 | | 1,827 | | | (762 | ) | | 2,393 | | | 1,093 | | 377 | | 2,162 | | | (695 | ) | | 2,937 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | 459 | | 837 | | 5,586 | | | (501 | ) | | 6,381 | | | 387 | | 634 | | 11,035 | | | (680 | ) | | 11,376 | |
| Provision for credit losses | | — | | 648 | | 1,847 | | — | | 2,495 | | | - -- | | 675 | | 3,883 | | - -- | | 4,558 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income after provision for credit losses | | 459 | | 189 | | 3,739 | | | (501 | ) | | 3,886 | | | 387 | | | (41 | ) | | 7,152 | | | (680 | ) | | 6,818 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | |
| Fee income – nonaffiliates | | — | | 109 | | 2,621 | | — | | 2,730 | | | - -- | | 53 | | 5,310 | | - -- | | 5,363 | |
| Other | | | (42 | ) | | 39 | | 1,699 | | | (428 | ) | | 1,268 | | | 173 | | 33 | | 4,697 | | | (625 | ) | | 4,278 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total noninterest income | | | (42 | ) | | 148 | | 4,320 | | | (428 | ) | | 3,998 | | | 173 | | 86 | | 10,007 | | | (625 | ) | | 9,641 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | |
| Salaries and benefits | | | (82 | ) | | 151 | | 3,050 | | — | | 3,119 | | | 138 | | 19 | | 6,337 | | - -- | | 6,494 | |
| Other | | 46 | | 286 | | 2,494 | | | (428 | ) | | 2,398 | | | 110 | | 194 | | 5,645 | | | (625 | ) | | 5,324 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total noninterest expense | | | (36 | ) | | 437 | | 5,544 | | | (428 | ) | | 5,517 | | | 248 | | 213 | | 11,982 | | | (625 | ) | | 11,818 | |
| | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES | | 453 | | | (100 | ) | | 2,515 | | | (501 | ) | | 2,367 | | |
| | | |
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES | | | 312 | | | (168 | ) | | 5,177 | | | (680 | ) | | 4,641 | |
| Income tax expense (benefit) | | | (49 | ) | | | (31 | ) | | 810 | | — | | 730 | | | | (158 | ) | | | (57 | ) | | 1,767 | | - -- | | 1,552 | |
| Equity in undistributed income of subsidiaries | | 1,135 | | — | | — | | | (1,135 | ) | | — | | | 2,575 | | - -- | | - -- | | | (2,575 | ) | | - -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 1,637 | | $ | (69 | ) | | $ | 1,705 | | $ | (1,636 | ) | | $ | 1,637 | | |
| | | |
NET INCOME (LOSS) BEFORE NONCONTROLLING INTERESTS | | | 3,045 | | | (111 | ) | | 3,410 | | | (3,255 | ) | | 3,089 | |
| Less: Net income from noncontrolling interests | | | - -- | | - -- | | 44 | | - -- | | 44 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
PARENT, WFFI, OTHER AND WELLS FARGO NET INCOME (LOSS) | | | $ | 3,045 | | $ | (111 | ) | | $ | 3,366 | | $ | (3,255 | ) | | $ | 3,045 | |
| | | | | | | | | | | | | |
| | | |
74117
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Quarter ended September 30, 2007 | | | Quarter ended March 31, 2008 | |
| | | Other | | | | | Other | | | |
| | | consolidating | | Consolidated | | | consolidating | | Consolidated | |
| (in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
| Dividends from subsidiaries: | | |
| Bank | | $ | 418 | | $ | — | | $ | — | | $ | (418 | ) | | $ | — | | | $ | 797 | | $ | - -- | | $ | - -- | | $ | (797 | ) | | $ | - -- | |
| Nonbank | | 18 | | — | | — | | | (18 | ) | | — | | | 11 | | - -- | | - -- | | | (11 | ) | | - -- | |
| Interest income from loans | | — | | 1,431 | | 6,058 | | | (12 | ) | | 7,477 | | | 1 | | 1,407 | | 5,824 | | | (20 | ) | | 7,212 | |
| Interest income from subsidiaries | | 1,002 | | — | | — | | | (1,002 | ) | | — | | | 859 | | - -- | | - -- | | | (859 | ) | | - -- | |
| Other interest income | | 38 | | 29 | | 1,681 | | | (2 | ) | | 1,746 | | | 54 | | 29 | | 1,556 | | | (2 | ) | | 1,637 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | 1,476 | | 1,460 | | 7,739 | | | (1,452 | ) | | 9,223 | | | 1,722 | | 1,436 | | 7,380 | | | (1,689 | ) | | 8,849 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | — | | — | | 2,397 | | | (179 | ) | | 2,218 | | | - -- | | - -- | | 1,759 | | | (165 | ) | | 1,594 | |
| Short-term borrowings | | 152 | | 120 | | 531 | | | (339 | ) | | 464 | | | 144 | | 83 | | 421 | | | (223 | ) | | 425 | |
| Long-term debt | | 1,007 | | 491 | | 261 | | | (498 | ) | | 1,261 | | | 858 | | 495 | | 210 | | | (493 | ) | | 1,070 | |
| Other interest-expense | | | - -- | | - -- | | - -- | | - -- | | - -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total interest expense | | 1,159 | | 611 | | 3,189 | | | (1,016 | ) | | 3,943 | | | 1,002 | | 578 | | 2,390 | | | (881 | ) | | 3,089 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | 317 | | 849 | | 4,550 | | | (436 | ) | | 5,280 | | | 720 | | 858 | | 4,990 | | | (808 | ) | | 5,760 | |
| Provision for credit losses | | — | | 250 | | 642 | | — | | 892 | | | - -- | | 342 | | 1,686 | | - -- | | 2,028 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income after provision for credit losses | | 317 | | 599 | | 3,908 | | | (436 | ) | | 4,388 | | | 720 | | 516 | | 3,304 | | | (808 | ) | | 3,732 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | |
| Fee income – nonaffiliates | | — | | 105 | | 2,636 | | — | | 2,741 | | | - -- | | 116 | | 2,452 | | - -- | | 2,568 | |
| Other | | | (7 | ) | | 31 | | 2,917 | | | (1,109 | ) | | 1,832 | | | 293 | | 48 | | 2,310 | | | (416 | ) | | 2,235 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total noninterest income | | | (7 | ) | | 136 | | 5,553 | | | (1,109 | ) | | 4,573 | | | 293 | | 164 | | 4,762 | | | (416 | ) | | 4,803 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | |
| Salaries and benefits | | | (9 | ) | | 293 | | 2,969 | | — | | 3,253 | | | | (103 | ) | | 266 | | 3,052 | | - -- | | 3,215 | |
| Other | | 189 | | 263 | | 3,075 | | | (1,109 | ) | | 2,418 | | | | (105 | ) | | 277 | | 2,471 | | | (416 | ) | | 2,227 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total noninterest expense | | 180 | | 556 | | 6,044 | | | (1,109 | ) | | 5,671 | | | | (208 | ) | | 543 | | 5,523 | | | (416 | ) | | 5,442 | |
| | | | | | | | | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES | | 130 | | 179 | | 3,417 | | | (436 | ) | | 3,290 | | |
| Income tax expense (benefit) | | | (158 | ) | | 55 | | 1,220 | | — | | 1,117 | | |
| | | |
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES | | | 1,221 | | 137 | | 2,543 | | | (808 | ) | | 3,093 | |
| Income tax expense | | | 145 | | 55 | | 874 | | - -- | | 1,074 | |
| Equity in undistributed income of subsidiaries | | 1,885 | | — | | — | | | (1,885 | ) | | — | | | 923 | | - -- | | - -- | | | (923 | ) | | - -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 2,173 | | $ | 124 | | $ | 2,197 | | $ | (2,321 | ) | | $ | 2,173 | | |
| | | |
NET INCOME BEFORE NONCONTROLLING INTERESTS | | | 1,999 | | 82 | | 1,669 | | | (1,731 | ) | | 2,019 | |
| Less: Net income from noncontrolling interests | | | - -- | | - -- | | 20 | | - -- | | 20 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
PARENT, WFFI, OTHER AND WELLS FARGO NET INCOME | | | $ | 1,999 | | $ | 82 | | $ | 1,649 | | $ | (1,731 | ) | | $ | 1,999 | |
| | | | | | | | | | | | | |
| | | |
75
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | | Nine months ended September 30, 2008 | |
| | | | | | | | | | | Other | | | | | | | | |
| | | | | | | | | | | consolidating | | | | | | | Consolidated | |
| (in millions) | | Parent | | | WFFI | | | subsidiaries | | | Eliminations | | | Company | |
| |
Dividends from subsidiaries: | | | | | | | | | | | | | | | | | | | | |
| Bank | | $ | 1,656 | | | $ | — | | | $ | — | | | $ | (1,656 | ) | | $ | — | |
| Nonbank | | | 11 | | | | — | | | | — | | | | (11 | ) | | | — | |
| Interest income from loans | | | 2 | | | | 4,058 | | | | 16,894 | | | | (48 | ) | | | 20,906 | |
| Interest income from subsidiaries | | | 2,286 | | | | — | | | | — | | | | (2,286 | ) | | | — | |
| Other interest income | | | 163 | | | | 81 | | | | 5,141 | | | | (121 | ) | | | 5,264 | |
| | | | | | | | | | | | | | | | |
| Total interest income | | | 4,118 | | | | 4,139 | | | | 22,035 | | | | (4,122 | ) | | | 26,170 | |
| | | | | | | | | | | | | | | | |
| | | — | | | | — | | | | 4,055 | | | | (379 | ) | | | 3,676 | |
| Short-term borrowings | | | 397 | | | | 197 | | | | 1,475 | | | | (795 | ) | | | 1,274 | |
| Long-term debt | | | 2,201 | | | | 1,402 | | | | 479 | | | | (1,281 | ) | | | 2,801 | |
| | | | | | | | | | | | | | | | |
| Total interest expense | | | 2,598 | | | | 1,599 | | | | 6,009 | | | | (2,455 | ) | | | 7,751 | |
| | | | | | | | | | | | | | | | |
| | | 1,520 | | | | 2,540 | | | | 16,026 | | | | (1,667 | ) | | | 18,419 | |
| Provision for credit losses | | | — | | | | 1,628 | | | | 5,907 | | | | — | | | | 7,535 | |
| | | | | | | | | | | | | | | | |
| Net interest income after provision for credit losses | | | 1,520 | | | | 912 | | | | 10,119 | | | | (1,667 | ) | | | 10,884 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Fee income – nonaffiliates | | | — | | | | 329 | | | | 7,630 | | | | — | | | | 7,959 | |
| Other | | | 325 | | | | 139 | | | | 6,903 | | | | (1,344 | ) | | | 6,023 | |
| | | | | | | | | | | | | | | | |
| Total noninterest income | | | 325 | | | | 468 | | | | 14,533 | | | | (1,344 | ) | | | 13,982 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Salaries and benefits | | | (167 | ) | | | 635 | | | | 9,295 | | | | — | | | | 9,763 | |
| Other | | | (14 | ) | | | 839 | | | | 7,595 | | | | (1,344 | ) | | | 7,076 | |
| | | | | | | | | | | | | | | | |
| Total noninterest expense | | | (181 | ) | | | 1,474 | | | | 16,890 | | | | (1,344 | ) | | | 16,839 | |
| | | | | | | | | | | | | | | | |
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARIES | | | 2,026 | | | | (94 | ) | | | 7,762 | | | | (1,667 | ) | | | 8,027 | |
| Income tax expense (benefit) | | | 47 | | | | (19 | ) | | | 2,610 | | | | — | | | | 2,638 | |
| Equity in undistributed income of subsidiaries | | | 3,410 | | | | — | | | | — | | | | (3,410 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 5,389 | | | $ | (75 | ) | | $ | 5,152 | | | $ | (5,077 | ) | | $ | 5,389 | |
| | | | | | | | | | | | | | | | |
| | |
76
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | | Nine months ended September 30, 2007 | |
| | | | | | | | | | | Other | | | | | | | | |
| | | | | | | | | | | consolidating | | | | | | | Consolidated | |
| (in millions) | | Parent | | | WFFI | | | subsidiaries | | | Eliminations | | | Company | |
| |
Dividends from subsidiaries: | | | | | | | | | | | | | | | | | | | | |
| Bank | | $ | 3,684 | | | $ | — | | | $ | — | | | $ | (3,684 | ) | | $ | — | |
| Nonbank | | | 22 | | | | — | | | | — | | | | (22 | ) | | | — | |
| Interest income from loans | | | — | | | | 4,226 | | | | 17,149 | | | | (34 | ) | | | 21,341 | |
| Interest income from subsidiaries | | | 2,723 | | | | — | | | | — | | | | (2,723 | ) | | | — | |
| Other interest income | | | 105 | | | | 81 | | | | 4,413 | | | | (5 | ) | | | 4,594 | |
| | | | | | | | | | | | | | | | |
| Total interest income | | | 6,534 | | | | 4,307 | | | | 21,562 | | | | (6,468 | ) | | | 25,935 | |
| | | | | | | | | | | | | | | | |
| | | — | | | | — | | | | 6,488 | | | | (472 | ) | | | 6,016 | |
| Short-term borrowings | | | 291 | | | | 346 | | | | 1,183 | | | | (955 | ) | | | 865 | |
| Long-term debt | | | 2,826 | | | | 1,405 | | | | 672 | | | | (1,335 | ) | | | 3,568 | |
| | | | | | | | | | | | | | | | |
| Total interest expense | | | 3,117 | | | | 1,751 | | | | 8,343 | | | | (2,762 | ) | | | 10,449 | |
| | | | | | | | | | | | | | | | |
| | | 3,417 | | | | 2,556 | | | | 13,219 | | | | (3,706 | ) | | | 15,486 | |
| Provision for credit losses | | | — | | | | 448 | | | | 1,879 | | | | — | | | | 2,327 | |
| | | | | | | | | | | | | | | | |
| Net interest income after provision for credit losses | | | 3,417 | | | | 2,108 | | | | 11,340 | | | | (3,706 | ) | | | 13,159 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Fee income – nonaffiliates | | | — | | | | 276 | | | | 7,596 | | | | — | | | | 7,872 | |
| Other | | | 120 | | | | 108 | | | | 6,732 | | | | (1,133 | ) | | | 5,827 | |
| | | | | | | | | | | | | | | | |
| Total noninterest income | | | 120 | | | | 384 | | | | 14,328 | | | | (1,133 | ) | | | 13,699 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Salaries and benefits | | | 49 | | | | 918 | | | | 8,948 | | | | — | | | | 9,915 | |
| Other | | | 247 | | | | 828 | | | | 7,067 | | | | (1,133 | ) | | | 7,009 | |
| | | | | | | | | | | | | | | | |
| Total noninterest expense | | | 296 | | | | 1,746 | | | | 16,015 | | | | (1,133 | ) | | | 16,924 | |
| | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAX EXPENSE
(BENEFIT) AND EQUITY
IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES | | | 3,241 | | | | 746 | | | | 9,653 | | | | (3,706 | ) | | | 9,934 | |
| Income tax expense (benefit) | | | (201 | ) | | | 267 | | | | 3,172 | | | | — | | | | 3,238 | |
| Equity in undistributed income of subsidiaries | | | 3,254 | | | | — | | | | — | | | | (3,254 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 6,696 | | | $ | 479 | | | $ | 6,481 | | | $ | (6,960 | ) | | $ | 6,696 | |
| | | | | | | | | | | | | | | | |
| | |
77118
Condensed Consolidating Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | September 30, 2008 | | | March 31, 2009 | |
| | | Other | | | | | Other | | | |
| | | consolidating | | Consolidated | | | consolidating | | Consolidated | |
| (in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
| | | | | |
| | |
| Cash and cash equivalents due from: | | |
| Subsidiary banks | | $ | 19,658 | | $ | 245 | | $ | — | | $ | (19,903 | ) | | $ | — | | | $ | 28,550 | | $ | 211 | | $ | -- | | $ | (28,761 | ) | | $ | -- | |
| Nonaffiliates | | — | | 168 | | 20,786 | | — | | 20,954 | | | -- | | 268 | | 40,543 | | -- | | 40,811 | |
| Securities available for sale | | 2,290 | | 2,064 | | 82,535 | | | (7 | ) | | 86,882 | | | 4,731 | | 2,221 | | 171,519 | | | (3 | ) | | 178,468 | |
| Mortgages and loans held for sale | | — | | — | | 19,374 | | — | | 19,374 | | | -- | | -- | | 45,113 | | -- | | 45,113 | |
| | 19 | | 48,229 | | 371,076 | | | (8,275 | ) | | 411,049 | | | 9 | | 37,598 | | 819,483 | | | (13,511 | ) | | 843,579 | |
| Loans to subsidiaries: | | |
| Bank | | 11,400 | | — | | — | | | (11,400 | ) | | — | | | 14,597 | | -- | | -- | | | (14,597 | ) | | -- | |
| Nonbank | | 52,947 | | — | | — | | | (52,947 | ) | | — | | | 64,161 | | -- | | -- | | | (64,161 | ) | | -- | |
| Allowance for loan losses | | — | | | (1,539 | ) | | | (6,326 | ) | | — | | | (7,865 | ) | | -- | | | (1,723 | ) | | | (20,558 | ) | | -- | | | (22,281 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net loans | | 64,366 | | 46,690 | | 364,750 | | | (72,622 | ) | | 403,184 | | | 78,767 | | 35,875 | | 798,925 | | | (92,269 | ) | | 821,298 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Investments in subsidiaries: | | |
| Bank | | 50,870 | | — | | — | | | (50,870 | ) | | — | | | 113,435 | | -- | | -- | | | (113,435 | ) | | -- | |
| Nonbank | | 5,066 | | — | | — | | | (5,066 | ) | | — | | | 19,663 | | -- | | -- | | | (19,663 | ) | | -- | |
| Other assets | | 11,017 | | 1,504 | | 84,582 | | | (5,136 | ) | | 91,967 | | | 12,316 | | 1,376 | | 200,163 | | | (13,654 | ) | | 200,201 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 153,267 | | $ | 50,671 | | $ | 572,027 | | $ | (153,604 | ) | | $ | 622,361 | | | $ | 257,462 | | $ | 39,951 | | $ | 1,256,263 | | $ | (267,785 | ) | | $ | 1,285,891 | |
| | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
| Deposits | | $ | — | | $ | — | | $ | 366,884 | | $ | (13,310 | ) | | $ | 353,574 | | | $ | -- | | $ | -- | | $ | 823,550 | | $ | (26,281 | ) | | $ | 797,269 | |
| Short-term borrowings | | 11,942 | | 12,691 | | 98,359 | | | (37,805 | ) | | 85,187 | | | 5,294 | | 8,237 | | 105,010 | | | (46,457 | ) | | 72,084 | |
| Accrued expenses and other liabilities | | 5,789 | | 1,279 | | 26,471 | | | (4,246 | ) | | 29,293 | | | 6,984 | | 1,182 | | 65,219 | | | (14,554 | ) | | 58,831 | |
| Long-term debt | | 78,720 | | 34,133 | | 27,108 | | | (32,611 | ) | | 107,350 | | | 133,679 | | 29,110 | | 124,221 | | | (36,360 | ) | | 250,650 | |
| Indebtedness to subsidiaries | | 9,859 | | — | | — | | | (9,859 | ) | | — | | | 11,210 | | -- | | -- | | | (11,210 | ) | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | 106,310 | | 48,103 | | 518,822 | | | (97,831 | ) | | 575,404 | | | 157,167 | | 38,529 | | 1,118,000 | | | (134,862 | ) | | 1,178,834 | |
| Stockholders’ equity | | 46,957 | | 2,568 | | 53,205 | | | (55,773 | ) | | 46,957 | | |
| Parent, WFFI, Other and Wells Fargo stockholders’ equity | | | 100,295 | | 1,407 | | 131,516 | | | (132,923 | ) | | 100,295 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 153,267 | | $ | 50,671 | | $ | 572,027 | | $ | (153,604 | ) | | $ | 622,361 | | |
| Noncontrolling interests | | | -- | | 15 | | 6,747 | | -- | | 6,762 | |
| | | | | | | | | | | | | |
| Total equity | | | 100,295 | | 1,422 | | 138,263 | | | (132,923 | ) | | 107,057 | |
| | | | | | | | | | | | | |
Total liabilities and equity | | | $ | 257,462 | | $ | 39,951 | | $ | 1,256,263 | | $ | (267,785 | ) | | $ | 1,285,891 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
78119
Condensed Consolidating Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | September 30, 2007 | | | March 31, 2008 | |
| | | Other | | | | | Other | | | |
| | | consolidating | | Consolidated | | | consolidating | | Consolidated | |
| (in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
| | | | | |
| | |
| Cash and cash equivalents due from: | | |
| Subsidiary banks | | $ | 8,358 | | $ | 194 | | $ | — | | $ | (8,552 | ) | | $ | — | | | $ | 15,105 | | $ | 306 | | $ | -- | | $ | (15,411 | ) | | $ | -- | |
| Nonaffiliates | | — | | 284 | | 16,462 | | — | | 16,746 | | | -- | | 214 | | 17,103 | | -- | | 17,317 | |
| Securities available for sale | | 2,531 | | 2,076 | | 52,839 | | | (6 | ) | | 57,440 | | | 2,270 | | 2,023 | | 77,499 | | | (5 | ) | | 81,787 | |
| Mortgages and loans held for sale | | — | | — | | 30,710 | | — | | 30,710 | | | -- | | -- | | 30,521 | | -- | | 30,521 | |
| | — | | 50,405 | | 320,896 | | | (8,379 | ) | | 362,922 | | | 10 | | 51,060 | | 344,624 | | | (9,361 | ) | | 386,333 | |
| Loans to subsidiaries: | | |
| Bank | | 11,400 | | — | | — | | | (11,400 | ) | | — | | | 11,400 | | -- | | -- | | | (11,400 | ) | | -- | |
| Nonbank | | 51,253 | | — | | — | | | (51,253 | ) | | — | | | 54,260 | | -- | | -- | | | (54,260 | ) | | -- | |
| Allowance for loan losses | | — | | | (846 | ) | | | (2,983 | ) | | — | | | (3,829 | ) | | -- | | | (1,025 | ) | | | (4,778 | ) | | -- | | | (5,803 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net loans | | 62,653 | | 49,559 | | 317,913 | | | (71,032 | ) | | 359,093 | | | 65,670 | | 50,035 | | 339,846 | | | (75,021 | ) | | 380,530 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Investments in subsidiaries: | | |
| Bank | | 47,165 | | — | | — | | | (47,165 | ) | | — | | | 49,371 | | -- | | -- | | | (49,371 | ) | | -- | |
| Nonbank | | 5,775 | | — | | — | | | (5,775 | ) | | — | | | 5,568 | | -- | | -- | | | (5,568 | ) | | -- | |
| Other assets | | 7,201 | | 1,724 | | 79,149 | | | (3,336 | ) | | 84,738 | | | 11,417 | | 1,574 | | 78,323 | | | (6,248 | ) | | 85,066 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 133,683 | | $ | 53,837 | | $ | 497,073 | | $ | (135,866 | ) | | $ | 548,727 | | | $ | 149,401 | | $ | 54,152 | | $ | 543,292 | | $ | (151,624 | ) | | $ | 595,221 | |
| | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
| Deposits | | $ | — | | $ | — | | $ | 343,508 | | $ | (8,552 | ) | | $ | 334,956 | | | $ | -- | | $ | -- | | $ | 373,555 | | $ | (15,411 | ) | | $ | 358,144 | |
| Short-term borrowings | | 33 | | 8,660 | | 58,185 | | | (25,149 | ) | | 41,729 | | | 5,023 | | 10,804 | | 69,075 | | | (30,919 | ) | | 53,983 | |
| Accrued expenses and other liabilities | | 5,300 | | 1,470 | | 25,472 | | | (3,358 | ) | | 28,884 | | | 4,921 | | 1,497 | | 29,054 | | | (3,992 | ) | | 31,480 | |
| Long-term debt | | 72,025 | | 40,424 | | 20,406 | | | (37,263 | ) | | 95,592 | | | 80,991 | | 38,579 | | 19,821 | | | (36,216 | ) | | 103,175 | |
| Indebtedness to subsidiaries | | 8,759 | | — | | — | | | (8,759 | ) | | — | | | 10,307 | | -- | | -- | | | (10,307 | ) | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities | | 86,117 | | 50,554 | | 447,571 | | | (83,081 | ) | | 501,161 | | | 101,242 | | 50,880 | | 491,505 | | | (96,845 | ) | | 546,782 | |
| Stockholders’ equity | | 47,566 | | 3,283 | | 49,502 | | | (52,785 | ) | | 47,566 | | |
| Parent, WFFI, Other and Wells Fargo stockholders’ equity | | | 48,159 | | 3,258 | | 51,521 | | | (54,779 | ) | | 48,159 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 133,683 | | $ | 53,837 | | $ | 497,073 | | $ | (135,866 | ) | | $ | 548,727 | | |
| Noncontrolling interests | | | -- | | 14 | | 266 | | -- | | 280 | |
| | | | | | | | | | | | | |
| Total equity | | | 48,159 | | 3,272 | | 51,787 | | | (54,779 | ) | | 48,439 | |
| | | | | | | | | | | | | |
Total liabilities and equity | | | $ | 149,401 | | $ | 54,152 | | $ | 543,292 | | $ | (151,624 | ) | | $ | 595,221 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
79120
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Nine months ended September 30, 2008 | | | Quarter ended March 31, 2009 | |
| | | Other | | | | | Other | | | |
| | | consolidating | | | | | consolidating | | | |
| | | subsidiaries/ | | Consolidated | | | subsidiaries/ | | Consolidated | |
| (in millions) | | Parent | | WFFI | | eliminations | | Company | | | Parent | | WFFI | | eliminations | | Company | |
| | | | | |
Cash flows from operating activities: | | |
| Net cash provided by operating activities | | $ | 160 | | $ | 1,419 | | $ | 10,572 | | $ | 12,151 | | |
| Net cash provided (used) by operating activities | | | $ | (828 | ) | | $ | 612 | | $ | 16,051 | | $ | 15,835 | |
| | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | |
| Securities available for sale: | | |
| Sales proceeds | | 2,511 | | 710 | | 36,477 | | 39,698 | | | 97 | | 193 | | 10,470 | | 10,760 | |
| Prepayments and maturities | | — | | 247 | | 15,632 | | 15,879 | | | -- | | 39 | | 7,304 | | 7,343 | |
| Purchases | | | (2,770 | ) | | | (1,013 | ) | | | (70,598 | ) | | | (74,381 | ) | | | (283 | ) | | | (317 | ) | | | (38,573 | ) | | | (39,173 | ) |
| Loans: | | |
| Increase in banking subsidiaries’ loan originations, net of collections | | — | | | (1,177 | ) | | | (30,829 | ) | | | (32,006 | ) | |
| Decrease in banking subsidiaries’ loan originations, net of collections | | | -- | | 17 | | 10,891 | | 10,908 | |
| Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries | | — | | — | | 1,843 | | 1,843 | | | -- | | -- | | 419 | | 419 | |
| Purchases (including participations) of loans by banking subsidiaries | | — | | — | | | (4,329 | ) | | | (4,329 | ) | | -- | | -- | | | (301 | ) | | | (301 | ) |
| Principal collected on nonbank entities’ loans | | — | | 11,614 | | 3,848 | | 15,462 | | | -- | | 2,310 | | 865 | | 3,175 | |
| Loans originated by nonbank entities | | — | | | (11,085 | ) | | | (2,795 | ) | | | (13,880 | ) | | -- | | | (991 | ) | | | (1,004 | ) | | | (1,995 | ) |
| Net repayments from (advances to) subsidiaries | | | (5,146 | ) | | — | | 5,146 | | — | | | 9,976 | | -- | | | (9,976 | ) | | -- | |
| Capital notes and term loans made to subsidiaries | | | (708 | ) | | — | | 708 | | — | | | | (22 | ) | | -- | | 22 | | -- | |
| Principal collected on notes/loans made to subsidiaries | | 6,179 | | — | | | (6,179 | ) | | — | | | 1,560 | | -- | | | (1,560 | ) | | -- | |
| Net decrease (increase) in investment in subsidiaries | | | (450 | ) | | — | | 450 | | — | | | | (436 | ) | | -- | | 436 | | -- | |
| Net cash paid for acquisitions | | | (427 | ) | | — | | | (163 | ) | | | (590 | ) | | -- | | -- | | | (123 | ) | | | (123 | ) |
| Net change in noncontrolling interests | | | -- | | -- | | | (186 | ) | | | (186 | ) |
| Other, net | | 430 | | 11 | | | (5,697 | ) | | | (5,256 | ) | | 22,264 | | 140 | | 5,284 | | 27,688 | |
| | | | | | | | | | | | | | | | | | | |
| Net cash used by investing activities | | | (381 | ) | | | (693 | ) | | | (56,486 | ) | | | (57,560 | ) | |
| Net cash provided (used) by investing activities | | | 33,156 | | 1,391 | | | (16,032 | ) | | 18,515 | |
| | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | |
| Net change in: | | |
| Deposits | | — | | — | | 7,370 | | 7,370 | | | -- | | -- | | 15,725 | | 15,725 | |
| Short-term borrowings | | 8,006 | | 5,360 | | 18,432 | | 31,798 | | | | (16,187 | ) | | | (426 | ) | | | (19,377 | ) | | | (35,990 | ) |
| Long-term debt: | | |
| Proceeds from issuance | | 13,529 | | 1,113 | | 8,109 | | 22,751 | | | 3,522 | | -- | | 289 | | 3,811 | |
| Repayment | | | (13,678 | ) | | | (7,269 | ) | | 5,508 | | | (15,439 | ) | | | (5,175 | ) | | | (1,524 | ) | | | (11,178 | ) | | | (17,877 | ) |
| Preferred stock: | | |
| Cash dividends paid and accretion | | | | (623 | ) | | -- | | -- | | | (623 | ) |
| Common stock: | | |
| Proceeds from issuance | | 1,269 | | — | | — | | 1,269 | | | 524 | | -- | | -- | | 524 | |
| Repurchased | | | (1,162 | ) | | — | | — | | | (1,162 | ) | | | (54 | ) | | -- | | -- | | | (54 | ) |
| Cash dividends paid | | | (3,178 | ) | | — | | — | | | (3,178 | ) | | | (1,443 | ) | | -- | | -- | | | (1,443 | ) |
| Excess tax benefits related to stock option payments | | 104 | | — | | — | | 104 | | |
| | | | | | | | | | | | | | | | | | | |
| Net cash provided (used) by financing activities | | 4,890 | | | (796 | ) | | 39,419 | | 43,513 | | |
| Net cash used by financing activities | | | | (19,436 | ) | | | (1,950 | ) | | | (14,541 | ) | | | (35,927 | ) |
| | | | | | | | | | | | | | | | | | | |
Net change in cash and due from banks | | 4,669 | | | (70 | ) | | | (6,495 | ) | | | (1,896 | ) | | 12,892 | | 53 | | | (14,522 | ) | | | (1,577 | ) |
Cash and due from banks at beginning of period | | 14,989 | | 483 | | | (715 | ) | | 14,757 | | |
Cash and due from banks at beginning of quarter | | | 15,658 | | 426 | | 7,679 | | 23,763 | |
| | | | | | | | | | | | | | | | | | | |
Cash and due from banks at end of period | | $ | 19,658 | | $ | 413 | | $ | (7,210 | ) | | $ | 12,861 | | |
Cash and due from banks at end of quarter | | | $ | 28,550 | | $ | 479 | | $ | (6,843 | ) | | $ | 22,186 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | |
80121
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Nine months ended September 30, 2007 | | | Quarter ended March 31, 2008 | |
| | | Other | | | | | Other | | | |
| | | consolidating | | | | | consolidating | | | |
| | | subsidiaries/ | | Consolidated | | | subsidiaries/ | | Consolidated | |
| (in millions) | | Parent | | WFFI | | eliminations | | Company | | | Parent | | WFFI | | eliminations | | Company | |
| | | | | |
Cash flows from operating activities: | | |
| Net cash provided (used) by operating activities | | $ | 2,970 | | $ | 1,133 | | $ | (3,251 | ) | | $ | 852 | | | $ | 499 | | $ | 668 | | $ | (1,557 | ) | | $ | (390 | ) |
| | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | |
| Securities available for sale: | | |
| Sales proceeds | | 1,836 | | 400 | | 35,061 | | 37,297 | | | 882 | | 359 | | 14,972 | | 16,213 | |
| Prepayments and maturities | | — | | 266 | | 6,602 | | 6,868 | | | -- | | 78 | | 5,388 | | 5,466 | |
| Purchases | | | (2,800 | ) | | | (998 | ) | | | (50,394 | ) | | | (54,192 | ) | | | (792 | ) | | | (357 | ) | | | (29,798 | ) | | | (30,947 | ) |
| Loans: | | |
| Increase in banking subsidiaries’ loan originations, net of collections | | — | | | (1,849 | ) | | | (32,171 | ) | | | (34,020 | ) | | -- | | | (171 | ) | | | (3,348 | ) | | | (3,519 | ) |
| Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries | | — | | — | | 2,611 | | 2,611 | | | -- | | -- | | 325 | | 325 | |
| Purchases (including participations) of loans by banking subsidiaries | | — | | — | | | (7,543 | ) | | | (7,543 | ) | | -- | | -- | | | (2,656 | ) | | | (2,656 | ) |
| Principal collected on nonbank entities’ loans | | — | | 14,512 | | 1,949 | | 16,461 | | | -- | | 4,194 | | 821 | | 5,015 | |
| Loans originated by nonbank entities | | — | | | (15,960 | ) | | | (3,230 | ) | | | (19,190 | ) | | -- | | | (4,439 | ) | | | (834 | ) | | | (5,273 | ) |
| Net repayments from (advances to) subsidiaries | | | (9,143 | ) | | — | | 9,143 | | — | | | | (2,858 | ) | | -- | | 2,858 | | -- | |
| Capital notes and term loans made to subsidiaries | | | (8,608 | ) | | — | | 8,608 | | — | | | | (630 | ) | | -- | | 630 | | -- | |
| Principal collected on notes/loans made to subsidiaries | | 6,512 | | — | | | (6,512 | ) | | — | | | 2,500 | | -- | | | (2,500 | ) | | -- | |
| Net decrease (increase) in investment in subsidiaries | | | (1,138 | ) | | — | | 1,138 | | — | | | | (48 | ) | | -- | | 48 | | -- | |
| Net cash paid for acquisitions | | — | | — | | | (2,862 | ) | | | (2,862 | ) | | -- | | -- | | | (46 | ) | | | (46 | ) |
| Net change in noncontrolling interests | | | -- | | -- | | 6 | | 6 | |
| Other, net | | — | | | (706 | ) | | | (1,279 | ) | | | (1,985 | ) | | 439 | | | (52 | ) | | | (3,391 | ) | | | (3,004 | ) |
| | | | | | | | | | | | | | | | | | | |
| Net cash used by investing activities | | | (13,341 | ) | | | (4,335 | ) | | | (38,879 | ) | | | (56,555 | ) | | | (507 | ) | | | (388 | ) | | | (17,525 | ) | | | (18,420 | ) |
| | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | |
| Net change in: | | |
| Deposits | | — | | — | | 22,954 | | 22,954 | | | -- | | -- | | 13,684 | | 13,684 | |
| Short-term borrowings | | 2,924 | | 2,112 | | 23,724 | | 28,760 | | | 1,506 | | 1,687 | | | (2,465 | ) | | 728 | |
| Long-term debt: | | |
| Proceeds from issuance | | 18,254 | | 9,435 | | | (5,120 | ) | | 22,569 | | | 7,075 | | 1,105 | | | (43 | ) | | 8,137 | |
| Repayment | | | (10,688 | ) | | | (8,347 | ) | | 4,189 | | | (14,846 | ) | | | (7,414 | ) | | | (3,037 | ) | | 2,882 | | | (7,569 | ) |
| Common stock: | | |
| Proceeds from issuance | | 1,531 | | — | | — | | 1,531 | | | 317 | | -- | | -- | | 317 | |
| Repurchased | | | (4,765 | ) | | — | | — | | | (4,765 | ) | | | (351 | ) | | -- | | -- | | | (351 | ) |
| Cash dividends paid | | | (2,919 | ) | | — | | — | | | (2,919 | ) | | | (1,024 | ) | | -- | | -- | | | (1,024 | ) |
| Excess tax benefits related to stock option payments | | 185 | | — | | — | | 185 | | | 15 | | -- | | -- | | 15 | |
| Other, net | | | (2 | ) | | 10 | | | (602 | ) | | | (594 | ) | | -- | | 2 | | 3,260 | | 3,262 | |
| | | | | | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | 4,520 | | 3,210 | | 45,145 | | 52,875 | | |
| Net cash provided (used) by financing activities | | | 124 | | | (243 | ) | | 17,318 | | 17,199 | |
| | | | | | | | | | | | | | | | | | | |
Net change in cash and due from banks | | | (5,851 | ) | | 8 | | 3,015 | | | (2,828 | ) | | 116 | | 37 | | | (1,764 | ) | | | (1,611 | ) |
Cash and due from banks at beginning of period | | 14,209 | | 470 | | 349 | | 15,028 | | |
Cash and due from banks at beginning of quarter | | | 14,989 | | 483 | | | (715 | ) | | 14,757 | |
| | | | | | | | | | | | | | | | | | | |
Cash and due from banks at end of period | | $ | 8,358 | | $ | 478 | | $ | 3,364 | | $ | 12,200 | | |
Cash and due from banks at end of quarter | | | $ | 15,105 | | $ | 520 | | $ | (2,479 | ) | | $ | 13,146 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | |
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19. REGULATORY AND AGENCY CAPITAL REQUIREMENTS
The Company and each of its subsidiary banks and thrifts are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board (FRB) and, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, respectively.
We do not consolidate our wholly-owned trusts (the Trusts) formed solely to issue trust preferred securities. At September 30, 2008,March 31, 2009, the amount of trust preferred securities and perpetual preferred purchase securities issued by the Trusts that was includable in Tier 1 and Tier 2 capital in accordance with FRB risk-based capital guidelines was approximately $11.2 billion and $20 million, respectively.$19.3 billion. The junior subordinated debentures held by the Trusts were included in the Company’s long-term debt.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | To be well capitalized | | | To be well capitalized | |
| | | under the FDICIA | | | under the FDICIA | |
| | | For capital | | prompt corrective | | | For capital | | prompt corrective | |
| | | Actual | | adequacy purposes | | action provisions | | | Actual | | adequacy purposes | | action provisions | |
| (in billions) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
| | | | | |
As of September 30, 2008: | | |
| | |
| Total capital (to risk-weighted assets) | | |
| Wells Fargo & Company | | | | $ | 60.5 | | | | | 11.51 | % | | ³ | | $ | 42.1 | | ³ | | | 8.00 | % | | | | | $ | 131.8 | | | | 12.30 | % | | ³ | | $ | 85.7 | | ³ | | 8.00 | % | |
| Wells Fargo Bank, N.A. | | 47.9 | | 11.11 | | ³ | | 34.5 | | ³ | | 8.00 | | ³ | | $ | 43.1 | | ³ | | | 10.00 | % | | 53.7 | | 11.87 | | ³ | | 36.2 | | ³ | | 8.00 | | ³ | | $ | 45.3 | | ³ | | 10.00 | % |
| Wachovia Bank, N.A. | | | 57.5 | | 12.02 | | ³ | | 38.2 | | ³ | | 8.00 | | ³ | | 47.8 | | ³ | | 10.00 | |
Tier 1 capital (to risk-weighted assets) | | |
| Wells Fargo & Company | | $ | 45.2 | | | 8.59 | % | | ³ | | $ | 21.0 | | ³ | | | 4.00 | % | | | $ | 89.0 | | 8.30 | % | | ³ | | $ | 42.9 | | ³ | | 4.00 | % | |
| Wells Fargo Bank, N.A. | | 33.5 | | 7.77 | | ³ | | 17.2 | | ³ | | 4.00 | | ³ | | $ | 25.9 | | ³ | | | 6.00 | % | | 34.8 | | 7.70 | | ³ | | 18.1 | | ³ | | 4.00 | | ³ | | $ | 27.2 | | ³ | | 6.00 | % |
| Wachovia Bank, N.A. | | | 35.4 | | 7.41 | | ³ | | 19.1 | | ³ | | 4.00 | | ³ | | 28.7 | | ³ | | 6.00 | |
Tier 1 capital (to average assets)
(Leverage ratio) | | |
| Wells Fargo & Company | | $ | 45.2 | | | 7.54 | % | | ³ | | $ | 24.0 | | ³ | | | 4.00 | %(1) | | | $ | 89.0 | | 7.09 | % | | ³ | | $ | 50.2 | | ³ | | 4.00 | %(1) | |
| Wells Fargo Bank, N.A. | | 33.5 | | 6.77 | | ³ | | 19.8 | | ³ | | | 4.00 | (1) | | ³ | | $ | 24.7 | | ³ | | | 5.00 | % | | 34.8 | | 6.53 | | ³ | | 21.3 | | ³ | | 4.00 | (1) | | ³ | | $ | 26.7 | | ³ | | 5.00 | % |
| Wachovia Bank, N.A. | | | 35.4 | | 6.20 | | ³ | | 22.9 | | ³ | | 4.00 | (1) | | ³ | | 28.6 | | ³ | | 5.00 | |
| | | | | |
| | |
| (1) | | The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations. |
As anCertain subsidiaries of the Company are approved seller/servicer, Wells Fargo Bank, N.A., through its mortgage banking division, isservicers, and are therefore required to maintain minimum levels of shareholders’ equity, as specified by various agencies, including the United States Department of Housing and Urban Development, Government National Mortgage Association, Federal Home Loan Mortgage Corporation and Federal National Mortgage Association. At September 30, 2008, Wells Fargo Bank, N.A.March 31, 2009, each seller/servicer met these requirements.
PART II — OTHER INFORMATION
| | | |
| Item 1. | | | Legal Proceedings |
|
| | | Information in response to this item can be found in Note 11 (Guarantees and Legal Actions) to Financial Statements in this Report which information is incorporated by reference into this item. |
|
| Item 1A. | | | Risk Factors |
Information in response to this item can be found under “Financial Review — Risk Factors” in this Report which information is incorporated by reference into this item.
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PART II – OTHER INFORMATION
| | |
Item 2. | | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
The following table shows Company repurchases of its common stock for each calendar month in the quarter ended September 30, 2008.March 31, 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Maximum number of | | | Maximum number of | |
| | | Total number | | shares that may yet | | Total number | | shares that may yet | |
| Calendar | | of shares | | Weighted-average | | be repurchased under | | of shares | | Weighted-average | | be repurchased under | |
| month | | repurchased | (1) | | price paid per share | | the authorizations | | repurchased | (1) | price paid per share | | the authorizations | |
| | 6,438,328 | | $ | 28.09 | | 17,931,365 | | |
| | 4,862,084 | | 30.74 | | 13,069,281 | | |
| | 8,885,308 | | 35.12 | | 29,183,973 | | |
| | | | |
| | | 2,228,293 | | $ | 24.00 | | 12,128,427 | |
| | | 10,458 | | 14.77 | | 12,117,969 | |
| | | 55,995 | | 10.31 | | 12,061,974 | |
| | | | | | | |
| Total | | 20,185,720 | | | 2,294,746 | |
| | | | | | | |
| | | | | |
| | |
| (1) | | All shares were repurchased under two authorizationsthe authorization covering up to 75 million and 25 million shares of common stock approved by the Board of Directors and publicly announced by the Company on November 7, 2007, and September 23, 2008, respectively.2008. Unless modified or revoked by the Board, these authorizations dothis authorization does not expire. |
As discussed under “Capital Management” in this Report, prior to October 28, 2011, unless we have redeemed the preferred securities issued to the Treasury Department or the Treasury Department has transferred the preferred securities to a third party, the consent of the Treasury Department will be required for us to increase our common stock dividend.
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A list of exhibits to this Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.
The Company’s SEC file number is 001-2979. On and before November 2, 1998, the Company filed documents with the SEC under the name Norwest Corporation. The former Wells Fargo & Company filed documents under SEC file number 001-6214.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
Dated: October 30, 2008 | May 11, 2009 | WELLS FARGO & COMPANY
| |
| | By: | | /s/ RICHARD D. LEVY | |
| | | By: | | /s/ RICHARDRichard D. LEVY |
| | | Levy | |
| | | | | Richard D. Levy
Executive Vice President and Controller
(Principal (Principal Accounting Officer) | |
|
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EXHIBIT INDEX
| | | | | | | | | | | | | |
| Exhibit | | | | | | | | | | | | |
| Number | | Description | | Location |
| | | | | |
2.1 | | Agreement and Plan of Merger, dated as of October 3, 2008, by and between Wells Fargo & Company and Wachovia Corporation. | | Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed October 9, 2008. |
| | | | | |
2.2 | | Share Exchange Agreement, dated as of October 3, 2008, by and between Wells Fargo & Company and Wachovia Corporation. | | Incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed October 9, 2008. |
| | | | | |
| 3(a) | | Restated Certificate of Incorporation. | | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed September 28, 2006. |
| | | | | | | | | | | | | |
| 3(b) | | Certificate of Designations for the Company’s 2007 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed March 19, 2007. |
| | | | | | | | | | | | | |
| 3(c) | | Certificate Eliminating the Certificate of Designations for the Company’s 1997 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed March 19, 2007. |
| | | | | | | | | | | | | |
| 3(d) | | Certificate of Designations for the Company’s 2008 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed March 18, 2008. |
| | | | | | | | | | | | | |
| 3(e) | | Certificate Eliminating the Certificate of Designations for the Company’s 1998 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed March 18, 2008. |
| | | | | | | | | | | | | |
| 3(f) | | Certificate of Designations for the Company’s Non-Cumulative Perpetual Preferred Stock, Series A. | | Incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed May 19, 2008. |
| | | | | | | | | | | | | |
| 3(g) | | Certificate of Designations for the Company’s Non-Cumulative Perpetual Preferred Stock, Series B. | | Incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed September 10, 2008. |
| | | | | |
3(h) | | By-Laws. | | | | | |
| 3(h) | | Certificate of Designations for the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D. | | Incorporated by reference to Exhibit 34.1 to the Company’s Current Report on Form 8-K filed September 29,October 30, 2008. |
| | | | | |
4(a) | | See Exhibits 3(a) through 3(h). | | | | | | | |
| 3(i) | | Certificate of Designations for the Company’s Dividend Equalization Preferred Shares. | | Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | |
4(b) | | The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. | | | | | | | |
| 3(j) | | Certificate of Designations for the Company’s Class A Preferred Stock, Series G. | | Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | |
10(a) | | Amendments to Directors Stock Compensation and Deferral Plan, effective September 23, 2008. | | Filed herewith. | | | |
| 3(k) | | Certificate of Designations for the Company’s Class A Preferred Stock, Series H. | | Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | |
12 | | Computation of Ratios of Earnings to Fixed Charges: | | Filed herewith. |
| | | | | | | | | | | | | | | | | |
| | |
| | | Quarter ended | | | Nine months ended | |
| | | September 30 | , | | September 30 | , |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | |
Including interest on deposits | | | 1.97 | | | | 1.82 | | | | 2.01 | | | | 1.94 | |
Excluding interest on deposits | | | 2.65 | | | | 2.85 | | | | 2.89 | | | | 3.16 | |
| | |
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| | | | | |
Exhibit3(l) | | Certificate of Designations for the Company’s Class A Preferred Stock, Series I. | | |
Number | | Description | | LocationIncorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | |
31(a) | | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. | | | |
| 3(m) | | Certificate of Designations for the Company’s 8.00% Non-Cumulative Perpetual Class A Preferred Stock, Series J. | | Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | |
31(b) | | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. | | | |
| 3(n) | | Certificate of Designations for the Company’s Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series K. | | Incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | |
32(a) | | Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350. | | Furnished herewith. |
| | | | | |
32(b)3(o) | | CertificationCertificate of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 ofDesignations for the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.Company’s 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L. | | Furnished herewith.Incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
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| | | | | | | | | | | | | |
| Exhibit | | | | | | | | | | | | |
| Number | | Description | | Location |
| | | | | | | | | | | | | |
| 3(p) | | By-Laws. | | Incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed December 4, 2006. |
| | | | | | | | | | | | | |
| 4(a) | | See Exhibits 3(a) through 3(p). | | |
| | | | | | | | | | | | | |
| 4(b) | | The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company. | | |
| | | | | | | | | | | | | |
| 10(a) | | Amendment to Directors Stock Compensation and Deferral Plan. | | Filed herewith. |
| | | | | | | | | | | | | |
| 10(b) | | Amendments to Amended and Restated Wachovia Corporation 2003 Stock Incentive Plan. | | Filed herewith. |
| | | | | | | | | | | | | |
| 12(a) | | Computation of Ratios of Earnings to Fixed Charges: | | Filed herewith. |
| | | | | | | | | | | | | |
| | | Quarter ended March 31 | , | | |
| | | | | | 2009 | | | | 2008 | | | |
| | | | | | |
| | | | | | | | | | | | | |
| | | Including interest on deposits | | | 2.50 | | | | 1.98 | | | |
| | | | | | | | | | | | | |
| | | Excluding interest on deposits | | | 3.22 | | | | 2.98 | | | |
| | | | | | |
| | | (Computation is based on Wells Fargo net income.) | | |
| | | | | | | | | | | | | |
| 12(b) | | Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends: | | Filed herewith. |
| | | | | | | | | | | | | |
| | | Quarter ended March 31 | , | | |
| | | | | | 2009 | | | | 2008 | | | |
| | | | | | |
| | | | | | | | | | | | | |
| | | Including interest on deposits | | | 1.89 | | | | 1.98 | | | |
| | | | | | | | | | | | | |
| | | Excluding interest on deposits | | | 2.17 | | | | 2.98 | | | |
| | | | | | |
| | | (Computation is based on Wells Fargo net income.) | | |
| | | | | | | | | | | | | |
| 31(a) | | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
| | | | | | | | | | | | | |
| 31(b) | | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
| | | | | | | | | | | | | |
| 32(a) | | Certification of Periodic Financial Report by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350. | | Furnished herewith. |
| | | | | | | | | | | | | |
| 32(b) | | Certification of Periodic Financial Report by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350. | | Furnished herewith. |
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