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 March 31,June 30, 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) | | No. 41-0449260 (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 |
| | April 30,July 31, 2009 |
Common stock, $1-2/3 par value | | | 4,263,860,3234,671,609,008 | |
FORM 10-Q
CROSS-REFERENCE INDEX
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PART I –— FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA(1)(2)
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| | | Quarter ended | | | Quarter ended | | Six months ended |
| | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | June 30, | | March 31, | | June 30, | | June 30, | | June 30, |
($ in millions, except per share amounts) | | 2009 | | 2008 | | 2008 | | | 2009 | | 2009 | | 2008 | | 2009 | | 2008 |
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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 | | |
For the Period | | | | | | | | | | | | | | | | | | | | | |
Wells Fargo net income | | | $ | 3,172 | | | | 3,045 | | | | 1,753 | | | | 6,217 | | | | 3,752 | |
Wells Fargo net income applicable to common stock | | | | 2,575 | | | | 2,384 | | | | 1,753 | | | | 4,959 | | | | 3,752 | |
Diluted earnings per common share | | | | 0.57 | | | | 0.56 | | | | 0.53 | | | | 1.13 | | | | 1.13 | |
Profitability ratios (annualized): | | | | | | | | | | | | | | | | | | | | | |
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 | | |
Wells Fargo net income to average assets (ROA) | | | | 1.00 | % | | | 0.96 | | | | 1.19 | | | | 0.98 | | | | 1.29 | |
Net income to average assets | | | | 1.02 | | | | 0.97 | | | | 1.20 | | | | 1.00 | | | | 1.30 | |
Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders’ equity (ROE) | | | | 13.70 | | | | 14.49 | | | | 14.58 | | | | 14.07 | | | | 15.71 | |
Net income to average total equity | | | | 11.56 | | | | 11.97 | | | | 14.62 | | | | 11.76 | | | | 15.77 | |
| | 56.2 | | 61.3 | | 51.5 | | | | 56.4 | | | | 56.2 | | | | 51.0 | | | | 56.3 | | | | 51.2 | |
| | $ | 21,017 | | $ | 9,477 | | $ | 10,563 | | | $ | 22,507 | | | | 21,017 | | | | 11,460 | | | | 43,524 | | | | 22,023 | |
Pre-tax pre-provision profit (4) | | 9,199 | | 3,667 | | 5,121 | | | | 9,810 | | | | 9,199 | | | | 5,615 | | | | 19,009 | | | | 10,736 | |
Dividends declared per common share | | 0.34 | | 0.34 | | 0.31 | | | | 0.05 | | | | 0.34 | | | | 0.31 | | | | 0.39 | | | | 0.62 | |
Average common shares outstanding | | 4,247.4 | | 3,582.4 | | 3,302.4 | | | | 4,483.1 | | | | 4,247.4 | | | | 3,309.8 | | | | 4,365.9 | | | | 3,306.1 | |
Diluted average common shares outstanding | | 4,249.3 | | 3,593.6 | | 3,317.9 | | | | 4,501.6 | | | | 4,249.3 | | | | 3,321.4 | | | | 4,375.1 | | | | 3,319.6 | |
| | $ | 855,591 | | $ | 413,940 | | $ | 383,919 | | | $ | 833,945 | | | | 855,591 | | | | 391,545 | | | | 844,708 | | | | 387,732 | |
Average assets | | 1,289,716 | | 633,223 | | 574,994 | | | | 1,274,926 | | | | 1,289,716 | | | | 594,749 | | | | 1,282,280 | | | | 584,871 | |
Average core deposits (5) | | 753,928 | | 344,957 | | 317,278 | | | | 765,697 | | | | 753,928 | | | | 318,377 | | | | 759,845 | | | | 317,827 | |
Average retail core deposits (6) | | 590,502 | | 243,464 | | 228,448 | | | | 596,648 | | | | 590,502 | | | | 230,365 | | | | 593,592 | | | | 229,315 | |
| | | 4.16 | % | | | 4.90 | % | | | 4.69 | % | | | 4.30 | % | | | 4.16 | | | | 4.92 | | | | 4.23 | | | | 4.81 | |
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At Period End | | | | | | | | | | | | | | | | | | | | | |
Securities available for sale | | $ | 178,468 | | $ | 151,569 | | $ | 81,787 | | | $ | 206,795 | | | | 178,468 | | | | 91,331 | | | | 206,795 | | | | 91,331 | |
Loans | | 843,579 | | 864,830 | | 386,333 | | | | 821,614 | | | | 843,579 | | | | 399,237 | | | | 821,614 | | | | 399,237 | |
Allowance for loan losses | | 22,281 | | 21,013 | | 5,803 | | | | 23,035 | | | | 22,281 | | | | 7,375 | | | | 23,035 | | | | 7,375 | |
Goodwill | | 23,825 | | 22,627 | | 13,148 | | | | 24,619 | | | | 23,825 | | | | 13,191 | | | | 24,619 | | | | 13,191 | |
Assets | | 1,285,891 | | 1,309,639 | | 595,221 | | | | 1,284,176 | | | | 1,285,891 | | | | 609,074 | | | | 1,284,176 | | | | 609,074 | |
Core deposits (5) | | 756,183 | | 745,432 | | 327,360 | | | | 761,122 | | | | 756,183 | | | | 310,410 | | | | 761,122 | | | | 310,410 | |
Wells Fargo stockholders’ equity | | 100,295 | | 99,084 | | 48,159 | | | | 114,623 | | | | 100,295 | | | | 47,964 | | | | 114,623 | | | | 47,964 | |
Total equity | | 107,057 | | 102,316 | | 48,439 | | | | 121,382 | | | | 107,057 | | | | 48,265 | | | | 121,382 | | | | 48,265 | |
Tier 1 capital (7) | | 88,977 | | 86,397 | | 39,211 | | | | 102,721 | | | | 88,977 | | | | 42,471 | | | | 102,721 | | | | 42,471 | |
Total capital (7) | | 131,820 | | 130,318 | | 54,522 | | | 144,984 | | | | 131,820 | | | | 57,909 | | | 144,984 | | | | 57,909 | |
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Wells Fargo common stockholders’ equity to assets | | | 5.40 | % | | | 5.21 | % | | | 8.09 | % | | | 6.51 | % | | | 5.40 | | | | 7.87 | | | | 6.51 | | | | 7.87 | |
Total equity to assets | | 8.33 | | 7.81 | | 8.14 | | | | 9.45 | | | | 8.33 | | | | 7.92 | | | | 9.45 | | | | 7.92 | |
Average Wells Fargo common stockholders’ equity to average assets | | 5.17 | | 8.50 | | 8.29 | | | | 5.92 | | | | 5.17 | | | | 8.13 | | | | 5.54 | | | | 8.21 | |
Average total equity to average assets | | 8.11 | | 11.09 | | 8.34 | | | | 8.85 | | | | 8.11 | | | | 8.18 | | | | 8.48 | | | | 8.26 | |
Risk-based capital (7) | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | 8.30 | | 7.84 | | 7.92 | | | | 9.80 | | | | 8.30 | | | | 8.24 | | | | 9.80 | | | | 8.24 | |
Total capital | | 12.30 | | 11.83 | | 11.01 | | | | 13.84 | | | | 12.30 | | | | 11.23 | | | | 13.84 | | | | 11.23 | |
Tier 1 leverage (7) | | 7.09 | | 14.52 | | 7.04 | | | | 8.32 | | | | 7.09 | | | | 7.35 | | | | 8.32 | | | | 7.35 | |
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Book value per common share | | $ | 16.28 | | $ | 16.15 | | $ | 14.58 | | | $ | 17.91 | | | | 16.28 | | | | 14.48 | | | | 17.91 | | | | 14.48 | |
Team members (active, full-time equivalent) | | 272,800 | | 270,800 | | 160,900 | | | | 269,900 | | | | 272,800 | | | | 160,500 | | | | 269,900 | | | | 160,500 | |
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High | | $ | 30.47 | | $ | 38.95 | | $ | 34.56 | | | $ | 28.45 | | | | 30.47 | | | | 32.40 | | | | 30.47 | | | | 34.56 | |
Low | | 7.80 | | 19.89 | | 24.38 | | | | 13.65 | | | | 7.80 | | | | 23.46 | | | | 7.80 | | | | 23.46 | |
Period end | | 14.24 | | 29.48 | | 29.10 | | | | 24.26 | | | | 14.24 | | | | 23.75 | | | | 24.26 | | | | 23.75 | |
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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. |
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(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. |
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(3) | | The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income). |
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(4) | | TotalPre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle. Federal banking regulators used a similar measure, pre-provision net revenue, in connection with the Supervisory Capital Assessment Program (SCAP) “stress test” to assess the capital adequacy of certain financial institutions. Under the SCAP guidelines, pre-provision net revenue is PTPP adjusted for certain items. |
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(5) | | Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep balances). |
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(6) | | Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits. |
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(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 on Form 10-Q for the quarter ended March 31,June 30, 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 significantlymaterially 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 our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (First Quarter 2009 Form 10-Q), and to the “Risk Factors” and “Regulation and Supervision” sections of our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 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 $1.3 trillion diversified financial services company providing banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage and consumer finance through banking stores, the internet and other distribution channels to consumers,individuals, businesses and institutions in all 50 states, the District of Columbia (D.C.) and in other countries. We ranked fourth in assets and second in the market value of our common stock among our peers at March 31,June 30, 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. When we refer to “legacy Wells Fargo,” we mean Wells Fargo excluding Wachovia Corporation (Wachovia).
Wells Fargo net income was a record $3.05 billion in first quarter 2009, with net income applicable to common stock of $2.38 billion. Earnings per common share were $0.56, after merger-related and restructuring expense of $206 million ($0.03 per common share) and a $1.3 billion credit reserve build ($0.19 per common share).
On December 31, 2008, Wells Fargo acquired Wachovia. Because the acquisition was completed at the end of 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, at fair value, in the consolidated balance sheet beginning on December 31, 2008, but not in averages.
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. In addition, FAS 160 requires that the consolidated income statement disclose amounts attributable to both Wells Fargo interests and the 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 and the breadth of our geographic reach 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.us, gain new customers in our extended markets, and increase market share in many businesses. We continued to earn more of our customers’ business in 2009 in both our retail and commercial banking businesses and in our equally customer-centric securities brokerage and investment banking businesses.
Wells Fargo net income was a record $3.2 billion in second quarter 2009, with net income applicable to common stock of $2.6 billion. Diluted earnings per common share were $0.57, after a $700 million credit reserve build ($0.10 per common share), a Federal Deposit Insurance Corporation (FDIC) special assessment of $565 million ($0.08 per common share) and merger-related and restructuring expenses of $244 million ($0.03 per common share).
On December 31, 2008, Wells Fargo acquired Wachovia. Because the acquisition was completed at the end of 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, at fair value, in the consolidated balance sheet beginning on December 31, 2008, but not in 2008 averages.
On January 1, 2009, we adopted Financial Accounting Standards Board (FASB) 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.
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Despite the continuing turmoil in the credit markets, we continued to lend to credit-worthy customers. We extended significantWells Fargo remains one of the largest providers of credit to the 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.economy. We have extended more than $225$471 billion of loans to creditworthy customers since October 2008, including $206 billion in credit to U.S. taxpayers since last October.new loan commitments and originations this quarter. 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— an average of 5.84 Wells Fargo products for retail banking household now has 5.81households and an average of 6.4 products almost onefor wholesale and commercial customers. One of every four of our legacy Wells Fargo retail banking households has eight or more Wells Fargo products 6.4 products for Wholesale Banking customers, and our average middle-market commercial banking customer has almost eight products. We believe there is potentially significant opportunity for growth as we increase the Wachovia retail bank household cross-sell. For example, while Wachovia has a similar number of retail banking stores and about 10 million retail bank households, Wachovia’s retail bank household cross-sell of Wachovia products is currently 4.55 compared with legacy Wells Fargo retail bank cross-sell of Wells Fargo products of 5.84. Business banking household cross-sell reached 3.66offers another potential opportunity for growth, with a cross-sell of 3.69 products at legacy Wells Fargo. Our goal is eight products per customer, which is currentlyapproximately half of our estimate of potential demand.
We continue to experience strong deposit growth, with average checking and savings deposits up 20% (annualized) from first quarter 2009, which contributed to the improvement in our net interest margin to 4.30% and provided increased funding diversity and stability. In addition to macro-economic factors such as money supply growth and higher consumer savings rates that are driving deposit growth industry-wide, we continue to see strong core deposit growth across all customer segments as we gain new customers, deepen our market penetration and expand relationships with existing customers. Average core deposits were $765.7 billion for second quarter 2009, up from $753.9 billion for first quarter 2009.
We took many actions to further strengthen our balance sheet, including building the allowance for credit losses to $23.5 billion, increasing Tier 1 common equity to $47.1 billion, or 4.49% of risk-weighted assets, and building Tier 1 capital to 9.80% of risk-weighted assets. While the Supervisory Capital Assessment Program (SCAP) will not be completed until after the end of the third quarter, we have already generated $14.2 billion from market and internal sources toward the $13.7 billion capital buffer required by the Federal Reserve. We expect to internally generate additional capital in third quarter 2009. See the “Capital Management” section in this Report for more information.
We are seeing some signs of moderation in the growth of consumer and small business credit losses, largely due to our efforts over the last two years to modify and restructure loans for our customers, our successful efforts to reduce high risk loan portfolios and the purchase accounting write-downs we have already taken in Wachovia’s loan portfolios. The Wachovia integration remains on schedule, with business and revenue synergies already exceeding our expectations. We are on track to realize annual run-rate savings of $5 billion upon completion of the Wachovia integration. We further expect additional efficiency initiatives to lower expenses over the rest of 2009.
We have stated in the past that to consistently grow over the long term, successful companies must invest in their core businesses and maintain strong balance sheets. In firstsecond quarter 2009, we opened 1412 banking stores throughout the combined Companycompany for a retail network total of 6,6386,668 stores. Conversion of Wachovia stores to the Wells Fargo platform is scheduled to begin later this year.
We believe it is important to maintain a well-controlled environment as we continue to grow our businesses and integrate the Wachovia businesses.businesses and grow the combined company. We manage our credit risk by setting what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We manage the interest rate and market risks inherent in our asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding. We maintain strong capital levels to provide forfacilitate future growth.
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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 fair values on the acquisition date fair values.date. Because the acquisition was completed on December 31, 2008, Wachovia’s results of operations were not included in our 2008 income statement, and Wachovia’s assets and liabilities did not contribute to the consolidated averages.statement. Beginning in 2009, our consolidated results and associated metrics, as well as our consolidated average balances, include Wachovia. The Wachovia acquisition was material to us, and the inclusion of results from Wachovia’s businesses in our 2009 financial statements is a material factor in the changes in our results compared with prior year periods.
Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on preliminary data as of an interim period with estimates through year end. Accordingly, we are re-validatingWe have validated and, where necessary, refiningrefined our December 31, 2008, fair value estimates and other purchase accounting adjustments. The impact of these refinements was recorded as an adjustment to goodwill in the first quarterhalf of 2009. Based on the purchase price of $23.1 billion and the $13.1$12.4 billion fair value of net assets acquired, inclusive of refinements identified in the first quarterhalf of 2009, the transaction resulted in goodwill of $9.9$10.7 billion.
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The more significant fair value adjustments in our purchase accounting for the Wachovia acquisition were to loans. CertainAs of December 31, 2008, certain of the loans acquired from Wachovia havehad evidence of credit deterioration since origination, and it iswas probable that we willwould not collect all contractually required principal and interest payments. Such loans identified at the time of the acquisition 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 (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 arewere written down to an amount estimated to be collectible. Accordingly, such loans are not classified as nonaccrual, even though they may be contractually past due, because we expect to fully collect the new carrying values of such loans (that is, the new cost basis arising out of our purchase accounting). Loans subject to SOP 03-3 are also excluded fromnot included in 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.
As a result of the application of SOP 03-3 accounting to Wachovia’s loan portfolios, certain of Wachovia’s loans, certaincredit-related ratios of the combined Company, cannotincluding, for example, the growth rate in nonperforming assets since December 31, 2008, may not necessarily be useddirectly comparable with periods prior to compare a portfolio that includes acquired credit-impaired loans accounted for underthe merger or with credit-related ratios of other financial institutions. As noted above, SOP 03-3 against ones that do not, for example,loans were reclassified to accrual status in comparing peer companies,purchase accounting, and cannot be used to compare ratios across periods such as periods that includeone effect of 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 allowance for credit losses as percentages of loans,elimination of nonaccrual loans and of nonperforming assets;is that, as certain non-SOP 03-3 loans begin to migrate to nonaccrual status, the percentage increase in nonaccrual loans and nonperforming assets as a percentagecan be higher because there are minimal loans transferring out of total loans; and net charge-offs as a percentage of average loans.
nonaccrual status. For further detail on the merger see the “Loan Portfolio” in this section and Note 2 (Business Combinations) to Financial Statements in this Report.
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Summary Results
Wells Fargo net income in firstsecond quarter 2009 was $3.05$3.2 billion ($0.560.57 per share), compared with $2.00$1.8 billion ($0.600.53 per share) in second quarter 2008. Net income for the first quarterhalf of 2009 was $6.2 billion ($1.13 per share), compared with $3.8 billion ($1.13 per share) for the first half of 2008. Wells Fargo return on average total assets (ROA) was 0.96%1.00% and return on average common Wells Fargo stockholders’ equity (ROE) was 14.49%13.70% in firstsecond quarter 2009, compared with 1.40%1.19% and 16.86%14.58%, respectively, in firstsecond quarter 2008. ROA was 0.98% and ROE was 14.07% for the first half of 2009, and 1.29% and 15.71%, respectively, for the first half of 2008.
Revenue, the sum of net interest income and noninterest income, of $21.02$22.5 billion in firstsecond quarter 2009 included another quarter of record, double-digit revenue growth at legacy Wells Fargo, up 16%19% year over year, as well as a strong contribution from Wachovia, which accounted for 41%39% of the Company’s combined revenue. Year-to-date revenue was $43.5 billion, almost double legacy Wells Fargo’s revenue for the comparable period last year. 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. The vast majority of our more than 80 businesses grew revenue again this quarter, including the following diverse businesses that all achieved greater than 8% (annualized) growth from first quarter 2009: regional banking, mortgage banking, investment banking, asset-based lending, auto lending, student lending, debit card, merchant card, wealth management, securities brokerage, retirement and international.
OurWe believe our balance sheet is well positioned given the current economic environment. Our allowance for credit losses was $22.8$23.5 billion at March 31,June 30, 2009, compared with $21.7 billion at December 31, 2008. Our allowance was adequate to covercovers expected consumer loan losses for at leastapproximately the next 12 months and to provide approximately 24 months of anticipated loss coverage for theinherent commercial and commercial real estate portfolios.loan losses expected to emerge over approximately the next 24 months. We reducedcontinued to reduce the higher risk inassets on our balance sheet,
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through write-downs taken at December 31, 2008, on Wachovia’s with 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 reducedFargo, Pick-a-Pay and commercial real estate at Wachovia) down by $4.5$6.3 billion and trading assets down by $8.4 billion.$6.4 billion in the quarter. We recorded $979 million of other-than-temporary impairment (OTTI) on securities in the first half of 2009.
Our financial results included the following:
Net interest income on a taxable-equivalent basis was $11.55$11.9 billion in firstsecond quarter 2009, with approximately 40% contributed by Wachovia, up from $5.81$6.3 billion in firstsecond quarter 2008, reflecting a strong combined net interest margin on average earningsearning assets of $1.11$1.1 trillion. Average earning assets were up $1.3 billion in second quarter 2009 from first quarter 2009, with an increase of $30.7 billion in securities and mortgage loans held for sale. This increase was partially offset by a reduction of $3.7 billion in average trading assets and a reduction of $21.6 billion in average loans, including $6.3 billion in the higher-risk loan portfolios that we are exiting. At 4.16%4.30% in firstsecond quarter 2009, our net interest margin remained strong and the highest among our large bank peers, due in part topeers. The net interest margin reflected the benefit of continued growth in core customer deposits, with about 80% of our core deposits now in checking and deposit pricing discipline.savings deposits.
Noninterest income reached $9.6$10.7 billion in firstsecond quarter 2009, up from $4.8$5.2 billion a year ago, largely driven by the Wachovia acquisition, as well as continued success in satisfying customers’ financial needs and the combined Company’scompany’s expanded breadth of products and services. Noninterest income included:
Mortgage banking noninterest income of $2.5 billion:$3.0 billion in second quarter 2009:
| – | | $1.62.2 billion in revenue from mortgage loan originations/sales activities on $101$129 billion in new originations, includes a reduction to revenue of $138 million to increase the mortgage repurchase reserve and a write-downincluding net write-downs of the mortgage warehouse for spread and other liquidity-related valuation adjustments |
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| – | | UnclosedMortgage applications of $194 billion, one of our highest quarters, with an unclosed application pipeline of $100$90 billion up 41% from priorat quarter indicates solid origination momentum heading into second quarter 2009end |
|
| – | | $875 million MSRs1.0 billion mortgage servicing rights (MSRs) mark-to-market gains, net of hedge results, reflecting a $2.8$2.3 billion reductionincrease in the fair value of the MSRs offset by a $3.7$1.3 billion economic hedge gain,loss in the quarter, with the net difference largely due to hedge carry income due toreflecting low short-term interest rates, which are likely to continue; MSRs as a percentage of loans serviced of 0.91% |
• | | 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 |
Trust and investment fees of $2.4 billion primarily reflected equity and bond origination fees and higher brokerage commissions as we continued to build our retail securities brokerage business; client assets in Wealth, Brokerage and Retirement were up 8% from first quarter 2009 driven largely by market value appreciation
Card and other fees of $1.9 billion reflected seasonally higher purchase volumes and higher customer penetration rates
Service charges on deposit accounts of $1.4 billion driven by continued strong checking account growth
Trading revenue of $749 million, with approximately two-thirds from customer transactions
Net losses on debt and equity securities totaling $38 million, including $463 million of OTTI write-downs. Net losses on debt securities of $78 million included OTTI of $308 million net of realized gains of $230 million. Net gains on equity securities totaled $40 million after $155 million of OTTI write-downs.
Net unrealized losses on securities available for sale declined to $4.7 billion$400 million at March 31,June 30, 2009, from $9.9 billion at December 31, 2008. OfIn second quarter 2009, the improvement, $4.5 billion was due tonet unrealized losses were virtually eliminated as credit spreads narrowed during the early adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) No. 157-4,Determining Fair Value Whenquarter and as unrealized gains emerged on new mortgage-backed securities (MBS) purchased during the Volume and Level of Activity forquarter at the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which clarified the use of trading pricespeak 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 spreads.MBS yields.
Noninterest expense was $11.82$12.7 billion in firstsecond quarter 2009, up from $5.44$5.8 billion in firstsecond quarter 2008, largely attributable to the Wachovia acquisition. Noninterest expense reflected our expanded geographic platformacquisition, as well as the FDIC special assessment of $565 million and capabilitieshigher variable compensation in businesses such as retailmortgage, brokerage asset management and investment banking related to increased customer sales. Noninterest expense also reflected $244 million of merger-related costs. We continued to hire new sales professionals in the quarter in our regional bank and retail securities brokerage business while improving sales force productivity. In addition, we opened 12 banking stores during the quarter. Even though we continue to invest appropriately in our business for long-term revenue growth, expenses were relatively flat overall reflecting the benefit of the consolidation of the two companies, and ongoing expense management initiatives. Including the FDIC special assessment and merger costs, which like mortgage banking, typically include higher revenue-based incentivetogether represented 6% of total noninterest expense thanduring the more traditional banking businesses. Ourquarter, the efficiency ratio was 56.2% in56.4%, flat from first quarter 2009.
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 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.quarter’s 56.2%.
Net charge-offs in firstsecond quarter 2009 were $3.3$4.4 billion (1.54%(2.11% of average total loans outstanding, annualized), including $371 million in the Wachovia portfolio, compared with $2.8$3.3 billion (2.69%) in fourth quarter 2008 and $1.5 billion (1.60%(1.54%) in first quarter 2009 and $1.5 billion (1.55%) in second quarter 2008. Legacy Wells Fargo net charge-offs were $3.4 billion compared with $2.9 billion in first quarter 2009 and Wachovia net charge-offs totaled $984 million, including $103 million related to SOP 03-3 loans, compared with $371 million in first quarter 2009. Wachovia loans accounted for under 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
Credit losses rose in the second quarter, as expected, due to the weak economy and higher unemployment in the quarter. We expect credit losses and nonperforming assets to increase further, although we are beginning to see some moderation in the growth rate of losses in a number of consumer portfolios, as evidenced by some stabilization in early stage delinquencies. This moderation is largely the result of actions we and Wachovia have taken over the last two years to reduce risk. While credit losses rose in
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second quarter 2009, charge-offs were on non-SOP 03-3 loans. the level of losses remained below the SCAP adverse scenario projections made by both the Company and the Federal Reserve.
Commercial and commercial real estate loan losses remained at relatively lowincreased in the quarter as the effects of the current economic cycle challenged more of our commercial customers. Loss levels reflectingincreased from prior periods, driven by losses from loans to customers whose businesses rely on the historically disciplinedresidential real estate industry and consumer goods and services. We expect this trend to continue until the economy improves. We believe our losses will be moderated by the effect of our long standing underwriting standards applied bydiscipline and relationship-centric business strategy. Approximately one third of the commercial losses were generated from our legacy Wells Fargo Business Direct channel. This channel consists of small lines of credit to small business customers. Losses from Business Direct decreased slightly from first quarter 2009, and delinquency levels showed moderate signs of improvement during the customer-relationship focusquarter, indicating possible stabilization in this portfolio. Losses in our consumer portfolios increased as expected, as more of our customers were affected by unemployment and the prolonged residential real estate down cycle. In line with our first quarter trends, our consumer real estate and credit cards rose modestlycard portfolio losses increased, while losses in the quarter,our auto secured portfolios improved as a result of vintage aging and price improvement 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.used car markets.
As long as the U.S. economy remains weak, losses on the combined portfolio will increase. Over the last two years, we have taken and willWe 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 portfolio and invest in loss mitigation activities. At year-end, we took significant write-downs in certain Wachovia portfolio at close,loan portfolios in purchase accounting and we ceased originationshave exited several higher risk non-strategic businesses and are liquidating certain higher-risk, lower-returnthese portfolios, such as Pick-a-Pay, and legacy Wells Fargo indirect auto and liquidatingthird party originated 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 ability to properly manage risk as weWe continue to meetmonitor credit standards to improve the credit quality of new loans, all in an effort to reduce the risk in the portfolio while continuing to originate appropriately priced new business for our customers’ needs. We believe thesecustomers. Even with the challenges that remain, our teams are effectively working together to manage the risk, reduction actions better position us for continuedand the Wells Fargo credit deterioration and economic headwinds.culture is being implemented across the combined company.
The provision for credit losses was $4.6$5.1 billion and $9.6 billion in the second quarter and first half of 2009, respectively, compared with $3.0 billion and $5.0 billion, respectively, in the same periods a year ago. The provision in the second quarter and first half of 2009 $8.4 billion in fourth quarter 2008included $700 million and $2.0 billion, in first quarter 2008. The provision in first quarter 2009 included a $1.3 billionrespectively, of credit reserve build due to higher credit losses inherent in the loan portfolio. The allowance for credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit commitments, was $22.8$23.5 billion (2.71%(2.86% of total loans) at March 31,June 30, 2009, compared with $21.7 billion (2.51%) at December 31, 2008, and $6.0 billion (1.56%) at 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 $10.52$15.8 billion (1.25%(1.92% of total loans) at March 31,June 30, 2009, compared with $6.80$10.5 billion (0.79%) at December 31, 2008, and $3.26 billion (0.84%(1.25%) at March 31, 2008.2009. Nonaccrual loans exclude loans acquired from Wachovia accounted for under SOP 03-3.03-3 since these loans were written down in purchase accounting as of December 31, 2008, to an amount expected to be collectible. The $3.7 billion increase in nonaccrual loans from December 31, 2008, represented increases in both the commercial and retail segments,consumer portfolios, with $1.5$3.2 billion related to Wachovia.Wachovia in second quarter 2009. The increases in nonaccrual loans were concentrated in portfolios secured by real estate or with borrowers dependent on the housing industry. Total nonperforming assets (NPAs) were $12.61$18.3 billion (1.50%(2.23% of total loans) at March 31,June 30, 2009, compared with $9.01$12.6 billion (1.04%) at December 31, 2008, and $4.50 billion (1.16%(1.50%) at March 31, 2008. Foreclosed assets2009.
The increase in nonaccrual loans in both first and second quarter 2009 was in part a consequence of purchase accounting. Typically, changes to nonaccrual loans from period to period represent inflows for loans that reach a specified past due status, net of any reductions for loans that are charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual because they return to accrual status. Substantially all of Wachovia’s nonaccrual loans were $2.06 billion at March 31, 2009, $2.19 billion at December 31, 2008,accounted for under SOP 03-3 in purchase accounting and, $1.22 billion at March 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 TCEas a result, were reclassified to tangible assets was 3.28%, up from 2.86% ataccrual status on December 31, 2008. TCEAs
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certain Wachovia non-SOP 03-3 loans reached the past due threshold to be classified as nonaccrual during second quarter 2009, there were minimal offsetting Wachovia loans already in nonaccrual status transferring out of nonaccrual status. The effect of this was 3.84%a higher dollar and percentage increase in nonaccrual loans in the quarter due to the application of risk-weighted assets. At March 31, 2009, Tier 1 capital was $89.0 billionSOP 03-3.
The increase in nonaccrual loans is also attributable to other factors, including deterioration in certain portfolios, particularly commercial and the Tier 1 capital ratio was 8.30%, up from 7.84% at December 31, 2008.consumer real estate, and an increase in restructured loans, which accelerates loss recognition and results in loans remaining in nonaccrual status for a longer period of time.
The Company and each of its subsidiary banks continued to remain well-capitalized. Our total risk-based capital (RBC) ratio at March 31,June 30, 2009, was 12.30%13.84% and our Tier 1 RBC ratio was 8.30%9.80%, exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies. Our total RBC ratio was 11.83% and our Tier 1 RBC ratio was 7.84% at December 31, 2008. Our Tier 1 leverage ratio was 7.09%8.32% and 14.52% at March 31,June 30, 2009, and December 31, 2008, respectively, exceeding the minimum regulatory guideline of 3% for bank holding companies.
On May 7,We continued to build capital in second quarter 2009. As a percentage of total risk-weighted assets, Tier 1 capital and Tier 1 common equity increased to 9.80% and 4.49%, respectively, at June 30, 2009, up from 8.30% and 3.12%, respectively, at March 31, 2009. As previously stated, the Federal Reserve confirmed that under its adverse stress test scenario the Company’s Tier 1asked us to generate a $13.7 billion regulatory 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 billionbuffer 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. Alsobased on May 8, 2009, the underwriterstheir revenue assumptions in the offering exercised their optionadverse case scenario. At June 30, 2009, with over a quarter to purchase up togo before the SCAP plan is completed, we have exceeded this requirement by $500 million. We accomplished this through an additional 51.15 million shares$8.6 billion equity raise and internally generated capital including $2.4 billion of common stock from the Company at $22 per share to cover over-allotments. The Company will receivepre-provision net proceeds of $8.4 billion from the offering including the exerciserevenue (pre-tax pre-provision profit plus certain SCAP adjustments) in excess of the over-allotment option. The Company expects to satisfy the remainderFederal Reserve’s estimate, $2.7 billion realization of the capital requirement through profitsdeferred tax assets and $500 million of other internally generated sources. The Company can satisfy any partsources of capital, including core deposit intangible amortization. We expect to realize additional internally generated SCAP-qualifying capital in third quarter 2009, including additional deferred tax asset realization, which will add to the capital requirement by exchanging up to $13.7 billion of its $25 billion of Capital Purchase Program (CPP) fundsamount already generated in the second quarter. See footnote 4 on page 2 and the “Capital Management” section in this Report for the Treasury’s Capital Assistance Program (CAP) on a dollar-for-dollar basis.more information.
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Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
• | | FAS 161,Disclosures about Derivative Instruments and Hedging Activities –— an amendment of FASB Statement No. 133; |
• | | FAS 160,Noncontrolling Interests in Consolidated Financial Statements –— an amendment of ARB No. 51; |
• | | FAS 141R (revised 2007),Business Combinations; |
• | | FSPFASB Staff Position (FSP) FAS 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; |
• | | FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments; and |
• | | FASBFSP Emerging Issues Task Force (EITF) No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. |
In second quarter 2009, we adopted the following new accounting pronouncements: |
• | | FSP FAS 107-1 and APB Opinion 28-1,Interim Disclosures about Fair Value of Financial Instruments; and |
• | | FAS 165,Subsequent Events. |
In addition, FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, wasthe following accounting pronouncements were issued by the FASB, but isare not yet effective. effective:
• | | FAS 168,TheFASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162; |
• | | FAS 166,Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140; |
• | | FAS 167,Amendments to FASB Interpretation No. 46(R); and |
• | | FSP FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets. |
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 1211 (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.
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We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). For more information, see the “Contractual Obligations” section 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. On December 4, 2008, Prudential has statedpublicly announced its intention to exercise its option to put its
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noncontrolling interest to us at a date in the future, but has not yet done so.end of the lookback period, as defined (January 1, 2010). 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,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, andwith 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 infor second quarter 2009; however, as permitted under the pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted in an increase in the valuation of securities available for sale in first quarter 2009 of $4.5 billion ($2.8 billion after tax), which iswas included in other comprehensive income, and trading assets of $18 million, which iswas reflected in earnings. See the “Critical Accounting Policies” section 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)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 not be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective infor second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to accumulatedcumulative 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.
FSP 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, 2009, with retrospective adoption required. The adoption of FSP EITF 03-6-1 did not have a material effect on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 requires disclosures aboutstates that entities must disclose the fair value of financial instruments forin interim reporting periods as well as in annual financial statements. The provisionsFSP also requires disclosure of the FSP are effectivemethods and assumptions used to estimate fair value as well as any changes in methods and assumptions that occurred during the reporting period. We adopted this pronouncement in second quarter 2009. See Note 12 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We will adopt this FSP for June 30, 2009, reporting.additional information. Because the FSP amends only the disclosure requirements related to the fair value of financial instruments, the adoption of this FSP does not affect our consolidated financial statements.
FAS 165 describes two types of subsequent events that previously were addressed in the FSPauditing literature, one that requires post-period end adjustment to the financial statements being issued, and one that requires footnote disclosure only. FAS 165 also requires a company to disclose the date through which management has evaluated subsequent events, which for public companies is the date that financial statements are issued. FAS 165 is effective in second quarter 2009 with prospective application. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for our discussion of subsequent events. Our adoption of this standard did not have a material impact on our consolidated financial statements.
FAS 168 establishes theFASB Accounting Standards CodificationTM (Codification) as the source of authoritative generally accepted accounting principles (GAAP) in the United States for companies to use in the preparation of their financial statements. SEC rules and interpretive releases are also authoritative GAAP for SEC registrants. The Codification includes guidance that has been issued by the FASB, EITF and the SEC. All guidance contained in the Codification carries the same level of authority and will supersede all existing non-SEC accounting and reporting standards. Any accounting literature that is non-SEC and has not been grandfathered will become nonauthoritative. FAS 168 is effective for us in third quarter 2009. This standard will change our disclosures as references to existing accounting literature will be updated to reflect the Codification. However, the adoption of FAS 168 will not affect our consolidated financial results.statements.
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In June 2009, the FASB issued FAS 166 and FAS 167, which will require us, effective January 1, 2010, to consolidate certain qualifying special purpose entities (QSPEs) and variable interest entities (VIEs) that are not currently included in our consolidated financial statements.
FAS 166 modifies the guidance in FAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.This standard eliminates the concept of QSPEs and provides additional criteria transferors must use to evaluate transfers of financial assets. To determine if a transfer is to be accounted for as a sale, the transferor must assess whether it and all of the entities included in its consolidated financial statements have surrendered control of the assets. A transferor must consider all arrangements or agreements made or contemplated at the time of transfer before reaching a conclusion on whether control has been relinquished. FAS 166 addresses situations in which a portion of a financial asset is transferred. In such instances the transfer can only be accounted for as a sale when the transferred portion is considered to be a participating interest. FAS 166 also requires that any assets or liabilities retained from a transfer accounted for as a sale be initially recognized at fair value. This standard is effective for us as of January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date.
FAS 167 amends several key provisions contained in FASB Interpretation No. 46 (Revised December 2003),Consolidation of Variable Interest Entities(FIN 46(R)). First, the scope of FAS 167 includes entities that were formerly designated as QSPEs under FAS 140. Second, FAS 167 changes the approach companies use to identify the VIEs for which they are deemed to be the primary beneficiary and are required to consolidate. Under FIN 46(R), the primary beneficiary is the entity that absorbs the majority of a VIE’s losses and receives the majority of the VIE’s returns. The guidance in FAS 167 identifies a VIE’s primary beneficiary as the entity that has the power to direct the VIE’s significant activities, and has an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Third, FAS 167 requires companies to continually reassess whether they are the primary beneficiary of a VIE. Existing rules only require companies to reconsider primary beneficiary conclusions when certain triggering events have occurred. FAS 167 is effective for us as of January 1, 2010, and applies to all existing QSPEs and VIEs, and VIEs created after the effective date.
Application of FAS 166 and FAS 167 will result in the January 1, 2010, consolidation of certain QSPEs and VIEs that are not currently included in our consolidated financial statements. We have performed a preliminary analysis of these accounting standards with respect to QSPE and VIE structures currently applicable to us and have identified the following items that may potentially be consolidated.
| | | | | | | | |
|
| | Incremental | | | Incremental | |
| | GAAP | | | risk-weighted | |
(in billions) | | assets | | | assets | |
|
Residential mortgage loans — nonconforming (1) (2) | | $ | 87 | | | | 42 | |
Other consumer loans | | | 6 | | | | 3 | |
Commercial paper conduit | | | 6 | | | | — | |
Investment funds | | | 8 | | | | 5 | |
Other | | | 2 | | | | (4 | ) |
|
Total | | $ | 109 | | | | 46 | |
|
| | |
(1) | | Represents certain of our residential mortgage loans that are not guaranteed by government-sponsored entities (“nonconforming”). We have concluded that $1.1 trillion of conforming residential mortgage loans involved in securitizations are not subject to consolidation under FAS 166 and FAS 167. |
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(2) | | We are actively exploring the sale of certain interests we hold in securitized residential mortgage loans, which would reduce the amount of residential mortgage loans subject to consolidation under FAS 166 and FAS 167 by approximately $37 billion ($18 billion of risk-weighted assets). There is no assurance that we will be able to execute such sales prior to adoption of these accounting standards, although it is our intent to do so. |
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FAS 166 and 167 are principles based and limited interpretive guidance is currently available. We will continue to evaluate QSPE and VIE structures applicable to us, monitor interpretive guidance, and work with our external auditors and other appropriate interested parties to properly implement these standards. Accordingly, the amount of assets that actually become consolidated on our financial statements upon implementation of these standards on January 1, 2010, may differ materially from our preliminary analysis presented in the previous table.
FSP FAS 132 (R)-1 requires new disclosures about plan assets that are applicable to the plan assets of our Cash Balance Plan and other postretirement benefit plans. The objectives of the new disclosures are to provide an understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure fair value, the effect of fair value measurements using significant unobservable inputs on the changes in plan assets and significant concentrations of risk within plan assets. The new disclosures under FSP FAS 132 (R)-1 will be provided for fiscal years ending after December 15, 2009, and disclosures are not required for earlier periods presented for comparative purposes.
14
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities, and our financial results. Six of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:
• | | the allowance for credit losses; |
• | | acquired loans accounted for under SOP 03-3; |
• | | the valuation of residential mortgage servicing rights (MSRs); |
• | | the fair valuation of financial instruments; |
• | | pension accounting; and |
• | | income taxes. |
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;
With respect to pension accounting, on April 28, 2009, the Board of Directors (the Board) approved amendments to freeze the benefits earned under the Wells Fargo qualified and supplemental cash balance plans and Wachovia’s cash balance pension plan, and to merge Wachovia’s plan into the Wells Fargo cash balance plan. These actions became effective on July 1, 2009. This will have the effect of reducing pension expense in future periods. See Note 14 (Employee Benefits) to Financial Statements in this Report for additional information.
Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit and Examination Committee.Committee of the Board. These policies are described in the “Financial Review –— Critical Accounting Policies” section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2008 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.
15
FAIR VALUE OF FINANCIAL INSTRUMENTS
We use fair value measurements to record fair value adjustments to certain financial instruments and to develop fair value disclosures. See our 2008 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.quotes from an external broker or pricing service. 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.require to arrive at the fair value. The more active and orderly markets for particular security classes wereare determined to be, the more weighting we assign to price quotes. The less active and the orderly markets wereare 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.
12
Approximately 22%24% of total assets ($285.3313.3 billion) at March 31,June 30, 2009, and 19% of total assets ($247.5 billion) at December 31, 2008, consisted of financial instruments recorded at fair value on a recurring basis. Assets for which fair values were measured using significant Level 3 inputs (before derivative netting adjustments) represented approximately 22%20% of these financial instruments (5% of total assets) at March 31,June 30, 2009, and approximately 22% (4% of total assets) at December 31, 2008. The fair value of the remaining assets werewas measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.
In first quarter 2009, $5.6 billion of debt securities available for sale were transferred from Level 2 to Level 3 because significant inputs to the valuation became unobservable, largely due to reduced levels of market liquidity.
Approximately 2% of total liabilities ($20.621.0 billion) at March 31,June 30, 2009, and 2% ($18.8 billion) at December 31, 2008, consisted of financial instruments recorded at fair value on a recurring basis. Liabilities valued using Level 3 measurements (before derivative netting adjustments) were $8.6$8.7 billion and $9.3 billion at March 31,June 30, 2009, and December 31, 2008, respectively.
1316
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, short-term borrowings 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$11.8 billion in firstsecond quarter 2009, with approximately 40%39% contributed by Wachovia, and $5.81$6.3 billion in firstsecond quarter 2008. Net interest income reflected a strong combined net interest margin of 4.16%4.30%, due in part toand the benefit of continued growth in core deposits and deposit pricing discipline.deposits.
Average earning assets increased to $1.1 trillion in firstsecond quarter 2009 from $496.9$515.8 billion in firstsecond quarter 2008. Average loans increased to $855.6$833.9 billion in firstsecond quarter 2009 from $383.9$391.5 billion a year ago. Average mortgages held for sale increased to $31.1$43.2 billion in firstsecond quarter 2009 from $26.3$28.0 billion a year ago. Average debt securities available for sale increased to $160.4$179.0 billion in firstsecond quarter 2009 from $75.2$84.7 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$765.7 billion in firstsecond quarter 2009 from $317.3$318.4 billion in firstsecond quarter 2008, with over half of the increase from Wachovia, and funded 88%92% and 83%81% of average loans in firstsecond quarter 2009 and 2008, respectively. About 80% of our core deposits are now in checking and savings deposits, one of the highest percentages in the industry. Total average retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow deposits, grew $362.1 billion to $590.5$596.6 billion for firstsecond quarter 2009 from $228.4$230.4 billion a year ago. Average mortgage escrow deposits were $24.7$32.0 billion, in first quarter 2009, up $4.3 billion from $20.4compared with $22.7 billion a year ago. Average savings certificates of deposits increased to $170.1$152.4 billion in firstsecond quarter 2009 from $41.9$37.6 billion a year ago and average noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking and market rate and other savings)savings deposits increased to $554.1$613.3 billion in firstsecond quarter 2009 from $250.0$280.7 billion a year ago. Total average interest-bearing deposits increased to $635.4$638.0 billion in firstsecond quarter 2009 from $258.4$262.5 billion a year ago.
The following table presents the individual components of net interest income and the net interest margin.
1417
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | Quarter ended March 31 | , | | Quarter ended June 30, | |
| | 2009 | | 2008 | | | 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 | |
| | | |
| | |
Earning assets | | |
Federal funds sold, securities purchased under resale agreements and other short-term investments | | $ | 24,074 | | | 0.84 | % | | $ | 50 | | $ | 3,888 | | | 3.30 | % | | $ | 32 | | | $ | 20,889 | | | 0.66 | % | | $ | 34 | | 3,853 | | | 2.32 | % | | $ | 22 | |
Trading assets | | 22,203 | | 4.97 | | 275 | | 5,129 | | 3.73 | | 48 | | | 18,464 | | 4.61 | | 213 | | 4,915 | | 3.24 | | 39 | |
Debt securities available for sale (3): | | |
Securities of U.S. Treasury and federal agencies | | 2,899 | | 0.93 | | 7 | | 975 | | 3.86 | | 9 | | | 2,102 | | 3.45 | | 17 | | 1,050 | | 3.77 | | 10 | |
Securities of U.S. states and political subdivisions | | 12,213 | | 6.43 | | 213 | | 6,290 | | 7.43 | | 120 | | | 12,189 | | 6.47 | | 206 | | 7,038 | | 6.62 | | 118 | |
Mortgage-backed securities: | | |
Federal agencies | | 76,545 | | 5.71 | | 1,068 | | 36,097 | | 6.10 | | 535 | | | 92,550 | | 5.36 | | 1,203 | | 40,630 | | 5.92 | | 588 | |
Residential and commercial | | 38,690 | | 8.57 | | 1,017 | | 20,994 | | 6.08 | | 324 | | | 41,257 | | 9.03 | | 1,044 | | 22,419 | | 5.87 | | 340 | |
| | | | | | | | | | | | | | | |
Total mortgage-backed securities | | 115,235 | | 6.82 | | 2,085 | | 57,091 | | 6.09 | | 859 | | | 133,807 | | 6.60 | | 2,247 | | 63,049 | | 5.90 | | 928 | |
Other debt securities (4) | | 30,080 | | 6.81 | | 551 | | 10,825 | | 6.93 | | 196 | | | 30,901 | | 7.23 | | 572 | | 13,600 | | 6.30 | | 226 | |
| | | | | | | | | | | | | | | |
Total debt securities available for sale (4) | | 160,427 | | 6.69 | | 2,856 | | 75,181 | | 6.30 | | 1,184 | | | 178,999 | | 6.67 | | 3,042 | | 84,737 | | 6.00 | | 1,282 | |
Mortgages held for sale (5) | | 31,058 | | 5.34 | | 415 | | 26,273 | | 6.00 | | 394 | | | 43,177 | | 5.05 | | 545 | | 28,004 | | 6.04 | | 423 | |
Loans held for sale (5) | | 7,949 | | 3.40 | | 67 | | 647 | | 7.54 | | 12 | | | 7,188 | | 2.83 | | 50 | | 734 | | 5.63 | | 10 | |
Loans: | | |
Commercial and commercial real estate: | | |
Commercial | | 196,923 | | 3.87 | | 1,884 | | 91,085 | | 6.92 | | 1,569 | | | 187,501 | | 4.11 | | 1,922 | | 95,263 | | 6.09 | | 1,444 | |
Other real estate mortgage | | 104,271 | | 3.47 | | 894 | | 37,426 | | 6.44 | | 600 | | | 104,297 | | 3.46 | | 900 | | 39,977 | | 5.77 | | 573 | |
Real estate construction | | 34,493 | | 3.03 | | 258 | | 18,932 | | 6.06 | | 285 | | | 33,857 | | 2.69 | | 227 | | 19,213 | | 5.01 | | 240 | |
Lease financing | | 15,810 | | 8.77 | | 347 | | 6,825 | | 5.77 | | 98 | | | 14,750 | | 9.22 | | 340 | | 7,087 | | 5.64 | | 100 | |
| | | | | | | | | | | | | | | |
Total commercial and commercial real estate | | 351,497 | | 3.89 | | 3,383 | | 154,268 | | 6.65 | | 2,552 | | | 340,405 | | 3.99 | | 3,389 | | 161,540 | | 5.86 | | 2,357 | |
| | | | | | | |
Consumer: | | |
Real estate 1-4 family first mortgage | | 245,494 | | 5.64 | | 3,444 | | 72,308 | | 6.90 | | 1,246 | | | 240,798 | | 5.53 | | 3,328 | | 73,663 | | 6.79 | | 1,250 | |
Real estate 1-4 family junior lien mortgage | | 110,128 | | 5.05 | | 1,375 | | 75,263 | | 7.31 | | 1,368 | | | 108,422 | | 4.77 | | 1,290 | | 75,018 | | 6.68 | | 1,246 | |
Credit card | | 23,295 | | 12.10 | | 704 | | 18,776 | | 12.33 | | 579 | | | 22,963 | | 12.74 | | 731 | | 19,037 | | 11.81 | | 561 | |
Other revolving credit and installment | | 92,820 | | 6.68 | | 1,527 | | 55,910 | | 9.09 | | 1,264 | | | 90,729 | | 6.64 | | 1,502 | | 54,842 | | 8.78 | | 1,198 | |
| | | | | | | | | | | | | | | |
Total consumer | | 471,737 | | 6.03 | | 7,050 | | 222,257 | | 8.05 | | 4,457 | | | 462,912 | | 5.93 | | 6,851 | | 222,560 | | 7.67 | | 4,255 | |
| | | | | | | |
Foreign | | 32,357 | | 4.36 | | 349 | | 7,394 | | 11.27 | | 207 | | | 30,628 | | 4.06 | | 310 | | 7,445 | | 10.61 | | 197 | |
| | | | | | | | | | | | | | | |
Total loans (5) | | 855,591 | | 5.09 | | 10,782 | | 383,919 | | 7.55 | | 7,216 | | | 833,945 | | 5.07 | | 10,550 | | 391,545 | | 6.98 | | 6,809 | |
Other | | 6,140 | | 2.87 | | 43 | | 1,825 | | 4.54 | | 20 | | | 6,079 | | 2.91 | | 45 | | 2,033 | | 4.47 | | 24 | |
| | | | | | | | | | | | | | | |
Total earning assets | | $ | 1,107,442 | | 5.22 | | 14,488 | | $ | 496,862 | | 7.19 | | 8,906 | | | $ | 1,108,741 | | | 5.21 | % | | $ | 14,479 | | 515,821 | | | 6.69 | % | | $ | 8,609 | |
| | | | | | | | | | | | | | | |
FUNDING SOURCES | | |
Funding sources | | |
Deposits: | | |
Interest-bearing checking | | $ | 80,393 | | 0.15 | | 30 | | $ | 5,226 | | 1.92 | | 25 | | | $ | 79,955 | | | 0.13 | % | | $ | 26 | | 5,487 | | | 1.18 | % | | $ | 16 | |
Market rate and other savings | | 313,445 | | 0.54 | | 419 | | 159,865 | | 1.97 | | 784 | | | 334,067 | | 0.40 | | 336 | | 161,760 | | 1.21 | | 486 | |
Savings certificates | | 170,122 | | 0.92 | | 387 | | 41,915 | | 3.96 | | 413 | | | 152,444 | | 1.19 | | 451 | | 37,634 | | 3.06 | | 287 | |
Other time deposits | | 25,555 | | 1.97 | | 124 | | 4,763 | | 3.53 | | 42 | | | 21,660 | | 2.00 | | 108 | | 5,773 | | 2.72 | | 38 | |
Deposits in foreign offices | | 45,896 | | 0.35 | | 39 | | 46,641 | | 2.84 | | 330 | | | 49,885 | | 0.29 | | 36 | | 51,884 | | 1.83 | | 236 | |
| | | | | | | | | | | | | | | |
Total interest-bearing deposits | | 635,411 | | 0.64 | | 999 | | 258,410 | | 2.48 | | 1,594 | | | 638,011 | | 0.60 | | 957 | | 262,538 | | 1.63 | | 1,063 | |
Short-term borrowings | | 76,068 | | 0.66 | | 123 | | 52,970 | | 3.23 | | 425 | | | 59,844 | | 0.39 | | 58 | | 66,537 | | 2.16 | | 357 | |
Long-term debt | | 258,957 | | 2.77 | | 1,783 | | 100,686 | | 4.29 | | 1,077 | | | 235,590 | | 2.52 | | 1,484 | | 100,552 | | 3.41 | | 856 | |
Other liabilities | | 3,778 | | 3.88 | | 36 | | -- | | -- | | -- | | | 4,604 | | 3.45 | | 40 | | — | | — | | — | |
| | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | 974,214 | | 1.22 | | 2,941 | | 412,066 | | 3.02 | | 3,096 | | | 938,049 | | 1.08 | | 2,539 | | 429,627 | | 2.13 | | 2,276 | |
Portion of noninterest-bearing funding sources | | 133,228 | | -- | | -- | | 84,796 | | -- | | -- | | | 170,692 | | — | | — | | 86,194 | | — | | — | |
| | | | | | | | | | | | | | | |
Total funding sources | | $ | 1,107,442 | | 1.06 | | 2,941 | | $ | 496,862 | | 2.50 | | 3,096 | | | $ | 1,108,741 | | 0.91 | | 2,539 | | 515,821 | | 1.77 | | 2,276 | |
| | | | | | | | | | | | | | | | | | |
Net interest margin and net interest income on a taxable-equivalent basis (6) | | | 4.16 | % | | $ | 11,547 | | | 4.69 | % | | $ | 5,810 | | | | 4.30 | % | | $ | 11,940 | | | 4.92 | % | | $ | 6,333 | |
| | | | | | | | | | | | | |
NONINTEREST-EARNING ASSETS | | |
Noninterest-earning assets | | |
Cash and due from banks | | $ | 20,255 | | $ | 11,648 | | | $ | 19,340 | | 10,875 | |
Goodwill | | 23,183 | | 13,161 | | | 24,261 | | 13,171 | |
Other | | 138,836 | | 53,323 | | | 122,584 | | 54,882 | |
| | | | | | | |
Total noninterest-earning assets | | $ | 182,274 | | $ | 78,132 | | | $ | 166,185 | | 78,928 | |
| | | | | | | |
NONINTEREST-BEARING FUNDING SOURCES | | |
Noninterest-bearing funding sources | | |
Deposits | | $ | 160,308 | | $ | 84,886 | | | $ | 174,529 | | 88,041 | |
Other liabilities | | 50,566 | | 30,062 | | | 49,570 | | 28,434 | |
Total equity | | 104,628 | | 47,980 | | | 112,778 | | 48,647 | |
Noninterest-bearing funding sources used to fund earning assets | | | (133,228 | ) | | | (84,796 | ) | | | | (170,692 | ) | | | (86,194 | ) | |
| | | | | | | |
Net noninterest-bearing funding sources | | $ | 182,274 | | $ | 78,132 | | | $ | 166,185 | | 78,928 | |
| | | | | | | |
TOTAL ASSETS | | $ | 1,289,716 | | $ | 574,994 | | |
Total assets | | | $ | 1,274,926 | | 594,749 | |
| | | | | | | |
| | | |
| | |
(1) | | Our average prime rate was 3.25% and 6.22%5.08% for the quarters ended March 31,June 30, 2009 and 2008, respectively, and 3.25% and 5.65% for the first half of 2009 and 2008, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.24%0.84% and 3.29%2.75% for the same quarters ended June 30, 2009 and 2008, respectively, and 1.04% and 3.02% for the first half of 2009 and 2008, 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. |
18
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | |
| | 2009 | | | 2008 | |
| | | | | | | | | | Interest | | | | | | | | | | | Interest | |
| | Average | | | Yields/ | | | income/ | | | Average | | | Yields/ | | | income/ | |
(in millions) | | balance | | | rates | | | expense | | | balance | | | rates | | | expense | |
|
Earning assets | | | | | | | | | | | | | | | | | | | | | | | | |
Federal funds sold, securities purchased under resale agreements and other short-term investments | | $ | 22,472 | | | | 0.75 | % | | $ | 84 | | | | 3,870 | | | | 2.81 | % | | $ | 54 | |
Trading assets | | | 20,323 | | | | 4.81 | | | | 488 | | | | 5,022 | | | | 3.49 | | | | 87 | |
Debt securities available for sale (3): | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | | 2,498 | | | | 2.00 | | | | 24 | | | | 1,012 | | | | 3.81 | | | | 19 | |
Securities of U.S. states and political subdivisions | | | 12,201 | | | | 6.45 | | | | 419 | | | | 6,664 | | | | 7.00 | | | | 238 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | 84,592 | | | | 5.51 | | | | 2,271 | | | | 38,364 | | | | 6.00 | | | | 1,123 | |
Residential and commercial | | | 39,980 | | | | 8.80 | | | | 2,061 | | | | 21,706 | | | | 5.97 | | | | 664 | |
| | | | | | | | | | | | | |
Total mortgage-backed securities | | | 124,572 | | | | 6.71 | | | | 4,332 | | | | 60,070 | | | | 5.99 | | | | 1,787 | |
Other debt securities (4) | | | 30,493 | | | | 7.02 | | | | 1,123 | | | | 12,213 | | | | 6.58 | | | | 422 | |
| | | | | | | | | | | | | |
Total debt securities available for sale (4) | | | 169,764 | | | | 6.68 | | | | 5,898 | | | | 79,959 | | | | 6.14 | | | | 2,466 | |
Mortgages held for sale (5) | | | 37,151 | | | | 5.17 | | | | 960 | | | | 27,138 | | | | 6.02 | | | | 817 | |
Loans held for sale (5) | | | 7,567 | | | | 3.13 | | | | 117 | | | | 691 | | | | 6.52 | | | | 22 | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 192,186 | | | | 3.99 | | | | 3,806 | | | | 93,174 | | | | 6.50 | | | | 3,013 | |
Other real estate mortgage | | | 104,283 | | | | 3.47 | | | | 1,794 | | | | 38,701 | | | | 6.09 | | | | 1,173 | |
Real estate construction | | | 34,174 | | | | 2.86 | | | | 485 | | | | 19,073 | | | | 5.53 | | | | 525 | |
Lease financing | | | 15,277 | | | | 8.99 | | | | 687 | | | | 6,956 | | | | 5.71 | | | | 198 | |
| | | | | | | | | | | | | |
Total commercial and commercial real estate | | | 345,920 | | | | 3.94 | | | | 6,772 | | | | 157,904 | | | | 6.25 | | | | 4,909 | |
| | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate 1-4 family first mortgage | | | 243,133 | | | | 5.59 | | | | 6,772 | | | | 72,985 | | | | 6.84 | | | | 2,496 | |
Real estate 1-4 family junior lien mortgage | | | 109,270 | | | | 4.91 | | | | 2,665 | | | | 75,140 | | | | 6.99 | | | | 2,614 | |
Credit card | | | 23,128 | | | | 12.42 | | | | 1,435 | | | | 18,907 | | | | 12.06 | | | | 1,140 | |
Other revolving credit and installment | | | 91,770 | | | | 6.66 | | | | 3,029 | | | | 55,376 | | | | 8.94 | | | | 2,462 | |
| | | | | | | | | | | | | |
Total consumer | | | 467,301 | | | | 5.98 | | | | 13,901 | | | | 222,408 | | | | 7.86 | | | | 8,712 | |
| | | | | | | | | | | | | |
Foreign | | | 31,487 | | | | 4.22 | | | | 659 | | | | 7,420 | | | | 10.94 | | | | 404 | |
| | | | | | | | | | | | | |
Total loans (5) | | | 844,708 | | | | 5.08 | | | | 21,332 | | | | 387,732 | | | | 7.26 | | | | 14,025 | |
Other | | | 6,110 | | | | 2.89 | | | | 88 | | | | 1,930 | | | | 4.50 | | | | 44 | |
| | | | | | | | | | | | | |
Total earning assets | | $ | 1,108,095 | | | | 5.22 | % | | $ | 28,967 | | | | 506,342 | | | | 6.94 | % | | $ | 17,515 | |
| | | | | | | | | | | | | |
Funding sources | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing checking | | $ | 80,173 | | | | 0.14 | % | | $ | 56 | | | | 5,357 | | | | 1.54 | % | | $ | 41 | |
Market rate and other savings | | | 323,813 | | | | 0.47 | | | | 755 | | | | 160,812 | | | | 1.59 | | | | 1,270 | |
Savings certificates | | | 161,234 | | | | 1.05 | | | | 838 | | | | 39,774 | | | | 3.54 | | | | 700 | |
Other time deposits | | | 23,597 | | | | 1.98 | | | | 232 | | | | 5,269 | | | | 3.09 | | | | 80 | |
Deposits in foreign offices | | | 47,901 | | | | 0.32 | | | | 75 | | | | 49,262 | | | | 2.31 | | | | 566 | |
| | | | | | | | | | | | | |
Total interest-bearing deposits | | | 636,718 | | | | 0.62 | | | | 1,956 | | | | 260,474 | | | | 2.05 | | | | 2,657 | |
Short-term borrowings | | | 67,911 | | | | 0.54 | | | | 181 | | | | 59,754 | | | | 2.63 | | | | 782 | |
Long-term debt | | | 247,209 | | | | 2.65 | | | | 3,267 | | | | 100,619 | | | | 3.85 | | | | 1,933 | |
Other liabilities | | | 4,194 | | | | 3.64 | | | | 76 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 956,032 | | | | 1.15 | | | | 5,480 | | | | 420,847 | | | | 2.56 | | | | 5,372 | |
Portion of noninterest-bearing funding sources | | | 152,063 | | | | — | | | | — | | | | 85,495 | | | | — | | | | — | |
| | | | | | | | | | | | | |
Total funding sources | | $ | 1,108,095 | | | | 0.99 | | | | 5,480 | | | | 506,342 | | | | 2.13 | | | | 5,372 | |
| | | | | | | | | | | | | | | | | | | |
Net interest margin and net interest income on a taxable-equivalent basis (6) | | | | | | | 4.23 | % | | $ | 23,487 | | | | | | | | 4.81 | % | | $ | 12,143 | |
| | | | | | | | | | | | |
Noninterest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 19,795 | | | | | | | | | | | | 11,262 | | | | | | | | | |
Goodwill | | | 23,725 | | | | | | | | | | | | 13,166 | | | | | | | | | |
Other | | | 130,665 | | | | | | | | | | | | 54,101 | | | | | | | | | |
| | | | | | | | |
Total noninterest-earning assets | | $ | 174,185 | | | | | | | | | | | | 78,529 | | | | | | | | | |
| | | | | | | | |
Noninterest-bearing funding sources | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 167,458 | | | | | | | | | | | | 86,464 | | | | | | | | | |
Other liabilities | | | 50,064 | | | | | | | | | | | | 29,246 | | | | | | | | | |
Total equity | | | 108,726 | | | | | | | | | | | | 48,314 | | | | | | | | | |
Noninterest-bearing funding sources used to fund earning assets | | | (152,063 | ) | | | | | | | | | | | (85,495 | ) | | | | | | | | |
| | | | | | | | |
Net noninterest-bearing funding sources | | $ | 174,185 | | | | | | | | | | | | 78,529 | | | | | | | | | |
| | | | | | | | |
Total assets | | $ | 1,282,280 | | | | | | | | | | | | 584,871 | | | | | | | | | |
| | | | | | | | |
|
1519
NONINTEREST INCOME
| | | | | |
| | | |
| | Quarter | | | | | | | | | | | | | | | | | |
| | ended March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | |
Service charges on deposit accounts | | $ | 1,394 | | $ | 748 | | | $ | 1,448 | | 800 | | 2,842 | | 1,548 | |
| | |
Trust and investment fees: | | |
Trust, investment and IRA fees | | 722 | | 559 | | | 839 | | 566 | | 1,561 | | 1,125 | |
Commissions and all other fees | | 1,493 | | 204 | | | 1,574 | | 196 | | 3,067 | | 400 | |
| | | | | | |
Total trust and investment fees | | 2,215 | | 763 | | | 2,413 | | 762 | | 4,628 | | 1,525 | |
| | |
Card fees | | 853 | | 558 | | | 923 | | 588 | | 1,776 | | 1,146 | |
Other fees: | | |
Cash network fees | | 58 | | 48 | | | 58 | | 47 | | 116 | | 95 | |
Charges and fees on loans | | 433 | | 248 | | | 440 | | 251 | | 873 | | 499 | |
All other fees | | 410 | | 203 | | | 465 | | 213 | | 875 | | 416 | |
| | | | | | |
Total other fees | | 901 | | 499 | | | 963 | | 511 | | 1,864 | | 1,010 | |
| | |
Mortgage banking: | | |
Servicing income, net | | 843 | | 273 | | | 753 | | 221 | | 1,596 | | 494 | |
Net gains on mortgage loan origination/sales activities | | 1,582 | | 267 | | | 2,203 | | 876 | | 3,785 | | 1,143 | |
All other | | 79 | | 91 | | | 90 | | 100 | | 169 | | 191 | |
| | | | | | |
Total mortgage banking | | 2,504 | | 631 | | | 3,046 | | 1,197 | | 5,550 | | 1,828 | |
| | |
Insurance | | 581 | | 504 | | | 595 | | 550 | | 1,176 | | 1,054 | |
Net gains from trading activities | | 787 | | 103 | | | 749 | | 516 | | 1,536 | | 619 | |
Net gains (losses) on debt securities available for sale | | | (119 | ) | | 323 | | | | (78 | ) | | | (91 | ) | | | (197 | ) | | 232 | |
Net gains (losses) from equity investments | | | (157 | ) | | 313 | | | 40 | | 47 | | | (117 | ) | | 360 | |
Operating leases | | 130 | | 143 | | | 168 | | 120 | | 298 | | 263 | |
All other | | 552 | | 218 | | | 476 | | 182 | | 1,028 | | 400 | |
| | | | | | |
| | |
Total | | $ | 9,641 | | $ | 4,803 | | | $ | 10,743 | | 5,182 | | 20,384 | | 9,985 | |
| | | | | | |
| | |
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 March 31,June 30, 2009, these assets totaled $1.53$1.7 trillion, including $474$497 billion from Wachovia, up from $1.13$1.1 trillion at March 31,June 30, 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. TheThese fees increased to $722$839 million in firstsecond quarter 2009 from $559$566 million a year ago.
We also receive commissions and other fees for providing services to full-service and discount brokerage customers. Generally, theseThese fees increased to $1.6 billion in second quarter 2009 from $196 million a year ago. These fees include transactional commissions, which are based on the number of transactions executed at the customer’s direction, orand asset-based fees, which are based on the market value of the customer’s assets. At March 31,June 30, 2009, brokerage balancesclient assets totaled $910$986 billion, including $812$880 billion from Wachovia, compared with $126$129 billion at March 31,June 30, 2008. TheCommissions and other fees increased to $1,493 millionalso include fees from $204 million a year ago.investment banking activities including equity and bond underwriting.
Card fees increased to $853$923 million in firstsecond quarter 2009 from $558$588 million a year ago, predominantly due to $268$320 million in card fees from the Wachovia portfolio.
Mortgage banking noninterest income was $2,504 million$3.0 billion in firstsecond quarter 2009, compared with $631 million$1.2 billion a year ago. Net gains on mortgage loan origination/sales activities of $1,582 million$2.2 billion in firstsecond quarter 2009 were up from $267$876 million a year ago. Business performance was very strong in firstsecond quarter 2009, reflecting strong refinance activity due to thea low interest rate environment, with residential real estate originations of $101$129 billion compared with $66$63 billion a
16
year ago. The 1-4 family first mortgage unclosed pipeline was $100$90 billion (including $4 billion from Wachovia) at March 31,June 30, 2009, $71 billion (including $5 billion from Wachovia) at December 31, 2008, and $61$47 billion at March 31,June 30, 2008. For additional detail, see the “Asset/Liability and Market Risk Management –— Mortgage
20
Banking Interest Rate and Market Risk”Risk,” section and Note 8 (Mortgage Banking Activities) and Note 1312 (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$104 million increase in the repurchase reserve in firstsecond quarter 2009 from DecemberMarch 31, 2008,2009, was due to higher defaults and loss severities and overall deterioration in the market. To the extent the housing market does not recover, the residential mortgage business could continue to have increased investor repurchase requests and 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, 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 in firstsecond quarter 2009 included an $875 milliona $1.03 billion net MSRs valuation gain recorded in earnings (a $2.8($2.32 billion reductionincrease in the fair value of the MSRs offset by a $3.7$1.29 billion hedge gain)loss) and in firstsecond quarter 2008 included a $94$65 million net MSRs valuation gainloss ($1.84.13 billion reductionincrease in the fair value of MSRs offset by a $1.9$4.20 billion hedge gain)loss). The net gain in the current quarter is largely due to hedge carry income reflecting lower short-term rates, which are likely to continue. Our portfolio of loans serviced for others was $1.85 trillion at March 31, 2009, and $1.86 trillion at both June 30, 2009, and December 31, 2008, which included $379 billion acquired from Wachovia.2008. At March 31,June 30, 2009, the ratio of MSRs to related loans serviced for others was 0.74%0.91%.
Insurance revenue was $581$595 million in firstsecond quarter 2009, up from $504$550 million a year ago, primarily due to the addition of Wachovia.
Income from trading activities was $787$749 million and $1.5 billion in the second quarter and first quarterhalf of 2009, respectively, up from $103$516 million and $619 million, respectively, a year ago, with the increase largely from Wachovia. Approximately two-thirds of the income this quarter was from customer-related business, with much of the remainder from economic hedging. Trading results included $18 million in first quarter 2009 from the application of FSP FAS 157-4.ago.
Net investment losses (debt and equity) totaled $276$38 million and $314 million in the second quarter and first quarterhalf of 2009, respectively, and included other-than-temporary impairmentOTTI write-downs of $516 million. $463 million and $979 million, respectively. Net investment losses of $44 million for second quarter 2008 and gains of $592 million for the first half of 2008 included $129 million and $202 million, respectively, of OTTI write-downs.
Net losses on debt securities available for sale were $119$78 million and $197 million in the second quarter and first half of 2009, compared with net losses of $91 million and net gains of $232 million, respectively, a year ago. Net gains from equity investments were $40 million in second quarter 2009, compared with net gains of $323 million a year ago. Net losses from equity investments were $157 million in first quarter 2009, compared with net gains of $313$47 million a year ago, which reflected the $334 million gain from our ownership interest in Visa, which completed its initial public offering in March 2008. For additional detail, see “Balance Sheet Analysis – Securities Available for Sale”Net losses from equity investments were $117 million in this Report.the first half of 2009 compared with net gains of $360 million in the first half of 2008.
1721
NONINTEREST EXPENSE
| | | | | | | | | |
| | | |
| | Quarter | | | | | | | | | | | | | | | | | |
| | ended March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | |
Salaries | | $ | 3,386 | | $ | 1,984 | | | $ | 3,438 | | 2,030 | | 6,824 | | 4,014 | |
Commission and incentive compensation | | 1,824 | | 644 | | | 2,060 | | 806 | | 3,884 | | 1,450 | |
Employee benefits | | 1,284 | | 587 | | | 1,227 | | 593 | | 2,511 | | 1,180 | |
Equipment | | 687 | | 348 | | | 575 | | 305 | | 1,262 | | 653 | |
Net occupancy | | 796 | | 399 | | | 783 | | 400 | | 1,579 | | 799 | |
Core deposit and other intangibles | | 647 | | 46 | | | 646 | | 46 | | 1,293 | | 92 | |
FDIC and other deposit assessments | | 338 | | 8 | | | 981 | | 18 | | 1,319 | | 26 | |
Outside professional services | | 410 | | 171 | | | 451 | | 212 | | 861 | | 383 | |
Insurance | | 267 | | 161 | | | 259 | | 206 | | 526 | | 367 | |
Postage, stationery and supplies | | 250 | | 141 | | | 240 | | 138 | | 490 | | 279 | |
Outside data processing | | 212 | | 109 | | | 282 | | 122 | | 494 | | 231 | |
Travel and entertainment | | 105 | | 105 | | | 131 | | 112 | | 236 | | 217 | |
Foreclosed assets | | 248 | | 107 | | | 187 | | 92 | | 435 | | 199 | |
Contract services | | 216 | | 108 | | | 256 | | 104 | | 472 | | 212 | |
Operating leases | | 70 | | 116 | | | 61 | | 102 | | 131 | | 218 | |
Advertising and promotion | | 125 | | 85 | | | 111 | | 104 | | 236 | | 189 | |
Telecommunications | | 158 | | 78 | | | 164 | | 82 | | 322 | | 160 | |
Operating losses (reduction in losses) | | 172 | | | (73 | ) | | 159 | | 56 | | 331 | | | (17 | ) |
All other | | 623 | | 318 | | | 686 | | 317 | | 1,309 | | 635 | |
| | | | | | |
Total | | $ | 11,818 | | $ | 5,442 | | | $ | 12,697 | | 5,845 | | 24,515 | | 11,287 | |
| | | | | | |
| | |
Noninterest expense more than doubled to $11.8$12.7 billion in firstsecond quarter 2009 from a year ago, primarily due to the acquisition of Wachovia, which resulted in an expanded geographic platform and capabilities in businesses such as retail brokerage, asset management and investment banking, which, like mortgage banking, typically include higher revenue-based incentive expense than the more traditional banking businesses. Noninterest expense included $244 million and $450 million of merger-related costs for the second quarter and first half of 2009, respectively. FDIC and other deposit assessments increased to $338$981 million in firstsecond quarter 2009 due to additional assessments related to the FDIC Transaction Account Guarantee Program compared with $8 million a year ago.and the FDIC special assessment of $565 million. See the “Liquidity and Funding” section in this Report for additional information on this program. Noninterest expense in firstinformation. Second quarter 2009 included $122a reduction in pension cost of approximately $125 million, which included $67 million of one-time curtailment gains, related to the freezing of the Wells Fargo and Wachovia pension plans. These actions are expected to reduce pension cost in the second half of 2009 by approximately $375 million. See Note 14 (Employee Benefits) to Financial Statements in this Report for additional information. Noninterest expense included $84 million and $206 million of additional insurance reserve at our captive mortgage reinsurance operation for the second quarter and $206 millionfirst half of merger-related costs.2009, respectively.
INCOME TAX EXPENSE
Our effective income tax rate was 33.8%31.8% in firstsecond quarter 2009, down from 34.9%32.2% in second quarter 2008, and 32.8% for the first quarterhalf of 2009, compared with 33.7% for the first half of 2008. The decrease is primarily attributable to higher tax-exempt income, tax credits and tax credits,settlements, 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 the noncontrolling interests. As a result, our effective tax rate is calculated by dividing income tax expense by income before income tax expense less the net income from noncontrolling interests.
1822
OPERATING SEGMENT RESULTS
Wells Fargo defines its operating segments by product type and customer segment. As a result of the combination of Wells Fargo and Wachovia, in first quarter 2009 management realigned its business segments into the following three lines of business: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement Services.Retirement. 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 other financial services companies. We revised prior period information to reflect the first quarter 2009 realignment of our operating segments; however, because the acquisition was completed on December 31, 2008, Wachovia’s results are not included in segmentthe income statement or in average balances for periods prior to 2009. The Wachovia acquisition was material to us, and the inclusion of results beginningfrom Wachovia’s businesses in 2009.our 2009 financial statements is a material factor in the changes in our results compared with prior year periods. For a more complete description of our operating segments, including additional financial information and the underlying management accounting process, see Note 1716 (Operating Segments) to Financial Statements in this Report.
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 the operating segments, Community Banking now includes Wells Fargo Financial.
Community Banking net income increased to $1.84$2.0 billion in firstsecond quarter 2009 from $1.52$1.2 billion a year ago. Net income increased to $3.8 billion for the first half of 2009, up from $2.7 billion a year 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 mortgage banking income. Revenue increased to $13.95$14.8 billion and $28.8 billion in the second quarter and first half of 2009, respectively, from $8.20$8.9 billion and $17.1 billion for the same periods a year ago. Net interest income increased to $8.50$8.8 billion in firstsecond quarter 2009 from $4.72$5.2 billion a year ago. Average loans increased to $552.8$540.7 billion in firstsecond quarter 2009 from $282.7$283.2 billion a year ago. Average core deposits increased to $538.0$543.9 billion in firstsecond quarter 2009 from $246.6$251.1 billion a year ago due to Wachovia, as well as double-digit growth in legacy Wells Fargo. Noninterest income increased to $5.46$6.0 billion in firstsecond quarter 2009 from $3.48$3.6 billion a year ago. Noninterest expense increased to $7.16$7.7 billion in second quarter 2009 from $3.91$4.3 billion a year ago. The provision for credit losses increased to $4.00$4.3 billion in firstsecond quarter 2009 from $1.87$2.8 billion a year ago.
Wholesale Bankingprovides financial solutions to businesses across the United States with annual sales generally in excess of $10 million and to 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$1.1 billion in firstsecond quarter 2009 from $483$576 million a year ago. The growthNet income increased to $2.2 billion for the first half of 2009, up from $1.1 billion a year ago. Growth in net income and average assets for Wholesale Banking was largely due to the addition of Wachovia businesses. Revenue increased to a record $4.91$5.2 billion and $10.1 billion in the second quarter and first quarterhalf of 2009, respectively, from $2.18$2.4 billion and $4.6 billion for the same periods a year ago. Net interest income increased to $2.37$2.5 billion in firstsecond quarter 2009 from $1.03$1.0 billion a year ago. Average loans increased to $271.9 billion in first
1923
increased to $263.5 billion in second quarter 2009 from $100.8$107.7 billion a year ago. Average core deposits increased to $138.5$138.1 billion in firstsecond quarter 2009 from $68.2$64.8 billion a year ago. Noninterest income increased to $2.54$2.8 billion in firstsecond quarter 2009 from $1.15$1.4 billion a year ago, primarily due to Wachovia, as well as strong growth in service charges on deposits and loan fees.ago. Noninterest expense increased to $2.53$2.8 billion in firstsecond quarter 2009 from $1.34$1.4 billion a year ago. The provision for credit losses increased to $545$738 million in firstsecond quarter 2009 from $161$246 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. Theclients. Wealth Management Group provides affluent and high net worthhigh-net-worth clients with a complete range of wealth management solutions including financial planning, private banking, credit, investment management, trust and trust.estate services, business succession planning and charitable services along with bank-based brokerage services through Wells Fargo Advisors and Wells Fargo Investments, LLC. Family Office Services meets the unique needsWealth provides family-office services to ultra-high-net-worth clients and is one of the ultra high net worth customers.largest multi-family financial office practices in the United States. Retail brokerage’sBrokerage’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. TheUnited States. 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 officewealth business and Wachovia’s retirement services and reinsurance group.business.
Wealth, Brokerage and Retirement Services net income was $259$363 million in firstsecond quarter 2009, up from $93$111 million a year ago. The growthNet income increased to $622 million for the first half of 2009, up from $204 million a year ago. Growth in net income and average assets for the segment iswas due to the addition of Wachovia businesses. Revenue increased to $2.64$3.0 billion and $5.6 billion in the second quarter and first quarterhalf of 2009, respectively, from $637$680 million and $1.3 billion for the same periods a year ago. Net interest income increased to $737$764 million in firstsecond quarter 2009 from $154$199 million a year ago. Average loans increased to $46.7$45.9 billion in firstsecond quarter 2009 from $13.7$14.8 billion a year ago. The provision for credit losses was $25$115 million in firstsecond quarter 2009.2009, up from $4 million a year ago. Noninterest income increased to $2.2 billion in second quarter 2009 from $481 million a year ago. Noninterest expense increased to $2.22$2.3 billion in firstsecond quarter 2009 from $485$497 million a year ago. First quarter 2009 noninterest expense includes $166 million of intangible amortization expense related to the Wachovia acquisition.
2024
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of both debt and marketable equity securities. We hold debt securities available for sale primarily for liquidity, interest rate risk management and long-term yield enhancement. Accordingly, this portfolio consists primarily of very liquid, high-quality federal agency debt and privately issued mortgage-backed securities. At March 31,June 30, 2009, we held $173.3$200.9 billion of debt securities available for sale, with net unrealized losses of $4.1 billion,$818 million, compared with $145.4 billion at December 31, 2008, including $63.7 billion acquired from Wachovia, with net unrealized losses of $9.8 billion. We also held $5.2$5.9 billion of marketable equity securities available for sale at March 31,June 30, 2009, with net unrealized lossesgains of $646$418 million, compared 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 Wachovia portfolio, the net unrealized losses in cumulative other comprehensive income, a component of common equity, at December 31, 2008, related entirely to the legacy Wells Fargo portfolio.
The decrease inAt June 30, 2009, the net unrealized losses on debt securities available for sale to $4.1 billion at March 31, 2009,were only $400 million, down from $9.8net unrealized losses of $9.9 billion at December 31, 2008, was predominantly due to2008. The net unrealized losses were virtually eliminated in second quarter 2009 as credit spreads narrowed during the early adoption of FSP FAS 157-4, which clarifiedquarter and as unrealized gains emerged on new MBS purchased during the use of trading pricesquarter at the peak 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 narrower credit spreads.MBS yields.
We analyze securities for other-than-temporary impairment (OTTI)OTTI on a quarterly 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 OTTI 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 within its industry, and whether it is more likely than not that we will be required to sell the security before a 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 whichthat are treated as debt securities for the purpose of OTTI analysis, we also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, any change in agency ratings at evaluation date from acquisition date and any likely imminent action. For asset-backed securities, we consider the credit performance of the underlying collateral, including delinquency rates, cumulative losses to date, and theany remaining credit enhancement compared to expected credit losses of the security.
21
For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and it is more likely than not we 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 firstsecond quarter 2009 OTTI write-downs of $516$463 million, $269$308 million related to debt securities and $247$155 million to equity securities. Under FSP FAS 115-2 and FAS 124-2, which we adopted this quarter, totalOf the OTTI on debt securities amounted to $603write-downs of $979 million which includes $263 millionin the first half of credit-related OTTI and $62009, $577 million related to debt securities we intendand $402 million related 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 onequity securities.
25
At March 31,June 30, 2009, we had approximately $6$7 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 accordanceconsistent 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 4.94.5 years at March 31,June 30, 2009. Since 77%78% 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 below.
MORTGAGE-BACKED SECURITIES
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Expected | |
| | Fair | | Net unrealized | | Remaining | | | Fair | | Net unrealized | | remaining | |
(in billions) | | value | | gain (loss) | | maturity | | | value | | gain (loss) | | maturity | |
| | | $ | 132.9 | | $ | (2.4 | ) | | 3.1 yrs. | | |
At March 31, 2009, assuming a 200 basis point: | | |
At June 30, 2009 | | | $ | 157.6 | | | (0.9 | ) | | 3.4 yrs. |
At June 30, 2009, assuming a 200 basis point: | | |
Increase in interest rates | | 121.5 | | | (13.8 | ) | | 6.7 yrs. | | | 144.6 | | | (13.9 | ) | | 4.9 yrs. |
Decrease in interest rates | | 137.9 | | 2.6 | | 2.2 yrs. | | | 166.3 | | 7.8 | | 2.1 yrs. |
| | | |
See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities available for sale by security type.
2226
LOAN PORTFOLIO
A discussion of average loan balances is included in “Earnings Performance –— Net Interest Income” on page 1417 and a comparative schedule of average loan balances is included in the table on page 15.18.
The major categories of loans outstanding showingincluding those subject to SOP 03-3 are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2009 | | December 31, 2008 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | All | | All | | | | | All | | All | | | |
| | SOP 03-3 | | other | | SOP 03-3 | | other | | | | | SOP 03-3 | | other | | SOP 03-3 | | other | | | |
(in millions) | | loans | | loans | | Total | | loans | | loans | | Total | | | loans | | loans | | Total | | loans | | loans | | Total | |
| Commercial and commercial real estate: | | |
Commercial | | $ | 3,088 | | $ | 188,623 | | $ | 191,711 | | $ | 4,580 | | $ | 197,889 | | $ | 202,469 | | | $ | 2,667 | | 179,370 | | 182,037 | | 4,580 | | 197,889 | | 202,469 | |
Other real estate mortgage | | 6,597 | | 98,337 | | 104,934 | | 7,762 | | 95,346 | | 103,108 | | | 5,826 | | 97,828 | | 103,654 | | 7,762 | | 95,346 | | 103,108 | |
Real estate construction | | 4,507 | | 29,405 | | 33,912 | | 4,503 | | 30,173 | | 34,676 | | | 4,295 | | 28,943 | | 33,238 | | 4,503 | | 30,173 | | 34,676 | |
Lease financing | | -- | | 14,792 | | 14,792 | | -- | | 15,829 | | 15,829 | | | — | | 14,555 | | 14,555 | | — | | 15,829 | | 15,829 | |
| | | | | | | | | | | | | | |
Total commercial and commercial real estate | | 14,192 | | 331,157 | | 345,349 | | 16,845 | | 339,237 | | 356,082 | | | 12,788 | | 320,696 | | 333,484 | | 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 | | | 40,471 | | 196,818 | | 237,289 | | 39,214 | | 208,680 | | 247,894 | |
Real estate 1-4 family junior lien mortgage | | 615 | | 109,133 | | 109,748 | | 728 | | 109,436 | | 110,164 | | | 398 | | 106,626 | | 107,024 | | 728 | | 109,436 | | 110,164 | |
Credit card | | -- | | 22,815 | | 22,815 | | -- | | 23,555 | | 23,555 | | | — | | 23,069 | | 23,069 | | — | | 23,555 | | 23,555 | |
Other revolving credit and installment | | 32 | | 91,220 | | 91,252 | | 151 | | 93,102 | | 93,253 | | | — | | 90,654 | | 90,654 | | 151 | | 93,102 | | 93,253 | |
| | | | | | | | | | | | | | |
Total consumer | | 42,167 | | 424,595 | | 466,762 | | 40,093 | | 434,773 | | 474,866 | | | 40,869 | | 417,167 | | 458,036 | | 40,093 | | 434,773 | | 474,866 | |
| | |
Foreign | | 1,849 | | 29,619 | | 31,468 | | 1,859 | | 32,023 | | 33,882 | | | 1,554 | | 28,540 | | 30,094 | | 1,859 | | 32,023 | | 33,882 | |
| | | | | | | | | | | | | | |
Total loans | | $ | 58,208 | | $ | 785,371 | | $ | 843,579 | | $ | 58,797 | | $ | 806,033 | | $ | 864,830 | | | $ | 55,211 | | 766,403 | | 821,614 | | 58,797 | | 806,033 | | 864,830 | |
| | | | | | | | | | | | | | |
| |
In the first quarterhalf of 2009, we refined certain of our initialpreliminary purchase accounting whichadjustments based on additional information as of December 31, 2008. This additional information resulted in changesa net increase 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 scopeunpaid principal balance of SOP 03-3 loans of $2.3 billion, consisting of a $1.7 billion decrease in commercial and commercial real estate loans and a $4.0 billion increase in consumer loans ($2.7 billion of which related to Pick-a-Pay loans).
The refinements resulted in a net increase to the nonaccretable difference of $3.8 billion and a net increase to the accretable yield, which is a premium, of $1.9 billion. Of the net increase in the nonaccretable difference, $300 million related to commercial and commercial real estate loans, and $3.5 billion to consumer loans ($2.2 billion of which related to Pick-a-Pay loans). Of the net increase in the accretable yield, which reflects changes in the amount and timing of estimated cash flows, the discount related to commercial and commercial real estate loans increased by $191 million, and the premium related to consumer loans increased by $2.1 billion ($2.0 billion of which related to Pick-a-Pay loans). The effect on goodwill of these adjustments amounted to a net increase in goodwill of $1.9 billion from initial year-end estimates, and(pre tax).
The nonaccretable difference we established in purchase accounting for SOP 03-3 loans absorbs losses that otherwise would be recorded as charge-offs. The amount absorbed by the fair value of these loans was $59.7 billion at December 31, 2008. These adjustments are reflectednonaccretable difference in the March 31,first half of 2009 loan balances, along with first quarter activity, inwas $2.2 billion for commercial and commercial real estate loans, and $5.1 billion for consumer loans (including $3.8 billion for Pick-a-Pay loans). These amounts do not affect our income statement or the table above.allowance for credit losses.
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.
2327
DEPOSITS
| | | | | | | | | | | | | |
| | | | | | | | | |
| | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | June 30, | | Dec. 31, | |
(in millions) | | 2009 | | 2008 | | 2008 | | | 2009 | | 2008 | |
| | |
Noninterest-bearing | | $ | 166,497 | | $ | 150,837 | | $ | 90,793 | | | $ | 173,149 | | 150,837 | |
Interest-bearing checking | | 89,010 | | 72,828 | | 5,372 | | | 59,396 | | 72,828 | |
Market rate and other savings | | 315,209 | | 306,255 | | 163,230 | | | 360,963 | | 306,255 | |
Savings certificates | | 160,220 | | 182,043 | | 39,554 | | | 143,151 | | 182,043 | |
Foreign deposits (1) | | 25,247 | | 33,469 | | 28,411 | | | 24,463 | | 33,469 | |
| | | | | | | | |
Core deposits | | 756,183 | | 745,432 | | 327,360 | | | 761,122 | | 745,432 | |
Other time deposits | | 23,329 | | 28,498 | | 6,033 | | | 19,904 | | 28,498 | |
Other foreign deposits | | 17,757 | | 7,472 | | 24,751 | | | 32,709 | | 7,472 | |
| | | | | | | | |
Total deposits | | $ | 797,269 | | $ | 781,402 | | $ | 358,144 | | | $ | 813,735 | | 781,402 | |
| | | | | | | | |
| |
| | |
(1) | | Reflects Eurodollar sweep balances included in core deposits. |
Deposits at March 31,June 30, 2009, totaled $797.3$813.7 billion, compared with $781.4 billion at December 31, 2008. A comparativeComparative detail of average deposit balances is provided on page 15.pages 18 and 19 of this Report. Total core deposits were $756.2$761.1 billion at March 31,June 30, 2009, up $10.8$15.7 billion from December 31, 2008. High-rate certificates of deposit (CDs) of $33.6$24 billion at legacy Wachovia matured in thesecond quarter including $13.22009 and were replaced by $14 billion from CD-only households. Higher-rate CDs are maturing andin checking, savings or lower-cost CDs. We continue to see strong core deposit growth across all customer segments as 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 31% (annualized) to $570.7 billion at March 31, 2009, from $529.9 billion at December 31, 2008. Deposit performance continued to benefit from deepergain new customers, deepen our market penetration flight to quality and mortgage escrow activity.expand relationships with existing customers.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in financial transactions that are not recorded in the balance sheet, or may be recorded in the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources, and/or (4) optimize capital. These are described below as off-balance sheet transactions with unconsolidated entities, and as guarantees and certain contingent arrangements. See discussion of FAS 166 and FAS 167 in the “Current Accounting Developments” section in this Report.
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. TheHistorically, the majority of SPEs arewere 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.
2428
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.
2529
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 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | Total | | Maximum | | Total | | Maximum | | | Total | | Maximum | | Total | | Maximum | |
| | entity | | Carrying | | exposure | | entity | | Carrying | | exposure | | | entity | | Carrying | | exposure | | entity | | Carrying | | exposure | |
(in millions) | | assets | | value | | to loss | | assets | | value | | to loss | | | 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 | | |
Residential mortgage loan securitizations: | | |
Conforming(1) | | | $ | 1,072,883 | | 23,513 | | 25,720 | | 1,008,824 | | 22,072 | | 22,569 | |
Other/nonconforming | | | 296,104 | | 10,514 | | 10,869 | | 135,951 | | 7,867 | | 8,869 | |
Commercial mortgage securitizations | | 391,114 | | 2,979 | | 6,013 | | 355,267 | | 3,060 | | 6,376 | | | 417,345 | | 2,788 | | 6,189 | | 355,267 | | 3,060 | | 6,376 | |
Student loan securitizations | | 2,776 | | 220 | | 220 | | 2,765 | | 133 | | 133 | | | 2,719 | | 215 | | 215 | | 2,765 | | 133 | | 133 | |
Auto loan securitizations | | 3,580 | | 115 | | 115 | | 4,133 | | 115 | | 115 | | | 3,236 | | 135 | | 135 | | 4,133 | | 115 | | 115 | |
Other | | 9,955 | | 11 | | 181 | | 11,877 | | 71 | | 1,576 | | | 9,488 | | 11 | | 48 | | 11,877 | | 71 | | 1,576 | |
| | | | | | | | | | | | | | |
Total QSPEs | | $ | 1,636,636 | | $ | 35,468 | | $ | 41,054 | | $ | 1,518,817 | | $ | 33,318 | | $ | 39,638 | | | $ | 1,801,775 | | 37,176 | | 43,176 | | 1,518,817 | | 33,318 | | 39,638 | |
| | | | | | | | | | | | | | |
| | |
CDOs | | $ | 53,439 | | $ | 15,603 | | $ | 20,101 | | $ | 48,802 | | $ | 15,133 | | $ | 20,443 | | | $ | 63,325 | | 14,449 | | 17,741 | | 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 | | |
Wachovia administered ABCP (2) conduit | | | 7,617 | | — | | 7,769 | | 10,767 | | — | | 15,824 | |
Asset-based finance structures | | | 18,471 | | 10,677 | | 11,294 | | 11,614 | | 9,096 | | 9,482 | |
Tax credit structures | | 27,197 | | 4,162 | | 5,040 | | 22,882 | | 3,850 | | 4,926 | | | 27,804 | | 3,805 | | 4,570 | | 22,882 | | 3,850 | | 4,926 | |
CLOs | | 24,691 | | 3,666 | | 4,195 | | 23,339 | | 3,326 | | 3,881 | | | 23,551 | | 3,676 | | 4,196 | | 23,339 | | 3,326 | | 3,881 | |
Investment funds | | 96,497 | | 1,918 | | 2,541 | | 105,808 | | 3,543 | | 3,690 | | | 93,044 | | 2,566 | | 3,182 | | 105,808 | | 3,543 | | 3,690 | |
Credit-linked note structures | | 1,578 | | 1,462 | | 2,241 | | 12,993 | | 1,522 | | 2,303 | | | 1,878 | | 1,290 | | 2,069 | | 12,993 | | 1,522 | | 2,303 | |
Money market funds | | 33,552 | | (9 | ) | | 51 | | 31,843 | | 60 | | 101 | | |
Money market funds (3) | | | 30,412 | | 24 | | 84 | | 31,843 | | 60 | | 101 | |
Other | | 3,989 | | 4,242 | | 5,031 | | 1,832 | | 3,806 | | 4,699 | | | 7,350 | | 3,929 | | 4,161 | | 1,832 | | 3,806 | | 4,699 | |
| | | | | | | | | | | | | | |
Total unconsolidated VIEs | | $ | 265,995 | | $ | 39,983 | | $ | 59,548 | | $ | 269,880 | | $ | 40,336 | | $ | 65,349 | | | $ | 273,452 | | 40,416 | | 55,066 | | 269,880 | | 40,336 | | 65,349 | |
| | | | | | | | | | | | | | |
| | |
| | |
(1) | | Conforming residential mortgage loan securitizations are those that are guaranteed by government-sponsored entites. We have concluded that conforming mortgages are not subject to consolidation under FAS 166 and FAS 167. See the “Current Accounting Developments” section in this Report for our estimate of the nonconforming mortgages that may potentially be consolidated under FAS 166 and FAS 167. |
|
(2) | | Asset-backed commercial paper. |
|
(3) | | Excludes previously supported money market funds, to which the Company no longer provides non-contractual financial support. |
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 the AICPA Investment Company Audit Guide, investments accounted for under the cost method and investments accounted for under the equity method.
In the table above, the columncolumns titled “Total entity assets” representsrepresent 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 principlesGAAP and represents the estimated loss that would be incurred under an assumed, hypothetical circumstance, despite itsalthough we believe extremely remote, possibility,hypothetical circumstance 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.
For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 7 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.
26
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.
2730
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.
We believe our underwriting process is well controlled and appropriate for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans. We only approve applications and make loans if we believe the customer has the ability to repay the loan or line of credit according to all its terms. We have significantly tightened our bank-selected reduced documentation requirements as a precautionary measure and substantially reduced third party originations due to the negative loss trends experienced in these channels. Appraisals or automated valuation models (AVMs) are used to support property values. AVMs are computer-based tools used to estimate the market value of homes. AVMs are a lower-cost alternative to appraisals and support valuations of large numbers of properties in a short period of time. AVMs estimate property values based on processing large volumes of market data including market comparables and price trends for local market areas. The primary risk associated with the use of AVMs is that the value of an individual property may vary significantly from the average for the market area. We have processes to periodically validate AVMs and specific risk management guidelines addressing the circumstances when AVMs may be used. Generally, AVMs are only used for properties with a loan amount under $250,000.
31
Commercial Real Estate
Commercial real estate lending is originated and held in the three business segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. As part of the Wachovia acquisition we acquired significant commercial real estate assets, which doubled the size of the portfolio. As part of our purchase accounting activities in fourth quarter 2008, we individually identified a population of these loans with evidence of deterioration of credit quality since origination for which it was probable that the investor would be unable to collect all contractually required payments receivable and accounted for them under SOP 03-3. This population of impaired loans is managed by an independent and dedicated team of real estate professionals.
The commercial real estate portfolio consists of both permanent commercial mortgage loans and construction loans. The combined loans outstanding totaled $136.9 billion at June 30, 2009, which represented 17% of total loans. Construction loans totaled $33.2 billion at June 30, 2009, or 4% of total loans, and had an annualized quarterly loss rate of 2.76%. Other commercial real estate loans totaled $103.7 billion at June 30, 2009, or 13% of total loans, and had an annualized quarterly loss rate of 0.56%. The portfolio is diversified both geographically and by product type. The largest geographic concentrations are found in California and Florida, which represented 21% and 11% of the total commercial real estate portfolio, respectively. By product type, the largest concentrations are owner-occupied and office buildings, which represented 23% and 15% of the population, respectively. The business strategy at legacy Wells Fargo is to maintain a high level of surveillance and regular customer interaction to understand and manage the risks associated with these assets, including regular loan reviews and appraisal updates. As issues are identified, management is engaged and dedicated workout groups are in place to manage problem assets.
At December 31, 2008, $19.3 billion of Wachovia’s commercial real estate loans were impaired under SOP 03-3, and we recorded an impairment write-down of $7.0 billion as of that date in purchase accounting, representing a 37% write-down of SOP 03-3 commercial real estate loans. In the first half of 2009, we recorded $83 million of charge-offs on SOP 03-3 commercial real estate loans indicating that, generally, losses in this portfolio were within management’s expectations.
32
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 ARMadjustable-rate mortgage (ARM) first mortgage portfolio. The nature of this product creates a potential opportunity for negative amortization. As part of ourUnder purchase accounting activities,for the Wachovia acquisition, the option ARM loans with the highest probability of default were identified assubject to SOP 03-3. See the “Pick-a-Pay Portfolio” section in this Report for additional detail.
The deterioration in specific segments of the Home Equity portfoliosportfolio required a targeted approach to managing these assets. AIn fourth quarter 2007 a liquidating portfolio was identified, consisting of home equity loans generated through third party wholesale channels not behind a Wells Fargo first mortgage, and home equity loans acquired through correspondents, was identified.correspondents. While the $9.9$9.3 billion of loans in this liquidating portfolio represented about 1% of total loans outstanding at March 31,June 30, 2009, these loans represented some of the highest risk in the $128.9$126.8 billion Home Equity portfolios,portfolio, with a loss rate of 9.27%11.29% compared with 2.09%3.25% 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$117.5 billion at March 31,June 30, 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 pagebelow includes the credit attributes of these two portfolios.
28
HOME EQUITY PORTFOLIO (1)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | % of loans | | | | | % of loans | | | |
| | two payments | | Annualized | | | two payments | | Annualized loss rate | |
| | Outstanding balances | | or more past due | | loss rate (1) | | | Outstanding balances | | or more past due | | for quarter ended | |
| | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | Dec. 31 | , | | June 30, | | Dec. 31, | | June 30, | | Dec. 31, | | June 30, | | Dec. 31, | |
(in millions) | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 (2) | |
| | | |
| | |
Core portfolio(3) | | |
California | | $ | 31,784 | | $ | 31,544 | | | 3.56 | % | | | 2.95 | % | | | 3.97 | % | | | 3.94 | % | | $ | 31,479 | | 31,544 | | | 3.63 | % | | 2.95 | | 5.36 | | 3.94 | |
Florida | | 12,067 | | 11,781 | | 3.73 | | 3.36 | | 2.03 | | 4.39 | | | 11,697 | | 11,781 | | 3.91 | | 3.36 | | 4.55 | | 4.39 | |
New Jersey | | 8,086 | | 7,888 | | 1.58 | | 1.41 | | 0.45 | | 0.78 | | | 8,224 | | 7,888 | | 1.70 | | 1.41 | | 1.37 | | 0.78 | |
Virginia | | 5,653 | | 5,688 | | 1.45 | | 1.50 | | 0.76 | | 1.56 | | | 5,805 | | 5,688 | | 1.26 | | 1.50 | | 0.99 | | 1.56 | |
Pennsylvania | | 5,129 | | 5,043 | | 1.04 | | 1.10 | | 0.29 | | 0.52 | | | 5,048 | | 5,043 | | 1.46 | | 1.10 | | 1.29 | | 0.52 | |
Other | | 56,342 | | 56,415 | | 2.06 | | 1.97 | | 1.59 | | 1.59 | | | 55,248 | | 56,415 | | 2.22 | | 1.97 | | 2.46 | | 1.59 | |
| | | | | | | |
Total | | 119,061 | | 118,359 | | 2.53 | | 2.27 | | 2.09 | | 2.39 | | | 117,501 | | 118,359 | | 2.65 | | 2.27 | | 3.25 | | 2.39 | |
| | | | | | | |
| | |
California | | 3,835 | | 4,008 | | 8.49 | | 6.69 | | 13.98 | | 12.32 | | | 3,616 | | 4,008 | | 8.16 | | 6.69 | | 17.13 | | 12.32 | |
Florida | | 492 | | 513 | | 10.35 | | 8.41 | | 13.33 | | 13.60 | | | 460 | | 513 | | 9.14 | | 8.41 | | 18.11 | | 13.60 | |
Arizona | | 233 | | 244 | | 8.37 | | 7.40 | | 15.04 | | 13.19 | | | 219 | | 244 | | 8.16 | | 7.40 | | 18.13 | | 13.19 | |
Texas | | 179 | | 191 | | 1.40 | | 1.27 | | 2.66 | | 1.67 | | | 169 | | 191 | | 1.13 | | 1.27 | | 2.96 | | 1.67 | |
Minnesota | | 122 | | 127 | | 3.88 | | 3.79 | | 6.92 | | 5.25 | | | 117 | | 127 | | 3.88 | | 3.79 | | 7.41 | | 5.25 | |
Other | | 5,001 | | 5,226 | | 3.96 | | 3.28 | | 5.29 | | 4.73 | | | 4,764 | | 5,226 | | 4.00 | | 3.28 | | 6.25 | | 4.73 | |
| | | | | | | |
Total | | 9,862 | | 10,309 | | 6.10 | | 4.93 | | 9.27 | | 8.27 | | | 9,345 | | 10,309 | | 5.91 | | 4.93 | | 11.29 | | 8.27 | |
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Total core and liquidating portfolios | | $ | 128,923 | | $ | 128,668 | | 2.80 | | 2.48 | | 2.65 | | 2.87 | | | $ | 126,846 | | 128,668 | | 2.89 | | 2.48 | | 3.85 | | 2.87 | |
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(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. |
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(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. |
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(3) | | Includes equity lines of credit and closed endclosed-end second liens associated with the Pick-a-Pay portfolio totaling $2.0 billion at June 30, 2009, and $2.1 billion at March 31, 2009, and December 31, 2008. Related credit losses are reported separately with the Pick-a-Pay portfolio. |
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Pick-a-Pay Portfolio
We acquired theOur 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,we acquired in the Wachovia merger, had an unpaid principal balance of $115.0$111.0 billion and a carrying value of $93.2 billion.$90.4 billion at June 30, 2009. Included in the Pick-a-Pay portfolio are loans accounted for under SOP 03-3 with an unpaid principal balance of $59.6 billion and a carrying value of $38.9 billion at June 30, 2009. The carrying value is net of $22.0$20.7 billion of purchase accounting net write-downs to reflect SOP 03-3 loans at fair value and a $215 million$0.1 billion increase to reflect all other loans at a market rate of interest. Equity lines of credit and closed-end second liens associated with Pick-a-Pay loans are reported in the home equity portfolio. The Pick-a-Pay portfolio is a liquidating portfolio as Wachovia ceased originating new Pick-a-Pay loans in 2008. The Pick-a-Pay portfolio carrying balance declined $2.8 billion from March 31, 2009, due to paid in full loans, loss mitigation efforts and because we are not originating new Pick-a-Pay product. At December 31, 2008, we recorded a $22.2 billion write-down in purchase accounting on Pick-a-Pay loans that were impaired under SOP 03-3. This amount was refined to $22.4 billion in the first half of 2009. Losses on this portfolio are in line with management’s expectations.
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%73% 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 utilizationTotal deferred interest of the minimum payment option. At$4.2 billion at June 30, 2009, was down from $4.4 billion 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.2009.
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.
Due to the terms of the Pick-a-Pay portfolio, there is little recast risk over the next three years. 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$2 million in the remaining three quartershalf of 2009, $9$8 million in 2010, $11$8 million in 2011 and $32$22 million in 2012. In firstsecond quarter 2009, the amount of loans recast based on reaching the principal cap was de minimus.minimal. In addition, we would expect the following balancebalances of ARM loans to start fully amortizing due to reaching their recast anniversary date and also having a payment change based onat the contractual terms ofrecast date greater than the loan to recast: $20annual 7.5% reset: $14 million in the remaining threetwo quarters of 2009, $51$46 million in 2010, $70$58 million in 2011 and $128$103 million in 2012. AIn second quarter 2009, the amount
34
of loans reaching their recast anniversary date and also having a payment change recast occurred on $4 million of loans during first quarter 2009.
Included inover 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 itannual 7.5% reset 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.not significant.
The table on the following pagebelow 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 potential charge-offs. Because SOP 03-3 loans are carried at fair value, the ratio of the carrying value LTV ratioto the current collateral value 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 loansboth ratios in the following table.
30
PICK-A-PAY PORTFOLIO
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2009 | |
| | SOP 03-3 loans | | All other loans | | | SOP 03-3 loans | | All other loans | |
| | Ratio of | | | | | | | | | Ratio of | | | | | | | |
| | carrying | | | | | | | | | carrying | | | | | | | |
| Unpaid | | Current | | value to | | Unpaid | | Current | | | | | Unpaid | | Current | | value to | | Unpaid | | Current | | | |
| principal | | LTV | | Carrying | | current | | principal | | LTV | | Carrying | | | principal | | LTV | | Carrying | | current | | principal | | LTV | | Carrying | |
(in millions) | | balance | | ratio | (1) | | value | (2) | | value | | balance | | ratio | (1) | | value | | | balance | | ratio (1) | | value (2) | | value | | balance | | ratio (1) | | value (2) | |
| | | |
| | |
| | $ | 42,216 | | | 152 | % | | $ | 26,907 | | | 98 | % | | $ | 25,875 | | | 90 | % | | $ | 25,979 | | | $ | 40,657 | | | 146 | % | | $ | 26,177 | | | 95 | % | | $ | 25,117 | | | 90 | % | | $ | 25,170 | |
Florida | | 6,260 | | 129 | | 3,779 | | 79 | | 5,412 | | 92 | | 5,433 | | | 6,117 | | 130 | | 3,903 | | 84 | | 5,276 | | 96 | | 5,287 | |
New Jersey | | 1,750 | | 101 | | 1,271 | | 74 | | 3,358 | | 76 | | 3,372 | | | 1,717 | | 99 | | 1,226 | | 71 | | 3,162 | | 80 | | 3,169 | |
Texas | | 475 | | 76 | | 336 | | 54 | | 2,204 | | 60 | | 2,213 | | | 466 | | 80 | | 341 | | 59 | | 2,108 | | 66 | | 2,112 | |
Arizona | | 1,642 | | 161 | | 987 | | 99 | | 1,239 | | 104 | | 1,244 | | | 1,553 | | 148 | | 1,001 | | 96 | | 1,195 | | 99 | | 1,197 | |
Other states | | 9,306 | | 110 | | 6,397 | | 77 | | 15,282 | | 79 | | 15,324 | | | 9,041 | | 108 | | 6,227 | | 75 | | 14,607 | | 83 | | 14,640 | |
| | | | | | | | | | | | | | | | | |
Total Pick-a-Pay loans | | $ | 61,649 | | $ | 39,677 | | $ | 53,370 | | $ | 53,565 | | | $ | 59,551 | | $ | 38,875 | | $ | 51,465 | | $ | 51,575 | |
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(1) | | CurrentThe current LTV ratio is based on collateral values and is updated quarterly by an independent vendor. LTV ratio includes unpaid principalcalculated as the outstanding loan balance onplus the outstanding balance of any equity lines of credit (included in the Home Equity Portfolio table on page 29 in this Report) that share common collateral divided by the collateral value. Collateral values are determined using automated valuation models (AVM) and are juniorupdated quarterly. AVMs are computer-based tools used to the above Pick-a-Pay loans.estimate market values of homes based on processing large volumes of market data including market comparables and price trends for local market areas. |
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(2) | | Carrying value, which does not reflect the allowance for loan losses, includes purchase accounting adjustments, which, for SOP 03-3 loans, arewere a deduction of $25.9$24.5 billion nonaccretable difference and an addition of $3.9$3.8 billion accretable yield at March 31,June 30, 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 Pick-a-Pay loan portfolio. We contact customers who are experiencing difficulty and may in certain cases modify the terms of a loan based on a customer’s documented income and other circumstances.
We also have in place proactivetaken steps to work with customers to refinance or restructure their Pick-a-Pay loans into other loan products. For customers at risk, we will offer combinations of term extensions of up to 40 years, interest rate reductions, to 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. In second quarter 2009, we completed 22,200 loan modifications, up from 11,000 in first quarter 2009. The majority of the loan modifications was concentrated in our impaired loan portfolio and eliminates the negative amortization feature. We expect to continually reassess our loss mitigation strategies and may adopt additional or different strategies in the future.
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Wells Fargo Financial
Wells Fargo Financial originates real estate secured debt consolidation loans, and both prime and non-prime auto secured loans, unsecured loans and credit cards.
Wells Fargo Financial had $28.8$28.0 billion and $29.1 billion in real estate secured loans at March 31,June 30, 2009, and December 31, 2008, respectively. Of this portfolio, $1.7 billion and $1.8 billion, for each period isrespectively, was considered prime based on secondary market standards.standards and has been priced to the customer accordingly. The remaining portfolio is non-prime but has been originated with standards that effectively mitigateto reduce credit risk. It wasThese loans were originated through our retail channel with documented income, LTV limits based on credit quality and property characteristics, and risk-based pricing. In addition, the loans were originated without teaser rates, interest-only or negative amortization features. Credit losses in the portfolio have increased in the current economic environment compared with historical levels, but performance remained similar to prime portfolios in the industry with overall credit lossesloss rates in the first quarterhalf of 2009 of 2.39% (annualized)2.74% on the entire portfolio. Of the portfolio, $9.5$9.2 billion at
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March 31, June 30, 2009, was originated with customer FICO scores below 620, but these loans have further restrictions on LTV and debt-to-income ratios to limit the credit risk.
Wells Fargo Financial also had $21.6$19.8 billion and $23.6 billion in auto secured loans and leases at March 31,June 30, 2009, and December 31, 2008, respectively, of which $5.8$5.3 billion and $6.3 billion, respectively, were originated with customer FICO scores below 620. Net charge-offsLoss rates in this portfolio in the second quarter and first quarterhalf of 2009 were 5.11% (annualized)4.72% and 5.03%, respectively, for FICO scores of 620 and above, and 6.88% (annualized)5.98% and 6.66%, respectively, for FICO scores below 620. These loans were priced based on relative risk. Of this portfolio, $16.3$14.5 billion represented loans and leases originated through its indirect auto business, whicha channel Wells Fargo Financial ceased originatingusing near the end of 2008.
Wells Fargo Financial had $7.9$7.8 billion and $8.4 billion in unsecured loans and credit card receivables at March 31,June 30, 2009, and December 31, 2008, respectively, of which $1.2$1.1 billion and $1.3 billion, respectively, was originated with customer FICO scores below 620. Net charge-offsloss rates in this portfolio in the second quarter and first quarterhalf of 2009 were 12.97% (annualized)14.13% and 13.81%, respectively, for FICO scores of 620 and above, and 19.58% (annualized)21.28% and 21.63%, respectively, for FICO scores below 620. Wells Fargo Financial has been actively tightening credit policies and managing credit lines to reduce exposure given 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. |
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.
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2008 Form 10-K describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS (1)
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| | | | | | | | | | | | | | June 30, 2009 | | | | | |
| | | | Legacy | | | | | |
| | Mar. 31 | , | Dec. 31 | , | Mar. 31 | , | | Wells | | Mar. 31, | | Dec. 31, | |
(in millions) | | 2009 | (1) | | 2008 | (1) | | 2008 | | | Fargo | | Wachovia | | Total | | 2009 | | 2008 | |
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Commercial and commercial real estate: | | |
Commercial | | $ | 1,696 | | $ | 1,253 | | $ | 588 | | | $ | 2,100 | | 810 | | 2,910 | | 1,696 | | 1,253 | |
Other real estate mortgage | | 1,324 | | 594 | | 152 | | | 1,057 | | 1,286 | | 2,343 | | 1,324 | | 594 | |
Real estate construction | | 1,371 | | 989 | | 438 | | | 1,991 | | 219 | | 2,210 | | 1,371 | | 989 | |
Lease financing | | 114 | | 92 | | 57 | | | 112 | | 18 | | 130 | | 114 | | 92 | |
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Total commercial and commercial real estate | | 4,505 | | 2,928 | | 1,235 | | | 5,260 | | 2,333 | | 7,593 | | 4,505 | | 2,928 | |
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Consumer: | | |
Real estate 1-4 family first mortgage (2) | | 4,218 | | 2,648 | | 1,398 | | | 3,975 | | 2,025 | | 6,000 | | 4,218 | | 2,648 | |
Real estate 1-4 family junior lien mortgage | | 1,418 | | 894 | | 381 | | |
Real estate 1-4 family junior lien mortgage (2) | | | 1,415 | | 237 | | 1,652 | | 1,418 | | 894 | |
Other revolving credit and installment | | 300 | | 273 | | 196 | | | 297 | | 30 | | 327 | | 300 | | 273 | |
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Total consumer | | 5,936 | | 3,815 | | 1,975 | | | 5,687 | | 2,292 | | 7,979 | | 5,936 | | 3,815 | |
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Foreign | | 75 | | 57 | | 49 | | | 67 | | 159 | | 226 | | 75 | | 57 | |
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Total nonaccrual loans (3) | | 10,516 | | 6,800 | | 3,259 | | | 11,014 | | 4,784 | | 15,798 | | 10,516 | | 6,800 | |
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As a percentage of total loans | | | 1.25 | % | | | 0.79 | % | | | 0.84 | % | | | 1.92 | % | | 1.25 | | 0.79 | |
| | |
GNMA loans (4) | | 768 | | 667 | | 578 | | | 932 | | — | | 932 | | 768 | | 667 | |
Other | | 1,294 | | 1,526 | | 637 | | | 809 | | 783 | | 1,592 | | 1,294 | | 1,526 | |
Real estate and other nonaccrual investments (5) | | 34 | | 16 | | 21 | | | 20 | | — | | 20 | | 34 | | 16 | |
| | | | | | | | |
Total nonaccrual loans and other nonperforming assets | | $ | 12,612 | | $ | 9,009 | | $ | 4,495 | | | $ | 12,775 | | 5,567 | | 18,342 | | 12,612 | | 9,009 | |
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As a percentage of total loans | | | 1.50 | % | | | 1.04 | % | | | 1.16 | % | | | 2.23 | % | | 1.50 | | 1.04 | |
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(1) | | At March 31, 2009, and December 31, 2008, nonaccrual loans excludeExcludes loans acquired from Wachovia that are accounted for under SOP 03-3. |
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(2) | | Includes nonaccrual mortgages held for sale. |
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(3) | | Includes impaired loans of $4,126 million, $3,640 million$5.7 billion and $859 million$3.6 billion at March 31,June 30, 2009, and December 31, 2008, respectively, of loans classified as impaired under FAS 114, where the scope of FAS 114 encompasses nonaccrual commercial loans greater than $5 million and March 31, 2008, respectively.all consumer TDRs that are nonaccrual. See Note 5 to Financial Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2008 Form 10-K for further information on impaired loans. |
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(4) | | Consistent with regulatory reporting requirements, foreclosed real estate securing Government 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 Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs.Affairs (VA). |
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(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$18.3 billion (1.50%(2.23% of total loans) at March 31,June 30, 2009, and included $10.5 billion of nonaccrual loans and $2.1$2.5 billion of foreclosed assets and repossessed vehicles, which have already been written down and are well secured, as well as $15.8 billion of nonaccrual loans. Of the $15.8 billion of nonaccrual loans, a total of $4.9 billion are nonaccrual loans that have already been written down through charge-offs during first quarter 2009, or previous quarters. These particular nonaccrual loans have now been written down by approximately 33%. Additionally, nonaccrual loans include $3.0 billion of commercial and commercial real estate loans and vehicles. $0.8 billion of consumer troubled debt restructured loans (TDRs), none of which have had prior charge-offs, and on which we collectively have specific FAS 114 reserves of $0.8 billion. Reserves under FAS 114,Accounting by Creditors for Impairment of a Loan — an Amendment of FASB Statement No. 5 and 15, which are part of the allowance for loan losses, reflect the total expected losses on the related loans. The remaining $7.1 billion of nonaccrual loans have reserves that are established as part of our ongoing allowance for loan losses process.
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Nonaccrual loans increased $3.7$5.3 billion or 46 basis points as a percentage of total loans, from DecemberMarch 31, 2008,2009, with increases in both the commercial and retail segments.consumer portfolios. The increase included $1.5 billion related to Wachovia, which grew from a relatively low $97 million at 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 is attributable to a number of factors, including deterioration in certain portfolios, particularly commercial and consumer real estate, and an increase in loan modifications and restructurings to assist homeowners and other borrowers in these challenging times. Consumer nonaccrual loans that have been modified remain in nonaccrual status until a borrower has made six contractual payments. Commercial and commercial real estate nonaccrual loans amounted to $7.6 billion at June 30, 2009, compared with $4.5 billion at March 31, 2009, and $2.9 billion at December 31, 2008. Of the $7.6 billion in nonaccrual loans at June 30, 2009, net charge-offs totaling $1.4 billion have already been recorded to date on $2.4 billion of those nonaccrual loans. We record charge-offs when circumstances confirm that a loss has occurred. Of the total commercial and commercial real estate nonaccrual loans, 92% were concentrated primarily in portfoliossecured, with 62% secured by real estate, orand the remainder secured by other assets such as receivables, inventory and equipment.
Consumer nonaccrual loans amounted to $8.0 billion at June 30, 2009, compared with borrowers dependent on the housing industry.
$5.9 billion at March 31, 2009, and $3.8 billion at December 31, 2008. The $2.1$4.2 billion increase in nonaccrual consumer loans from December 31, 2008, was due primarily torepresented an increase of $884$3.4 billion in 1-4 family first mortgage loans (including $2.0 billion from Wachovia) and $758 million in 1-4 family junior liens (including $213 million from Wachovia, $405 million in Wells Fargo FinancialWachovia). Of the $8.0 billion of consumer nonaccrual loans, charge-offs totaling $1.0 billion have already been recorded to date on $2.5 billion of those nonaccrual loans. The consumer nonaccrual loans were 99% secured, with 95% secured by real estate. Consumer loans secured by real estate $383 million in Home Mortgage and $366 million fromare charged-off to the legacy Wells Fargo Home Equity Group. Nonaccrual real estate 1-4 familyappraised value of the underlying collateral when these loans included approximatelyreach 180 days delinquent.
Total consumer TDRs amounted to $5.6 billion at June 30, 2009, compared with $3.5 billion of loansat March 31, 2009. Of the TDRs, $1.2 billion at June 30, 2009, and $868 million at March 31, 2009, were classified as nonaccrual. When a loan is restructured in a TDR, a reserve is established in accordance with FAS 114.
Nonperforming assets at June 30, 2009, included $932 million of loans that are FHA insured or VA guaranteed, which have little to no loss content, and $1.6 billion of foreclosed assets, which have been modified. Our policy requires six consecutive monthswritten down to the value of payments on modifiedthe underlying collateral.
In addition to the factors discussed above, the increase was in part a consequence of purchase accounting. Nonaccrual loans beforefrom Wachovia grew to $4.8 billion at June 30, 2009, from a low $97 million at year-end 2008. Typically, changes to nonaccrual loans period-over-period represent inflows for loans that reach a specified past due status, somewhat offset by reductions for loans that are charged off, sold, transferred to foreclosed properties, or are no longer classified as nonaccrual because they are returnedreturn to accrual status. Other foreclosed assets decreased $232Substantially all of Wachovia’s nonaccrual loans were accounted for under SOP 03-3 in purchase accounting and, as a result, were reclassified to accrual status on December 31, 2008, because they were written down to an amount we expect to fully collect. Accordingly, only $97 million to $1.3 billion at March 31, 2009,in loans from $1.5 billionWachovia were on nonaccrual status at December 31, 2008, which included $885 million from Wachovia. Until conditions improve2008. As certain Wachovia non-SOP 03-3 loans reach the past due threshold to be classified as nonaccrual, there are minimal Wachovia loans transferring out of nonaccrual status. The effect of this can be higher growth in nonaccrual loans 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 primarily a direct resultfirst several quarters following application of the conditions in the residential real estate markets and general consumer economy.SOP 03-3.
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We expect nonperforming asset balances to continue to grow, reflecting an environment where retaining these assets is the most 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 continue to increase staffing in our workout and collection organizations to ensure these troubled borrowers receive the attention and help they need. See “Financial Review – Allowancethe “Allowance for Credit Losses” section 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 eveninterest. 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 $14,736$16,657 million at March 31,June 30, 2009, and $11,830 million at December 31, 2008, (Wachovia and Wells Fargo combined), and $6,919 million at March 31, 2008. The total included $9,509 million, $8,184$10,651 million and $5,288$8,184 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.VA.
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)
| | | | | | | | | | | | | |
| | | | | | | | | | |
| Mar. 31 | , | Dec. 31 | , | Mar. 31 | , | | June 30, | | Dec. 31, | |
(in millions) | | 2009 | | 2008 | (2) | | 2008 | | | 2009 | | 2008 (1) | |
| | | |
Commercial and commercial real estate: | | |
Commercial | | $ | 417 | | $ | 218 | | $ | 29 | | | $ | 415 | | 218 | |
Other real estate mortgage | | 355 | | 88 | | 24 | | | 702 | | 88 | |
Real estate construction | | 624 | | 232 | | 15 | | | 860 | | 232 | |
| | | | | | | | |
Total commercial and commercial real estate | | 1,396 | | 538 | | 68 | | | 1,977 | | 538 | |
| | |
Consumer: | | |
Real estate 1-4 family first mortgage (1) | | 1,361 | | 883 | | 314 | | |
Real estate 1-4 family first mortgage (2) | | | 1,497 | | 883 | |
Real estate 1-4 family junior lien mortgage | | 598 | | 457 | | 228 | | | 660 | | 457 | |
Credit card | | 738 | | 687 | | 449 | | | 680 | | 687 | |
Other revolving credit and installment | | 1,105 | | 1,047 | | 532 | | | 1,160 | | 1,047 | |
| | | | | | | | |
Total consumer | | 3,802 | | 3,074 | | 1,523 | | | 3,997 | | 3,074 | |
| | |
Foreign | | 29 | | 34 | | 40 | | | 32 | | 34 | |
| | | | | | | | |
Total | | $ | 5,227 | | $ | 3,646 | | $ | 1,631 | | | $ | 6,006 | | 3,646 | |
| | | | | | | | |
| | |
| | |
(1) | | Includes mortgage loans held for sale 90 days or more past due and still accruing. |
(2)(1) | | 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. |
|
(2) | | Includes mortgage loans held for sale 90 days or more past due and still accruing. |
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Net Charge-offs
Net charge-offs in firstsecond quarter 2009 were $3.3$4.4 billion (1.54%(2.11% of average total loans outstanding, annualized), including $371$984 million in the Wachovia portfolio, compared with $2.8$3.3 billion (2.69%(1.54%) in fourthfirst quarter 20082009 and $1.5 billion (1.60%(1.55%) in firstsecond quarter 2008. Commercial and commercial real estate losses remained at relatively low levels reflectingincreased during the historically disciplined underwriting standards applied by Wells Fargoquarter as expected due to the challenging economy impacting loans to customers who are tied to the residential real estate industry and the customer-relationship focusto consumer products and services. Increases in this portfolio. Losses inour residential real estate and credit cards rosecard portfolios were expected as rising unemployment impacted loan performance. Losses in the auto loan portfolios fell modestly in the quarter in line with expectations, while other credit losses, principally indirect auto, declined due to seasonalityas a large portion of the poorer-performing vintages have run off and our risk reduction actions in indirect auto over the last two years.used car pricing improved.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $391$758 million in firstsecond quarter 2009. These results included $310$410 million from legacy Wells Fargo, which increased $117$100 million linked quarter.from first quarter 2009. 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$82 million linked quarter to $582 million infrom first quarter 2009 to $664 million in second quarter 2009, including $48$11 million relating to the $2.4$2.6 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$1.2 billion in firstsecond quarter 2009 included $801$991 million in the legacy Wells Fargo portfolio, which increased $99$190 million linkedfrom first quarter 2009 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 onAdditionally the credit performancerise in unemployment levels is increasing the frequency of junior lien holders behind these modifications.loss. More information about the Home Equity portfolio is available on page 29.33.
Commercial and commercial real estate net charge-offs of $697 million$1.1 billion in firstsecond quarter 2009 included $667$897 million in the legacy Wells Fargo portfolio, down $175up $230 million linkedfrom first quarter which included $2942009. The increase from first quarter 2009 was offset by an $11 million related to the customers of the Madoff investment firm. The linked-quarter trends also reflected a $100 million increasedecrease relating to our legacy Wells Fargo Business Direct portfolio while other commercial losses declined and remained at relatively low levels.portfolio. Wholesale credit results continued to deteriorate. Commercial lending requests slowed during firstsecond quarter 2009 as borrowers reducedcontinued to reduce their receivable and inventory levels to conserve cash.
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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 and excludes loans carried at 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. See the “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” section in our 2008 Form 10-K for additional information.
We apply a consistent methodology to determine the allowance for credit losses, using both forecastedhistorical and historicalforecasted 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 theare based on borrower industryinformation and strength of collateral, value, combined with historically-based grade specific loss factors. The allowance for individually-rated nonaccruing loans with an outstanding balance of $5 million or greater is determined through an individual impairment analysis consistent with FAS 114 guidance. For statistically managed portfolios (typically consumer), we generally leverage models which
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use credit-related characteristics such as credit rating scores, delinquency migration 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 lossesconsumer TDRs is affected by credit performance, changes in portfolio composition, and management’s assessmentbased on the risk characteristics of the economic environment and related impact on underlying credit risk.modified loans. While the allowance is builtdetermined using product/product and business segment estimates, it is available to absorb losses forin the entire loan portfolio.
At March 31,June 30, 2009, the allowance for loan losses totaled $22.3$23.0 billion (2.64%(2.80% 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$23.5 billion (2.71%(2.86%) at March 31,June 30, 2009, compared with $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,June 30, 2009, did not include any amountsincluded $49 million related to credit-impaired loans acquired from Wachovia accounted for under SOP 03-3. The reserve for unfunded credit commitments was $565$495 million at March 31,June 30, 2009, compared with $698 million at December 31, 2008, and $210 million at March 31, 2008.
Total provision expense in the second quarter and first quarterhalf of 2009 was $4.6$5.1 billion and $9.6 billion, respectively, and included a credit reserve build of $1.3 billion.$700 million and $2.0 billion, respectively. The $1.3 billion reserve build wasbuilds were 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 avoid foreclosure and keep qualifying borrowers in their homes. We anticipate further increases in TDR volumes as we continue to utilize government sponsoredgovernment-sponsored programs and other methods to minimize foreclosures and associated credit losses.
The application of SOP 03-3 to loans acquired from Wachovia affects reported net charge-offs and nonaccrual loans as described in “Loans”on page 5 in this Report and, therefore, the allowance ratios associated with these measures should not be relied upon as a tool for determiningconsidered when evaluating the adequacy of the allowance and shouldor for comparison with other peer banks because the information may 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.directly comparable.
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The ratio of the allowance for credit losses to total nonaccrual loans was 217%,149% and 319% at June 30, 2009, 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 55%expected 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%134% and 97%173% for the quarters ended June 30, 2009, and 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 DecemberMarch 31, 2008, is2009, was directly related to the addition ofincreased Wachovia charge-offs in first quarter 2009. Loanas the non-SOP 03-3 portfolio matures and the effect of the SOP 03-3 accounting began to dissipate. Reported loan losses for the quarter excluded those losses from SOP 03-3 loans as these loans have already beenwere reduced to their fair value at the result being significantly lower losses on the balancetime of the portfolio.acquisition.
We believe the allowance for credit losses of $22.8$23.5 billion was adequate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at March 31,June 30, 2009. The allowance for credit losses is subject to change and considers existing factors at the time, including economic or market conditions and ongoing internal and external examination processes. 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 the “Financial Review – Critical Accounting Policies – Allowance for Credit Losses” section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in our 2008 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); |
• | | 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). |
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);
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 March 31,June 30, 2009, our most recent simulation indicated estimated earnings at risk of approximately 4%9% of our most likely earnings plan using a scenario in which the federal funds rate rises to 2.75%4.0% and the 10-year Constant Maturity Treasury bond yield rises to 3.45%5.3% by the end of 2009.June 2010. 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 the “Mortgage Banking Interest Rate and Market Risk” section 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 notional or contractual amount and fair values of these derivatives as of March 31,June 30, 2009, and December 31, 2008, are presented in Note 1211 (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 held using interest rate swaps, swaptions, futures, forwards and options.
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• | | 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 and MSRs 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 reduce 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.originate, except for the Pick-a-Pay portfolio. 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 mortgages as part of our corporate 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.sale (MHFS).
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)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 MSRs and MHFS, 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 existed 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, (whichwhich are now hedged with free-standing derivatives (economic hedges) along with our MSRs)MSRs, reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. During 2008 and inthe first quarterhalf of 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
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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. The valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable. Changes in interest rates influence a variety of significant assumptions included in the periodic valuation of MSRs, including prepayment speeds, expected returns and potential risks on the servicing asset portfolio, the value of escrow balances and other servicing valuation 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, (netnet of any gains on free-standing derivatives (economic hedges) used to hedge MSRs).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, extends 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 firstsecond quarter 2009, a $2.8$2.3 billion decreaseincrease in the fair value of our MSRs and $3.7$1.3 billion of gainslosses on free-standing derivatives used to hedge the MSRs resulted in a net gain of $875 million.$1.0 billion. This net gain is largely due to hedge carry income reflecting low short-term rates.
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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. Additionally, the hedge carry income we earn on our economic hedges for the MSRs may not continue if the spread between short-term and long-term rates decreases.
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• | | 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 $13.6$16.9 billion at March 31,June 30, 2009, and $16.2 billion at December 31, 2008. The weighted-average note rate on the owned servicing portfolio was 5.83%5.74% at March 31,June 30, 2009, and 5.92% at December 31, 2008. Our total MSRs were 0.74%0.91% of mortgage loans serviced for others at March 31,June 30, 2009, compared with 0.87% at December 31, 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 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. We were required by Staff 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. 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, (referredreferred to as a fall-out factor).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 option 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 March 31,June 30, 2009, and December 31, 2008, are included in Note 1211 (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 instruments that are considered trading positions. The average one-day VAR throughout firstsecond quarter 2009 was $103$59 million, with a lower bound of $83$38 million and an upper bound of $130$82 million.
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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).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$2.8 billion at June 30, 2009, and $2.71$2.7 billion at December 31, 2008, and principal investments of $1.27 billion and $1.28$1.3 billion at March 31, 2009, and December 31, 2008, respectively.both period ends. Private equity investments are carried at cost subject to other-than-temporary impairment. Principal investments are carried at fair value with net unrealized gains and losses reported in noninterest income.
We also have marketable equity securities in the securities available-for-sale portfolio, including securities relating to our venture capital activities. We manage these investments within capital 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. The fair value and cost of marketable equity securities was $5.18$5.9 billion and cost was $5.83$5.5 billion, respectively, at March 31,June 30, 2009, and $6.14$6.1 billion and $6.30$6.3 billion, respectively, at December 31, 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 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 BoardBanks or the 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. Investors in the long-term capital markets generally will consider, among other factors, a company’s debt rating in making investment decisions. Wells Fargo Bank, N.A. is rated “Aa2,” by Moody’s Investors Service, and “AA,” by Standard & Poor’s Rating Services. 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. Material changes in these factors could result in a different debt rating; however, a change in debt rating 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 participatingparticipates in the Federal Deposit Insurance Corporation’s (FDIC)FDIC’s 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 insuredFDIC-insured institutions. Under the Debt Guarantee Program, we had $88.2 billion of remaining capacity to
issue guaranteed debt as of March 31,June 30, 2009. Eligible entities are assessed fees payable to the FDIC for coverage under the program. This assessment is in addition to risk-based deposit insurance assessments currently imposed under FDIC rules and 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 2006,2009, the Parent’sParent filed a registration statement with the SEC for the issuance of senior and subordinated notes, preferred stock and other securities. This registration statement replaces a registration statement for the issuance of similar securities became effective.that expired in June 2009. The 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
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currently authorized by the Board to issue $60 billion in outstanding short-term debt and $170 billion in outstanding long-term debt, subject to a total outstanding debt limit of $230 billion. At March 31,June 30, 2009, the Parent had outstanding short-term, long-term and total debt under these authorities of $15.7$17.5 billion, $133.9$127.8 billion and $149.6$145.3 billion, respectively. During the first quarterhalf of 2009, the Parent issued a total of $3.5 billion in registered senior notes guaranteed by the FDIC. We used the proceeds from securities issued in the first quarterhalf of 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 the first quarterhalf of 2009, Wells Fargo Bank, N.A. issued $7.5$14.5 billion in short-term notes. At March 31,June 30, 2009, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $45.7$46.0 billion in short-term senior notes and $46.4$48.5 billion in long-term senior or subordinated notes, respectively.notes. Securities are issued under this program as private placements in accordance with Office of the Comptroller of the Currency (OCC) regulations.
Wachovia Bank, N.A.Wachovia Bank, N.A. had $49.0 billion available for issuance under a global note program at March 31,June 30, 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 the 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,June 30, 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 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,June 30, 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. At March 31,June 30, 2009, CAD$6.5 billion remained available for future issuance. All medium-term notes issued by WFFCC are unconditionally guaranteed by the Parent.
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, the Federal Home Loan Bank of San Francisco and the Federal Home Loan Bank of Seattle (collectively, the FHLBs). Each member of each of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.
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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 2007,2008, 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 the first quarterhalf of 2009, we repurchased approximately 23 million shares of our common stock. At March 31,June 30, 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 the first quarterhalf of 2009, retained earnings increased $406 million,$2.6 billion, a major portion from Wells Fargo net income of $3.05$6.2 billion, less common and preferred dividends and accretion of $2.10$2.7 billion. In the first quarterhalf of 2009, we issued approximately 35442 million shares, or $543 million,$9.3 billion, of common stock, (includingincluding 392 million shares issued for our ESOP plan)($8.6 billion) in a common stock offering and 2 million shares from time to time during the period under various employee benefit and director plans (including our ESOP plan) and under our dividend reinvestment and direct stock repurchasepurchase programs.
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OnIn 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 Securities Purchase Agreements), we issued to the Treasury Department under its Capital Purchase Program (CPP) 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. We 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. Unless 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. The terms of the Treasury Department’s purchase of the preferred securities include certain restrictions on certain forms of executive compensation and 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, subject to customary anti-dilution provisions. The warrants expire ten years from the issuance date. Both the preferred securities and warrants are accounted fortreated as components of Tier 1 capital.
In March 2009,Prior to October 2011, unless we reducedhave 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
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required for us to increase our common stock dividend by 85% to $0.05(currently, $.05 per share enhancingper quarter) 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 our CPP purchase agreement. In addition, so long as the preferred securities remain outstanding, we are subject to restrictions on certain forms of, and limits on the tax deductibility of compensation we pay our executive officers and certain other highly-compensated employees under provisions of the American Recovery and Reinvestment Act of 2009 (ARRA) and related Treasury Department regulations.
Under the CPP purchase agreement entered into with the Treasury Department in connection with the issuance of the preferred securities and the warrants, we were not permitted to redeem the preferred securities and repurchase the warrants during the first three years after issuance except with the proceeds from a “qualifying equity offering.” Under the ARRA and related Treasury Department and Federal Reserve regulatory guidance, these limitations have been superseded, and we may redeem the preferred securities at par value plus accrued and unpaid dividends in minimum increments of 25% of the preferred securities issue price, subject to the approval of the Federal Reserve and our compliance with existing regulatory procedures for redeeming capital instruments. We may also repurchase the warrants at their appraised fair market value upon our redemption of all outstanding preferred securities, following an appraisal procedure established by the Treasury Department and under the CPP purchase agreement. On June 1, 2009, the Federal Reserve issued regulatory criteria applicable to the 19 bank holding companies, including the Company, that participated in SCAP and who wish to redeem preferred stock issued to the Treasury Department under its CPP. In order to redeem the preferred securities, we must, among other criteria, demonstrate our ability to build capital.
At March 31, 2009,obtain long-term debt funding without reliance on the Company and each of our subsidiary banks were “well capitalized” underFDIC’s TGLP, as well as successfully access the applicable regulatory capital adequacy guidelines. For additional information see Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.public equity markets.
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, under SCAP, to increase common equity bygenerate a $13.7 billion regulatory capital buffer by November 9, 2009. At June 30, 2009, with over a quarter to go before the SCAP plan is completed, we exceeded this requirement by $500 million and we expect to internally generate additional capital in third quarter 2009 beyond the $500 million excess. We accomplished this through an $8.6 billion (gross proceeds) common stock offering, pre-provision net revenue (pre-tax pre-provision profit plus certain SCAP adjustments) in excess of the Federal Reserve’s estimates, realization of deferred tax assets, and other internally generated sources, including core deposit intangible amortization.
On May 8,13, 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 51.15we issued 392 million shares of common stock fromin an offering to the Companypublic valued at $22 per share$8.6 billion. The common stock offering was in response to cover over-allotments. The Company will receive net proceeds of $8.4the Federal Reserve’s requirement for us to generate a $13.7 billion from the offering including the exerciseregulatory capital buffer as a result 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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Tangible Common EquitySCAP stress test discussed above.
We strengthened our capital position in firstsecond quarter 2009. TangibleTier 1 common equity (TCE) was $41.1$47.1 billion at quarter end,June 30, 2009, an increase of $4.5 billion. The ratio of TCE to tangible assets$13.7 billion from March 31, 2009. Tier 1 common equity was 3.28%, up from 2.86% at December 31, 2008. TCE was 3.84%4.49% of risk-weighted assets. At March 31,June 30, 2009, Tierthe Company and each of our subsidiary banks were “well capitalized” under the applicable regulatory capital adequacy guidelines. For additional information see Note 18 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.
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TIER 1 capital was $89.0 billion and the Tier 1 capital ratio was 8.30%, up from 7.84% at December 31, 2008.COMMON EQUITY(1)
| | | | | | | | | | | | | | | | | | |
| |
| | | | 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 | % |
| | | | | | | | | | | | | | | | |
| |
|
| | | | | | | | |
| | June 30, | | | Mar. 31, | |
(in billions) | | 2009 | | | 2009 | |
|
Total equity | | $ | 121.4 | | | | 107.1 | |
Less: Noncontrolling interests | | | (6.8 | ) | | | (6.8 | ) |
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Total Wells Fargo stockholders’ equity | | | 114.6 | | | | 100.3 | |
|
Less: Preferred equity | | | (31.0 | ) | | | (30.9 | ) |
Goodwill and intangible assets (other than MSRs) | | | (38.7 | ) | | | (38.5 | ) |
Applicable deferred assets | | | 5.5 | | | | 5.7 | |
Deferred tax asset limitation | | | (2.0 | ) | | | (4.7 | ) |
MSRs over specified limitations | | | (1.6 | ) | | | (1.3 | ) |
Cumulative other comprehensive income | | | 0.6 | | | | 3.6 | |
Other | | | (0.3 | ) | | | (0.8 | ) |
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Tier 1 common equity | (A) | $ | 47.1 | | | | 33.4 | |
|
Total risk-weighted assets (2) | (B) | $ | 1,047.7 | | | | 1,071.5 | |
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Tier 1 common equity to total risk-weighted assets | (A)/(B) | | 4.49 | % | | | 3.12 | |
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| | |
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(1) | | TangibleTier 1 common equity is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies, including the Federal Reserve in the SCAP, to assess the capital position of financial services companies. Tier 1 common equity includes total Wells Fargo stockholders’ equity, less preferred equity, goodwill and intangible assets (excluding MSRs), net of related deferred taxes, adjusted for specified Tier 1 regulatory capital limitations covering deferred taxes, MSRs, and the portion of noncontrolling interests accounted for under FAS 160 that does not have risk sharing attributes similar to common equity.cumulative other comprehensive income. Management reviews tangibleTier 1 common equity along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information 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.participants. |
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(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. |
Prudential Joint Venture
As described in the “Contractual Obligations” section in our 2008 Form 10-K, we own a controlling interest in a retail securities brokerage joint venture, which Wachovia entered into with Prudential Financial, Inc. (Prudential) in 2003. See also the “Current Accounting Developments” section in this Report for additional information. On October 1, 2007, Wachovia completed its acquisition of A.G. Edwards, Inc. and on January 1, 2008, contributed the retail securities brokerage business of A.G. Edwards to the joint venture. In connection with Wachovia’s contribution of A.G. Edwards to the joint venture, Prudential elected to exercise its “lookback” option under the joint venture agreements, which permits Prudential to delay until January 1, 2010, its decision whether to make payments to avoid dilution of its pre-contribution 38% ownership interest in the joint venture or, alternatively, to “put” its joint venture interests to Wells Fargo based on the appraised value of the joint venture, excluding the A.G. Edwards business, as of January 1, 2008. On December 4, 2008, Prudential announced its intention to exercise its rights under the “lookback” option to put its interests in the joint venture to Wells Fargo at the end of the “lookback” period and, on June 17, 2009, Prudential provided written notice to Wells Fargo of its exercise of this “lookback” option. Under the terms of the joint venture agreements, we expect the closing of the “put” transaction to occur on or about January 1, 2010. In connection with determining the amount to be paid to Prudential for its minority interest, Wells Fargo and Prudential are currently establishing processes for appraising the value of the joint venture as of a date immediately prior to the A.G. Edwards contribution. The estimated value of the investment is included in noncontrolling interests and therefore has already been deducted from Tier 1 common equity.
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RISK FACTORS
An investment in the Company 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)Notes, including Note 10 (Guarantees and Legal Actions)) 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 discussiondiscussions below and in our First Quarter 2009 Form 10-Q that supplementssupplement the “Risk Factors” section of the 2008 Form 10-K. Any factor described in this Report, or in our 2008 Form 10-K or our First Quarter 2009 Form 10-Q 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 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 to differ significantlymaterially from projections or forecasts of our financial results and condition and expectations for our operations and business that we make in forward-looking statements in this Report and in presentations and 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, as actual results could differ significantly.materially. Forward-looking statements speak only as of the date made, and we do not undertake to update them to reflect changes or events that occur after that 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, including, among others, that:
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
• | | we expect to internally generate additional SCAP-qualifying capital in third quarter 2009; |
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• | | we are on track to realize annual run-rate savings of $5 billion upon completion of the Wachovia integration; |
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• | | we expect additional efficiency initiatives to lower expenses over the remainder of 2009; |
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• | | we currently project, based on preliminary estimates, to add assets to our consolidated financial statements following the January 1, 2010 implementation of FAS 166 and FAS 167; |
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• | | conversion of Wachovia stores to the Wells Fargo platform is scheduled to begin later this year; |
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• | | we believe our balance sheet is well-positioned given the current economic environment; |
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• | | our allowance for credit losses at June 30, 2009, was adequate to cover expected consumer losses for approximately the next 12 months and inherent commercial and commercial real estate loan losses expected to emerge over approximately the next 24 months; |
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• | | short-term rates, for purposes of hedge carry income, are likely to continue; |
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• | | we expect credit losses and nonperforming assets to increase; |
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• | | we expect increased commercial and commercial real estate credit losses until the economy improves; |
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• | | we believe commercial and commercial real estate losses will be moderated by the effect of our underwriting discipline and relationship-centric business strategy; |
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• | | to the extent the housing market does not recover, the residential mortgage business could continue to have increased loss severity on repurchases, causing future increases in the repurchase reserve; |
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• | | we expect certain specified Pick-a-Pay loan balances to recast and/or start fully amortizing in the remaining half of 2009 and through 2012; |
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• | | we will continue to hold more nonperforming assets on our balance sheet until conditions improve in the residential real estate and liquidity markets; |
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we expect actions taken with respect to the Wells Fargo qualified and supplemental Cash Balance Plans and the Wachovia Pension Plan will reduce pension cost by approximately $330 million in 2009.• | | we expect nonperforming asset balances to continue to grow; |
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• | | until housing prices fully stabilize, credit performance of the 1-4 family first mortgage portfolio will continue to deteriorate; |
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• | | we expect the closing of the Prudential put transaction to occur on or about January 1, 2010; |
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• | | we expect further increases in the volume of TDRs as we continue to utilize government-sponsored programs and other methods to minimize foreclosures and associated credit losses; |
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• | | 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; |
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• | | we expect to recover the entire amortized cost basis of certain specified securities; |
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• | | 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; |
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• | | we believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income; |
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• | | we believe the carrying value of our liability under certain specified guarantees is more representative of our exposure to loss than the maximum exposure to loss; |
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• | | we believe the eventual outcome of certain legal actions against us will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position or results of operations; |
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• | | we expect that $125 million of deferred net loss on derivatives in other comprehensive income at June 30, 2009, will be reclassified as earnings during the next twelve months; |
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• | | we expect actions taken with respect to the Wells Fargo qualified and supplemental Cash Balance Plans and the Wachovia Pension Plan will reduce pension cost in the second half of 2009 by approximately $375 million; and |
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• | | we do not expect that we will be required to make a minimum contribution in 2009 for the Cash Balance Plan. |
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| | Several factors could cause actual results to differ materially from expectations including: |
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• | | current and future economic and market conditions, including credit markets, housing prices and unemployment; |
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• | | our capital requirements, including the SCAP capital buffer requirement, and ability to raise capital on favorable terms; |
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• | | the terms of capital investments or other financial assistance provided by the U.S. government; |
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• | | legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan modifications; |
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• | | our ability to successfully integrate the Wachovia merger and realize the expected cost savings and other benefits; |
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• | | our ability to realize the efficiency initiatives to lower expenses when and in the amount expected; |
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• | | the adequacy of our allowance for credit losses; |
|
• | | recognition of OTTI 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 the demand for our products and services; |
|
• | | the effect of the fall in stock market prices on our investment banking business and our fee income from our brokerage, asset and wealth management businesses; |
53
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 ability 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 the 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 accounting policies or in accounting standards or in how accounting standards are to be applied;
mergers and acquisitions;
federal and state regulations;
reputational damage from negative publicity, fines, penalties and other negative consequences from regulatory violations;
the loss of checking and saving account deposits to other investments such as the stock market; and
fiscal and monetary policies of the Federal Reserve Board.
• | | 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 accounting policies or in accounting standards or in how accounting standards are to be applied, including interpretive guidance; |
|
• | | mergers, acquisitions and divestitures; |
|
• | | federal and state regulations; |
|
• | | reputational damage from negative publicity, fines, penalties and other negative consequences from regulatory violations; |
|
• | | the loss of checking and saving account deposits to other investments such as the stock market, and the resulting increase in our funding costs and impact on our net interest margin; and |
|
• | | fiscal and monetary policies of the Federal Reserve Board. |
There is no assurance that our allowance for credit losses will be adequate to cover future credit losses, especially if credit markets, housing prices and unemployment do not stabilize. Increases in loan charge-offs or in the allowance for credit losses and related provision expense could materially adversely affect our financial results and condition.
51
The following risk factors supplement There is no assurance that we will meet the discussion under “Risk Factors” contained inSCAP capital requirement on the November 9, 2009, deadline established by the Federal Reserve. Although we exceeded the requirement at June 30, 2009, our 2008 Form 10-K.
The Company’s participation in government programsSCAP-qualifying capital could decline before the deadline. Failure to modify first and second lien mortgage loans could adversely affectmeet 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 programsrequirement 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 toequity securities or the Departmentconversion of the Treasury to purchase additional shares of ourpreferred securities into common stock as contemplated by the published terms of the Capital Assistance Program. The issuance of additional shares of common stock or common equivalent securitiesresulting in future equity offerings,dilution to the Department of the Treasury under the Capital Assistance Program or otherwise will dilute the ownership interest of our existing common stockholders. There canis no assurance that our preliminary interpretation of FAS 166 and FAS 167 will be no assurances thatthe final interpretation of those standards when they are implemented on January 1, 2010. If our preliminary interpretation of FAS 166 and FAS 167 is not consistent with the final interpretation of those standards upon implementation, we will notmay have to consolidate more or less assets 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 ofconsolidated financial statements than those in our common stock or similar securities, including warrants, in the market thereafter, or the perception that such sales could occur.preliminary analysis, which difference may be material.
5254
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of March 31,June 30, 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 March 31,June 30, 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’s principal executive and principal financial officers and effected by the Company’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; |
• | | 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 Company are being made only in accordance with authorizations of management and directors of the Company; and |
• | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the 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 Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’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.
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 No change occurred during firstsecond quarter 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
5355
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
| | | | | | | | |
| |
| | Quarter ended March 31 | , |
(in millions, except per share amounts) | | 2009 | | | 2008 | |
| |
| | | | | | | | |
Trading assets | | $ | 266 | | | $ | 47 | |
Securities available for sale | | | 2,709 | | | | 1,132 | |
Mortgages held for sale | | | 415 | | | | 394 | |
Loans held for sale | | | 67 | | | | 12 | |
Loans | | | 10,765 | | | | 7,212 | |
Other interest income | | | 91 | | | | 52 | |
| | | | | | |
Total interest income | | | 14,313 | | | | 8,849 | |
| | | | | | |
| | | | | | | | |
Deposits | | | 999 | | | | 1,594 | |
Short-term borrowings | | | 123 | | | | 425 | |
Long-term debt | | | 1,779 | | | | 1,070 | |
Other interest expense | | | 36 | | | | -- | |
| | | | | | |
Total interest expense | | | 2,937 | | | | 3,089 | |
| | | | | | |
| | | 11,376 | | | | 5,760 | |
Provision for credit losses | | | 4,558 | | | | 2,028 | |
| | | | | | |
Net interest income after provision for credit losses | | | 6,818 | | | | 3,732 | |
| | | | | | |
| | | | | | | | |
Service charges on deposit accounts | | | 1,394 | | | | 748 | |
Trust and investment fees | | | 2,215 | | | | 763 | |
Card fees | | | 853 | | | | 558 | |
Other fees | | | 901 | | | | 499 | |
Mortgage banking | | | 2,504 | | | | 631 | |
Insurance | | | 581 | | | | 504 | |
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 | | | (157 | ) | | | 313 | |
Other | | | 1,469 | | | | 464 | |
| | | | | | |
Total noninterest income | | | 9,641 | | | | 4,803 | |
| | | | | | |
| | | | | | | | |
Salaries | | | 3,386 | | | | 1,984 | |
Commission and incentive compensation | | | 1,824 | | | | 644 | |
Employee benefits | | | 1,284 | | | | 587 | |
Equipment | | | 687 | | | | 348 | |
Net occupancy | | | 796 | | | | 399 | |
Core deposit and other intangibles | | | 647 | | | | 46 | |
FDIC and other deposit assessments | | | 338 | | | | 8 | |
Other | | | 2,856 | | | | 1,426 | |
| | | | | | |
Total noninterest expense | | | 11,818 | | | | 5,442 | |
| | | | | | |
INCOME BEFORE INCOME TAX EXPENSE | | | 4,641 | | | | 3,093 | |
Income tax expense | | | 1,552 | | | | 1,074 | |
| | | | | | |
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 | | $ | 0.56 | | | $ | 0.61 | |
DILUTED EARNINGS PER COMMON SHARE | | $ | 0.56 | | | $ | 0.60 | |
DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.34 | | | $ | 0.31 | |
Average common shares outstanding | | | 4,247.4 | | | | 3,302.4 | |
Diluted average common shares outstanding | | | 4,249.3 | | | | 3,317.9 | |
| |
The accompanying notes are an integral part of these statements.
54
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| | | | | | | | | | | | |
| |
| | March 31 | , | | December 31 | , | | March 31 | , |
(in millions, except shares) | | 2009 | | | 2008 | | | 2008 | |
| |
| | | | | | | | | | | | |
Cash and due from banks | | $ | 22,186 | | | $ | 23,763 | | | $ | 13,146 | |
Federal funds sold, securities purchased under resale agreements and other short-term investments | | | 18,625 | | | | 49,433 | | | | 4,171 | |
Trading assets | | | 46,497 | | | | 54,884 | | | | 8,893 | |
Securities available for sale | | | 178,468 | | | | 151,569 | | | | 81,787 | |
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 | |
| | | 843,579 | | | | 864,830 | | | | 386,333 | |
Allowance for loan losses | | | (22,281 | ) | | | (21,013 | ) | | | (5,803 | ) |
| | | | | | | | | |
Net loans | | | 821,298 | | | | 843,817 | | | | 380,530 | |
| | | | | | | | | |
Mortgage servicing rights: | | | | | | | | | | | | |
Measured at fair value (residential MSRs) | | | 12,391 | | | | 14,714 | | | | 14,956 | |
Amortized | | | 1,257 | | | | 1,446 | | | | 455 | |
Premises and equipment, net | | | 11,215 | | | | 11,269 | | | | 5,056 | |
Goodwill | | | 23,825 | | | | 22,627 | | | | 13,148 | |
Other assets | | | 105,016 | | | | 109,801 | | | | 42,558 | |
| | | | | | | | | |
| | $ | 1,285,891 | | | $ | 1,309,639 | | | $ | 595,221 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Noninterest-bearing deposits | | $ | 166,497 | | | $ | 150,837 | | | $ | 90,793 | |
Interest-bearing deposits | | | 630,772 | | | | 630,565 | | | | 267,351 | |
| | | | | | | | | |
Total deposits | | | 797,269 | | | | 781,402 | | | | 358,144 | |
Short-term borrowings | | | 72,084 | | | | 108,074 | | | | 53,983 | |
Accrued expenses and other liabilities | | | 58,831 | | | | 50,689 | | | | 31,480 | |
Long-term debt | | | 250,650 | | | | 267,158 | | | | 103,175 | |
| | | | | | | | | |
| | | 1,178,834 | | | | 1,207,323 | | | | 546,782 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Wells Fargo stockholders’ equity: | | | | | | | | | | | | |
Preferred stock | | | 31,411 | | | | 31,332 | | | | 837 | |
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 | | | 32,414 | | | | 36,026 | | | | 8,259 | |
Retained earnings | | | 36,949 | | | | 36,543 | | | | 39,896 | |
Cumulative other comprehensive income (loss) | | | (3,624 | ) | | | (6,869 | ) | | | 120 | |
Treasury stock – 102,524,177 shares, 135,290,540 shares and 170,411,704 shares | | | (3,593 | ) | | | (4,666 | ) | | | (5,850 | ) |
Unearned ESOP shares | | | (535 | ) | | | (555 | ) | | | (891 | ) |
| | | | | | | | | |
Total Wells Fargo stockholders’ equity | | | 100,295 | | | | 99,084 | | | | 48,159 | |
| | | | | | | | | |
| | | 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.
55
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | |
| |
| | | |
| | | |
| | | |
| | Preferred stock | | | Common stock | |
(in millions, except shares) | | Shares | | Amount | | | Shares | | | Amount | |
| |
BALANCE DECEMBER 31, 2007 | | | 449,804 | | | $ | 450 | | | | 3,297,102,208 | | | $ | 5,788 | |
| | | | | | | | | | | | |
Cumulative effect of adoption of EITF 06-4 and EITF 06-10 | | | | | | | | | | | | | | | | |
FAS 158 change of measurement date | | | | | | | | | | | | | | | | |
|
BALANCE JANUARY 1, 2008 | | | 449,804 | | | | 450 | | | | 3,297,102,208 | | | | 5,788 | |
| | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | |
Translation adjustments | | | | | | | | | | | | | | | | |
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 | | | | | | | | | | | | | | | | |
Noncontrolling interests | | | | | | | | | | | | | | | | |
Common stock issued | | | | | | | | | | | 12,053,786 | | | | | |
Common stock repurchased | | | | | | | | | | | (11,404,468 | ) | | | | |
Preferred stock issued to ESOP | | | 520,500 | | | | 521 | | | | | | | | | |
Preferred stock released to ESOP | | | | | | | | | | | | | | | | |
Preferred stock converted to common shares | | | (133,756 | ) | | | (134 | ) | | | 4,598,820 | | | | | |
Common stock dividends | | | | | | | | | | | | | | | | |
Tax benefit upon exercise of stock options | | | | | | | | | | | | | | | | |
Stock option compensation expense | | | | | | | | | | | | | | | | |
Net change in deferred compensation and related plans | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net change | | | 386,744 | | | | 387 | | | | 5,248,138 | | | | -- | |
| | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | |
| |
|
| | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | | Six months ended June 30, | |
(in millions, except per share amounts) | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Interest income | | | | | | | | | | | | | | | | |
Trading assets | | $ | 206 | | | | 38 | | | | 472 | | | | 85 | |
Securities available for sale | | | 2,887 | | | | 1,224 | | | | 5,596 | | | | 2,356 | |
Mortgages held for sale | | | 545 | | | | 423 | | | | 960 | | | | 817 | |
Loans held for sale | | | 50 | | | | 10 | | | | 117 | | | | 22 | |
Loans | | | 10,532 | | | | 6,806 | | | | 21,297 | | | | 14,018 | |
Other interest income | | | 81 | | | | 46 | | | | 172 | | | | 98 | |
|
Total interest income | | | 14,301 | | | | 8,547 | | | | 28,614 | | | | 17,396 | |
|
Interest expense | | | | | | | | | | | | | | | | |
Deposits | | | 957 | | | | 1,063 | | | | 1,956 | | | | 2,657 | |
Short-term borrowings | | | 55 | | | | 357 | | | | 178 | | | | 782 | |
Long-term debt | | | 1,485 | | | | 849 | | | | 3,264 | | | | 1,919 | |
Other interest expense | | | 40 | | | | — | | | | 76 | | | | — | |
|
Total interest expense | | | 2,537 | | | | 2,269 | | | | 5,474 | | | | 5,358 | |
|
Net interest income | | | 11,764 | | | | 6,278 | | | | 23,140 | | | | 12,038 | |
Provision for credit losses | | | 5,086 | | | | 3,012 | | | | 9,644 | | | | 5,040 | |
|
Net interest income after provision for credit losses | | | 6,678 | | | | 3,266 | | | | 13,496 | | | | 6,998 | |
|
Noninterest income | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | 1,448 | | | | 800 | | | | 2,842 | | | | 1,548 | |
Trust and investment fees | | | 2,413 | | | | 762 | | | | 4,628 | | | | 1,525 | |
Card fees | | | 923 | | | | 588 | | | | 1,776 | | | | 1,146 | |
Other fees | | | 963 | | | | 511 | | | | 1,864 | | | | 1,010 | |
Mortgage banking | | | 3,046 | | | | 1,197 | | | | 5,550 | | | | 1,828 | |
Insurance | | | 595 | | | | 550 | | | | 1,176 | | | | 1,054 | |
Net gains (losses) on debt securities available for sale (includes impairment losses of $308 and $577, consisting of $972 and $1,575 of total other-than-temporary impairment losses, net of $664 and $998 recognized in other comprehensive income, for the quarter and six months ended June 30, 2009, respectively) | | | (78 | ) | | | (91 | ) | | | (197 | ) | | | 232 | |
Net gains (losses) from equity investments | | | 40 | | | | 47 | | | | (117 | ) | | | 360 | |
Other | | | 1,393 | | | | 818 | | | | 2,862 | | | | 1,282 | |
|
Total noninterest income | | | 10,743 | | | | 5,182 | | | | 20,384 | | | | 9,985 | |
|
Noninterest expense | | | | | | | | | | | | | | | | |
Salaries | | | 3,438 | | | | 2,030 | | | | 6,824 | | | | 4,014 | |
Commission and incentive compensation | | | 2,060 | | | | 806 | | | | 3,884 | | | | 1,450 | |
Employee benefits | | | 1,227 | | | | 593 | | | | 2,511 | | | | 1,180 | |
Equipment | | | 575 | | | | 305 | | | | 1,262 | | | | 653 | |
Net occupancy | | | 783 | | | | 400 | | | | 1,579 | | | | 799 | |
Core deposit and other intangibles | | | 646 | | | | 46 | | | | 1,293 | | | | 92 | |
FDIC and other deposit assessments | | | 981 | | | | 18 | | | | 1,319 | | | | 26 | |
Other | | | 2,987 | | | | 1,647 | | | | 5,843 | | | | 3,073 | |
|
Total noninterest expense | | | 12,697 | | | | 5,845 | | | | 24,515 | | | | 11,287 | |
|
Income before income tax expense | | | 4,724 | | | | 2,603 | | | | 9,365 | | | | 5,696 | |
Income tax expense | | | 1,475 | | | | 834 | | | | 3,027 | | | | 1,908 | |
|
Net income before noncontrolling interests | | | 3,249 | | | | 1,769 | | | | 6,338 | | | | 3,788 | |
Less: Net income from noncontrolling interests | | | 77 | | | | 16 | | | | 121 | | | | 36 | |
|
Wells Fargo net income | | $ | 3,172 | | | | 1,753 | | | | 6,217 | | | | 3,752 | |
|
Wells Fargo net income applicable to common stock | | $ | 2,575 | | | | 1,753 | | | | 4,959 | | | | 3,752 | |
|
Per share information | | | | | | | | | | | | | | | | |
Earnings per common share | | $ | 0.58 | | | | 0.53 | | | | 1.14 | | | | 1.13 | |
Diluted earnings per common share | | | 0.57 | | | | 0.53 | | | | 1.13 | | | | 1.13 | |
Dividends declared per common share | | | 0.05 | | | | 0.31 | | | | 0.39 | | | | 0.62 | |
Average common shares outstanding | | | 4,483.1 | | | | 3,309.8 | | | | 4,365.9 | | | | 3,306.1 | |
Diluted average common shares outstanding | | | 4,501.6 | | | | 3,321.4 | | | | 4,375.1 | | | | 3,319.6 | |
|
The accompanying notes are an integral part of these statements.
56
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
| | | | | | | | |
| | June 30, | | | December 31, | |
(in millions, except shares) | | 2009 | | | 2008 | |
|
Assets | | | | | | | | |
Cash and due from banks | | $ | 20,632 | | | | 23,763 | |
Federal funds sold, securities purchased under resale agreements and other short-term investments | | | 15,976 | | | | 49,433 | |
Trading assets | | | 40,110 | | | | 54,884 | |
Securities available for sale | | | 206,795 | | | | 151,569 | |
Mortgages held for sale (includes $40,190 and $18,754 carried at fair value) | | | 41,991 | | | | 20,088 | |
Loans held for sale (includes $141 and $398 carried at fair value) | | | 5,413 | | | | 6,228 | |
| | | | | | | | |
Loans | | | 821,614 | | | | 864,830 | |
Allowance for loan losses | | | (23,035 | ) | | | (21,013 | ) |
|
Net loans | | | 798,579 | | | | 843,817 | |
|
Mortgage servicing rights: | | | | | | | | |
Measured at fair value (residential MSRs) | | | 15,690 | | | | 14,714 | |
Amortized | | | 1,205 | | | | 1,446 | |
Premises and equipment, net | | | 11,151 | | | | 11,269 | |
Goodwill | | | 24,619 | | | | 22,627 | |
Other assets | | | 102,015 | | | | 109,801 | |
|
Total assets | | $ | 1,284,176 | | | | 1,309,639 | |
|
Liabilities | | | | | | | | |
Noninterest-bearing deposits | | $ | 173,149 | | | | 150,837 | |
Interest-bearing deposits | | | 640,586 | | | | 630,565 | |
|
Total deposits | | | 813,735 | | | | 781,402 | |
Short-term borrowings | | | 55,483 | | | | 108,074 | |
Accrued expenses and other liabilities | | | 64,160 | | | | 50,689 | |
Long-term debt | | | 229,416 | | | | 267,158 | |
|
Total liabilities | | | 1,162,794 | | | | 1,207,323 | |
|
Equity | | | | | | | | |
Wells Fargo stockholders’ equity: | | | | | | | | |
Preferred stock | | | 31,497 | | | | 31,332 | |
Common stock — $1-2/3 par value, authorized 6,000,000,000 shares; issued 4,756,071,429 shares and 4,363,921,429 shares | | | 7,927 | | | | 7,273 | |
Additional paid-in capital | | | 40,270 | | | | 36,026 | |
Retained earnings | | | 39,165 | | | | 36,543 | |
Cumulative other comprehensive income (loss) | | | (590 | ) | | | (6,869 | ) |
Treasury stock - 87,923,034 shares and 135,290,540 shares | | | (3,126 | ) | | | (4,666 | ) |
Unearned ESOP shares | | | (520 | ) | | | (555 | ) |
|
Total Wells Fargo stockholders’ equity | | | 114,623 | | | | 99,084 | |
Noncontrolling interests | | | 6,759 | | | | 3,232 | |
|
Total equity | | | 121,382 | | | | 102,316 | |
|
Total liabilities and equity | | $ | 1,284,176 | | | | 1,309,639 | |
|
The accompanying notes are an integral part of these statements.
57
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
| | | | | | | | |
| |
| | Quarter ended March 31 | , |
(in millions) | | 2009 | | | 2008 | |
| |
Cash flows from operating activities: | | | | | | | | |
Wells Fargo net income | | $ | 3,045 | | | $ | 1,999 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Provision for credit losses | | | 4,558 | | | | 2,028 | |
Changes in fair value of MSRs (residential) and MHFS carried at fair value | | | 2,141 | | | | 1,812 | |
Depreciation and amortization | | | 981 | | | | 368 | |
Other net gains | | | (383 | ) | | | (158 | ) |
Preferred shares released to ESOP | | | 19 | | | | 134 | |
Stock option compensation expense | | | 95 | | | | 71 | |
Excess tax benefits related to stock option payments | | | -- | | | | (15 | ) |
Originations of MHFS | | | (98,613 | ) | | | (59,146 | ) |
Proceeds from sales of and principal collected on mortgages originated for sale | | | 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 | | | 7,821 | | | | (1,166 | ) |
Deferred income taxes | | | 2,373 | | | | (200 | ) |
Accrued interest receivable | | | 674 | | | | 142 | |
Accrued interest payable | | | (767 | ) | | | (63 | ) |
Other assets, net | | | 6,372 | | | | (4,356 | ) |
Other accrued expenses and liabilities, net | | | 5,818 | | | | 1,423 | |
| | | | | | |
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 | | | 30,808 | | | | (1,417 | ) |
Securities available for sale: | | | | | | | | |
Sales proceeds | | | 10,760 | | | | 16,213 | |
Prepayments and maturities | | | 7,343 | | | | 5,466 | |
Purchases | | | (39,173 | ) | | | (30,947 | ) |
Loans: | | | | | | | | |
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 | | | 419 | | | | 325 | |
Purchases (including participations) of loans by banking subsidiaries | | | (301 | ) | | | (2,656 | ) |
Principal collected on nonbank entities’ loans | | | 3,175 | | | | 5,015 | |
Loans originated by nonbank entities | | | (1,995 | ) | | | (5,273 | ) |
Net cash paid for acquisitions | | | (123 | ) | | | (46 | ) |
Proceeds from sales of foreclosed assets | | | 1,001 | | | | 438 | |
Changes in MSRs from purchases and sales | | | (4 | ) | | | 37 | |
Net change in noncontrolling interests | | | (186 | ) | | | 6 | |
Other, net | | | (4,117 | ) | | | (2,062 | ) |
| | | | | | |
Net cash provided (used) by investing activities | | | 18,515 | | | | (18,420 | ) |
| | | | | | |
Cash flows from financing activities: | | | | | | | | |
Net change in: | | | | | | | | |
Deposits | | | 15,725 | | | | 13,684 | |
Short-term borrowings | | | (35,990 | ) | | | 728 | |
Long-term debt: | | | | | | | | |
Proceeds from issuance | | | 3,811 | | | | 8,137 | |
Repayment | | | (17,877 | ) | | | (7,569 | ) |
Preferred stock: | | | | | | | | |
Cash dividends paid and accretion | | | (623 | ) | | | -- | |
Common stock: | | | | | | | | |
Proceeds from issuance | | | 524 | | | | 317 | |
Repurchased | | | (54 | ) | | | (351 | ) |
Cash dividends paid | | | (1,443 | ) | | | (1,024 | ) |
Excess tax benefits related to stock option payments | | | -- | | | | 15 | |
Other, net | | | -- | | | | 3,262 | |
| | | | | | |
Net cash provided (used) by financing activities | | | (35,927 | ) | | | 17,199 | |
| | | | | | |
Net change in cash and due from banks | | | (1,577 | ) | | | (1,611 | ) |
Cash and due from banks at beginning of quarter | | | 23,763 | | | | 14,757 | |
| | | | | | |
Cash and due from banks at end of quarter | | $ | 22,186 | | | $ | 13,146 | |
| | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | |
Cash paid during the quarter for: | | | | | | | | |
Interest | | $ | 3,704 | | | $ | 3,152 | |
Income taxes | | | 249 | | | | 259 | |
Noncash investing and financing activities: | | | | | | | | |
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 | | | -- | | | | 268 | |
Transfers from MHFS to loans | | | 32 | | | | 55 | |
Transfers from MHFS to MSRs | | | 1,451 | | | | 802 | |
Transfers from MHFS to foreclosed assets | | | 33 | | | | -- | |
Net transfers from LHFS to loans | | | -- | | | | 176 | |
Transfers from loans to foreclosed assets | | | 1,479 | | | | 775 | |
| |
|
| | | | | | | | | | | | | | | | |
| | Preferred stock | | | Common stock | |
(in millions, except shares) | | Shares | | | Amount | | | Shares | | | Amount | |
|
Balance December 31, 2007 | | | 449,804 | | | $ | 450 | | | | 3,297,102,208 | | | $ | 5,788 | |
|
Cumulative effect of adoption of EITF 06-4 and EITF 06-10 | | | | | | | | | | | | | | | | |
FAS 158 change of measurement date | | | | | | | | | | | | | | | | |
|
Balance January 1, 2008 | | | 449,804 | | | | 450 | | | | 3,297,102,208 | | | | 5,788 | |
|
Comprehensive income: | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | |
Translation adjustments | | | | | | | | | | | | | | | | |
Net unrealized losses on securities available for sale, net of reclassification of $141 million of net gains included in net income | | | | | | | | | | | | | | | | |
Net unrealized losses on derivatives and hedging activities, net of reclassification of $71 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 | | | | | | | | | | | 22,714,143 | | | | | |
Common stock repurchased | | | | | | | | | | | (17,141,540 | ) | | | | |
Preferred stock issued to ESOP | | | 520,500 | | | | 521 | | | | | | | | | |
Preferred stock released to ESOP | | | | | | | | | | | | | | | | |
Preferred stock converted to common shares | | | (246,983 | ) | | | (248 | ) | | | 9,285,888 | | | | | |
Common stock dividends | | | | | | | | | | | | | | | | |
Tax benefit upon exercise of stock options | | | | | | | | | | | | | | | | |
Stock option compensation expense | | | | | | | | | | | | | | | | |
Net change in deferred compensation and related plans | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | |
|
Net change | | | 273,517 | | | | 273 | | | | 14,858,491 | | | | — | |
|
Balance June 30, 2008 | | | 723,321 | | | $ | 723 | | | | 3,311,960,699 | | | $ | 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 $5 million of net losses included in net income | | | | | | | | | | | | | | | | |
Net unrealized losses on derivatives and hedging activities, net of reclassification of $175 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 | | | | | | | | | | | 439,968,781 | | | | 654 | |
Common stock repurchased | | | | | | | | | | | (2,731,755 | ) | | | | |
Preferred stock released to ESOP | | | | | | | | | | | | | | | | |
Preferred stock converted to common shares | | | (32,703 | ) | | | (33 | ) | | | 2,280,480 | | | | | |
Common stock dividends | | | | | | | | | | | | | | | | |
Preferred stock dividends and accretion | | | | | | | 198 | | | | | | | | | |
Tax benefit upon exercise of stock options | | | | | | | | | | | | | | | | |
Stock option compensation expense | | | | | | | | | | | | | | | | |
Net change in deferred compensation and related plans | | | | | | | | | | | | | | | | |
|
Net change | | | (32,703 | ) | | | 165 | | | | 439,517,506 | | | | 654 | |
|
Balance June 30, 2009 | | | 10,079,118 | | | $ | 31,497 | | | | 4,668,148,395 | | | $ | 7,927 | |
|
The accompanying notes are an integral part of these statements.
58
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Wells Fargo stockholders’ equity | | | | | | | |
| | | | | | | | | | Cumulative | | | | | | | | | | | Total | | | | | | | |
| | Additional | | | | | | | other | | | | | | | Unearned | | | Wells Fargo | | | | | | | |
| | paid-in | | | Retained | | | comprensive | | | 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 3,752 | | | | | | | | | | | | | | | | 3,752 | | | | 36 | | | | 3,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | (6 | ) | | | | | | | | | | | (6 | ) | | | | | | | (6 | ) |
| | | | | | | | | | | (1,732 | ) | | | | | | | | | | | (1,732 | ) | | | | | | | (1,732 | ) |
| | | | | | | | | | | (49 | ) | | | | | | | | | | | (49 | ) | | | | | | | (49 | ) |
| | | | | | | | | | | 2 | | | | | | | | | | | | 2 | | | | | | | | 2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | 1,967 | | | | 36 | | | | 2,003 | |
| | | | | | | | | | | | | | | | | | | | | | | — | | | | (21 | ) | | | (21 | ) |
| | | (25 | ) | | | (110 | ) | | | | | | | 743 | | | | | | | | 608 | | | | | | | | 608 | |
| | | | | | | | | | | | | | | (520 | ) | | | | | | | (520 | ) | | | | | | | (520 | ) |
| | | 30 | | | | | | | | | | | | | | | | (551 | ) | | | — | | | | | | | | — | |
| | | (14 | ) | | | | | | | | | | | | | | | 262 | | | | 248 | | | | | | | | 248 | |
| | | (56 | ) | | | | | | | | | | | 304 | | | | | | | | — | | | | | | | | — | |
| | | | | | | (2,050 | ) | | | | | | | | | | | | | | | (2,050 | ) | | | | | | | (2,050 | ) |
| | | 19 | | | | | | | | | | | | | | | | | | | | 19 | | | | | | | | 19 | |
| | | 103 | | | | | | | | | | | | | | | | | | | | 103 | | | | | | | | 103 | |
| | | 18 | | | | | | | | | | | | (8 | ) | | | | | | | 10 | | | | | | | | 10 | |
| | | (21 | ) | | | | | | | | | | | | | | | | | | | (21 | ) | | | | | | | (21 | ) |
|
| | | 54 | | | | 1,592 | | | | (1,785 | ) | | | 519 | | | | (289 | ) | | | 364 | | | | 15 | | | | 379 | |
|
| | | 8,266 | | | | 40,534 | | | | (1,060 | ) | | | (5,516 | ) | | | (771 | ) | | | 47,964 | | | | 301 | | | $ | 48,265 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 6,217 | | | | | | | | | | | | | | | | 6,217 | | | | 121 | | | | 6,338 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 35 | | | | | | | | | | | | 35 | | | | (4 | ) | | | 31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | (628 | ) | | | | | | | | | | | (628 | ) | | | | | | | (628 | ) |
| | | | | | | | | | | 6,667 | | | | | | | | | | | | 6,667 | | | | 34 | | | | 6,701 | |
| | | | | | | | | | | (300 | ) | | | | | | | | | | | (300 | ) | | | | | | | (300 | ) |
|
| | | | | | | | | | | 558 | | | | | | | | | | | | 558 | | | | | | | | 558 | |
|
| | | | | | | | | | | | | | | | | | | | | | | 12,549 | | | | 151 | | | | 12,700 | |
| | | (5 | ) | | | | | | | | | | | | | | | | | | | (5 | ) | | | (340 | ) | | | (345 | ) |
| | | 7,845 | | | | (733 | ) | | | | | | | 1,542 | | | | | | | | 9,308 | | | | | | | | 9,308 | |
| | | | | | | | | | | | | | | (63 | ) | | | | | | | (63 | ) | | | | | | | (63 | ) |
| | | (2 | ) | | | | | | | | | | | | | | | 35 | | | | 33 | | | | | | | | 33 | |
| | | (40 | ) | | | | | | | | | | | 73 | | | | | | | | — | | | | | | | | — | |
| | | | | | | (1,657 | ) | | | | | | | | | | | | | | | (1,657 | ) | | | | | | | (1,657 | ) |
| | | | | | | (1,258 | ) | | | | | | | | | | | | | | | (1,060 | ) | | | | | | | (1,060 | ) |
| | | 3 | | | | | | | | | | | | | | | | | | | | 3 | | | | | | | | 3 | |
| | | 138 | | | | | | | | | | | | | | | | | | | | 138 | | | | | | | | 138 | |
| | | 21 | | | | | | | | | | | | (12 | ) | | | | | | | 9 | | | | | | | | 9 | |
|
| | | 7,960 | | | | 2,569 | | | | 6,332 | | | | 1,540 | | | | 35 | | | | 19,255 | | | | (189 | ) | | | 19,066 | |
|
| | | 40,270 | | | | 39,165 | | | | (590 | ) | | | (3,126 | ) | | | (520 | ) | | | 114,623 | | | | 6,759 | | | $ | 121,382 | |
|
59
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
| | | | | | | | |
| | Six months ended June 30, | |
(in millions) | | 2009 | | | 2008 | |
|
Cash flows from operating activities: | | | | | | | | |
Net income before noncontrolling interests | | $ | 6,338 | | | | 3,788 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Provision for credit losses | | | 9,644 | | | | 5,040 | |
Changes in fair value of MSRs (residential) and MHFS carried at fair value | | | 201 | | | | (1,763 | ) |
Depreciation and amortization | | | 1,540 | | | | 748 | |
Other net gains | | | (4,028 | ) | | | (588 | ) |
Preferred shares released to ESOP | | | 33 | | | | 248 | |
Stock option compensation expense | | | 138 | | | | 103 | |
Excess tax benefits related to stock option payments | | | (3 | ) | | | (19 | ) |
Originations of MHFS | | | (226,452 | ) | | | (116,407 | ) |
Proceeds from sales of and principal collected on mortgages originated for sale | | | 207,006 | | | | 118,478 | |
Originations of LHFS | | | (5,403 | ) | | | — | |
Proceeds from sales of LHFS | | | 13,264 | | | | — | |
Purchases of LHFS | | | (6,478 | ) | | | — | |
Net change in: | | | | | | | | |
Trading assets | | | 14,592 | | | | (1,954 | ) |
Deferred income taxes | | | 3,289 | | | | 205 | |
Accrued interest receivable | | | 284 | | | | 183 | |
Accrued interest payable | | | (631 | ) | | | (205 | ) |
Other assets, net | | | (336 | ) | | | 2,330 | |
Other accrued expenses and liabilities, net | | | 4,851 | | | | 2,590 | |
|
Net cash provided by operating activities | | | 17,849 | | | | 12,777 | |
|
Cash flows from investing activities: | | | | | | | | |
Net change in: | | | | | | | | |
Federal funds sold, securities purchased under resale agreements and other short-term investments | | | 33,457 | | | | (1,334 | ) |
Securities available for sale: | | | | | | | | |
Sales proceeds | | | 18,871 | | | | 21,106 | |
Prepayments and maturities | | | 18,484 | | | | 10,427 | |
Purchases | | | (80,923 | ) | | | (52,197 | ) |
Loans: | | | | | | | | |
Decrease (increase) in banking subsidiaries’ loan originations, net of collections | | | 28,470 | | | | (17,592 | ) |
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries | | | 3,179 | | | | 1,556 | |
Purchases (including participations) of loans by banking subsidiaries | | | (1,563 | ) | | | (5,956 | ) |
Principal collected on nonbank entities’ loans | | | 6,471 | | | | 11,727 | |
Loans originated by nonbank entities | | | (4,319 | ) | | | (10,127 | ) |
Net cash paid for acquisitions | | | (132 | ) | | | (386 | ) |
Proceeds from sales of foreclosed assets | | | 1,813 | | | | 877 | |
Changes in MSRs from purchases and sales | | | (9 | ) | | | 130 | |
Net change in noncontrolling interests | | | (315 | ) | | | (21 | ) |
Other, net | | | 683 | | | | (259 | ) |
|
Net cash provided (used) by investing activities | | | 24,167 | | | | (42,049 | ) |
|
Cash flows from financing activities: | | | | | | | | |
Net change in: | | | | | | | | |
Deposits | | | 32,192 | | | | (5,336 | ) |
Short-term borrowings | | | (52,591 | ) | | | 32,884 | |
Long-term debt: | | | | | | | | |
Proceeds from issuance | | | 3,876 | | | | 12,483 | |
Repayment | | | (35,162 | ) | | | (9,963 | ) |
Preferred stock: | | | | | | | | |
Cash dividends paid | | | (1,053 | ) | | | — | |
Common stock: | | | | | | | | |
Proceeds from issuance | | | 9,308 | | | | 608 | |
Repurchased | | | (63 | ) | | | (520 | ) |
Cash dividends paid | | | (1,657 | ) | | | (2,050 | ) |
Excess tax benefits related to stock option payments | | | 3 | | | | 19 | |
|
Net cash provided (used) by financing activities | | | (45,147 | ) | | | 28,125 | |
Net change in cash and due from banks | | | (3,131 | ) | | | (1,147 | ) |
Cash and due from banks at beginning of period | | | 23,763 | | | | 14,757 | |
|
Cash and due from banks at end of period | | $ | 20,632 | | | | 13,610 | |
|
Supplemental cash flow disclosures: | | | | | | | | |
Cash paid for interest | | $ | 6,105 | | | | 5,563 | |
Cash paid for income taxes | | | 1,062 | | | | 2,385 | |
|
The accompanying notes are an integral part of these statements. See Note 1 for noncash investing and financing activities.
60
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells 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 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 market 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 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)12), pension accounting (Note 15)14) 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 Financial Accounting Standards Board (FASB) 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.
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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, 2008 (2008 Form 10-K).
Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
• | | FAS 161,Disclosures about Derivative Instruments and Hedging Activities –— an amendment of FASB Statement No. 133; |
• | | FAS 160,Noncontrolling Interests in Consolidated Financial Statements –— an amendment of ARB No. 51; |
• | | FAS 141R (revised 2007),Business Combinations; |
• | | FSPFASB Staff Position (FSP) FAS 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; |
• | | FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments; and |
• | | FASBFSP Emerging Issues Task Force (EITF) No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. |
In second quarter 2009, we adopted the following new accounting pronouncements: |
• | | FSP FAS 107-1 and APB Opinion 28-1,Interim Disclosures about Fair Value of Financial Instruments; and |
• | | FAS 165,Subsequent Events. |
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 1211 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 the “Contractual Obligations” section 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.
62
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. On December 4, 2008, Prudential has statedpublicly announced 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.end of the lookback period, as defined (January 1, 2010). 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,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, andwith 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 infor second quarter 2009; however, as permitted under the pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted in an increase in the valuation of securities available for sale in first quarter 2009 of $4.5 billion ($2.8 billion after tax), which iswas included in other comprehensive income, and trading assets of $18 million, which iswas reflected in earnings.
61
The following table provides See the detail of the first quarter 2009 $4.5 billion (pre tax) increase“Critical Accounting Policies” section in fair value of securities availablethis Report 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. |
more information.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
63
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 not be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The provisions of this FSP are effective infor second quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009, and increased the beginning balance of retained earnings by $85 million ($53 million after tax) with a corresponding adjustment to accumulatedcumulative 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 of the FSP, $334 million of OTTI remained in other comprehensive income that would have been reported in the income statement under the prior guidance.
FSP 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, 2009, with retrospective adoption required. The adoption of FSP EITF 03-6-1 did not have a material effect on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1 states that entities must disclose the fair value of financial instruments in interim reporting periods as well as in annual financial statements. The FSP also requires disclosure of the methods and assumptions used to estimate fair value as well as any changes in methods and assumptions that occurred during the reporting period. We adopted this pronouncement in second quarter 2009. See Note 12 for additional information. Because the FSP amends only the disclosure requirements related to the fair value of financial instruments, the adoption of this FSP does not affect our consolidated financial statements.
FAS 165 describes two types of subsequent events that previously were addressed in the auditing literature, one that requires post-period end adjustment to the financial statements being issued, and one that requires footnote disclosure only. FAS 165 also requires a company to disclose the date through which management has evaluated subsequent events, which for public companies is the date that financial statements are issued. FAS 165 is effective in second quarter 2009 with prospective application. Our adoption of this standard did not have a material impact on our consolidated financial statements.
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Supplemental Cash Flow Information
Noncash investing and financing activities are presented below, including information on transfers impacting mortgages held for sale (MHFS), loans held for sale (LHFS), and mortgage servicing rights (MSRs).
|
| | | | | | | | |
| | Six months ended June 30, | |
(in millions) | | 2009 | | | 2008 | |
|
Transfers from trading assets to securities available for sale | | $ | 845 | | | | — | |
Transfers from MHFS to trading assets | | | 663 | | | | — | |
Transfers from MHFS to securities available for sale | | | — | | | | 268 | |
Transfers from MHFS to MSRs | | | 3,550 | | | | 1,800 | |
Transfers from MHFS to foreclosed assets | | | 87 | | | | — | |
Net transfers from loans to MHFS | | | 45 | | | | (235 | ) | |
Net transfers from loans to LHFS | | | 16 | | | | (412 | ) | |
Transfers from loans to foreclosed assets | | | 3,307 | | | | 1,403 | |
|
|
Subsequent Events
We have evaluated the effects of subsequent events that have occurred subsequent to period end June 30, 2009, and through August 7, 2009, which is the date we issued our financial statements. During this period, there have been no material events that would require recognition in our second quarter 2009 consolidated financial statements or disclosure in the Notes to the financial statements.
65
2. BUSINESS COMBINATIONS
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.
In the first quarterhalf of 2009, we completed the acquisitions of a factoring business with total assets of $74 million and anfour insurance brokerage businessbusinesses with total assets of $23$32 million.
At March 31,June 30, 2009, we had no pending business combinations.
On December 31, 2008, we acquired all outstanding shares of Wachovia common stock in a stock-for-stock transaction. Because the transaction closed on the last day of the annual reporting period, certain fair value purchase accounting adjustments were based on data as of an interim period with estimates through year end. Accordingly, we 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 period of up to one year from the date of the acquisition as we further refine acquisition date fair values. The impact of the first quarter 2009 refinementsall changes were recorded to goodwill and increased goodwill by $1.14$1.9 billion in the first quarterhalf of 2009. This acquisition was nontaxable and, as a result, there is no tax basis in goodwill. Accordingly, none of the goodwill associated with the Wachovia acquisition is deductible for tax purposes.
The refined allocation of the purchase price at December 31, 2008, is presented in the following table.
Purchase Price and Goodwill
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Dec. 31 | , | | | | | Dec. 31, | | | |
| | 2008 | | Dec. 31 | , | | 2008 | | Dec. 31, | |
(in millions) | | (refined) | | Refinements | | 2008 | | | (refined) | | Refinements | | 2008 | |
| | | |
| | |
Value of common shares | | $ | 14,621 | | $ | -- | | $ | 14,621 | | | $ | 14,621 | | — | | 14,621 | |
Value of preferred shares | | 8,409 | | -- | | 8,409 | | | 8,409 | | — | | 8,409 | |
Other (value of share-based awards and direct acquisition costs) | | 62 | | -- | | 62 | | | 62 | | — | | 62 | |
| | | | | | | | |
Total purchase price | | 23,092 | | -- | | 23,092 | | | 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 | | | 19,386 | | | (8 | ) | | 19,394 | |
Adjustments to reflect assets acquired and liabilities assumed at fair value: | | |
Loans and leases, net | | | (17,139 | ) | | | (742 | ) | | | (16,397 | ) | | | (17,961 | ) | | | (1,564 | ) | | | (16,397 | ) |
Premises and equipment, net | | | (656 | ) | | | (200 | ) | | | (456 | ) | | | (680 | ) | | | (224 | ) | | | (456 | ) |
Intangible assets | | 14,590 | | | (150 | ) | | 14,740 | | | 14,589 | | | (151 | ) | | 14,740 | |
Other assets | | | (3,675 | ) | | | (231 | ) | | | (3,444 | ) | | | (3,869 | ) | | | (425 | ) | | | (3,444 | ) |
Deposits | | | (4,576 | ) | | | (142 | ) | | | (4,434 | ) | | | (4,575 | ) | | | (141 | ) | | | (4,434 | ) |
Accrued expenses and other liabilities (exit, termination and other liabilities) | | | (2,153 | ) | | | (554 | ) | | | (1,599 | ) | | | (2,404 | ) | | | (805 | ) | | | (1,599 | ) |
Long-term debt | | | (199 | ) | | | (9 | ) | | | (190 | ) | | | (226 | ) | | | (36 | ) | | | (190 | ) |
Deferred taxes | | 7,635 | | 959 | | 6,676 | | | 8,104 | | 1,428 | | 6,676 | |
| | | | | | | | |
Fair value of net assets acquired | | 13,146 | | | (1,144 | ) | | 14,290 | | | 12,364 | | | (1,926 | ) | | 14,290 | |
| | | | | | | | |
Goodwill resulting from the merger | | $ | 9,946 | | $ | 1,144 | | $ | 8,802 | | | $ | 10,728 | | 1,926 | | 8,802 | |
| | | | | | | | |
| | | |
6366
The increase in goodwill includes the recognition of additional types of 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 | | | | | Employee | | Contract | | Facilities | | | |
(in millions) | termination | | termination | | related | | Total | | | termination | | termination | | related | | Total | |
| | | |
Balance, December 31, 2008 | | $ | 57 | | $ | 13 | | $ | 129 | | $ | 199 | | | $ | 57 | | 13 | | 129 | | 199 | |
Purchase accounting adjustments | | 100 | | 200 | | 60 | | 360 | | | 100 | | 200 | | 60 | | 360 | |
Cash payments | | | (50 | ) | | -- | | | (8 | ) | | | (58 | ) | |
Cash payments / utilization | | | | (50 | ) | | — | | | (8 | ) | | | (58 | ) |
| | | | | | | | | | |
Balance, March 31, 2009 | | $ | 107 | | $ | 213 | | $ | 181 | | $ | 501 | | | 107 | | 213 | | 181 | | 501 | |
| | | | | | | | | | |
Purchase accounting adjustments | | | 165 | | 16 | | | (75 | ) | | 106 | |
Cash payments / utilization | | | | (46 | ) | | — | | | (41 | ) | | | (87 | ) |
| | | |
Balance, June 30, 2009 | | | $ | 226 | | 229 | | 65 | | 520 | |
| | |
| | |
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS3. | | FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM INVESTMENTS |
The following table provides the detail of federal funds sold, securities purchased under resale agreements and other short-term investments.
| | | | | | | | | | | | | |
| | | | | | | | | | |
| | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | June 30, | | Dec. 31, | |
(in millions) | | 2009 | | 2008 | | 2008 | | | 2009 | | 2008 | |
| | | |
Federal funds sold and securities purchased under resale agreements | | $ | 4,114 | | $ | 8,439 | | $ | 2,209 | | | $ | 12,071 | | 8,439 | |
Interest-earning deposits | | 13,359 | | 39,890 | | 994 | | | 2,876 | | 39,890 | |
Other short-term investments | | 1,152 | | 1,104 | | 968 | | | 1,029 | | 1,104 | |
| | | | | | | | |
Total | | $ | 18,625 | | $ | 49,433 | | $ | 4,171 | | | $ | 15,976 | | 49,433 | |
| | | | | | | | |
| | | |
6467
4. SECURITIES AVAILABLE FOR SALE
The following table provides the cost and fair value for the major categories of securities available for sale carried at fair value.sale. 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.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Gross | | Gross | | | | | Gross | | Gross | | | |
| | unrealized | | unrealized | | Fair | | | unrealized | | unrealized | | Fair | |
(in millions) | | Cost | | gains | | losses | | value | | | Cost | | gains | | losses | | value | |
| | |
| | |
Securities of U.S. Treasury and federal agencies | | $ | 983 | | $ | 33 | | $ | -- | | $ | 1,016 | | |
Securities of U.S. states and political subdivisions | | 7,453 | | 109 | | | (382 | ) | | 7,180 | | |
Mortgage-backed securities: | | |
Federal agencies | | 37,468 | | 1,145 | | | (36 | ) | | 38,577 | | |
Residential | | 15,625 | | 55 | | | (217 | ) | | 15,463 | | |
Commercial | | 7,755 | | 85 | | | (718 | ) | | 7,122 | | |
| | | | | | | | | | |
Total mortgage-backed securities | | 60,848 | | 1,285 | | | (971 | ) | | 61,162 | | |
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 | | | $ | 3,187 | | 62 | | — | | 3,249 | |
Securities of U.S. states and political subdivisions | | 14,062 | | 116 | | | (1,520 | ) | | 12,658 | | | 14,062 | | 116 | | | (1,520 | ) | | 12,658 | |
Mortgage-backed securities: | | |
Federal agencies | | 64,726 | | 1,711 | | | (3 | ) | | 66,434 | | | 64,726 | | 1,711 | | | (3 | ) | | 66,434 | |
Residential | | 29,536 | | 11 | | | (4,717 | ) | | 24,830 | | | 29,536 | | 11 | | | (4,717 | ) | | 24,830 | |
Commercial | | 12,305 | | 51 | | | (3,878 | ) | | 8,478 | | | 12,305 | | 51 | | | (3,878 | ) | | 8,478 | |
| | | | | | | | | | |
Total mortgage-backed securities | | 106,567 | | 1,773 | | | (8,598 | ) | | 99,742 | | | 106,567 | | 1,773 | | | (8,598 | ) | | 99,742 | |
| | |
Corporate debt securities | | 7,382 | | 81 | | | (539 | ) | | 6,924 | | | 7,382 | | 81 | | | (539 | ) | | 6,924 | |
Collateralized debt obligations | | 2,634 | | 21 | | | (570 | ) | | 2,085 | | | 2,634 | | 21 | | | (570 | ) | | 2,085 | |
Other (1) (2) | | 21,363 | | 14 | | | (602 | ) | | 20,775 | | | 21,363 | | 14 | | | (602 | ) | | 20,775 | |
| | | | | | | | | | |
Total debt securities | | 155,195 | | 2,067 | | | (11,829 | ) | | 145,433 | | | 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 | | 177,362 | | 5,885 | | | (9,958 | ) | | 173,289 | | |
Marketable equity securities: | | |
Perpetual preferred securities | | 4,483 | | 41 | | | (754 | ) | | 3,770 | | | 5,040 | | 13 | | | (327 | ) | | 4,726 | |
Other marketable equity securities | | 1,342 | | 190 | | | (123 | ) | | 1,409 | | | 1,256 | | 181 | | | (27 | ) | | 1,410 | |
| | | | | | | | | | |
Total marketable equity securities | | 5,825 | | 231 | | | (877 | ) | | 5,179 | | | 6,296 | | 194 | | | (354 | ) | | 6,136 | |
| | | | | | | | | | |
Total | | $ | 183,187 | | $ | 6,116 | | $ | (10,835 | ) | | $ | 178,468 | | | $ | 161,491 | | 2,261 | | | (12,183 | ) | | 151,569 | |
| | | | | | | | | | |
| | | |
June 30, 2009 | | |
Securities of U.S. Treasury and federal agencies | | | $ | 2,482 | | 48 | | | (13 | ) | | 2,517 | |
Securities of U.S. states and political subdivisions | | | 12,802 | | 354 | | | (778 | ) | | 12,378 | |
Mortgage-backed securities: | | |
Federal agencies | | | 112,049 | | 2,833 | | | (38 | ) | | 114,844 | |
Residential(2) | | | 34,022 | | 1,523 | | | (3,021 | ) | | 32,524 | |
Commercial | | | 12,418 | | 410 | | | (2,605 | ) | | 10,223 | |
| | |
Total mortgage-backed securities | | | 158,489 | | 4,766 | | | (5,664 | ) | | 157,591 | |
| | |
Corporate debt securities | | | 8,575 | | 501 | | | (263 | ) | | 8,813 | |
Collateralized debt obligations | | | 3,048 | | 229 | | | (529 | ) | | 2,748 | |
Other(1) | | | 16,308 | | 858 | | | (327 | ) | | 16,839 | |
| | |
Total debt securities | | | 201,704 | | 6,756 | | | (7,574 | ) | | 200,886 | |
| | |
Marketable equity securities: | | |
Perpetual preferred securities | | | 4,136 | | 201 | | | (274 | ) | | 4,063 | |
Other marketable equity securities | | | 1,355 | | 532 | | | (41 | ) | | 1,846 | |
| | |
Total marketable equity securities | | | 5,491 | | 733 | | | (315 | ) | | 5,909 | |
| | |
Total | | | $ | 207,195 | | 7,489 | | | (7,889 | ) | | 206,795 | |
| | |
| | |
| | |
|
(1) | | The “Other” category includes certain asset-backed securities collateralized by auto leases with a cost basis and fair value of $8,407$8,962 million and $8,309$9,201 million, respectively, at March 31,June 30, 2009, and $8,310 million and $7,852 million, respectively, at December 31, 2008, and $5,909 million and $5,941 million at March 31, 2008. |
|
(2) | | Foreign residential mortgage-backed securities with a fair value of $6.0$3.4 billion are included in residential mortgage-backed securities at March 31,June 30, 2009. These instruments were included in other debt securities at December 31, 2008, and had a fair value of $6.3 billion. |
6568
Gross Unrealized Losses and Fair Value
The following table shows the gross unrealized losses and fair value of securities in the securities available-for-sale portfolio by length of time that individual securities in each category had been in a continuous loss position. Debt securities on 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 based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | Total | | | Less than 12 months | | 12 months or more | | Total | |
| | Gross | | Gross | | Gross | | | | | Gross | | Gross | | Gross | | | |
| unrealized | | Fair | | unrealized | | Fair | | unrealized | | Fair | | | unrealized | | Fair | | unrealized | | Fair | | unrealized | | Fair | |
(in millions) | | losses | | value | | losses | | value | | losses | | value | | | 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 | | | | (745 | ) | | 3,483 | | | (775 | ) | | 1,702 | | | (1,520 | ) | | 5,185 | |
Mortgage-backed securities: | | |
Federal agencies | | | (3 | ) | | 83 | | -- | | -- | | | (3 | ) | | 83 | | | | (3 | ) | | 83 | | — | | — | | | (3 | ) | | 83 | |
Residential | | | (4,471 | ) | | 9,960 | | | (246 | ) | | 238 | | | (4,717 | ) | | 10,198 | | | | (4,471 | ) | | 9,960 | | | (246 | ) | | 238 | | | (4,717 | ) | | 10,198 | |
Commercial | | | (1,726 | ) | | 4,152 | | | (2,152 | ) | | 2,302 | | | (3,878 | ) | | 6,454 | | | | (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 | | | | (6,200 | ) | | 14,195 | | | (2,398 | ) | | 2,540 | | | (8,598 | ) | | 16,735 | |
| | |
Corporate debt securities | | | (285 | ) | | 1,056 | | | (254 | ) | | 469 | | | (539 | ) | | 1,525 | | | | (285 | ) | | 1,056 | | | (254 | ) | | 469 | | | (539 | ) | | 1,525 | |
Collateralized debt obligations | | | (113 | ) | | 215 | | | (457 | ) | | 180 | | | (570 | ) | | 395 | | | | (113 | ) | | 215 | | | (457 | ) | | 180 | | | (570 | ) | | 395 | |
Other | | | (554 | ) | | 8,638 | | | (48 | ) | | 38 | | | (602 | ) | | 8,676 | | | | (554 | ) | | 8,638 | | | (48 | ) | | 38 | | | (602 | ) | | 8,676 | |
| | | | | | | | | | | | | | |
Total debt securities | | | (7,897 | ) | | 27,587 | | | (3,932 | ) | | 4,929 | | | (11,829 | ) | | 32,516 | | | | (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 | | | | (75 | ) | | 265 | | | (252 | ) | | 360 | | | (327 | ) | | 625 | |
Other marketable equity securities | | | (123 | ) | | 387 | | -- | | -- | | | (123 | ) | | 387 | | | | (23 | ) | | 72 | | | (4 | ) | | 9 | | | (27 | ) | | 81 | |
| | | | | | | | | | | | | | |
Total marketable equity securities | | | (528 | ) | | 1,194 | | | (349 | ) | | 366 | | | (877 | ) | | 1,560 | | | | (98 | ) | | 337 | | | (256 | ) | | 369 | | | (354 | ) | | 706 | |
| | | | | | | | | | | | | | |
| | $ | (4,859 | ) | | $ | 34,227 | | $ | (5,976 | ) | | $ | 12,714 | | $ | (10,835 | ) | | $ | 46,941 | | | $ | (7,995 | ) | | 27,924 | | | (4,188 | ) | | 5,298 | | | (12,183 | ) | | 33,222 | |
| | | | | | | | | | | | | | |
| | | |
June 30, 2009 | | |
Securities of U.S. Treasury and federal agencies | | | $ | (13 | ) | | 519 | | — | | — | | | (13 | ) | | 519 | |
Securities of U.S. states and political subdivisions | | | | (165 | ) | | 3,122 | | | (613 | ) | | 3,064 | | | (778 | ) | | 6,186 | |
Mortgage-backed securities: | | |
Federal agencies | | | | (38 | ) | | 6,778 | | — | | — | | | (38 | ) | | 6,778 | |
Residential | | | | (604 | ) | | 7,699 | | | (2,417 | ) | | 10,116 | | | (3,021 | ) | | 17,815 | |
Commercial | | | | (592 | ) | | 2,904 | | | (2,013 | ) | | 4,199 | | | (2,605 | ) | | 7,103 | |
| | |
Total mortgage-backed securities | | | | (1,234 | ) | | 17,381 | | | (4,430 | ) | | 14,315 | | | (5,664 | ) | | 31,696 | |
| | |
Corporate debt securities | | | | (89 | ) | | 993 | | | (174 | ) | | 767 | | | (263 | ) | | 1,760 | |
Collateralized debt obligations | | | | (154 | ) | | 694 | | | (375 | ) | | 397 | | | (529 | ) | | 1,091 | |
Other | | | | (194 | ) | | 1,350 | | | (133 | ) | | 78 | | | (327 | ) | | 1,428 | |
| | |
Total debt securities | | | | (1,849 | ) | | 24,059 | | | (5,725 | ) | | 18,621 | | | (7,574 | ) | | 42,680 | |
| | |
Marketable equity securities: | | |
Perpetual preferred securities | | | | (14 | ) | | 326 | | | (260 | ) | | 615 | | | (274 | ) | | 941 | |
Other marketable equity securities | | | | (31 | ) | | 239 | | | (10 | ) | | 17 | | | (41 | ) | | 256 | |
| | |
Total marketable equity securities | | | | (45 | ) | | 565 | | | (270 | ) | | 632 | | | (315 | ) | | 1,197 | |
| | |
Total | | | $ | (1,894 | ) | | 24,624 | | | (5,995 | ) | | 19,253 | | | (7,889 | ) | | 43,877 | |
| | |
For the securities in the above table, we do not have the intent to sell and have determined it is more likely than not that we will not be required to sell the security prior to recovery of the amortized cost basis. We have assessed each security for credit impairment. For debt securities, we evaluate, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities amortized cost basis. For equity securities, we consider numerous factors in determining
69
whether impairment exists, including our intent and ability to hold the securities for a period of time sufficient to recover the securities’ amortized cost basis.
In determining whether a loss is temporary, we consider all relevant information including:
• | | The length of time and the extent to which the fair value has been less than the amortized cost basis; |
|
• | | Adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement); |
The historical and implied volatility of the fair value of the security;
The payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
Failure of the issuer of the security to make scheduled interest or principal payments;
Any changes to the rating of the security by a rating agency; and
Recoveries or additional declines in fair value subsequent to the balance sheet date.
To the extent we estimate future expected cash flows, we considered all available information in developing those expected cash flows. For asset-backed securities such as residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations and other types of asset-backed securities, such information generally included:
Remaining payment terms of the security (including as applicable, terms that require underlying obligor payments to increase in the future);
Current delinquencies and nonperforming assets of underlying collateral;
Expected future default rates;
Collateral value by vintage, geographic region, industry concentration or property type; and
Subordination levels or other credit enhancements.
Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data.
Securities of U.S. Treasury and federal agencies
The unrealized losses associated with U.S. Treasury and federal agency securities do not have any credit losses due to the guarantees provided by the United States government.
Securities of U.S. states and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and not due to the credit quality of the securities. These investments are almost exclusively investment grade and were generally underwritten in accordance with our own 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 our ongoing impairment analysis, but are expected to perform, even if
66
the rating agencies reduce the credit rating of the bond insurers. As a result, we concluded thatexpect to recover the entire amortized cost basis of these securities.
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Federal Agency Mortgage-Backed Securities
The unrealized losses associated with federal agency mortgage-backed securities wereare primarily driven by changes in interest rates and not other-than-temporarily impaired at March 31, 2009.due to credit losses. These securities are issued by U.S. government or government-sponsored entities and do not have any credit losses given the explicit or implicit government guarantee.
Residential Mortgage-Backed Securities
The unrealized losses associated with private collateralized mortgage obligationsresidential mortgage-backed securities are primarily related to securities backeddriven by commercial mortgageshigher projected collateral losses, wider credit spreads and residential mortgages. Approximately 75% of the securities were AAA-rated by at least one major rating agency.changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. We estimate loss projections for eachlosses to a security by assessingforecasting the underlying mortgage loans collateralizingin each transaction. The forecasted loan performance is used to project cash flows to the securityvarious tranches in the structure. Cash flow forecasts also considered, as applicable, independent industry analyst reports and determining expected default ratesforecasts, sector credit ratings, and loss severities.other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we concluded thatexpect to recover the entire amortized cost basis of these securities were not other-than-temporarily impaired at March 31, 2009.securities.
Commercial Mortgage-Backed Securities
The unrealized losses associated with commercial mortgage-backed securities are primarily driven by higher projected collateral losses and wider credit spreads. These investments are almost exclusively investment grade. We assess for credit impairment using a cash flow model. The key assumptions include default rates and severities. We estimate losses to a security by forecasting the underlying loans in each transaction. The forecasted loan performance is used to project cash flows to the various tranches in the structure. Cash flow forecasts also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings, and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Corporate Debt Securities
The unrealized losses associated with corporate debt 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.
Collateralized Debt Obligations
The unrealized losses associated with collateralized debt obligations relate to securities primarily backed by commercial, residential or other consumer collateral. The losses are primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
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Other Debt Securities
The unrealized losses associated with other debt securities primarily relate to other asset-backed securities, which are primarily backed by auto, home equity and student loans. The losses are primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our credit enhancement, we expect to recover the entire amortized cost basis of these securities.
Marketable Equity Securities
Our marketable equity securities included $3.8 billion ofinclude investments in perpetual preferred securities, at March 31, 2009. These securitieswhich provide very attractive tax-equivalent yields and were current as to periodic distributions in accordance with their respective terms as of March 31,June 30, 2009. We evaluated these hybrid financial instruments with investment-grade ratings for impairment using an evaluation methodology similar to that used for debt securities. Perpetual preferred securities were not other-than-temporarily impaired at March 31,June 30, 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 wouldexpected to 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 obligationsresidential and commercial mortgage-backed securities 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.
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The table below shows the gross unrealized losses and fair value of debt and perpetual preferred securities in the available-for-sale portfolio by those rated investment grade and those rated less than investment grade, according to their lowest credit rating by Standard & Poor’s Rating Services (S&P) or Moody’s Investors Service (Moody’s). Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by S&P or Baa3 or higher by Moody’s, are generally considered by the rating agencies and market participants to be low credit risk. Conversely, securities rated below investment grade, labeled as “speculative grade” by the rating agencies, are considered to be distinctively higher credit risk than investment grade securities. We have also included securities not rated by S&P or Moody’s in the table below based on the internal credit grade of the securities (used for credit risk management purposes) equivalent to the credit rating assigned by major credit agencies. If an internal credit grade was not assigned, we categorized the security as non-investment grade.
|
| | | | | | | | | | | | | | | | |
| | Investment grade | | | Non-investment grade | |
| | Gross | | | | | | | Gross | | | | |
| | unrealized | | | Fair | | | unrealized | | | Fair | |
(in millions) | | losses | | | value | | | losses | | | value | |
|
December 31, 2008 | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | — | | | | — | | | | — | | | | — | |
Securities of U.S. states and political subdivisions | | | (1,464 | ) | | | 5,028 | | | | (56 | ) | | | 157 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | |
Federal agencies | | | (3 | ) | | | 83 | | | | — | | | | — | |
Residential | | | (4,574 | ) | | | 10,045 | | | | (143 | ) | | | 153 | |
Commercial | | | (3,863 | ) | | | 6,427 | | | | (15 | ) | | | 27 | |
|
Total mortgage-backed securities | | | (8,440 | ) | | | 16,555 | | | | (158 | ) | | | 180 | |
Corporate debt securities | | | (36 | ) | | | 579 | | | | (503 | ) | | | 946 | |
Collateralized debt obligations | | | (478 | ) | | | 373 | | | | (92 | ) | | | 22 | |
Other | | | (549 | ) | | | 8,612 | | | | (53 | ) | | | 64 | |
|
Total debt securities | | | (10,967 | ) | | | 31,147 | | | | (862 | ) | | | 1,369 | |
Perpetual preferred securities | | | (311 | ) | | | 604 | | | | (16 | ) | | | 21 | |
|
Total | | $ | (11,278 | ) | | | 31,751 | | | | (878 | ) | | | 1,390 | |
|
June 30, 2009 | | | | | | | | | | | | | | | | |
Securities of U.S. Treasury and federal agencies | | $ | (13 | ) | | | 519 | | | | — | | | | — | |
Securities of U.S. states and political subdivisions | | | (670 | ) | | | 5,856 | | | | (108 | ) | | | 330 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | |
Federal agencies | | | (38 | ) | | | 6,778 | | | | — | | | | — | |
Residential | | | (1,127 | ) | | | 10,150 | | | | (1,894 | ) | | | 7,665 | |
Commercial | | | (2,558 | ) | | | 6,967 | | | | (47 | ) | | | 136 | |
|
Total mortgage-backed securities | | | (3,723 | ) | | | 23,895 | | | | (1,941 | ) | | | 7,801 | |
Corporate debt securities | | | (88 | ) | | | 787 | | | | (175 | ) | | | 973 | |
Collateralized debt obligations | | | (194 | ) | | | 652 | | | | (335 | ) | | | 439 | |
Other | | | (66 | ) | | | 782 | | | | (261 | ) | | | 646 | |
|
Total debt securities | | | (4,754 | ) | | | 32,491 | | | | (2,820 | ) | | | 10,189 | |
Perpetual preferred securities | | | (259 | ) | | | 836 | | | | (15 | ) | | | 105 | |
|
Total | | $ | (5,013 | ) | | | 33,327 | | | | (2,835 | ) | | | 10,294 | |
|
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Realized Gains and Losses
The following table shows the gross realized gains and losses on the sales of securities from the securities available-for-sale portfolio, including marketable equity securities. Realized losses include OTTI write-downs.
|
| | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | | Six months ended June 30, | |
(in millions) | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Gross realized gains | | $ | 416 | | | | 76 | | | | 710 | | | | 454 | |
Gross realized losses | | | (348 | ) | | | (139 | ) | | | (718 | ) | | | (227 | ) |
|
Net realized gains (losses) | | $ | 68 | | | | (63 | ) | | | (8 | ) | | | 227 | |
|
Other-Than-Temporary Impairment
The following table shows the detail of total OTTI related to debt and equity securities available for sale, and nonmarketable equity securities.
|
| | | | | | | | |
| | June 30, 2009 | |
| | Quarter | | | Six months | |
(in millions) | | ended | | | ended | |
|
OTTI write-downs (included in earnings) | | | | | | | | |
Debt securities | | $ | 308 | | | | 577 | |
Equity securities: | | | | | | | | |
Securities available for sale | | | 27 | | | | 70 | |
Nonmarketable equity securities | | | 128 | | | | 332 | |
|
Total equity securities | | | 155 | | | | 402 | |
|
Total OTTI write-downs | | $ | 463 | | | | 979 | |
|
OTTI on debt securities | | | | | | | | |
Recorded as part of gross realized losses: | | | | | | | | |
Credit-related OTTI | | $ | 307 | | | | 570 | |
Securities we intend to sell | | | 1 | | | | 7 | |
Recorded directly to other comprehensive income for non-credit-related impairment | | | 664 | | | | 998 | |
|
Total OTTI on debt securities | | $ | 972 | | | | 1,575 | |
|
The following table provides detail of OTTI recognized in earnings for debt and equity securities available for sale by major security type.
|
| | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | | Six months ended June 30, | |
(in millions) | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Debt securities | | | | | | | | | | | | | | | | |
U.S. states and political subdivisions | | $ | 5 | | | | — | | | | 5 | | | | — | |
Residential mortgage-backed securities | | | 214 | | | | 69 | | | | 392 | | | | 73 | |
Commercial mortgage-backed securities | | | 1 | | | | — | | | | 11 | | | | — | |
Corporate debt securities | | | 22 | | | | 19 | | | | 53 | | | | 31 | |
Collateralized debt obligations | | | 46 | | | | 4 | | | | 96 | | | | 4 | |
Other debt securities | | | 20 | | | | — | | | | 20 | | | | — | |
|
Total debt securities | | | 308 | | | | 92 | | | | 577 | | | | 108 | |
Marketable equity securities | | | | | | | | | | | | | | | | |
Perpetual preferred securities | | | 18 | | | | 33 | | | | 45 | | | | 33 | |
Other marketable equity securities | | | 9 | | | | 4 | | | | 25 | | | | 61 | |
|
Total marketable equity securities | | | 27 | | | | 37 | | | | 70 | | | | 94 | |
|
Total OTTI losses recognized in earnings | | $ | 335 | | | | 129 | | | | 647 | | | | 202 | |
|
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Securities that were determined to be credit impaired during the current quarter as opposed to prior quarters, in general have experienced further degradation in expected cash flows primarily due to higher loss forecasts and slower prepayment speeds.
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.flows discounted at the security’s effective yield. The remaining difference
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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, therefore, is not required to be recognized as losses in the income statement, but is recognized in other comprehensive income. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income.
The following table below 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 the first quarterhalf of 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 or expect to receive cash flows in excess of what we previously 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 | | | Quarter ended | | Six months ended | |
(in millions) | March 31, 2009 | | | June 30, 2009 | | June 30, 2009 | |
| | | |
Balance, beginning of period | | $ | 471 | | | $ | 727 | | 471 | |
| | |
| | |
Initial credit impairments | | 197 | | | 216 | | 413 | |
Subsequent credit impairments | | 66 | | | 91 | | 157 | |
| | |
| | |
For securities sold | | | (7 | ) | | | (16 | ) | | | (23 | ) |
Due to change in intent to sell or requirement to sell | | | | (1 | ) | | | (1 | ) |
For increases in expected cash flows | | | | (5 | ) | | | (5 | ) |
| | | | |
| | $ | 727 | | | $ | 1,012 | | 1,012 | |
| | | | |
| | |
| | |
(1) | | Excludes $6$1 million and $7 million for the quarter and six months ended June 30, 2009, respectively, 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 below presents a summary of the significant inputs considered in determining the measurement of the credit loss component recognized in earnings for asset-backedresidential mortgage-backed securities as of March 31,at June 30, 2009.
| | | | |
| |
| | Residential MBS | |
| |
Expected remaining life of loan losses (1):
| | | | | | | | | | | | Residential MBS | | | | Quarter ended | | | Six months ended | | | | June 30, 2009 | | | June 30, 2009 | | | Expected remaining life of loan losses (1): | | | | | | | | | Range (2) | | | 0 to 57.66 | % | | | 0 to 57.66 | | Weighted average (3) | | | 9.95 | | | | 10.35 | | | | | | | | | | | Current subordination levels (4): | | | | | | | | | Range (2) | | | 0 to 18.99 | | | | 0 to 19.68 | | Weighted average (3) | | | 7.66 | | | | 7.49 | | | | | | | | | | | Prepayment speed (annual CPR (5)): | | | | | | | | | Range (2) | | | 5.42 to 18.25 | | | | 5.42 to 24.64 | | Weighted average (3) | | | 10.18 | | | | 11.47 | | |
| | | | |
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)
(5) | | 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 gross realized gains and losses on the sales of securities from the securities available-for-sale portfolio, including marketable equity securities. 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 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, and $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 securities 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 contractual yields of debt securities available for sale. The remaining contractual principal maturities for mortgage-backed securities were allocateddetermined assuming no prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining contractual principal maturity | | | Remaining contractual principal maturity | |
| | Weighted- | | After one year | | After five years | | | | | Weighted- | | After one year | | After five years | | | |
| | Total | | average | | Within one year | | through five years | | through ten years | | After ten 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 | | | 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 | % | | $ | 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 | | | 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 | | | 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 | | | 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 | | | 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 | | | 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 | | | 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 | | | 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 | | | 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 | % | | $ | 145,433 | | | 6.00 | % | | $ | 2,446 | | | 1.60 | % | | $ | 13,912 | | | 6.34 | % | | $ | 6,440 | | | 6.14 | % | | $ | 122,635 | | | 6.04 | % |
| | | | | | | | | | | | |
| | |
| | |
June 30, 2009 | | |
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 | % | | $ | 2,517 | | | 1.83 | % | | $ | 560 | | | 0.34 | % | | $ | 751 | | | 3.12 | % | | $ | 1,187 | | | 1.66 | % | | $ | 19 | | | 5.53 | % |
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 | | | 12,378 | | 6.86 | | 81 | | 9.02 | | 633 | | 7.02 | | 1,095 | | 6.88 | | 10,569 | | 6.83 | |
Mortgage-backed securities: | | |
Federal agencies | | 90,648 | | 5.62 | | 6 | | 4.80 | | 97 | | 5.50 | | 329 | | 5.57 | | 90,216 | | 5.62 | | | 114,844 | | 5.31 | | 20 | | 4.59 | | 73 | | 5.72 | | 313 | | 5.62 | | 114,438 | | 5.31 | |
Residential | | 32,482 | | 5.41 | | 8 | | 4.42 | | 131 | | 0.80 | | 91 | | 6.31 | | 32,252 | | 5.43 | | | 32,524 | | 5.82 | | 15 | | 4.83 | | 125 | | 0.57 | | 127 | | 5.79 | | 32,257 | | 5.84 | |
Commercial | | 9,775 | | 5.20 | | 79 | | 1.46 | | 72 | | 5.31 | | 158 | | 7.67 | | 9,466 | | 5.19 | | | 10,223 | | 6.85 | | 80 | | 1.19 | | 72 | | 5.20 | | 201 | | 6.43 | | 9,870 | | 6.92 | |
| | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | 132,905 | | 5.54 | | 93 | | 1.94 | | 300 | | 3.40 | | 578 | | 6.26 | | 131,934 | | 5.54 | | | 157,591 | | 5.51 | | 115 | | 2.27 | | 270 | | 3.20 | | 641 | | 5.91 | | 156,565 | | 5.52 | |
| | | | | | | | | | | |
Corporate debt securities | | 6,986 | | 5.85 | | 715 | | 5.48 | | 3,092 | | 4.95 | | 2,643 | | 7.03 | | 536 | | 5.42 | | | 8,813 | | 5.17 | | 763 | | 4.95 | | 4,777 | | 4.77 | | 2,863 | | 5.94 | | 410 | | 4.85 | |
Collateralized debt obligations | | 2,386 | | 2.53 | | -- | | -- | | 168 | | 5.87 | | 1,025 | | 2.94 | | 1,193 | | 1.69 | | | 2,748 | | 2.34 | | — | | — | | 97 | | 4.98 | | 1,185 | | 2.99 | | 1,466 | | 1.64 | |
Other | | 16,263 | | 4.59 | | 35 | | 3.47 | | 9,414 | | 6.65 | | 766 | | 1.62 | | 6,048 | | 1.76 | | | 16,839 | | 3.83 | | 103 | | 4.03 | | 9,769 | | 5.26 | | 1,075 | | 3.64 | | 5,892 | | 1.50 | |
| | | | | | | | | | | | | | | | | | | | | |
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 | % | | $ | 200,886 | | | 5.35 | % | | $ | 1,622 | | | 3.32 | % | | $ | 16,297 | | | 5.05 | % | | $ | 8,046 | | | 4.69 | % | | $ | 174,921 | | | 5.43 | % |
| | | | | | | | | | | | |
| | |
| | |
(1) | | The weighted-average yield is computed using the contractual life amortization method. |
7077
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The major categories of loans outstanding showing 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 balances of all other loans are presented net of unearned income, net deferred loan fees, and unamortized discount and premium totaling $21,173$16,535 million at June 30, 2009, and $16,891 million, and $4,172 million, at March 31, 2009, December 31, 2008, and March 31, 2008, respectively.2008.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2009 | | December 31, 2008 | | | | | June 30, 2009 | | Dec. 31, 2008 | |
| | All | | All | | | | | All | | All | | | |
| | SOP 03-3 | | other | | SOP 03-3 | | other | | Mar. 31 | , | | SOP 03-3 | | other | | SOP 03-3 | | other | | | |
(in millions) | | loans | | loans | | Total | | loans | | loans | | Total | | 2008 | | | loans | | loans | | Total | | loans | | loans | | Total | |
| | | |
Commercial and commercial real estate: | | |
Commercial | | $ | 3,088 | | $ | 188,623 | | $ | 191,711 | | $ | 4,580 | | $ | 197,889 | | $ | 202,469 | | $ | 92,589 | | | $ | 2,667 | | 179,370 | | 182,037 | | 4,580 | | 197,889 | | 202,469 | |
Other real estate mortgage | | 6,597 | | 98,337 | | 104,934 | | 7,762 | | 95,346 | | 103,108 | | 38,415 | | | 5,826 | | 97,828 | | 103,654 | | 7,762 | | 95,346 | | 103,108 | |
Real estate construction | | 4,507 | | 29,405 | | 33,912 | | 4,503 | | 30,173 | | 34,676 | | 18,885 | | | 4,295 | | 28,943 | | 33,238 | | 4,503 | | 30,173 | | 34,676 | |
Lease financing | | -- | | 14,792 | | 14,792 | | -- | | 15,829 | | 15,829 | | 6,885 | | | — | | 14,555 | | 14,555 | | — | | 15,829 | | 15,829 | |
| | | | | | | | | | | | | | | | |
Total commercial and commercial real estate | | 14,192 | | 331,157 | | 345,349 | | 16,845 | | 339,237 | | 356,082 | | 156,774 | | | 12,788 | | 320,696 | | 333,484 | | 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 | | 73,321 | | | 40,471 | | 196,818 | | 237,289 | | 39,214 | | 208,680 | | 247,894 | |
Real estate 1-4 family junior lien mortgage | | 615 | | 109,133 | | 109,748 | | 728 | | 109,436 | | 110,164 | | 74,840 | | | 398 | | 106,626 | | 107,024 | | 728 | | 109,436 | | 110,164 | |
Credit card | | -- | | 22,815 | | 22,815 | | -- | | 23,555 | | 23,555 | | 18,677 | | | — | | 23,069 | | 23,069 | | — | | 23,555 | | 23,555 | |
Other revolving credit and installment | | 32 | | 91,220 | | 91,252 | | 151 | | 93,102 | | 93,253 | | 55,505 | | | — | | 90,654 | | 90,654 | | 151 | | 93,102 | | 93,253 | |
| | | | | | | | | | | | | | | | |
Total consumer | | 42,167 | | 424,595 | | 466,762 | | 40,093 | | 434,773 | | 474,866 | | 222,343 | | | 40,869 | | 417,167 | | 458,036 | | 40,093 | | 434,773 | | 474,866 | |
| | |
Foreign | | 1,849 | | 29,619 | | 31,468 | | 1,859 | | 32,023 | | 33,882 | | 7,216 | | | 1,554 | | 28,540 | | 30,094 | | 1,859 | | 32,023 | | 33,882 | |
| | | | | | | | | | | | | | | | |
Total loans | | $ | 58,208 | | $ | 785,371 | | $ | 843,579 | | $ | 58,797 | | $ | 806,033 | | $ | 864,830 | | $ | 386,333 | | | $ | 55,211 | | 766,403 | | 821,614 | | 58,797 | | 806,033 | | 864,830 | |
| | | | | | | | | | | | | | | | |
| | |
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 $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:
| | | | | | | | | | | |
| | | | | | | | | | |
| Mar. 31 | , | | Dec. 31 | , | Mar. 31 | , | | June 30, | | Dec. 31, | |
(in millions) | | 2009 | | 2008 | | 2008 | | | 2009 | | 2008 | |
| | | |
Impairment measurement based on: | | |
Collateral value method | | $ | 345 | | | $ 88 | | | $ 14 | | | $ | 247 | | 88 | |
Discounted cash flow method (1) | | 6,445 | | 3,552 | | 909 | | | 9,864 | | 3,552 | |
| | | | | | | | |
Total (2) | | $ | 6,790 | | | $3,640 | | | $ 923 | | | $ | 10,111 | | 3,640 | |
| | | | | | | | |
| | |
| | |
(1) | | The March 31,June 30, 2009, balance includes $474$446 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 $6,206 million, $3,468$9,746 million and $828$3,468 million of impaired loans with a related allowance of $1,571$2,045 million and $816 million and $111 million at March 31,June 30, 2009, and December 31, 2008, and March 31, 2008, respectively. The remaining impaired loans do not have a related allowance. |
The average recorded investment in impaired loans was $5,795$8,465 million in firstsecond quarter 2009 and $678$2,944 million in firstfourth quarter 2008. In the first half of 2009, the average recorded investment was $7,199 million.
7178
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 ended March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | |
Balance, beginning of period | | $ | 21,711 | | $ | 5,518 | | | $ | 22,846 | | 6,013 | | 21,711 | | 5,518 | |
Provision for credit losses | | 4,558 | | 2,028 | | | 5,086 | | 3,012 | | 9,644 | | 5,040 | |
| | |
Commercial and commercial real estate: | | |
Commercial | | | (596 | ) | | | (259 | ) | | | (755 | ) | | | (333 | ) | | | (1,351 | ) | | | (592 | ) |
Other real estate mortgage | | | (31 | ) | | | (4 | ) | | | (152 | ) | | | (6 | ) | | | (183 | ) | | | (10 | ) |
Real estate construction | | | (105 | ) | | | (29 | ) | | | (236 | ) | | | (28 | ) | | | (341 | ) | | | (57 | ) |
Lease financing | | | (20 | ) | | | (12 | ) | | | (65 | ) | | | (13 | ) | | | (85 | ) | | | (25 | ) |
| | | | | | |
Total commercial and commercial real estate | | | (752 | ) | | | (304 | ) | | | (1,208 | ) | | | (380 | ) | | | (1,960 | ) | | | (684 | ) |
| | |
Consumer: | | |
Real estate 1-4 family first mortgage | | | (424 | ) | | | (81 | ) | | | (790 | ) | | | (103 | ) | | | (1,214 | ) | | | (184 | ) |
Real estate 1-4 family junior lien mortgage | | | (873 | ) | | | (455 | ) | | | (1,215 | ) | | | (352 | ) | | | (2,088 | ) | | | (807 | ) |
Credit card | | | (622 | ) | | | (313 | ) | | | (712 | ) | | | (369 | ) | | | (1,334 | ) | | | (682 | ) |
Other revolving credit and installment | | | (900 | ) | | | (543 | ) | | | (802 | ) | | | (488 | ) | | | (1,702 | ) | | | (1,031 | ) |
| | | | | | |
Total consumer | | | (2,819 | ) | | | (1,392 | ) | | | (3,519 | ) | | | (1,312 | ) | | | (6,338 | ) | | | (2,704 | ) |
| | |
Foreign | | | (54 | ) | | | (68 | ) | | | (56 | ) | | | (58 | ) | | | (110 | ) | | | (126 | ) |
| | | | | | |
Total loan charge-offs | | | (3,625 | ) | | | (1,764 | ) | | | (4,783 | ) | | | (1,750 | ) | | | (8,408 | ) | | | (3,514 | ) |
| | | | | | |
| | |
Commercial and commercial real estate: | | |
Commercial | | 40 | | 31 | | | 51 | | 32 | | 91 | | 63 | |
Other real estate mortgage | | 10 | | 1 | | | 6 | | 2 | | 16 | | 3 | |
Real estate construction | | 2 | | 1 | | | 4 | | 1 | | 6 | | 2 | |
Lease financing | | 3 | | 3 | | | 4 | | 3 | | 7 | | 6 | |
| | | | | | |
Total commercial and commercial real estate | | 55 | | 36 | | | 65 | | 38 | | 120 | | 74 | |
| | |
Consumer: | | |
Real estate 1-4 family first mortgage | | 33 | | 6 | | | 32 | | 7 | | 65 | | 13 | |
Real estate 1-4 family junior lien mortgage | | 26 | | 17 | | | 44 | | 18 | | 70 | | 35 | |
Credit card | | 40 | | 38 | | | 48 | | 40 | | 88 | | 78 | |
Other revolving credit and installment | | 204 | | 125 | | | 198 | | 121 | | 402 | | 246 | |
| | | | | | |
Total consumer | | 303 | | 186 | | | 322 | | 186 | | 625 | | 372 | |
| | |
Foreign | | 9 | | 14 | | | 10 | | 14 | | 19 | | 28 | |
| | | | | | |
Total loan recoveries | | 367 | | 236 | | | 397 | | 238 | | 764 | | 474 | |
| | | | | | |
Net loan charge-offs (1) | | | (3,258 | ) | | | (1,528 | ) | | | (4,386 | ) | | | (1,512 | ) | | | (7,644 | ) | | | (3,040 | ) |
| | | | | | |
Allowances related to business combinations/other | | | (165 | ) | | | (5 | ) | | | (16 | ) | | 4 | | | (181 | ) | | | (1 | ) |
| | | | | | |
| | $ | 22,846 | | $ | 6,013 | | | $ | 23,530 | | 7,517 | | 23,530 | | 7,517 | |
| | | | | | |
| | |
Allowance for loan losses | | $ | 22,281 | | $ | 5,803 | | | $ | 23,035 | | 7,375 | | 23,035 | | 7,375 | |
Reserve for unfunded credit commitments | | 565 | | 210 | | | 495 | | 142 | | 495 | | 142 | |
| | | | | | |
Allowance for credit losses | | $ | 22,846 | | $ | 6,013 | | | $ | 23,530 | | 7,517 | | 23,530 | | 7,517 | |
| | | | | | |
Net loan charge-offs (annualized) as a percentage of average total loans | | | 1.54 | % | | | 1.60 | % | |
Net loan charge-offs (annualized) as a percentage of average total loans (1) | | | | 2.11 | % | | 1.55 | | 1.82 | | 1.58 | |
Allowance for loan losses as a percentage of total loans (2) | | | 2.64 | % | | | 1.50 | % | | 2.80 | | 1.85 | | 2.80 | | 1.85 | |
Allowance for credit losses as a percentage of total loans (2) | | 2.71 | | 1.56 | | | 2.86 | | 1.88 | | 2.86 | | 1.88 | |
| | | |
| | |
(1) | | LoansFor loans accounted for under SOP 03-3, werecharge-offs are only recorded into the extend that losses exceed the purchase accounting at fair value and, accordingly, charge-offs do not include losses on such loans.estimates. |
|
(2) | | The allowance for loan losses and the allowance for credit losses do not include any amounts$49 million for the quarter ended June 30, 2009, and none for prior periods 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. |
7279
SOP 03-3
At June 30, 2009, and December 31, 2008, and March 31, 2009, loans within the scope of SOP 03-3 had an unpaid principal balance of $95.8$87.5 billion and $93.0$96.2 billion, respectively, and a carrying value of $59.7$55.2 billion and $58.2$59.2 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 | |
| | | | |
| |
|
| | | | |
| | Dec. 31, 2008 | |
(in millions) | | (refined) | |
|
Contractually required payments including interest | | $ | 114,935 | |
Nonaccretable difference (1) | | | (45,242 | ) |
|
Cash flows expected to be collected (2) | | | 69,693 | |
Accretable yield | | | (10,492 | ) |
|
Fair value of loans acquired | | $ | 59,201 | |
|
| | |
(1) | | Includes $40.0$40.9 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 | ) |
| | | | |
| |
|
| | | | | | | | |
| | Quarter ended | | | Six months ended | |
(in millions) | | June 30, 2009 | | | June 30, 2009 | |
|
Balance, beginning of period (refined) | | $ | (9,927 | ) | | | (10,492 | ) |
Reclassified from nonaccretable difference | | | (20 | ) | | | (20 | ) |
Accretion | | | 495 | | | | 1,060 | |
|
Balance, end of period | | $ | (9,452 | ) | | | (9,452 | ) |
|
In second quarter 2009, we recorded $152 million of provision for credit losses for deterioration in Wachovia’s SOP 03-3 loans that occurred subsequent to the acquisition on December 31, 2008. This included net charge-offs of $103 million and an addition to the allowance for loan losses at June 30, 2009, of $49 million. The provision for credit losses for SOP 03-3 loans in first quarter 2009, was $19 million and there was no related allowance for loan losses at March 31, 2009.
7380
6. OTHER ASSETS
The components of other assets were:
| | | | | | | | | | | | | |
| | | | | | | | | | |
| | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | June 30, | | Dec. 31, | |
(in millions) | | 2009 | | 2008 | | 2008 | | | 2009 | | 2008 | |
| | | |
Nonmarketable equity investments: | | |
Cost method: | | |
Private equity investments | | $ | 2,588 | | $ | 2,706 | | $ | 2,078 | | | $ | 2,781 | | 3,040 | |
Federal bank stock | | 6,080 | | 6,106 | | 2,110 | | | 5,997 | | 6,106 | |
Other | | 2,306 | | 2,292 | | 1,939 | | |
| | | | | | | | |
Total cost method | | 10,974 | | 11,104 | | 6,127 | | | 8,778 | | 9,146 | |
Equity method | | 4,151 | | 4,400 | | 1,107 | | | 6,029 | | 6,358 | |
Principal investments (1) | | 1,270 | | 1,278 | | -- | | | 1,250 | | 1,278 | |
| | | | | | | | |
Total nonmarketable equity investments | | 16,395 | | 16,782 | | 7,234 | | |
Total nonmarketable equity investments (2) | | | 16,057 | | 16,782 | |
| | |
| | 2,866 | | 2,251 | | 1,955 | | | 2,690 | | 2,251 | |
Accounts receivable | | 16,471 | | 22,493 | | 14,547 | | | 16,181 | | 22,493 | |
Interest receivable | | 5,009 | | 5,746 | | 2,835 | | | 5,378 | | 5,746 | |
Core deposit intangibles | | 12,026 | | 11,999 | | 403 | | | 11,494 | | 11,999 | |
Customer relationship and other intangibles | | 2,700 | | 3,516 | | 306 | | | 2,591 | | 3,516 | |
Foreclosed assets: | | |
GNMA loans (2)(3) | | 768 | | 667 | | 578 | | | 932 | | 667 | |
Other | | 1,294 | | 1,526 | | 637 | | | 1,592 | | 1,526 | |
Due from customers on acceptances | | 188 | | 615 | | 66 | | | 615 | | 615 | |
Other | | 47,299 | | 44,206 | | 13,997 | | | 44,485 | | 44,206 | |
| | | | | | | | |
Total other assets | | $ | 105,016 | | $ | 109,801 | | $ | 42,558 | | | $ | 102,015 | | 109,801 | |
| | | | | | | | |
| | |
| | |
(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) | | Certain amounts in the above table have been reclassified to conform to the current presentation. |
|
(3) | | Consistent with regulatory reporting requirements, foreclosed assets include foreclosed real estate securing 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 ended March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | |
Net gains (losses) from private equity investments (1) | | $ | (220 | ) | | $ | 346 | | | $ | (71 | ) | | 18 | | | (291 | ) | | 364 | |
Net losses from principal investments | | | (8 | ) | | -- | | | | (7 | ) | | — | | | (15 | ) | | — | |
Net losses from all other nonmarketable equity investments | | | (49 | ) | | | (39 | ) | |
Net gains (losses) from all other nonmarketable equity investments | | | | (94 | ) | | 48 | | | (143 | ) | | 9 | |
| | | | | | |
Net gains (losses) from nonmarketable equity investments | | $ | (277 | ) | | $ | 307 | | | $ | (172 | ) | | 66 | | | (449 | ) | | 373 | |
| | | | | | |
| | |
| | |
(1) | | Net gains from first quarterin 2008 include $334 million gain from our ownership in Visa, which completed its initial public offering in March 2008. |
7481
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, under current accounting standards, 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.
7582
The classifications of assets and liabilities in our balance sheet associated with our transactions with QSPEs and VIEs are as follows:follow:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Transfers that | | | | | Transfers that | | | |
| | VIEs that we | | we account | | | | | VIEs that we | | VIEs | | we account | | | |
| | do not | | VIEs that we | | for as secured | | | | | do not | | that we | | for as secured | | | |
(in millions) | | QSPEs | | consolidate | | consolidate | | borrowings | | Total | | | QSPEs | | consolidate (1) | | consolidate | | borrowings | | Total | |
| | | |
| | |
| | |
| | $ | -- | | $ | -- | | $ | 117 | | $ | 287 | | $ | 404 | | | $ | — | | — | | 117 | | 287 | | 404 | |
Trading account assets | | 1,261 | | 5,241 | | 71 | | 141 | | 6,714 | | | 1,261 | | 5,241 | | 71 | | 141 | | 6,714 | |
Securities (1) | | 18,078 | | 15,168 | | 922 | | 6,094 | | 40,262 | | |
Securities (2) | | | 18,078 | | 15,168 | | 922 | | 6,094 | | 40,262 | |
Mortgages held for sale | | 56 | | -- | | -- | | -- | | 56 | | | 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 | | |
Loans (3) | | | — | | 16,882 | | 217 | | 4,126 | | 21,225 | |
MSRs | | 11,969 | | 18 | | -- | | -- | | 11,987 | | | 14,106 | | — | | — | | — | | 14,106 | |
Other assets | | 258 | | 5,648 | | 2,616 | | 167 | | 8,689 | | | 345 | | 5,022 | | 2,416 | | 55 | | 7,838 | |
| | | | | | | | | | | | |
Total assets | | 36,090 | | 42,334 | | 4,776 | | 9,723 | | 92,923 | | | 33,846 | | 42,313 | | 3,743 | | 10,703 | | 90,605 | |
| | | | | | | | | | | | |
| | -- | | -- | | 306 | | 2,307 | | 2,613 | | | — | | — | | 307 | | 1,440 | | 1,747 | |
Accrued expenses and other liabilities | | 622 | | 2,351 | | 517 | | 90 | | 3,580 | | | 528 | | 1,976 | | 330 | | 26 | | 2,860 | |
Long term debt | | -- | | -- | | 1,807 | | 6,529 | | 8,336 | | | — | | — | | 1,773 | | 7,125 | | 8,898 | |
Noncontrolling interests | | -- | | -- | | 138 | | -- | | 138 | | | — | | — | | 121 | | — | | 121 | |
| | | | | | | | | | | | |
Total liabilities and noncontrolling interests | | 622 | | 2,351 | | 2,768 | | 8,926 | | 14,667 | | | 528 | | 1,976 | | 2,531 | | 8,591 | | 13,626 | |
| | | | | | | | | | | | |
| | $ | 35,468 | | $ | 39,983 | | $ | 2,008 | | $ | 797 | | $ | 78,256 | | | $ | 33,318 | | 40,337 | | 1,212 | | 2,112 | | 76,979 | |
| | | | | | | | | | | | |
| | | |
June 30, 2009 | | |
| | |
Cash | | | $ | — | | — | | 157 | | 241 | | 398 | |
Trading account assets | | | 1,868 | | 5,360 | | 68 | | 89 | | 7,385 | |
Securities(2) | | | 20,113 | | 15,222 | | 1,558 | | 6,113 | | 43,006 | |
Mortgages held for sale | | | — | | — | | — | | — | | — | |
Loans(3) | | | — | | 16,834 | | 320 | | 3,224 | | 20,378 | |
MSRs | | | 15,932 | | 10 | | — | | — | | 15,942 | |
Other assets | | | 268 | | 5,962 | | 2,573 | | 52 | | 8,855 | |
| | |
Total assets | | | 38,181 | | 43,388 | | 4,676 | | 9,719 | | 95,964 | |
| | |
Short-term borrowings | | | — | | — | | 296 | | 2,278 | | 2,574 | |
Accrued expenses and other liabilities | | | 1,005 | | 2,972 | | 609 | | 3,944 | | 8,530 | |
Long term debt | | | — | | — | | 1,877 | | 2,852 | | 4,729 | |
Noncontrolling interests | | | — | | — | | 122 | | — | | 122 | |
| | |
Total liabilities and noncontrolling interests | | | 1,005 | | 2,972 | | 2,904 | | 9,074 | | 15,955 | |
| | |
Net assets | | | $ | 37,176 | | 40,416 | | 1,772 | | 645 | | 80,009 | |
| | |
| | |
(1) | | Reverse repurchase agreements of $769 million are included in other assets at June 30, 2009. These instruments were included in loans at December 31, 2008, in the amount of $349 million. |
|
(2) | | Excludes 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) |
(3) | | 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 fordetermined these forms of involvement to be insignificant due to the temporary nature and size as well as our lack of involvement in accordance with the AICPA Investment Company Audit Guide, investments accounted for under the cost method, and investments accounted for under the equity method.design or operations of VIEs or QSPEs.
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
76
the form of standby letters of credit. Through these securitizations we may be exposed to liability under limited amounts of recourse as
83
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 | | | | | Other | | | |
| | Total | | Debt and | | commitments | | | | | Total | | Debt and | | commitments | | | |
| | QSPE | | equity | | Servicing | | and | | Net | | | QSPE | | equity | | Servicing | | and | | Net | |
(in millions) | | assets (1) | | interests (2) | | assets | | Derivatives | | guarantees | | assets | | | 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 | | |
| | | Carrying value — asset (liability) | |
| | | |
Residential mortgage loan securitizations: | | |
Conforming (3) | | | $ | 1,008,824 | | 10,207 | | 11,715 | | — | | 150 | | 22,072 | |
Other/nonconforming | | | 135,951 | | 7,262 | | 1,236 | | 30 | | | (661 | ) | | 7,867 | |
Commercial mortgage securitizations | | 355,267 | | 1,452 | | 1,098 | | 524 | | | (14 | ) | | 3,060 | | | 355,267 | | 1,452 | | 1,098 | | 524 | | | (14 | ) | | 3,060 | |
Auto loan securitizations | | 4,133 | | 72 | | -- | | 43 | | -- | | 115 | | | 4,133 | | 72 | | — | | 43 | | — | | 115 | |
Student loan securitizations | | 2,765 | | 76 | | 57 | | -- | | -- | | 133 | | | 2,765 | | 76 | | 57 | | — | | — | | 133 | |
Other | | 11,877 | | 74 | | -- | | | (3 | ) | | -- | | 71 | | | 11,877 | | 74 | | — | | | (3 | ) | | — | | 71 | |
| | | | | | | | | | | | | | |
Total | | $ | 1,518,817 | | $ | 19,143 | | $ | 14,106 | | $ | 594 | | $ | (525 | ) | | $ | 33,318 | | | $ | 1,518,817 | | 19,143 | | 14,106 | | 594 | | | (525 | ) | | 33,318 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maximum exposure to loss | | | Maximum exposure to loss |
Residential mortgage loan securitizations | | $ | 17,469 | | $ | 12,951 | | $ | 300 | | $ | 718 | | $ | 31,438 | | |
| | | |
Residential mortgage loan securitizations: | | |
Conforming (3) | | | $ | 10,207 | | 11,715 | | — | | 647 | | 22,569 | |
Other/nonconforming | | | 7,262 | | 1,236 | | 300 | | 71 | | 8,869 | |
Commercial mortgage securitizations | | 1,452 | | 1,098 | | 524 | | 3,302 | | 6,376 | | | 1,452 | | 1,098 | | 524 | | 3,302 | | 6,376 | |
Auto loan securitizations | | 72 | | -- | | 43 | | -- | | 115 | | | 72 | | — | | 43 | | — | | 115 | |
Student loan securitizations | | 76 | | 57 | | -- | | -- | | 133 | | | 76 | | 57 | | — | | — | | 133 | |
Other | | 74 | | -- | | 1,465 | | 37 | | 1,576 | | | 74 | | — | | 1,465 | | 37 | | 1,576 | |
| | | | | | | | | | | | |
Total | | $ | 19,143 | | $ | 14,106 | | $ | 2,332 | | $ | 4,057 | | $ | 39,638 | | | $ | 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 | | |
June 30, 2009 | | |
| | | Carrying value — asset (liability) |
| | | |
Residential mortgage loan securitizations: | | |
Conforming (3) | | | $ | 1,072,883 | | 11,263 | | 12,921 | | — | | | (671 | ) | | 23,513 | |
Other/nonconforming | | | 296,104 | | 8,501 | | 2,054 | | 19 | | | (60 | ) | | 10,514 | |
Commercial mortgage securitizations | | 391,114 | | 1,561 | | 953 | | 482 | | | (17 | ) | | 2,979 | | | 417,345 | | 1,569 | | 903 | | 335 | | | (19 | ) | | 2,788 | |
Auto loan securitizations | | 3,580 | | 76 | | -- | | 39 | | -- | | 115 | | | 3,236 | | 105 | | — | | 30 | | — | | 135 | |
Student loan securitizations | | 2,776 | | 165 | | 55 | | -- | | -- | | 220 | | | 2,719 | | 161 | | 54 | | — | | — | | 215 | |
Other | | 9,955 | | 11 | | -- | | -- | | -- | | 11 | | | 9,488 | | 11 | | — | | — | | — | | 11 | |
| | | | | | | | | | | | | | |
Total | | $ | 1,636,636 | | $ | 23,576 | | $ | 11,969 | | $ | 545 | | $ | (622 | ) | | $ | 35,468 | | | $ | 1,801,775 | | 21,610 | | 15,932 | | 384 | | | (750 | ) | | 37,176 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maximum exposure to loss | | | Maximum exposure to loss |
Residential mortgage loan securitizations | | $ | 21,763 | | $ | 10,961 | | $ | 276 | | $ | 1,525 | | $ | 34,525 | | |
| | | |
Residential mortgage loan securitizations: | | |
Conforming (3) | | | $ | 11,263 | | 12,921 | | — | | 1,536 | | 25,720 | |
Other/nonconforming | | | 8,501 | | 2,054 | | 254 | | 60 | | 10,869 | |
Commercial mortgage securitizations | | 1,561 | | 953 | | 482 | | 3,017 | | 6,013 | | | 1,569 | | 903 | | 585 | | 3,132 | | 6,189 | |
Auto loan securitizations | | 76 | | -- | | 39 | | -- | | 115 | | | 105 | | — | | 30 | | — | | 135 | |
Student loan securitizations | | 165 | | 55 | | -- | | -- | | 220 | | | 161 | | 54 | | — | | — | | 215 | |
Other | | 11 | | -- | | 133 | | 37 | | 181 | | | 11 | | — | | — | | 37 | | 48 | |
| | | | | | | | | | | | |
Total | | $ | 23,576 | | $ | 11,969 | | $ | 930 | | $ | 4,579 | | $ | 41,054 | | | $ | 21,610 | | 15,932 | | 869 | | 4,765 | | 43,176 | |
| | | | | | | | | | | | |
| | |
| | |
(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. |
|
(3) | | Conforming residential mortgage loan securitizations are those that are guaranteed by government-sponsored entities. |
84
“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 principlesGAAP and represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite what we believe is 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.
77
We recognized net losses of $4$1 million and $5 million from sales of financial assets in securitizations in the second quarter and first quarter 2009.half of 2009, respectively. Additionally, we had the following cash flows with our securitization trusts.
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Quarter ended March 31, 2009 | , | | Quarter ended June 30, 2009 | | Six months ended June 30, 2009 | |
| | Other | | | Other | | Other | |
| | Mortgage | | financial | | | Mortgage | | financial | | Mortgage | | financial | |
(in millions) | | loans | | assets | | | loans | | assets | | loans | | assets | |
| | | |
Sales proceeds from securitizations (1) | | | $81,178 | | | $ -- | | | $ | 120,167 | | — | | 201,345 | | — | |
Servicing fees | | 1,000 | | 18 | | | 1,084 | | 5 | | 2,084 | | 23 | |
Other interests held | | 495 | | 79 | | | 668 | | 37 | | 1,163 | | 116 | |
Purchases of delinquent assets | | 13 | | -- | | | 11 | | — | | 24 | | — | |
Net servicing advances | | 62 | | -- | | | 67 | | — | | 129 | | — | |
| | | |
| | |
| | |
(1) | | Represents cash flow data for all loans securitized in first quarter 2009.the periods presented. |
For securitizations completed in firstsecond 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. |
securitization: a prepayment speed (annual constant prepayment rate) of 10.4%, life of 6.8 years and a discount rate of 8.8%.7885
Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at March 31,June 30, 2009, for residential and commercial mortgage servicing rights, and other interests held related primarily to residential mortgage loan securitizations are presented in the following table.
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Mortgage | | Other | | Other interests held – | | | Other interests held (1) |
($ in millions) | | servicing rights | | interests held | | subordinate bonds | | |
| | | Mortgage | | Interest- | | | | | |
| | | servicing | | only | | Subordinated | | Senior | |
(in millions) | | | rights | | strips | | bonds (2) | | bonds (3) | |
| Fair value of interests held | | $ | 12,932 | | $ | 265 | | $ | 176 | | | $ | 17,001 | | 510 | | 604 | | 6,251 | |
Expected weighted-average life (in years) | | 3.6 | | 4.2 | | 5.4 | | | 5.4 | | 3.5 | | 4.7 | | 7.6 | |
| | |
Prepayment speed assumption (annual CPR) | | | 19.6 | % | | | 17.6 | % | | | 14.0 | % | | | 18.1 | % | | 9.0 | | 8.1 | | 10.2 | |
Decrease in fair value from: | | |
10% increase | | $ | 650 | | $ | 17 | | $ | - -- | | |
25% increase | | 1,482 | | 38 | | - -- | | |
10% adverse change | | | $ | 763 | | 15 | | 8 | | 74 | |
25% adverse change | | | 1,786 | | 35 | | 15 | | 194 | |
| | |
Discount rate assumption | | | 10.0 | % | | | 12.6 | % | | | 13.6 | % | | | 8.6 | % | | 10.1 | | 18.3 | | 10.4 | |
MSRs and other interests held | | |
Decrease in fair value from: | | |
MSRs and other interests held Decrease in fair value from: | | |
100 basis point increase | | $ | 448 | | $ | 8 | | | $ | 745 | | 14 | | 19 | | 194 | |
200 basis point increase | | 861 | | 15 | | | 1,426 | | 26 | | 38 | | 372 | |
| | |
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 | % | | 4.9 | % | | 3.9 | |
Decrease in fair value from: | | |
10% higher losses | | $ | 16 | | | $ | 27 | | 15 | |
25% higher losses | | 36 | | | 48 | | 38 | |
| | | |
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.
| | |
(1) | | Excludes securities retained in securitizations issued through government-sponsored entities (GSEs) such as FNMA, FHLMC and GNMA because we do not believe the value of these securities would be materially affected by the adverse changes in assumptions noted in the table. These GSE securities and other interests held presented in this table are included in debt and equity interests in our disclosure of our involvements with QSPEs shown on page 84. |
|
(2) | | Subordinated interests include only those bonds whose credit rating was below AAA by a major rating agency at issuance. |
|
(3) | | Senior interests include only those bonds whose credit rating was AAA by a major rating agency at issuance. |
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% variationvariations 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 | | | Net charge-offs | |
| | Total loans (1) | | loans (2)(3) | | (recoveries) (3) | | | Total loans (1) | | Delinquent loans (2) (3) | | (recoveries) (3) | |
| | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | Dec. 31 | , | | Quarter ended | | | June 30, | | Dec. 31, | | June 30, | | Dec. 31, | | Six months ended | |
(in millions) | | 2009 | | 2008 | | 2009 | | 2008 | | March 31, 2009 | | | 2009 | | 2008 | | 2009 | | 2008 | | June 30, 2009 | |
| |
| | |
Commercial and commercial real estate: | | |
Commercial | | $ | 193,236 | | $ | 204,113 | | $ | 2,113 | | $ | 1,471 | | $ | 556 | | | $ | 183,368 | | 204,113 | | 3,327 | | 1,471 | | 1,260 | |
Other real estate mortgage | | 312,211 | | 310,480 | | 2,912 | | 1,058 | | 25 | | | 310,645 | | 310,480 | | 4,827 | | 1,058 | | 176 | |
Real estate construction | | 33,912 | | 34,676 | | 1,995 | | 1,221 | | 103 | | | 33,238 | | 34,676 | | 3,070 | | 1,221 | | 335 | |
Lease financing | | 14,792 | | 15,829 | | 114 | | 92 | | 17 | | | 14,555 | | 15,829 | | 130 | | 92 | | 78 | |
| | | | | | | | | | | | |
Total commercial and commercial real estate | | 554,151 | | 565,098 | | 7,134 | | 3,842 | | 701 | | | 541,806 | | 565,098 | | 11,354 | | 3,842 | | 1,849 | |
| | |
Consumer: | | |
Real estate 1-4 family first mortgage | | 1,211,050 | | 1,165,456 | | 10,213 | | 6,849 | | 593 | | | 1,230,256 | | 1,165,456 | | 13,403 | | 6,849 | | 1,648 | |
Real estate 1-4 family junior lien mortgage | | 114,845 | | 115,308 | | 2,096 | | 1,421 | | 880 | | | 112,015 | | 115,308 | | 2,354 | | 1,421 | | 2,069 | |
Credit card | | 22,815 | | 23,555 | | 738 | | 687 | | 582 | | | 23,069 | | 23,555 | | 680 | | 687 | | 1,246 | |
Other revolving credit and installment | | 104,469 | | 104,886 | | 1,504 | | 1,427 | | 737 | | | 100,782 | | 104,886 | | 1,574 | | 1,427 | | 1,366 | |
| | | | | | | | | | | | |
Total consumer | | 1,453,179 | | 1,409,205 | | 14,551 | | 10,384 | | 2,792 | | | 1,466,122 | | 1,409,205 | | 18,011 | | 10,384 | | 6,329 | |
| | |
Foreign | | 31,468 | | 33,882 | | 104 | | 91 | | 45 | | | 30,094 | | 33,882 | | 258 | | 91 | | 91 | |
| | | | | | | | | | | | |
Total loans owned and securitized | | 2,038,798 | | 2,008,185 | | $ | 21,789 | | $ | 14,317 | | $ | 3,538 | | | 2,038,022 | | 2,008,185 | | $ | 29,623 | | 14,317 | | 8,269 | |
| | | | | | | | | | | | |
Less: | | |
Securitized loans | | 1,150,106 | | 1,117,039 | | | 1,169,004 | | 1,117,039 | |
Mortgages held for sale | | 36,807 | | 20,088 | | | 41,991 | | 20,088 | |
Loans held for sale | | 8,306 | | 6,228 | | | 5,413 | | 6,228 | |
| | | | | | | |
Total loans held | | $ | 843,579 | | $ | 864,830 | | | $ | 821,614 | | 864,830 | |
| | | | | | |
| | |
| | |
(1) | | Represents loans in the balance sheet or that have been securitized and includes residential mortgages sold to FNMA, FHLMC and FHLMCGNMA 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, FHLMC and FHLMC.GNMA. 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 | | | | | Other | | | |
| | Total | | Debt and | | commitments | | | | | Total | | Debt and | | commitments | | | |
| | VIE | | equity | | and | | Net | | | VIE | | equity | | and | | Net | |
(in millions) | | assets (1) | | interests | | Derivatives | | guarantees | | assets | | | assets (1) | | interests | | Derivatives | | guarantees | | assets | |
| | | |
December 31, 2008 | | Carrying value – asset (liability)
| | | |
| | | |
| | | Carrying value — asset (liability) |
CDOs | | $ | 48,802 | | $ | 14,080 | | $ | 1,053 | | $ | - -- | | $ | 15,133 | | | $ | 48,802 | | 14,080 | | 1,053 | | — | | 15,133 | |
Wachovia administered ABCP conduit | | 10,767 | | - -- | | - -- | | - -- | | - -- | | | 10,767 | | — | | — | | — | | — | |
Asset-based lending structures | | 11,614 | | 9,232 | | | (136 | ) | | - -- | | 9,096 | | |
Asset-based finance structures | | | 11,614 | | 9,232 | | | (136 | ) | | — | | 9,096 | |
Tax credit structures | | 22,882 | | 4,366 | | - -- | | | (516 | ) | | 3,850 | | | 22,882 | | 4,366 | | — | | | (516 | ) | | 3,850 | |
CLOs | | 23,339 | | 3,217 | | 109 | | - -- | | 3,326 | | | 23,339 | | 3,217 | | 109 | | — | | 3,326 | |
Investment funds | | 105,808 | | 3,543 | | - -- | | - -- | | 3,543 | | | 105,808 | | 3,543 | | — | | — | | 3,543 | |
Credit-linked note structures | | 12,993 | | 50 | | 1,472 | | - -- | | 1,522 | | | 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 | | |
| | | | | | | | | | | | |
Money market funds (2) | | | 31,843 | | 50 | | 10 | | — | | 60 | |
Other (3) | | | 1,832 | | 3,983 | | | (36 | ) | | | (141 | ) | | 3,806 | |
| | |
Total | | $ | 269,880 | | $ | 38,521 | | $ | 2,472 | | $ | (657 | ) | | $ | 40,336 | | | $ | 269,880 | | 38,521 | | 2,472 | | | (657 | ) | | 40,336 | |
| | | | | | | | | | | | |
| | |
| | Maximum exposure to loss
| | Maximum exposure to loss |
| | | | |
| | |
CDOs | | $ | 14,080 | | $ | 4,849 | | $ | 1,514 | | $ | 20,443 | | | $ | 14,080 | | 4,849 | | 1,514 | | 20,443 | |
Wachovia administered ABCP conduit | | - -- | | 15,824 | | - -- | | 15,824 | | | — | | 15,824 | | — | | 15,824 | |
Asset-based lending structures | | 9,346 | | 136 | | - -- | | 9,482 | | |
Asset-based finance structures | | | 9,346 | | 136 | | — | | 9,482 | |
Tax credit structures | | 4,366 | | - -- | | 560 | | 4,926 | | | 4,366 | | — | | 560 | | 4,926 | |
CLOs | | 3,217 | | 109 | | 555 | | 3,881 | | | 3,217 | | 109 | | 555 | | 3,881 | |
Investment funds | | 3,550 | | - -- | | 140 | | 3,690 | | | 3,550 | | — | | 140 | | 3,690 | |
Credit-linked note structures | | 50 | | 2,253 | | - -- | | 2,303 | | | 50 | | 2,253 | | — | | 2,303 | |
Money market funds | | 50 | | 51 | | - -- | | 101 | | |
Other (2) | | 3,991 | | 130 | | 578 | | 4,699 | | |
| | | | | | | | | | |
Money market funds (2) | | | 50 | | 51 | | — | | 101 | |
Other (3) | | | 3,991 | | 130 | | 578 | | 4,699 | |
| | |
Total | | $ | 38,650 | | $ | 23,352 | | $ | 3,347 | | $ | 65,349 | | | $ | 38,650 | | 23,352 | | 3,347 | | 65,349 | |
| | | | | | | | | | |
| | |
March 31, 2009 | | Carrying value – asset (liability)
| |
June 30, 2009 | | |
| | |
| | | | Carrying value — asset (liability) |
| | | |
CDOs | | $ | 53,439 | | $ | 14,595 | | $ | 1,008 | | $ | - -- | | $ | 15,603 | | | $ | 63,325 | | 14,165 | | 1,132 | | | (848 | ) | | 14,449 | |
Wachovia administered ABCP conduit | | 9,894 | | - -- | | - -- | | - -- | | -- | | | 7,617 | | — | | — | | — | | — | |
Asset-based lending structures | | 15,158 | | 9,061 | | | (122 | ) | | - -- | | 8,939 | | |
Asset-based finance structures | | | 18,471 | | 10,765 | | | (88 | ) | | — | | 10,677 | |
Tax credit structures | | 27,197 | | 5,025 | | - -- | | | (863 | ) | | 4,162 | | | 27,804 | | 4,558 | | — | | | (753 | ) | | 3,805 | |
CLOs | | 24,691 | | 3,547 | | 119 | | - -- | | 3,666 | | | 23,551 | | 3,561 | | 115 | | — | | 3,676 | |
Investment funds | | 96,497 | | 1,918 | | - -- | | - -- | | 1,918 | | | 93,044 | | 2,566 | | — | | — | | 2,566 | |
Credit-linked note structures | | 1,578 | | 52 | | 1,410 | | - -- | | 1,462 | | | 1,878 | | 64 | | 1,226 | | — | | 1,290 | |
Money market funds | | 33,552 | | - -- | | (9 | ) | | - -- | | (9 | ) | |
Other (2) | | 3,989 | | 4,336 | | | (8 | ) | | | (86 | ) | | 4,242 | | |
| | | | | | | | | | | | |
Money market funds(2) | | | 30,412 | | 33 | | | (9 | ) | | — | | 24 | |
Other(3) | | | 7,350 | | 3,959 | | 1 | | | (31 | ) | | 3,929 | |
| | |
Total | | $ | 265,995 | | $ | 38,534 | | $ | 2,398 | | $ | (949 | ) | | $ | 39,983 | | | $ | 273,452 | | 39,671 | | 2,377 | | | (1,632 | ) | | 40,416 | |
| | | | | | | | | | | | |
| | |
| | Maximum exposure to loss
| | Maximum exposure to loss |
| | | | |
| | |
CDOs | | $ | 14,595 | | $ | 4,414 | | $ | 1,092 | | $ | 20,101 | | | $ | 14,165 | | 3,480 | | 96 | | 17,741 | |
Wachovia administered ABCP conduit | | - -- | | 10,092 | | - -- | | 10,092 | | | — | | 7,769 | | — | | 7,769 | |
Asset-based lending structures | | 9,061 | | 122 | | 1,073 | | 10,256 | | |
Asset-based finance structures | | | 10,765 | | 88 | | 441 | | 11,294 | |
Tax credit structures | | 5,025 | | - -- | | 15 | | 5,040 | | | 4,558 | | — | | 12 | | 4,570 | |
CLOs | | 3,547 | | 119 | | 529 | | 4,195 | | | 3,561 | | 115 | | 520 | | 4,196 | |
Investment funds | | 1,918 | | 500 | | 123 | | 2,541 | | | 2,566 | | 500 | | 116 | | 3,182 | |
Credit-linked note structures | | 52 | | 2,189 | | - -- | | 2,241 | | | 64 | | 2,005 | | — | | 2,069 | |
Money market funds | | - -- | | 39 | | 12 | | 51 | | |
Other (2) | | 4,336 | | 160 | | 535 | | 5,031 | | |
| | | | | | | | | | |
Money market funds(2) | | | 33 | | 39 | | 12 | | 84 | |
Other(3) | | | 3,959 | | 2 | | 200 | | 4,161 | |
| | |
Total | | $ | 38,534 | | $ | 17,635 | | $ | 3,379 | | $ | 59,548 | | | $ | 39,671 | | 13,998 | | 1,397 | | 55,066 | |
| | | | | | | | | | |
| | |
| | |
(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) | | Excludes previously supported money market funds, to which the Company no longer provides non-contractual financial support. |
|
(3) | | 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 principlesGAAP and represents the estimated loss that would be incurred under an assumed, hypothetical circumstance, despite itsalthough we believe extremely remote, possibility,hypothetical circumstance, 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 the 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 transactions, 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
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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 2.82.9 years at June 30, 2009, 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 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | asset | | committed | | asset | | committed | | | Funded | | Total | | Funded | | Total | |
| | composition | | exposure | | composition | | exposure | | | asset | | committed | | asset | | committed | |
| | | composition | | exposure | | composition | | exposure | |
| | |
Auto loans | | | 34.1 | % | | | 27.8 | % | | | 34.1 | % | | | 26.7 | % | | | 24.2 | % | | 22.0 | | 34.1 | | 26.7 | |
Commercial and middle market loans | | 28.9 | | 31.1 | | 27.6 | | 32.6 | | | 47.8 | | 44.5 | | 27.6 | | 32.6 | |
Equipment loans | | 14.8 | | 11.8 | | 14.4 | | 11.4 | | | 15.3 | | 12.9 | | 14.4 | | 11.4 | |
Trade receivables | | 5.8 | | 10.3 | | 8.8 | | 10.9 | | | 5.0 | | 10.3 | | 8.8 | | 10.9 | |
Credit cards | | 7.2 | | 8.8 | | 7.0 | | 7.9 | | | 2.4 | | 1.8 | | 7.0 | | 7.9 | |
Leases | | 7.0 | | 6.2 | | 6.1 | | 7.0 | | | 2.5 | | 3.5 | | 6.1 | | 7.0 | |
Other | | 2.2 | | 4.0 | | 2.0 | | 3.5 | | | 2.8 | | 5.0 | | 2.0 | | 3.5 | |
| | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100.0 | % | | 100.0 | | 100.0 | | 100.0 | |
| | | | | | | | | | |
| | |
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 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | asset | | committed | | asset | | committed | | | Funded | | Total | | Funded | | Total | |
| | composition | | exposure | | composition | | exposure | | | asset | | committed | | asset | | committed | |
| | | composition | | exposure | | composition | | exposure | |
| | |
AAA | | | 7.0 | % | | | 8.9 | % | | | 9.4 | % | | | 10.4 | % | | | 4.4 | % | | 3.5 | | 9.4 | | 10.4 | |
AA | | 8.5 | | 9.4 | | 8.3 | | 11.7 | | | 8.7 | | 7.8 | | 8.3 | | 11.7 | |
A | | 47.9 | | 50.7 | | 52.2 | | 51.5 | | | 44.7 | | 53.3 | | 52.2 | | 51.5 | |
BBB/BB | | 36.6 | | 31.0 | | 30.1 | | 26.4 | | | 42.2 | | 35.4 | | 30.1 | | 26.4 | |
| | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100.0 | % | | 100.0 | | 100.0 | | 100.0 | |
| | | | | | | | | | |
| | |
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 27.251.6 days inat June 30, 2009, and the average yield on the commercial paper was 0.59%0.60%. 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,June 30, 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
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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,June 30, 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 mapped 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’conduit’s 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 lendingfinance structures
We engage in various forms of structured lendingfinance 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 do not retain a majority of the variability in these transactions.
For example, we had investments in asset backedasset-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 liquidity to fund ongoing vehicle sales operations.
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Tax credit structures
We make passive investments in affordable housing and sustainable energy projects that are designed to generate a return 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,June 30, 2009, we had investments of $1.2 billion and lending arrangements of $88$769 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.
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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. We entered into this agreement in order to maintain a AAA credit rating and a net asset value of $1.00 for the 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,June 30, 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 the first quarterhalf of 2009 in connection with these support agreements. We do not consolidate these funds because we do not absorb the majority of the expected future variability associated with the funds assets. 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 enter into credit-linked note structures for two separate purposes. First and primarily, we structure transactions for clients designed to provide investors with specified returns based on the returns of an underlying security, loan or index. ToSecond, in certain situations, we also use credit-linked note structures to generate regulatory capital for the Company we also structureby structuring similar transactions that are indexed to the returns of a pool of underlying securities or loans that we own. TheseBoth of these types of transactions result in the issuance of credit-linked notes. These transactionsnotes and 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
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underlying. underlying securities or loans. 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 administrator 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 two of 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,June 30, 2009, and December 31, 2008, we held in our securities available-for-sale portfolio $3.7$3.5 billion of ARS issued by VIEs that we redeemed pursuant to this agreement.agreement, compared with $3.7 billion at December 31, 2008. 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. We did not have a liability related to this event at June 30, 2009. 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;2008; however, certain of these securities may be repaid in full by the 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$19.4 billion of debt financing through the issuance of trust preferred securities at March 31,June 30, 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
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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) | | | Carrying value (1) | |
| | Total | | Third | | | | | Total | | Third | | | |
| | VIE | | Consolidated | | party | | Noncontrolling | | | VIE | | Consolidated | | party | | Noncontrolling | |
(in millions) | | assets | | assets | | liabilities | | interests | | | assets | | assets | | liabilities | | interests | |
| |
| | |
December 31, 2008 | | |
| | |
Secured borrowings: | | |
Municipal tender option bond securitizations | | $ | 6,358 | | $ | 6,280 | | $ | 4,765 | | $ | - -- | | | $ | 6,358 | | 6,280 | | 4,765 | | — | |
Auto loan securitizations | | 2,134 | | 2,134 | | 1,869 | | - -- | | | 2,134 | | 2,134 | | 1,869 | | — | |
Commercial real estate loans | | 1,294 | | 1,294 | | 1,258 | | - -- | | | 1,294 | | 1,294 | | 1,258 | | — | |
Residential mortgage securitizations | | 1,124 | | 995 | | 699 | | - -- | | | 1,124 | | 995 | | 699 | | — | |
| | | | | | | | | | |
| | |
Total secured borrowings | | 10,910 | | 10,703 | | 8,591 | | - -- | | | 10,910 | | 10,703 | | 8,591 | | — | |
| | | | | | | | | | |
| | |
Consolidated VIEs: | | |
Structured asset finance | | 3,491 | | 1,666 | | 1,481 | | 13 | | | 3,491 | | 1,666 | | 1,481 | | 13 | |
Investment funds | | 1,119 | | 1,070 | | 155 | | 97 | | | 1,119 | | 1,070 | | 155 | | 97 | |
Other | | 1,007 | | 1,007 | | 774 | | 11 | | | 1,007 | | 1,007 | | 774 | | 11 | |
| | | | | | | | | | |
Total consolidated VIEs | | 5,617 | | 3,743 | | 2,410 | | 121 | | | 5,617 | | 3,743 | | 2,410 | | 121 | |
| | | | | | | | | | |
| | |
Total secured borrowings and consolidated VIEs | | $ | 16,527 | | $ | 14,446 | | $ | 11,001 | | $ | 121 | | | $ | 16,527 | | 14,446 | | 11,001 | | 121 | |
| | | | | | | | | | |
| | |
March 31, 2009 | | |
June 30, 2009 | | |
| | |
Secured borrowings: | | |
Municipal tender option bond securitizations | | $ | 6,081 | | $ | 6,010 | | $ | 5,822 | | $ | -- | | | $ | 6,397 | | 6,222 | | 6,174 | | — | |
Auto loan securitizations | | 1,702 | | 1,702 | | 1,441 | | -- | | | 1,312 | | 1,312 | | 1,109 | | — | |
Commercial real estate loans | | 1,112 | | 1,112 | | 1,049 | | -- | | | 1,302 | | 1,302 | | 1,177 | | — | |
Residential mortgage securitizations | | 1,025 | | 899 | | 614 | | -- | | | 1,004 | | 883 | | 614 | | — | |
| | | | | | | | | | |
| | |
Total secured borrowings | | 9,920 | | 9,723 | | 8,926 | | -- | | | 10,015 | | 9,719 | | 9,074 | | — | |
| | | | | | | | | | |
| |
Consolidated VIEs: | | |
Structured asset finance | | 3,476 | | 1,723 | | 1,556 | | 16 | | | 3,352 | | 1,599 | | 1,602 | | 14 | |
Investment funds | | 1,946 | | 1,946 | | 242 | | 105 | | | 1,909 | | 1,909 | | 253 | | 94 | |
Other | | 1,108 | | 1,107 | | 832 | | 17 | | | 1,226 | | 1,168 | | 927 | | 14 | |
| | | | | | | | | | |
Total consolidated VIEs | | 6,530 | | 4,776 | | 2,630 | | 138 | | | 6,487 | | 4,676 | | 2,782 | | 122 | |
| | | | | | | | | | |
| | |
Total secured borrowings and consolidated VIEs | | $ | 16,450 | | $ | 14,499 | | $ | 11,556 | | $ | 138 | | | $ | 16,502 | | 14,395 | | 11,856 | | 122 | |
| | | | | | | | | | |
| | |
| | |
(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
Mortgage 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 March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | |
Fair value, beginning of quarter | | $ | 14,714 | | $ | 16,763 | | |
Fair value, beginning of period | | | $ | 12,391 | | 14,956 | | 14,714 | | 16,763 | |
Purchases | | - -- | | 52 | | | — | | 82 | | — | | 134 | |
Acquired from Wachovia (1) | | 34 | | - -- | | | — | | — | | 34 | | — | |
Servicing from securitizations or asset transfers | | 1,447 | | 797 | | | 2,081 | | 994 | | 3,528 | | 1,791 | |
Sales | | - -- | | | (92 | ) | | — | | | (177 | ) | | — | | | (269 | ) |
| | | | | | |
Net additions | | 1,481 | | 757 | | | 2,081 | | 899 | | 3,562 | | 1,656 | |
| | |
Changes in fair value: | | |
Due to changes in valuation model inputs or assumptions (2) | | | (2,824 | ) | | | (1,798 | ) | | 2,316 | | 4,132 | | | (508 | ) | | 2,334 | |
Other changes in fair value (3) | | | (980 | ) | | | (766 | ) | | | (1,098 | ) | | | (654 | ) | | | (2,078 | ) | | | (1,420 | ) |
| | | | | | |
Total changes in fair value | | | (3,804 | ) | | | (2,564 | ) | | | 1,218 | | | | 3,478 | | | | (2,586 | ) | | | 914 | |
| | |
Fair value, end of quarter | | $ | 12,391 | | $ | 14,956 | | |
Fair value, end of period | | | $ | 15,690 | | 19,333 | | 15,690 | | 19,333 | |
| | | | | | |
| | |
| | |
(1) | | First quarter 2009 reflectsReflects refinements to initial December 31, 2008, Wachovia purchase accounting adjustments. |
|
(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. |
The changes in amortized commercial MSRs were:
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Quarter ended March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | |
Balance, beginning of quarter | | $ | 1,446 | | $ | 466 | | |
Balance, beginning of period | | | $ | 1,257 | | 455 | | 1,446 | | 466 | |
Purchases (1) | | 4 | | 3 | | | 6 | | 2 | | 10 | | 5 | |
Acquired from Wachovia (2) | | | (127 | ) | | - -- | | | | (8 | ) | | — | | | (135 | ) | | — | |
Servicing from securitizations or asset transfers (1) | | 4 | | 5 | | | 18 | | 4 | | 22 | | 9 | |
Amortization | | | (70 | ) | | | (19 | ) | | | (68 | ) | | | (19 | ) | | | (138 | ) | | | (38 | ) |
| | | | | | |
Balance, end of quarter (3) | | $ | 1,257 | | $ | 455 | | |
| | | | | | |
Balance, end of period (3) | | | $ | 1,205 | | 442 | | 1,205 | | 442 | |
| | |
Fair value of amortized MSRs: | | |
Beginning of quarter | | $ | 1,555 | | $ | 573 | | |
End of quarter | | 1,392 | | 601 | | |
Beginning of period | | | $ | 1,392 | | 601 | | 1,555 | | 573 | |
End of period | | | 1,311 | | 595 | | 1,311 | | 595 | |
| | | |
| | |
(1) | | Based on March 31,June 30, 2009, assumptions, the weighted-average amortization period for MSRs added during the second quarter and first half of 2009 was approximately 16.7 years.16.6 years and 16.5 years, respectively. |
|
(2) | | First quarter 2009 reflectsReflects refinements to initial December 31, 2008, Wachovia purchase accounting adjustments. |
|
(3) | | There was no valuation allowance recorded for the periods presented. |
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The components of our managed servicing portfolio were:
| | | | | | | | | | | | | |
| | | | | | | | | |
| | Mar. 31 | , | | Dec. 31 | , | | Mar. 31 | , | | June 30, | | Dec. 31, | |
(in billions) | | 2009 | | 2008 | | 2008 | | | 2009 | | 2008 | |
| | | |
Residential mortgage loans serviced for others (1) | | $ | 1,379 | | $ | 1,388 | | $ | 1,288 | | | $ | 1,394 | | 1,388 | |
Owned loans serviced (2) | | 267 | | 268 | | 102 | | | 270 | | 268 | |
| | | | | | | | |
Total owned residential mortgage loans serviced | | 1,646 | | 1,656 | | 1,390 | | |
Owned servicing of residential mortgage loans | | | 1,664 | | 1,656 | |
Commercial mortgage loans serviced for others | | 474 | | 472 | | 144 | | | 470 | | 472 | |
| | | | | | | | |
Total owned loans serviced | | 2,120 | | 2,128 | | 1,534 | | |
Total owned servicing of loans | | | 2,134 | | 2,128 | |
Sub-servicing | | 23 | | 26 | | 21 | | | 22 | | 26 | |
| | | | | | | | |
| | |
Total managed servicing portfolio | | $ | 2,143 | | $ | 2,154 | | $ | 1,555 | | | $ | 2,156 | | 2,154 | |
| | | | | | | | |
Ratio of MSRs to related loans serviced for others | | | 0.74 | % | | | 0.87 | % | | | 1.08 | % | | | 0.91 | % | | 0.87 | |
| | | |
| | |
(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 March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | |
Servicing income, net: | | |
Servicing fees (1) | | $ | 1,018 | | $ | 964 | | |
Servicing fees | | | $ | 888 | | 959 | | 1,906 | | 1,923 | |
Changes in fair value of residential MSRs: | | |
Due to changes in valuation model inputs or assumptions (2) | | | (2,824 | ) | | | (1,798 | ) | |
Other changes in fair value (3) | | | (980 | ) | | | (766 | ) | |
Due to changes in valuation model inputs or assumptions (1) | | | 2,316 | | 4,132 | | | (508 | ) | | 2,334 | |
Other changes in fair value (2) | | | | (1,098 | ) | | | (654 | ) | | | (2,078 | ) | | | (1,420 | ) |
| | | | | | |
Total changes in fair value of residential MSRs | | | (3,804 | ) | | | (2,564 | ) | | 1,218 | | 3,478 | | | (2,586 | ) | | 914 | |
Amortization | | | (70 | ) | | | (19 | ) | | | (68 | ) | | | (19 | ) | | | (138 | ) | | | (38 | ) |
Net derivative gains from economic hedges (4) | | 3,699 | | 1,892 | | |
Net derivative gains (losses) from economic hedges (3) | | | | (1,285 | ) | | | (4,197 | ) | | 2,414 | | | (2,305 | ) |
| | | | | | |
Total servicing income, net | | 843 | | 273 | | | 753 | | 221 | | 1,596 | | 494 | |
Net gains on mortgage loan origination/sales activities | | 1,582 | | 267 | | | 2,203 | | 876 | | 3,785 | | 1,143 | |
All other | | 79 | | 91 | | | 90 | | 100 | | 169 | | 191 | |
| | | | | | |
Total mortgage banking noninterest income | | $ | 2,504 | | $ | 631 | | | $ | 3,046 | | 1,197 | | 5,550 | | 1,828 | |
| | | | | | |
Market-related valuation changes to MSRs, net of hedge results (1)+(3) | | | $ | 1,031 | | | (65 | ) | | 1,906 | | 29 | |
| | |
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)(2) | | Represents changes due to collection/realization of expected cash flows over time. |
|
(4)(3) | | Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 1211 – Free-Standing Derivatives in this Report for additional discussion and detail. |
Servicing fees include certain unreimbursed direct servicing obligations primarily associated with workout activities. In addition, servicing fees and all other in the table above included:
|
| | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | | Six months ended June 30, | |
(in millions) | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Contractually specified servicing fees | | $ | 1,090 | | | | 969 | | | | 2,151 | | | | 1,937 | |
Late charges | | | 78 | | | | 69 | | | | 166 | | | | 144 | |
Ancillary fees | | | 47 | | | | 39 | | | | 96 | | | | 76 | |
|
|
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9. INTANGIBLE ASSETS
The gross carrying value of intangible assets and accumulated amortization was:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31 | , | | December 31 | , | | March 31 | , | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2008 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | Gross | | Gross | | Gross | | | | | Gross | | Gross | | | |
| | carrying | | Accumulated | | carrying | | Accumulated | | carrying | | Accumulated | | | carrying | | Accumulated | | carrying | | Accumulated | |
(in millions) | | value | | amortization | | value | | amortization | | value | | amortization | | | value | | amortization | | value | | amortization | |
| |
| | |
Amortized intangible assets: | | |
MSRs (1) | | $ | 1,553 | | $ | 296 | | $ | 1,672 | | $ | 226 | | $ | 625 | | $ | 170 | | | $ | 1,567 | | 362 | | 1,672 | | 226 | |
Core deposit intangibles | | 14,746 | | 2,720 | | 14,188 | | 2,189 | | 2,503 | | 2,100 | | | 14,745 | | 3,251 | | 14,188 | | 2,189 | |
Customer relationship and other intangibles | | 3,287 | | 601 | | 3,988 | | 486 | | 733 | | 441 | | | 3,343 | | 723 | | 3,988 | | 486 | |
| | | | | | | | | | | | | | |
Total amortized intangible assets | | $ | 19,586 | | $ | 3,617 | | $ | 19,848 | | $ | 2,901 | | $ | 3,861 | | $ | 2,711 | | | $ | 19,655 | | 4,336 | | 19,848 | | 2,901 | |
| | | | | | | | | | | | | | |
| | |
MSRs (fair value) (1) | | $ | 12,391 | | $ | 14,714 | | $ | 14,956 | | |
MSRs (carried at fair value) (1) | | | $ | 15,690 | | 14,714 | |
Goodwill | | | 24,619 | | 22,627 | |
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 March 31,June 30, 2009, follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Customer | | | | | | | Customer | | | |
| | Core | | relationship | | Amortized | | | | | Amortized | | Core | | relationship | | | |
| | deposit | | and other | | commercial | | | | | commercial | | deposit | | and other | | | |
(in millions) | | intangibles | | intangibles | | MSRs | | Total | | | MSRs | | intangibles | | intangibles | | Total | |
| Six months ended June 30, 2009 (actual) | | | $ | 138 | | 1,063 | | 237 | | 1,438 | |
| | |
Three months ended March 31, 2009 (actual) | | $ | 532 | | $ | 115 | | $ | 70 | | $ | 717 | | |
| | | | | | | | | | |
| | |
Estimate for year ended December 31, 2009 | | $ | 2,121 | | $ | 466 | | $ | 259 | | $ | 2,846 | | |
Estimate for year ended December 31, | | |
2009 | | | $ | 260 | | 2,121 | | 474 | | 2,855 | |
2010 | | 1,813 | | 370 | | 213 | | 2,396 | | | 220 | | 1,813 | | 379 | | 2,412 | |
2011 | | 1,544 | | 309 | | 188 | | 2,041 | | | 192 | | 1,544 | | 319 | | 2,055 | |
2012 | | 1,352 | | 290 | | 151 | | 1,793 | | | 155 | | 1,352 | | 300 | | 1,807 | |
2013 | | 1,202 | | 271 | | 118 | | 1,591 | | | 120 | | 1,202 | | 278 | | 1,600 | |
2014 | | 1,078 | | 253 | | 103 | | 1,434 | | | 104 | | 1,078 | | 260 | | 1,442 | |
| | | |
We based our projections of amortization expense shown above on existing asset balances at March 31,June 30, 2009. Future amortization expense may vary based on additional amortized intangible assets acquired through business combinations.
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10. GOODWILLfrom these projections.
For our goodwill impairment analysis, we allocate all of the goodwill to the individual operating segments. As a result of the combination of Wells Fargo and Wachovia, management realigned its business segments into the following three lines of business: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement. As part of this realignment, we updated our reporting units. We identify reporting units that are one level below an operating segments.segment (referred to as a component), and distinguish these reporting units as those components are based on how the segments and components are managed, taking into consideration the economic characteristics, nature of the products and customers of the components. We allocate goodwill to reporting units based on relative fair value, using certain performance metrics. We have revised prior period information to reflect this realignment. See Note 1716 in this Report for further information on management reporting.
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The following table shows the allocation of goodwill to our operating segments for purposes of goodwill impairment testing. The additions in the first quarterhalf of 2009 predominantly relate to additional goodwill recorded in connection with refinements to our initial acquisition date purchase accounting.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Wealth, | | | | | Wealth, | | | |
| | Brokerage and | | | | | Brokerage and | | | |
| | Community | | Wholesale | | Retirement | | Consolidated | | | Community | | Wholesale | | Retirement | | Consolidated | |
(in millions) | | Banking | | Banking | | Services | | Company | | | Banking | | Banking | | Services | | Company | |
| | | |
December 31, 2007 | | $ | 10,591 | | $ | 2,136 | | $ | 379 | | $ | 13,106 | | | $ | 10,591 | | 2,147 | | 368 | | 13,106 | |
| | |
Reduction in goodwill related to divested businesses | | | — | | | (1 | ) | | — | | | (1 | ) |
Goodwill from business combinations | | - -- | | 44 | | - -- | | 44 | | | | (4 | ) | | 92 | | — | | 88 | |
Foreign currency translation adjustments | | | (2 | ) | | - -- | | - -- | | | (2 | ) | | | (2 | ) | | — | | — | | | (2 | ) |
| | | | | | | | | | |
March 31, 2008 | | $ | 10,589 | | $ | 2,180 | | $ | 379 | | $ | 13,148 | | |
June 30, 2008 | | | $ | 10,585 | | 2,238 | | 368 | | 13,191 | |
| | | | | | | | | | |
| | |
December 31, 2008 | | $ | 16,810 | | $ | 5,438 | | $ | 379 | | $ | 22,627 | | | $ | 16,810 | | 5,449 | | 368 | | 22,627 | |
| | |
Goodwill from business combinations | | 732 | | 467 | | -- | | 1,199 | | | 1,240 | | 750 | | — | | 1,990 | |
Foreign currency translation adjustments | | | (1 | ) | | - -- | | - -- | | | (1 | ) | | 2 | | — | | — | | 2 | |
| | | | | | | | | | |
March 31, 2009 | | $ | 17,541 | | $ | 5,905 | | $ | 379 | | $ | 23,825 | | |
June 30, 2009 | | | $ | 18,052 | | 6,199 | | 368 | | 24,619 | |
| | | | | | | | | | |
| | |
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11.10. GUARANTEES AND LEGAL ACTIONS
Guarantees
Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of securities lending indemnifications, standby letters of credit, liquidity agreements, written put options, recourse obligations, residual value guarantees, 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 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | Maximum | | Higher | | Maximum | | Higher | | | Maximum | | Non- | | Maximum | | Non- | |
| | Carrying | | exposure | | performance | | Carrying | | exposure | | performance | | | Carrying | | exposure | | investment | | Carrying | | exposure | | investment | |
(in millions) | | value | | to loss | | risk | | value | | to loss | | risk | | | value | | to loss | | grade | | value | | to loss | | grade | |
| |
| | |
Standby letters of credit | | $ | 318 | | $ | 50,325 | | $ | 10,157 | | $ | 130 | | $ | 47,191 | | $ | 17,293 | | | $ | 327 | | 50,822 | | 13,713 | | 130 | | 47,191 | | 17,293 | |
Securities and other lending indemnifications | | 51 | | 28,611 | | 3,859 | | - -- | | 30,120 | | 1,907 | | | 51 | | 28,170 | | 2,811 | | — | | 30,120 | | 1,907 | |
Liquidity agreements (1) | | 41 | | 14,514 | | - -- | | 30 | | 17,602 | | - -- | | | 33 | | 11,781 | | — | | 30 | | 17,602 | | — | |
Written put options (1) | | 1,558 | | 7,423 | | 3,109 | | 1,376 | | 10,182 | | 5,314 | | | 920 | | 5,416 | | 963 | | 1,376 | | 10,182 | | 5,314 | |
Loans sold with recourse | | 192 | | 6,288 | | 2,169 | | 53 | | 6,126 | | 2,038 | | | 83 | | 5,507 | | 2,113 | | 53 | | 6,126 | | 2,038 | |
Residual value guarantees | | - -- | | 197 | | - -- | | - -- | | 1,121 | | - -- | | | — | | 197 | | — | | — | | 1,121 | | — | |
Contingent consideration | | - -- | | 134 | | - -- | | 11 | | 187 | | - -- | | | 9 | | 143 | | — | | 11 | | 187 | | — | |
Other guarantees | | - -- | | 73 | | - -- | | - -- | | 38 | | - -- | | | — | | 51 | | — | | — | | 38 | | — | |
| | | | | | | | | | | | | | |
Total guarantees | | $ | 2,160 | | $ | 107,565 | | $ | 19,294 | | $ | 1,600 | | $ | 112,567 | | $ | 26,552 | | | $ | 1,423 | | 102,087 | | 19,600 | | 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 12.11. 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 risk”“Non-investment grade” are required disclosures under generally accepted accounting principles. Higher performance riskGAAP. Non-investment grade 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 ifIf the underlying assets under the guarantee haveare non-investment grade (that is, an external rating that is below investment grade or an internal credit default grade that is equivalent thereto. to a below investment grade external rating), we consider the risk of payment of performance to be high. Internal credit default grades are determined based upon the same credit policies that we use to evaluate the risk of payment or performance when making loans and other extensions of credit. These credit policies are more fully described in Note 5 in this Report.
Maximum exposure to loss represents the estimated loss that would be incurred under an assumed hypothetical circumstance, despite what we believe is 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 our customers and third parties. Standby letters of credit are agreements where we are obligated to make payment to a third party on behalf of a customer in the event the customer fails to meet their contractual obligations. We consider the credit risk in standby letters of credit and commercial and similar letters of credit in determining the allowance for credit losses.
9298
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,June 30, 2009, and December 31, 2008, respectively, there was $29.2$29.1 billion and $31.0 billion in collateral supporting loaned securities with values of $28.6$28.2 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, 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 provide 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 credit 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 counterparty to pledge the underlying instrument as collateral for the transaction. Our ultimate obligation under written put options 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 1211 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 maximum 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 the first quarterhalf of 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,June 30, 2009, the only remaining residual value guarantee related to a leasing transaction on certain corporate buildings. At December 31, 2008, the residual value guarantees also included leasing transactions related to railcars, 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 lessor from loss on sale of the related asset at the end of the lease term. To
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the extent that a sale of the 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 reimburse the lessor under our 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.
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We have entered into various contingent performance guarantees through credit risk participation arrangements. Under these agreements, if a customer defaults on its obligation to perform under certain credit agreements with third parties, we will be required to make payments to the third parties.
Legal Actions
The following supplements and amends our discussion of certain matters previously reported in Item 3 (Legal Proceedings) of our 2008 Form 10-K for events occurring in the most recent quarter.
Municipal Derivatives Bid PracticesAuction Rate Securities AllOn June 30, 2009, Wachovia completed the second, and final, phase of its buy back of qualifying securities as required in its regulatory settlements with the SEC and various state securities regulators.
ERISA Litigation On June 18, 2009, the U.S. District Court for the Southern District of New York entered a Memorandum and federal purportedOrder transferring these consolidated cases to the U.S. District Court for the Western District of North Carolina.
Golden West and Related Litigation On May 8, 2009 and on June 12, 2009, two additional cases (not class actions have now been consolidatedactions) containing allegations similar to the allegations in theIn re Wachovia Equity Securities Litigation,and captioned,Stichting Pensioenfonds ABP v. Wachovia Corp. et al. and FC Holdings AB, et al. v. Wachovia Corp., et al.,respectively, were filed in the U.S. District Court for the Southern District of New York. On April 30,June 22, 2009, the U.S. District Court granted a motion filed by Wachovia and certain other defendants and dismissed all claims against Wachovia. Plaintiffs may replead their claims.
Auction Rate Securities On April 23, 2009,for the Attorney General of the StateNorthern District of California filed a complaint inentered an Order To Transfer Three Related Actions Pursuant To U.S.C. Section 1404(a) whereby the Superior Court oftransferred the State of CaliforniaMiller, et al. v. Wachovia Corporation, et al.; Swiskay, et al. v. Wachovia Corporation, et al.; and Orange County Employees’ Retirement System, et al. v. Wachovia Corporation, et al.cases to the U.S. District Court for the CountySouthern District 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.New York.
Merger-RelatedMerger Related Litigation On March 20,July 13, 2009, the U.S. District Court for the Southern District of New York remandedissued an Opinion and Order denying Citigroup’s motion for partial judgment on the pleadings in theWachovia Corp. v. Citigroup, Inc. v.case. The Court held that an Exclusivity Agreement, entered into between Citigroup and Wachovia Corp., et al.case toon September 29, 2008, and which formed the Supreme Courtbasis for a substantial portion of the allegations of Citigroup’s complaint against Wachovia and Wells Fargo, was void as against public policy by enactment of Section 126(c) of the Emergency Economic Stabilization Act on October 3, 2008.
Illinois Attorney General Litigation On July 31, 2009, the Attorney General for the State of New York for the County of Manhattan.
Golden West and Related Litigation On March 19, 2009, the defendantsIllinois filed a motion to dismisscivil lawsuit against Wells Fargo & Company, Wells Fargo Bank, N.A. and Wells Fargo Financial Illinois, Inc. in the amended class actionCircuit Court for Cook County, Illinois. The Illinois Attorney General alleges that the Wells Fargo defendants engaged in illegal discrimination by “reverse redlining” and by steering African-American and Latino customers into high cost, subprime mortgage loans while other borrowers with similar incomes received lower cost mortgages. Illinois also alleges that Wells Fargo Financial Illinois, Inc. misled Illinois customers about the terms of mortgage loans. Illinois’ complaint in theLipetzcase, which has now been re-captioned asIn re Wachovia Equity Securities Litigation. Briefingagainst all Wells Fargo defendants is scheduled to be complete by 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, LLCcase was remanded to the Superior Courtbased on alleged violation of the StateIllinois Human Rights Act and the Illinois Fairness in Lending Act. The complaint also alleges that Wells Fargo Financial Illinois, Inc. violated the Illinois Consumer Fraud and Deceptive Business Practices Act and the Illinois Uniform Deceptive Trade Practices Act. Illinois’ complaint seeks an injunction against the defendants’ alleged violation of California for the County of Los Angeles.these Illinois statutes, restitution to consumers and civil money penalties.
Outlook Based on information currently available, advice of counsel, available insurance coverage and established reserves, Wells Fargo believes that the eventual outcome of the 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 Wells Fargo’s consolidated
94
financial position or results of 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 Wells Fargo’s results of operations for any particular period.
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12.11. 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 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | Notional or | | Fair value | | Notional or | | Fair value | | | Notional or | | Fair value | | Notional or | | Fair value | |
| | contractual | | Asset | | Liability | | contractual | | Asset | | Liability | | | contractual | | Asset | | Liability | | contractual | | Asset | | Liability | |
(in millions) | | amount | | derivatives | | derivatives | | amount | | derivatives | | derivatives | | | 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 | | |
Qualifying hedge contracts accounted for under FAS 133(1) | | |
Interest rate contracts (2) | | | $ | 152,416 | | 7,547 | | 1,970 | | 191,972 | | 11,511 | | 3,287 | |
Foreign exchange contracts | | 42,308 | | 1,119 | | 1,344 | | 38,386 | | 1,138 | | 1,198 | | | 31,655 | | 1,616 | | 680 | | 38,386 | | 1,138 | | 1,198 | |
| | | | | | | | | | | | | |
Total derivatives designated as hedging instruments under FAS 133 | | 11,388 | | 4,191 | | 12,649 | | 4,485 | | | 9,163 | | 2,650 | | 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 | | |
Free-standing derivatives (economic hedges) (1): | | |
Interest rate contracts (3) | | | 991,981 | | 7,092 | | 7,508 | | 750,728 | | 12,635 | | 9,708 | |
Equity contracts | | 39 | | -- | | 9 | | - -- | | - -- | | - -- | | | 39 | | — | | 9 | | — | | — | | — | |
Foreign exchange contracts | | 4,435 | | 370 | | 131 | | 4,208 | | 150 | | 325 | | | 14,227 | | 129 | | 109 | | 4,208 | | 150 | | 325 | |
Credit contracts | | 2,644 | | 473 | | -- | | 644 | | 528 | | -- | | |
Credit contracts — protection sold | | | 2,000 | | — | | — | | — | | — | | — | |
Credit contracts — protection purchased | | | 644 | | 421 | | — | | 644 | | 528 | | — | |
Other derivatives | | 951 | | 3 | | 139 | | 4,458 | | 108 | | 71 | | | 1,143 | | — | | 60 | | 4,458 | | 108 | | 71 | |
| | | | | | | | | | | | | |
Subtotal | | 11,860 | | 9,212 | | 13,421 | | 10,104 | | | 7,642 | | 7,686 | | 13,421 | | 10,104 | |
| | | | | | | | | | | | | |
Customer accommodation, trading and other free-standing derivatives (3): | | |
Customer accommodation, trading and other free-standing derivatives (4): | | |
Interest rate contracts | | 3,399,331 | | 115,111 | | 113,609 | | 3,752,656 | | 142,739 | | 141,508 | | | 3,161,347 | | 71,752 | | 70,758 | | 3,752,656 | | 142,739 | | 141,508 | |
Commodity contracts | | 58,421 | | 6,035 | | 6,203 | | 86,360 | | 6,117 | | 6,068 | | | 81,629 | | 5,232 | | 5,155 | | 86,360 | | 6,117 | | 6,068 | |
Equity contracts | | 35,511 | | 2,276 | | 2,664 | | 37,136 | | 3,088 | | 2,678 | | | 32,505 | | 1,993 | | 2,339 | | 37,136 | | 3,088 | | 2,678 | |
Foreign exchange contracts | | 267,361 | | 4,791 | | 4,595 | | 273,437 | | 7,562 | | 7,419 | | | 204,026 | | 3,408 | | 2,811 | | 273,437 | | 7,562 | | 7,419 | |
Credit contracts | | 278,620 | | 24,986 | | 24,493 | | 272,722 | | 21,953 | | 21,787 | | |
Credit contracts — protection sold | | | 105,389 | | 754 | | 14,667 | | 137,113 | | 349 | | 20,880 | |
Credit contracts — protection purchased | | | 111,756 | | 15,150 | | 877 | | 140,442 | | 22,100 | | 1,281 | |
Other derivatives | | 4,323 | | 882 | | 133 | | 6,322 | | 524 | | 524 | | | 4,086 | | 708 | | 324 | | 1,490 | | 28 | | 150 | |
| | | | | | | | | | | | | |
Subtotal | | 154,081 | | 151,697 | | 181,983 | | 179,984 | | | 98,997 | | 96,931 | | 181,983 | | 179,984 | |
| | | | | | | | | | | | | |
Total derivatives not designated as hedging instruments under FAS 133 | | 165,941 | | 160,909 | | 195,404 | | 190,088 | | | 106,639 | | 104,617 | | 195,404 | | 190,088 | |
| | | | | | | | | | | | | |
| | |
Subtotal | | 177,329 | | 165,100 | | 208,053 | | 194,573 | | | 115,802 | | 107,267 | | 208,053 | | 194,573 | |
| | | | | | | | | | | | | |
| | |
Netting (4) | | | (140,124 | ) | | | (152,208 | ) | | | (168,690 | ) | | | (182,435 | ) | |
| | | | | | | | | | |
Netting(5) | | | | (87,780 | ) | | | (97,261 | ) | | | (168,690 | ) | | | (182,435 | ) |
| | | | | |
Total | | $ | 37,205 | | $ | 12,892 | | $ | 39,363 | | $ | 12,138 | | | $ | 28,022 | | 10,006 | | 39,363 | | 12,138 | |
| | | | | | | | | | |
| | |
| | |
(1) | | Represents asset/liability management hedges, which are included in other assets or other liabilities. |
|
(2) | | Notional amounts presented exclude $17.9 billion of basis swaps that are combined with receive fixed-rate / pay floating-rate swaps and designated as one hedging instrument. |
|
(3) | | 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)(4) | | Customer accommodation, trading and other free-standing derivatives are included in trading assets or other liabilities. |
|
(4)(5) | | 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$15.9 billion and $6.8$5.2 billion, respectively, at March 31,June 30, 2009, and $17.7 billion and $22.2 billion, respectively, at December 31, 2008. |
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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, 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 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 interest rate swaps and forward contracts to hedge against changes in fair value of certain debt securities that are classified as securities available for sale, due to changes in interest 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, certificates of deposit, repurchase 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.
For certain fair value hedging relationships, we use statistical regression analysis to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. Such analysis may include regression analysis or analysis of the price sensitivity of the hedging instrument relative to that of the hedged item. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset or liability being hedged due to 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. Additionally, for other fair 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 net gains (losses) recognized in the income statement related to derivatives in FAS 133 fair value 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) |
| | | | | | | | | | | | |
| |
|
| | | | | | | | | | | | | | | | | | | | |
| | Interest rate contracts hedging: | | | Foreign exchange contracts hedging: | |
| | Securities | | | | | | | Securities | | | | | | | |
| | available | | | Long-term | | | available | | | Short-term | | | Long-term | |
(in millions) | | for sale | | | debt | | | for sale | | | borrowings | | | debt | |
|
Quarter ended June 30, 2009 | | | | | | | | | | | | | | | | | | | | |
Gains (losses) recorded in net interest income | | $ | (71 | ) | | | 383 | | | | (18 | ) | | | 12 | | | | 78 | |
| | | | | | | | | | | | | | | | | | | | |
Gains (losses) recorded in noninterest income | | | | | | | | | | | | | | | | | | | | |
Recognized on derivatives | | | 712 | | | | (2,680 | ) | | | (2 | ) | | | 1 | | | | 1,204 | |
Recognized on hedged item | | | (703 | ) | | | 2,585 | | | | 2 | | | | (1 | ) | | | (1,281 | ) |
|
Recognized on fair value hedges (ineffective portion) (1) | | $ | 9 | | | | (95 | ) | | | — | | | | — | | | | (77 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, 2009 | | | | | | | | | | | | | | | | | | | | |
Gains (losses) recorded in net interest income | | $ | (112 | ) | | | 647 | | | | (46 | ) | | | 28 | | | | 154 | |
| | | | | | | | | | | | | | | | | | | | |
Gains (losses) recorded in noninterest income | | | | | | | | | | | | | | | | | | | | |
Recognized on derivatives | | | 794 | | | | (3,469 | ) | | | — | | | | — | | | | 942 | |
Recognized on hedged item | | | (796 | ) | | | 3,383 | | | | — | | | | — | | | | (951 | ) |
|
Recognized on fair value hedges (ineffective portion) (1) | | $ | (2 | ) | | | (86 | ) | | | — | | | | — | | | | (9 | ) |
|
| | |
(1) | | None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness. |
97103
Cash Flow Hedges
We hedge floating-rate debt against future interest rate increases by using interest rate swaps, to convert floating-rate debt to fixed rates and by using interest rate caps, floors and futures to limit variability of rates.cash flows due to changes in the benchmark interest rate. 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 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 on earnings is recorded. All parts of gain or loss on these derivatives are included in the assessment of hedge effectiveness. For all cash flow hedges, we 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 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.
We expect that $34$125 million of deferred net lossesgains on derivatives in other comprehensive income at March 31,June 30, 2009, will be reclassified as earnings during the next twelve months, compared with $60 million of net deferred losses at December 31, 2008. We are hedging our exposure to the variability of future cash flows for all forecasted transactions for a maximum of 17 years for both hedges of floating-rate debt and floating-rate commercial loans.
The following table shows the gains (losses) recognized related to derivatives in FAS 133 cash flow hedging relationships.
| | |
| | | | | | | | | | | | | | | | | | | | |
| | | Quarter ended | | Six months ended | |
(in millions) | | Quarter ended March 31, 2009 | | | June 30, 2009 | | June 30, 2009 | |
| | Gains (pre tax) | | |
Losses (after tax) recognized in OCI on derivatives (effective portion) | | | $ | (196 | ) | | | (128 | ) |
Gains (pre tax) reclassified from cumulative OCI into net interest income (effective portion) | | | 144 | | 279 | |
Gains (pre tax) recognized in noninterest income on derivatives (ineffective portion) (1) | | | 5 | | 11 | |
| | 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 other income.
The derivatives used to hedge residential MSRs include swaps, swaptions, forwards, Eurodollar and Treasury futures and options contracts resulted in net derivative losses of $1,285 million and net derivative gains of $3,699$2,414 million, respectively, in the second quarter and first quarterhalf of 2009 and $1,892net derivative losses of $4,197 million and $2,305 million, respectively, in first quarterthe same periods of 2008 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 assetliability of $2,845$960 million at March 31,June 30, 2009, and a net asset of $3,610 million at December 31, 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.
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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, 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 we 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. 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 at March 31,June 30, 2009, and December 31, 2008, was a net liability of $81 million and a net asset of $474 million and $125 million, respectively, and is included in the caption “Interest rate contracts” under “Customer accommodation, trading and other free-standing derivatives” in the table on page 96.102.
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.
105
The following table shows the net 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 | | | Quarter ended | | Six months ended | |
(in millions) | on derivatives | | | June 30, 2009 | | June 30, 2009 | |
|
Free-standing derivatives (economic hedges) | | |
Interest rate contracts (1) | | |
Recognized in noninterest income: | | |
Mortgage banking | | $ | 2,364 | | | $ | 692 | | 3,056 | |
Other | | | (5 | ) | | 4 | | | (1 | ) |
| | |
Foreign exchange contracts | | 80 | | | | (98 | ) | | | (18 | ) |
| | |
Equity contracts | | 2 | | | — | | 2 | |
Credit contracts | | | (58 | ) | | | (56 | ) | | | (114 | ) |
| | | | |
Subtotal | | 2,383 | | | 542 | | 2,925 | |
| | | | |
| | |
Customer accommodation, trading and other free-standing derivatives | | |
Interest rate contracts (2) | | |
Recognized in noninterest income: | | |
Mortgage banking | | 1,013 | | | | (203 | ) | | 810 | |
Other | | 313 | | | 86 | | 399 | |
| | |
Commodity contracts | | | (12 | ) | | | (27 | ) | | | (39 | ) |
Equity contracts | | | (123 | ) | | | (58 | ) | | | (181 | ) |
Foreign exchange contracts | | 113 | | | 145 | | 258 | |
Credit contracts | | 254 | | | | (352 | ) | | | (98 | ) |
Other | | | (163 | ) | | | (13 | ) | | | (176 | ) |
| | | | |
Subtotal | | 1,395 | | | | (422 | ) | | 973 | |
| | | | |
Total | | $ | 3,778 | | | $ | 120 | | 3,898 | |
| | | | |
| |
| | |
(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.
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The following table provides details of sold and purchased 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 | | | | | |
| | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Notional amount | | | | |
| | | | | | | | | | Protection | | | Net | | | | | | | | | | |
| | | | | | | | | | purchased | | | protection | | | | | | | | | | |
| | | | | | | | | | with | | | (sold)/ | | | Other | | | Non- | | | | |
| | Fair value | | | Protection | | | identical | | | purchased | | | protection | | | investment | | | Range of | |
(in millions) | | liability | | | sold (A) | | | underlyings (B) | | | (A) - (B) | | | purchased | | | grade | | | maturities | |
|
December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit default swaps on: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate bonds | | $ | 9,643 | | | | 83,446 | | | | 31,413 | | | | 52,033 | | | | 50,585 | | | | 39,987 | | | | 2009-2018 | |
Structured products | | | 4,940 | | | | 7,451 | | | | 5,061 | | | | 2,390 | | | | 6,559 | | | | 5,824 | | | | 2009-2056 | |
Credit protection on: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit default swap index | | | 2,611 | | | | 35,943 | | | | 4,606 | | | | 31,337 | | | | 31,410 | | | | 6,364 | | | | 2009-2017 | |
Commercial mortgage- backed securities index | | | 2,231 | | | | 7,291 | | | | 1,521 | | | | 5,770 | | | | 3,919 | | | | 2,938 | | | | 2009-2052 | |
Asset-backed securities index | | | 1,331 | | | | 1,526 | | | | 235 | | | | 1,291 | | | | 803 | | | | 1,116 | | | | 2037-2046 | |
Loan deliverable credit default swaps | | | 106 | | | | 611 | | | | 281 | | | | 330 | | | | 1,033 | | | | 592 | | | | 2009-2014 | |
Other | | | 18 | | | | 845 | | | | 21 | | | | 824 | | | | — | | | | 150 | | | | 2009-2020 | |
| | | | |
Total credit derivatives | | $ | 20,880 | | | | 137,113 | | | | 43,138 | | | | 93,975 | | | | 94,309 | | | | 56,971 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit default swaps on: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate bonds | | $ | 5,133 | | | | 69,747 | | | | 24,503 | | | | 45,244 | | | | 45,567 | | | | 34,433 | | | | 2009-2018 | |
Structured products | | | 5,021 | | | | 6,147 | | | | 4,075 | | | | 2,072 | | | | 4,846 | | | | 4,717 | | | | 2009-2056 | |
Credit protection on: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Default swap index | | | 1,235 | | | | 21,672 | | | | 4,011 | | | | 17,661 | | | | 19,076 | | | | 5,178 | | | | 2009-2017 | |
Commercial mortgage- backed securities index | | | 2,352 | | | | 4,713 | | | | 1,111 | | | | 3,602 | | | | 3,302 | | | | 63 | | | | 2009-2052 | |
Asset-backed securities index | | | 875 | | | | 1,008 | | | | 232 | | | | 776 | | | | 705 | | | | 611 | | | | 2037-2046 | |
Loan deliverable credit default swaps | | | 48 | | | | 542 | | | | 266 | | | | 276 | | | | 516 | | | | 534 | | | | 2009-2014 | |
Other | | | 3 | | | | 1,560 | | | | 5 | | | | 1,555 | | | | 110 | | | | 909 | | | | 2009-2020 | |
| | | | |
Total credit derivatives | | $ | 14,667 | | | | 105,389 | | | | 34,203 | | | | 71,186 | | | | 74,122 | | | | 46,445 | | | | | |
|
“Maximum exposure to loss” and “higher performance risk” are required disclosuresThe amounts under generally accepted accounting principles. Higher performance risk representsnon-investment grade represent the notional amounts of those credit derivatives on which we have a higher performance risk, or higher risk of being required to perform under the terms of the credit derivative.derivative and is a function of the underlying assets. 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 lossProtection sold represents the estimated maximum exposure to loss that would be incurred under an assumed hypothetical circumstance, despite what we believe is 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,net protection (sold)/purchased, which is either fair value or cost adjusted for incurred credit losses,representative of the net notional amount of protection sold and purchased with identical underlyings, in combination with other protection purchased, is more representative of our exposure to loss than either higher performance risknon-investment grade or maximumprotection sold. Other protection purchased represents additional protection, which may offset the exposure to loss.loss for protection sold, that was not purchased with an identical underlying of the protection sold.
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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,June 30, 2009, was $18.9$12.7 billion for which we have posted $15.9$11.9 billion collateral in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on March 31,June 30, 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 counterparty 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 amounts 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.in determining fair value.
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13.12. 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 securities sold but not yet purchased (short sale liabilities) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as nonprime residential and commercial MHFS, certain LHFS, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. 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 primarily used unadjusted 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 activeorderly included non-agency residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations, home equity asset-backed securities, auto 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 existed 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) reduces certain timing differences and better matches 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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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. |
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.
Determination of Fair Value
Under FAS 157, we base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FAS 157.
In instances where there is limited or no observable market data, fair value measurements for assets and liabilities are based primarily upon our own estimates or combination of our own estimates and independent vendor or broker pricing, and the measurements are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future values.
We incorporate lack of liquidity into our fair value measurement based on the type of asset measured and the valuation methodology used. For example, for residential mortgage loans held for sale and certain securities where the significant inputs have become unobservable due to the illiquid markets and vendor or broker pricing is not used, we use a discounted cash flow technique to measure fair value. This technique incorporates forecasting of expected cash flows discounted at an appropriate market discount rate to reflect the lack of liquidity in the market that a market participant would consider. For other securities where vendor or broker pricing is used, we use either unadjusted broker quotes or vendor prices or vendor or broker prices adjusted by weighting them with internal discounted cash flow techniques to measure fair value. These unadjusted or adjusted vendor or broker prices inherently reflect any lack of liquidity in the market as the fair value measurement represents an exit price from a market participant viewpoint.
Following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value (FAS 107,Disclosures about Fair Value of Financial Statements, disclosures).
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Assets
Short-term financial assets
Short-term financial assets include cash and due from banks, federal funds sold and securities purchased under resale agreements and due from customers on acceptances. These assets are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Trading assets and Securities available for sale
Trading assets and securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. Such instruments are classified within Level 1 of the fair value hierarchy. Examples include exchange-traded equity securities and some highly liquid government securities such as U.S. Treasuries.
When instruments are traded in secondary markets and quoted market prices do not exist for such securities, we generally rely on internal valuation techniques or on prices obtained from independent pricing services or brokers (collectively, vendors) or combination thereof. Trading assets and liabilities are typically valued using trader prices that are subject to independent price verification procedures. The majority of fair values derived using internal valuation techniques are verified against multiple pricing sources, including prices obtained from independent vendors. Vendors compile prices from various sources and often apply matrix pricing for similar securities when no price is observable. We review pricing methodologies provided by the vendors in order to determine if observable market information is being used, versus unobservable inputs. When evaluating the appropriateness of an internal trader price compared to vendor prices, considerations include the range and quality of vendor prices. Vendor prices are used to ensure the reasonableness of a trader price; however valuing financial instruments involves judgments acquired from knowledge of a particular market and is not perfunctory. If a trader asserts that a vendor price is not reflective of market value, justification for using the trader price, including recent sales activity where possible, must be provided to and approved by the appropriate levels of management. Similarly, while securities available for sale traded in secondary markets are typically valued using unadjusted vendor prices or vendor prices adjusted by weighting them with internal discounted cash flow techniques, these prices are reviewed and, if deemed inappropriate by a trader who has the most knowledge of a particular market, can be adjusted. Securities measured with these internal valuation techniques are generally classified as Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow analyses using significant inputs observable in the market where available or combination of multiple valuation techniques. Examples include certain residential and commercial mortgage-backed securities, municipal bonds, U.S. government and agency mortgage-backed securities, and corporate debt securities.
Security fair value measurements using significant inputs that are unobservable in the market due to limited activity or a less liquid market are classified as Level 3 in the fair value hierarchy. Such measurements include securities valued using internal models or combination of multiple valuation techniques such as weighting of internal models and vendor or broker pricing, where the unobservable inputs are significant to the overall fair value measurement.. Securities classified as Level 3 include certain residential and commercial mortgage-backed securities, asset-backed securities collateralized by auto leases and cash reserves, collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs), and certain residual and retained interests in residential mortgage loan securitizations. CDOs are valued using the prices of similar instruments, the pricing of completed or pending third party transactions or the pricing of the underlying collateral within the CDO. Where prices are not readily available, management’s best estimate is used.
Mortgages held for sale (MHFS)
Under FAS 159, we elected to carry our new prime residential MHFS portfolio at fair value. The remaining MHFS are carried at the lower of cost or market value. Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. As necessary, these prices are adjusted for typical securitization activities, including servicing value, portfolio composition, market conditions and liquidity. Most of our MHFS are classified
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as Level 2. For the portion where market pricing data is not available, we use a discounted cash flow model to estimate fair value and, accordingly, classify as Level 3.
Loans held for sale (LHFS)
Loans held for sale are carried at the lower of cost or market value, or at fair value for certain portfolios that we intend to hold for trading purposes. The fair value of LHFS is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify those loans subjected to nonrecurring fair value adjustments as Level 2.
Loans
For the carrying value of loans, including loans accounted for under SOP 03-3, see Note 1 – Loans. We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FAS 107 disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect (1) partial write-downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value.
The fair value estimates for FAS 107 purposes differentiate loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by product and loan rate.
The fair value of commercial and commercial real estate loans is calculated by discounting contractual cash flows, adjusted for credit loss estimates, using discount rates that reflect our current pricing for loans with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior lien mortgages, fair value is calculated by discounting contractual cash flows, adjusted for prepayment and credit loss estimates, using discount rates based on current industry pricing (where readily available) or our own estimate of an appropriate risk-adjusted discount rate for loans of similar size, type, remaining maturity and repricing characteristics.
For credit card loans, the portfolio’s yield is equal to our current pricing and, therefore, the fair value is equal to book value adjusted for estimates of credit losses inherent in the portfolio at the balance sheet date.
For all other consumer loans, the fair value is generally calculated by discounting the contractual cash flows, adjusted for prepayment and credit loss estimates, based on the current rates we offer for loans with similar characteristics.
Loan commitments, standby letters of credit and commercial and similar letters of credit are not included in the FAS 107 table on page 120. These instruments generate ongoing fees at our current pricing levels, which are recognized over the term of the commitment period. In situations where the credit quality of the counterparty to a commitment has declined, we record a reserve. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related reserve. This amounted to $549 million and $719 million at June 30, 2009, and December 31, 2008, respectively. Certain letters of credit that are hedged with derivative instruments are carried at fair value in trading assets or liabilities. For those letters of credit fair value is calculated based on readily quotable credit default spreads, using a market risk credit default swap model.
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Derivatives
Quoted market prices are available and used for our exchange-traded derivatives, such as certain interest rate futures and option contracts, which we classify as Level 1. However, substantially all of our derivatives are traded in over-the-counter (OTC) markets where quoted market prices are not readily available. OTC derivatives are valued using internal valuation techniques. Valuation techniques and inputs to internally-developed models depend on the type of derivative and nature of the underlying rate, price or index upon which the derivative’s value is based. Key inputs can include yield curves, credit curves, foreign-exchange rates, prepayment rates, volatility measurements and correlation of such inputs. Where model inputs can be observed in a liquid market and the model does not require significant judgment, such derivatives are typically classified as Level 2 of the fair value hierarchy. Examples of derivatives classified as Level 2 include generic interest rate swaps, foreign currency swaps, commodity swaps, and option contracts. When instruments are traded in less liquid markets and significant inputs are unobservable, such derivatives are classified as Level 3. Examples of derivatives classified as Level 3 include complex and highly structured derivatives, credit default swaps, interest rate lock commitments written for our residential mortgage loans that we intend to sell and long dated equity options where volatility is not observable. Additionally, significant judgments are required when classifying financial instruments within the fair value hierarchy, particularly between Level 2 and 3, as is the case for certain derivatives.
Mortgage servicing rights and certain other interests held in securitizations
Mortgage servicing rights (MSRs) and certain other interests held in securitizations (e.g., interest-only strips) do not trade in an active market with readily observable prices. Accordingly, we determine the fair value of MSRs using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds (including housing price volatility), discount rate, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, ancillary income and late fees. Commercial MSRs are carried at lower of cost or market value, and therefore can be subject to fair value measurements on a nonrecurring basis. For other interests held in securitizations (such as interest-only strips) we use a valuation model that calculates the present value of estimated future cash flows. The model incorporates our own estimates of assumptions market participants use in determining the fair value, including estimates of prepayment speeds, discount rates, defaults and contractual fee income. Interest-only strips are recorded as trading assets. Fair value measurements of our MSRs and interest-only strips use significant unobservable inputs and, accordingly, we classify as Level 3.
Foreclosed assets
Foreclosed assets include foreclosed properties securing residential, auto and Government National Mortgage Association loans. Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral and, accordingly, we classify foreclosed assets as Level 2.
Nonmarketable equity investments
Nonmarketable equity investments are recorded under the cost or equity method of accounting. Nonmarketable equity securities that fall within the scope of the AICPA Investment Company Audit Guide are carried at fair value (principal investments). There are generally restrictions on the sale and/or liquidation of these investments, including federal bank stock. Federal bank stock carrying value approximates fair value. We use facts and circumstances available to estimate the fair value of our nonmarketable equity investments. We typically consider our access to and need for capital (including recent or projected financing activity), qualitative assessments of the viability of the investee, evaluation of the financial statements of the investee and prospects for its future. Principal investments, including
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certain public equity and non-public securities and certain investments in private equity funds, are recorded at fair value with realized and unrealized gains and losses included in gains and losses on equity investments in the income statement, and are included in other assets on the balance sheet. Public equity investments are valued using quoted market prices and discounts are only applied when there are trading restrictions that are an attribute of the investment. Investments in non-public securities are recorded at our estimate of fair value using metrics such as security prices of comparable public companies, acquisition prices for similar companies and original investment purchase price multiples, while also incorporating a portfolio company’s financial performance and specific factors. For investments in private equity funds, we use the net asset value (NAV) provided by the fund sponsor as an appropriate measure of fair value. In some cases, such NAVs require adjustments based on certain unobservable inputs.
Liabilities
Deposit liabilities
Deposit liabilities are carried at historical cost. FAS 107 states that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking, and market rate and other savings, is equal to the amount payable on demand at the measurement date. The fair value of other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like wholesale deposits with similar remaining maturities.
Short-term financial liabilities
Short-term financial liabilities are carried at historical cost and include federal funds purchased and securities sold under repurchase agreements, commercial paper and other short-term borrowings. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Other liabilities
Other liabilities recorded at fair value on a recurring basis, excluding derivative liabilities (see the “Derivatives” section for derivative liabilities), includes short sale liabilities and repurchase obligations (due to standard representations and warranties) under our residential mortgage loan contracts. Short sale liabilities are classified as either Level 1 or Level 2, generally dependent upon whether the underlying securities have readily obtained quoted prices in active exchange markets. The value of the repurchase obligations is determined using a cash flow valuation technique consistent with what market participants would use in estimating the fair value. Key assumptions in the valuation process are estimates for repurchase demands and losses subsequent to repurchase. Such assumptions are unobservable and, accordingly, we classify repurchase obligations as Level 3.
Long-term debt
Long-term debt is carried at amortized cost. However, we are required to estimate the fair value of long-term debt under FAS 107. Generally, the discounted cash flow method is used to estimate the fair value of our long-term debt. Contractual cash flows are discounted using rates currently offered for new notes with similar remaining maturities and, as such, these discount rates include our current spread levels. The fair value estimates generated are corroborated against observable market prices. For foreign-currency denominated debt, we estimate fair value based upon observable market prices for the instruments.
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The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | | | | |
|
(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 | ) |
| | | | | | | | | | | | | | | |
|
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting (1) | | Total | | | 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 | | | $ | 911 | | 16,045 | | 3,495 | | — | | 20,451 | |
Derivatives (trading assets) | | 331 | | 174,355 | | 7,897 | | | (148,150 | ) | | 34,433 | | | 331 | | 174,355 | | 7,897 | | | (148,150 | ) | | 34,433 | |
| | |
Securities of U.S. Treasury and federal agencies | | 3,177 | | 72 | | - -- | | - -- | | 3,249 | | | 3,177 | | 72 | | — | | — | | 3,249 | |
Securities of U.S. states and political subdivisions | | 1 | | 11,754 | | 903 | | - -- | | 12,658 | | | 1 | | 11,754 | | 903 | | — | | 12,658 | |
Mortgage-backed securities: | | |
Federal agencies | | - -- | | 66,430 | | 4 | | - -- | | 66,434 | | | — | | 66,430 | | 4 | | — | | 66,434 | |
Residential | | - -- | | 21,320 | | 3,510 | | - -- | | 24,830 | | | — | | 21,320 | | 3,510 | | — | | 24,830 | |
Commercial | | - -- | | 8,192 | | 286 | | - -- | | 8,478 | | | — | | 8,192 | | 286 | | — | | 8,478 | |
| | | | | | | | | | | | |
Total mortgage-backed securities | | - -- | | 95,942 | | 3,800 | | - -- | | 99,742 | | | — | | 95,942 | | 3,800 | | — | | 99,742 | |
| | |
Corporate debt securities | | - -- | | 6,642 | | 282 | | - -- | | 6,924 | | | — | | 6,642 | | 282 | | — | | 6,924 | |
Collateralized debt obligations | | - -- | | 2 | | 2,083 | | - -- | | 2,085 | | | — | | 2 | | 2,083 | | — | | 2,085 | |
Other | | - -- | | 7,976 | | 12,799 | | - -- | | 20,775 | | | — | | 7,976 | | 12,799 | | — | | 20,775 | |
| | | | | | | | | | | | |
Total debt securities | | 3,178 | | 122,388 | | 19,867 | | - -- | | 145,433 | | | 3,178 | | 122,388 | | 19,867 | | — | | 145,433 | |
| | |
Marketable equity securities: | | |
Perpetual preferred securities | | 886 | | 1,065 | | 2,775 | | - -- | | 4,726 | | | 886 | | 1,065 | | 2,775 | | — | | 4,726 | |
Other marketable equity securities | | 1,099 | | 261 | | 50 | | - -- | | 1,410 | | | 1,099 | | 261 | | 50 | | — | | 1,410 | |
| | | | | | | | | | | | |
Total marketable equity securities | | 1,985 | | 1,326 | | 2,825 | | - -- | | 6,136 | | | 1,985 | | 1,326 | | 2,825 | | — | | 6,136 | |
| | | | | | | | | | | | |
Total | | 5,163 | | 123,714 | | 22,692 | | - -- | | 151,569 | | | 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 June 30, 2009 | | |
Trading assets (excluding derivatives) | | | $ | 2,930 | | 14,514 | | 2,475 | | — | | 19,919 | |
Derivatives (trading assets) | | | 332 | | 92,105 | | 7,071 | | | (79,317 | ) | | 20,191 | |
Securities of U.S. Treasury and federal agencies | | | 1,189 | | 1,328 | | — | | — | | 2,517 | |
Securities of U.S. states and political subdivisions | | | — | | 11,473 | | 905 | | — | | 12,378 | |
Mortgage-backed securities: | | |
Federal agencies | | | — | | 114,844 | | — | | — | | 114,844 | |
Residential | | | — | | 26,611 | | 5,913 | | — | | 32,524 | |
Commercial | | | — | | 7,608 | | 2,615 | | — | | 10,223 | |
| | |
Total mortgage-backed securities | | | — | | 149,063 | | 8,528 | | — | | 157,591 | |
| | |
Corporate debt securities | | | — | | 8,527 | | 286 | | — | | 8,813 | |
Collateralized debt obligations | | | — | | — | | 2,748 | | — | | 2,748 | |
Other | | | — | | 1,121 | | 15,718 | | — | | 16,839 | |
| | |
Total debt securities | | | 1,189 | | 171,512 | | 28,185 | | — | | 200,886 | |
| | |
Marketable equity securities: | | |
Perpetual preferred securities | | | 657 | | 690 | | 2,716 | | — | | 4,063 | |
Other marketable equity securities | | | 1,274 | | 445 | | 127 | | — | | 1,846 | |
| | |
Total marketable equity securities | | | 1,931 | | 1,135 | | 2,843 | | — | | 5,909 | |
| | |
Total | | | 3,120 | | 172,647 | | 31,028 | | — | | 206,795 | |
| | |
Mortgages held for sale | | - -- | | 14,036 | | 4,718 | | - -- | | 18,754 | | | — | | 36,091 | | 4,099 | | — | | 40,190 | |
Loans held for sale | | - -- | | 398 | | - -- | | - -- | | 398 | | | — | | 141 | | — | | — | | 141 | |
Mortgage servicing rights (residential) | | - -- | | - -- | | 14,714 | | - -- | | 14,714 | | | — | | — | | 15,690 | | — | | 15,690 | |
Other assets (2) | | 3,975 | | 21,751 | | 2,041 | | | (20,540 | ) | | 7,227 | | | 3,133 | | 13,836 | | 1,844 | | | (8,463 | ) | | 10,350 | |
| | | | | | | | | | | | |
Total | | $ | 10,380 | | $ | 350,299 | | $ | 55,557 | | $ | (168,690 | ) | | $ | 247,546 | | | $ | 9,515 | | 329,334 | | 62,207 | | | (87,780 | ) | | 313,276 | |
| | | | | | | | | | | | |
| | |
Other liabilities (3) | | $ | (4,815 | ) | | $ | (187,098 | ) | | $ | (9,308 | ) | | $ | 182,435 | | $ | (18,786 | ) | | $ | (8,693 | ) | | | (100,834 | ) | | | (8,747 | ) | | 97,261 | | | (21,013 | ) |
| | | | | | | | | | | | |
| | |
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. |
105115
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 | | | Net unrealized | |
| | (losses) included in | | Purchases, | | gains (losses) | | | Total net gains | | Purchases, | | gains (losses) | |
| | sales, | | Net | | included in net | | | (losses) included in | | sales, | | Net | | included in net | |
| | Other | | issuances | | transfers | | income relating | | | Other | | issuances | | transfers | | income related | |
| | Balance, | | compre- | | and | | into and/ | | Balance, | | to assets and | | | Balance, | | compre- | | and | | into and/ | | Balance, | | to assets and | |
| | beginning | | Net | | hensive | | settlements, | | or out of | | end of | | liabilities held | | | beginning | | Net | | hensive | | settlements, | | or out of | | end | | liabilities held | |
(in millions) | | of period | | income | | income | | net | | Level 3 | (1) | | period | | at period end | (2) | | of period | | income | | income | | net | | Level 3 (1) | | of 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 | | |
| | |
Quarter ended June 30, 2008 | | |
Trading assets (excluding derivatives) | | $ | 3,495 | | $ | (38 | ) | | $ | - -- | | $ | (523 | ) | | $ | 324 | | $ | 3,258 | | $ | 2 | (3) | | $ | 362 | | 181 | | — | | 4 | | — | | 547 | | | 207 | (3) |
Securities available for sale: | | |
Securities of U.S. states and political subdivisions | | 903 | | | (2 | ) | | 2 | | | (7 | ) | | | (75 | ) | | 821 | | -- | | | 166 | | — | | | (10 | ) | | 9 | | 278 | | 443 | | | (20 | ) |
Mortgage-backed securities: | | |
Federal agencies | | 4 | | - -- | | - -- | | - -- | | | (4 | ) | | - -- | | -- | | | — | | — | | — | | — | | 7 | | 7 | | — | |
Residential | | 3,510 | | | (29 | ) | | 711 | | | (170 | ) | | 3,635 | | 7,657 | | | (95 | ) | | 556 | | | (69 | ) | | | (43 | ) | | 1 | | 5 | | 450 | | | (64 | ) |
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 | ) | | 556 | | | (69 | ) | | | (43 | ) | | 1 | | 12 | | 457 | | | (64 | ) |
| | |
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 | ) | | 5,961 | | — | | | (329 | ) | | 628 | | 1,443 | | 7,703 | | — | |
| | | | | | | | | | | | | | | | |
Total debt securities | | 19,867 | | 9 | | 2,033 | | 1,330 | | 5,593 | | 28,832 | | | (135 | ) | | 6,683 | | | (69 | ) | | | (382 | ) | | 638 | | 1,733 | | 8,603 | | | (84 | ) |
Marketable equity securities | | |
| | |
Marketable equity securities: | | |
Perpetual preferred securities | | 2,775 | | 70 | | 26 | | | (311 | ) | | | (3 | ) | | 2,557 | | -- | | | — | | — | | — | | — | | — | | — | | — | |
Other marketable equity securities | | 50 | | - -- | | | (18 | ) | | 60 | | | (48 | ) | | 44 | | -- | | | 1 | | — | | — | | — | | — | | 1 | | — | |
| | | | | | | | | | | | | | | | |
Total marketable equity securities | | 2,825 | | 70 | | 8 | | | (251 | ) | | | (51 | ) | | 2,601 | | -- | | | 1 | | — | | — | | — | | — | | 1 | | — | |
| | | | | | | | | | | | | | | | |
Total securities available for sale | | $ | 22,692 | | $ | 79 | | $ | 2,041 | | $ | 1,079 | | $ | 5,542 | | $ | 31,433 | | $ | (135 | ) | | $ | 6,684 | | | (69 | ) | | | (382 | ) | | 638 | | 1,733 | | 8,604 | | | (84 | ) |
| | | | | | | | | | | | | | | | |
Mortgages held for sale | | | $ | 1,260 | | | (43 | ) | | — | | 763 | | 3,296 | | 5,276 | | | (43 | )(4) |
Mortgage servicing rights (residential) | | | 14,956 | | 3,478 | | — | | 899 | | — | | 19,333 | | | 4,121 | (4)(5) |
Net derivative assets and liabilities | | | | (31 | ) | | | (311 | ) | | — | | 295 | | — | | | (47 | ) | | | (42 | )(4) |
Other assets (excluding derivatives) | | | — | | — | | — | | — | | — | | — | | — | |
Other liabilities (excluding derivatives) | | | | (329 | ) | | | (35 | ) | | — | | 7 | | — | | | (357 | ) | | | (36 | ) |
| | |
| | |
Quarter ended June 30, 2009 | | |
Trading assets (excluding derivatives) | | | $ | 3,258 | | 80 | | — | | | (875 | ) | | 12 | | 2,475 | | | 99 | (3) |
Securities available for sale: | | |
Securities of U.S. states and political subdivisions | | | 821 | | 20 | | 11 | | 53 | | — | | 905 | | 5 | |
Mortgage-backed securities: | | |
Federal agencies | | | — | | — | | — | | — | | — | | — | | — | |
Residential | | | 7,657 | | | (1 | ) | | 173 | | | (418 | ) | | | (1,498 | ) | | 5,913 | | | (56 | ) |
Commercial | | | 2,497 | | | (110 | ) | | 246 | | | (2 | ) | | | (16 | ) | | 2,615 | | | (1 | ) |
| | |
Total mortgage-backed securities | | | 10,154 | | | (111 | ) | | 419 | | | (420 | ) | | | (1,514 | ) | | 8,528 | | | (57 | ) |
| | |
Corporate debt securities | | | 261 | | 4 | | 46 | | | (6 | ) | | | (19 | ) | | 286 | | — | |
Collateralized debt obligations | | | 2,329 | | | (15 | ) | | 17 | | 102 | | 315 | | 2,748 | | | (46 | ) |
Other | | | 15,267 | | 49 | | 427 | | 186 | | | (211 | ) | | 15,718 | | | (21 | ) |
| | |
Total debt securities | | | 28,832 | | | (53 | ) | | 920 | | | (85 | ) | | | (1,429 | ) | | 28,185 | | | (119 | ) |
| | |
Marketable equity securities: | | |
Perpetual preferred securities | | | 2,557 | | 16 | | 89 | | 77 | | | (23 | ) | | 2,716 | | | (1 | ) |
Other marketable equity securities | | | 44 | | — | | 17 | | 2 | | 64 | | 127 | | — | |
| | |
Total marketable equity securities | | | 2,601 | | 16 | | 106 | | 79 | | 41 | | 2,843 | | | (1 | ) |
| | |
Total securities available for sale | | | $ | 31,433 | | | (37 | ) | | 1,026 | | | (6 | ) | | | (1,388 | ) | | 31,028 | | | (120 | ) |
| | |
Mortgages held for sale | | $ | 4,718 | | $ | 2 | | $ | - -- | | $ | (110 | ) | | $ | (94 | ) | | $ | 4,516 | | $ | (1 | )(4) | | $ | 4,516 | | | (4 | ) | | — | | | (361 | ) | | | (52 | ) | | 4,099 | | | (8) | (4) |
| | |
Mortgage servicing rights (residential) | | 14,714 | | | (3,804 | ) | | - -- | | 1,481 | | - -- | | 12,391 | | | (2,824 | )(4)(5) | | 12,391 | | 1,217 | | — | | 2,082 | | — | | 15,690 | | | 2,316 | (4)(5) |
| | |
Net derivative assets and liabilities | | 37 | | 848 | | - -- | | | (89 | ) | | 240 | | 1,036 | | | 616 | (4) | | 1,036 | | | (854 | ) | | — | | | (413 | ) | | 25 | | | (206 | ) | | | (483) | (4) |
| | |
Other assets (excluding derivatives) | | 1,231 | | | (9 | ) | | - -- | | | (1 | ) | | - -- | | 1,221 | | | (12 | )(4) | | 1,221 | | | (24 | ) | | — | | 29 | | — | | 1,226 | | | (14) | (4) |
| | |
Other liabilities (excluding derivatives) | | | (638 | ) | | | (76 | ) | | - -- | | | (15 | ) | | - -- | | | (729 | ) | | | (76 | ) | | | (729 | ) | | | (102 | ) | | — | | | (19 | ) | | | (2 | ) | | | (852 | ) | | | (102 | ) |
| | | |
| | |
(1) | | The amounts presented as transfers into and out of Level 3 represent fair value as of the beginning of the period presented. |
|
(2) | | 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. |
|
(3) | | Included in other noninterest income in the income statement.
|
|
(4) | | Included in mortgage banking in the income statement. |
|
(5) | | Represents total unrealized lossesgains of $2,824$2,316 million and $1,798$4,132 million, net of gains of nil and $11 million related to sales, in the second quarter of 2009 and 2008, respectively. |
116
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Net unrealized | |
| | | | | | Total net gains | | | Purchases, | | | | | | | | | | | gains (losses) | |
| | | | | | (losses) included in | | | sales, | | | Net | | | | | | | included in net | |
| | | | | | | | | | Other | | | issuances | | | transfers | | | | | | | income related | |
| | Balance, | | | | | | | compre- | | | and | | | into and/ | | | Balance, | | | to assets and | |
| | beginning | | | Net | | | hensive | | | settlements, | | | or out of | | | end | | | liabilities held | |
(in millions) | | of period | | | income | | | income | | | net | | | Level 3 (1) | | | of period | | | at period end (2) | |
|
Six months ended June 30, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading assets (excluding derivatives) | | $ | 418 | | | | 113 | | | | — | | | | 16 | | | | — | | | | 547 | | | | 166 | (3) |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. states and political subdivisions | | | 168 | | | | — | | | | (18 | ) | | | 15 | | | | 278 | | | | 443 | | | | (20 | ) |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | — | | | | — | | | | — | | | | — | | | | 7 | | | | 7 | | | | — | |
Residential | | | 486 | | | | (77 | ) | | | (25 | ) | | | 61 | | | | 5 | | | | 450 | | | | (68 | ) |
Commercial | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
|
Total mortgage-backed securities | | | 486 | | | | (77 | ) | | | (25 | ) | | | 61 | | | | 12 | | | | 457 | | | | (68 | ) |
|
Corporate debt securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Collateralized debt obligations | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other | | | 4,726 | | | | — | | | | (297 | ) | | | 1,831 | | | | 1,443 | | | | 7,703 | | | | — | |
|
Total debt securities | | | 5,380 | | | | (77 | ) | | | (340 | ) | | | 1,907 | | | | 1,733 | | | | 8,603 | | | | (88 | ) |
|
Marketable equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Perpetual preferred securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other marketable equity securities | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | |
|
Total marketable equity securities | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | |
|
Total securities available for sale | | $ | 5,381 | | | | (77 | ) | | | (340 | ) | | | 1,907 | | | | 1,733 | | | | 8,604 | | | | (88 | ) |
|
Mortgages held for sale | | $ | 146 | | | | (48 | ) | | | — | | | | 790 | | | | 4,388 | | | | 5,276 | | | | (48 | )(4) |
Mortgage servicing rights (residential) | | | 16,763 | | | | 914 | | | | — | | | | 1,656 | | | | — | | | | 19,333 | | | | 2,342 | (4)(5) |
Net derivative assets and liabilities | | | 6 | | | | (490 | ) | | | — | | | | 437 | | | | — | | | | (47 | ) | | | (48 | )(4) |
Other assets (excluding derivatives) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other liabilities (excluding derivatives) | | | (280 | ) | | | (101 | ) | | | — | | | | 24 | | | | — | | | | (357 | ) | | | (101 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Six months ended June 30, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading assets (excluding derivatives) | | $ | 3,495 | | | | 42 | | | | — | | | | (1,398 | ) | | | 336 | | | | 2,475 | | | | 82 | (3) |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities of U.S. states and political subdivisions | | | 903 | | | | 18 | | | | 13 | | | | 46 | | | | (75 | ) | | | 905 | | | | (6 | ) |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agencies | | | 4 | | | | — | | | | — | | | | — | | | | (4 | ) | | | — | | | | — | |
Residential | | | 3,510 | | | | (30 | ) | | | 884 | | | | (588 | ) | | | 2,137 | | | | 5,913 | | | | (151 | ) |
Commercial | | | 286 | | | | (118 | ) | | | 747 | | | | 49 | | | | 1,651 | | | | 2,615 | | | | (11 | ) |
|
Total mortgage-backed securities | | | 3,800 | | | | (148 | ) | | | 1,631 | | | | (539 | ) | | | 3,784 | | | | 8,528 | | | | (162 | ) |
|
Corporate debt securities | | | 282 | | | | 2 | | | | 56 | | | | (23 | ) | | | (31 | ) | | | 286 | | | | — | |
Collateralized debt obligations | | | 2,083 | | | | 55 | | | | 189 | | | | 104 | | | | 317 | | | | 2,748 | | | | (56 | ) |
Other | | | 12,799 | | | | 29 | | | | 1,064 | | | | 1,657 | | | | 169 | | | | 15,718 | | | | (53 | ) |
|
Total debt securities | | | 19,867 | | | | (44 | ) | | | 2,953 | | | | 1,245 | | | | 4,164 | | | | 28,185 | | | | (277 | ) |
|
Marketable equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Perpetual preferred securities | | | 2,775 | | | | 86 | | | | 115 | | | | (234 | ) | | | (26 | ) | | | 2,716 | | | | (1 | ) |
Other marketable equity securities | | | 50 | | | | — | | | | (1 | ) | | | 62 | | | | 16 | | | | 127 | | | | — | |
|
Total marketable equity securities | | | 2,825 | | | | 86 | | | | 114 | | | | (172 | ) | | | (10 | ) | | | 2,843 | | | | (1 | ) |
|
Total securities available for sale | | $ | 22,692 | | | | 42 | | | | 3,067 | | | | 1,073 | | | | 4,154 | | | | 31,028 | | | | (278 | ) |
|
Mortgages held for sale | | $ | 4,718 | | | | (2 | ) | | | — | | | | (471 | ) | | | (146 | ) | | | 4,099 | | | | (9) | (4) |
Mortgage servicing rights (residential) | | | 14,714 | | | | (2,587 | ) | | | — | | | | 3,563 | | | | — | | | | 15,690 | | | | (508) | (4)(5) |
Net derivative assets and liabilities | | | 37 | | | | (6 | ) | | | — | | | | (502 | ) | | | 265 | | | | (206 | ) | | | (422) | (4) |
Other assets (excluding derivatives) | | | 1,231 | | | | (33 | ) | | | — | | | | 28 | | | | — | | | | 1,226 | | | | (3) | (4) |
Other liabilities (excluding derivatives) | | | (638 | ) | | | (178 | ) | | | — | | | | (34 | ) | | | (2 | ) | | | (852 | ) | | | (179 | ) |
|
| | |
(1) | | The amounts presented as transfers into and out of Level 3 represent fair value as of the beginning of the period presented. |
|
(2) | | 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. |
|
(3) | | Included in other noninterest income in the income statement. |
|
(4) | | Included in mortgage banking in the income statement. |
|
(5) | | Represents total unrealized gains (losses) of $(508) million and $2,334 million, net of losses of nil and $4$8 million related to sales, in the first quarterhalf of 2009 and 2008, respectively. |
106117
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.
For certain assets and liabilities, we obtain fair value measurements from independent brokers or independent third party pricing services.services and record the unadjusted fair value in our financial statements. The detail by level is shown in the table below. Fair value measurements obtained from independent brokers or independent third party pricing services that we have adjusted to determine the fair value recorded in our financial statements are not included in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Independent brokers | | Third party pricing services | | | Independent brokers | | Third party pricing services | |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | | | 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 | | | $ | 190 | | 3,272 | | 12 | | 917 | | 1,944 | | 110 | |
Derivatives (trading and other assets) | | 3,419 | | 106 | | 106 | | 605 | | 4,635 | | - -- | | | 3,419 | | 106 | | 106 | | 605 | | 4,635 | | — | |
Securities available for sale | | 181 | | 8,916 | | 1,681 | | 3,944 | | 109,170 | | 8 | | | 181 | | 8,916 | | 1,681 | | 3,944 | | 109,170 | | 8 | |
Loans held for sale | | - -- | | 1 | | - -- | | - -- | | 353 | | - -- | | | — | | 1 | | — | | — | | 353 | | — | |
Other liabilities | | 1,105 | | 175 | | 128 | | 2,208 | | 5,171 | | 1 | | | 1,105 | | 175 | | 128 | | 2,208 | | 5,171 | | 1 | |
| | |
March 31, 2009 | | |
| | |
June 30, 2009 | | |
Trading assets (excluding derivatives) | | $ | 422 | | $ | 3,600 | | $ | 20 | | $ | 22 | | $ | 1,551 | | $ | 2 | | | $ | 1,161 | | 3,420 | | — | | 25 | | 2,464 | | 26 | |
Derivatives (trading and other assets) | | 3,527 | | 2,215 | | 52 | | - -- | | 4,268 | | 8 | | | — | | — | | 44 | | — | | 3,412 | | 3 | |
Securities available for sale | | 400 | | 1,956 | | 256 | | 3,297 | | 113,274 | | 11 | | | 372 | | 3,964 | | 563 | | 1,594 | | 140,425 | | 89 | |
Loans held for sale | | - -- | | - -- | | - -- | | - -- | | 78 | | -- | | | — | | — | | — | | — | | 2 | | — | |
Derivatives (liabilities) | | 699 | | 1,976 | | 71 | | - -- | | 4,133 | | 2 | | | — | | — | | 70 | | — | | 3,586 | | 2 | |
Other liabilities | | 74 | | 175 | | - -- | | 6 | | 518 | | -- | | | 266 | | 412 | | — | | 9 | | 599 | | 17 | |
|
107
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 gains | | |
| | Carrying value at quarter end | | (losses) for | | | Carrying value at period end | |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Total | | quarter ended | | | Level 1 | | Level 2 | | Level 3 | | Total | |
|
March 31, 2008 | | |
| | |
December 31, 2008 | | |
Mortgages held for sale | | $ | - -- | | $ | 1,678 | | $ | 103 | | $ | 1,781 | | $ | (78 | ) | | $ | — | | 521 | | 534 | | 1,055 | |
Loans held for sale | | - -- | | 360 | | - -- | | 360 | | | (11 | ) | | — | | 338 | | — | | 338 | |
Loans (1) | | - -- | | 540 | | 6 | | 546 | | | (1,297 | ) | | — | | 1,487 | | 107 | | 1,594 | |
Private equity investments | | 16 | | - -- | | 3 | | 19 | | | (14 | ) | | 134 | | — | | 18 | | 152 | |
Foreclosed assets (2) | | - -- | | 384 | | - -- | | 384 | | | (104 | ) | | — | | 274 | | 55 | | 329 | |
Operating lease assets | | - -- | | 19 | | - -- | | 19 | | - -- | | | — | | 186 | | — | | 186 | |
| | | | |
| | $ | (1,504 | ) | |
| | | | |
March 31, 2009 | | |
| | |
June 30, 2009 | | |
Mortgages held for sale | | $ | - -- | | $ | 668 | | $ | 676 | | $ | 1,344 | | $ | 4 | | | $ | — | | 983 | | 628 | | 1,611 | |
Loans held for sale | | - -- | | 1,002 | | - -- | | 1,002 | | 48 | | | — | | 693 | | — | | 693 | |
Loans (1) | | - -- | | 1,459 | | 111 | | 1,570 | | | (2,604 | ) | | — | | 3,263 | | 166 | | 3,429 | |
Private equity investments | | - -- | | - -- | | 31 | | 31 | | | (50 | ) | | — | | — | | 43 | | 43 | |
Foreclosed assets (2) | | - -- | | 387 | | 40 | | 427 | | | (112 | ) | | — | | 469 | | 34 | | 503 | |
Operating lease assets | | - -- | | 181 | | - -- | | 181 | | | (11 | ) | | — | | 117 | | — | | 117 | |
| | | | |
| | $ | (2,725 | ) | |
| | | | |
| |
| | |
(1) | | Represents carrying value and related write-downs of loans for which adjustments are 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. |
108118
The following table presents the increase (decrease) in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the income statement, relating to assets held at period end.
| | | | | | | | |
|
| | Six months ended June 30, | |
(in millions) | | 2009 | | | 2008 | |
|
Mortgages held for sale | | $ | 1 | | | | (91 | ) |
Loans held for sale | | | 119 | | | | 5 | |
Loans (1) | | | (6,100 | ) | | | (2,619 | ) |
Private equity investments | | | (61 | ) | | | (19 | ) |
Foreclosed assets (2) | | | (225 | ) | | | (127 | ) |
Operating lease assets | | | (16 | ) | | | (3 | ) |
|
Total | | | (6,282 | ) | | | (2,854 | ) |
|
(1) | | Represents write-downs of loans based on the appraised value of the collateral. |
|
(2) | | Represents the losses on foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets. |
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 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | Fair value | | Fair value | | Fair value | | | Fair value | | Fair value | |
| | carrying | | carrying | | carrying | | | carrying | | carrying | |
| | amount | | amount | | amount | | | amount | | amount | |
| | less | | less | | less | | | less | | less | |
| Fair value | | Aggregate | | aggregate | | Fair value | | Aggregate | | aggregate | | Fair value | | Aggregate | | aggregate | | | Fair value | | Aggregate | | aggregate | | Fair value | | Aggregate | | aggregate | |
| carrying | | unpaid | | unpaid | | carrying | | unpaid | | unpaid | | carrying | | unpaid | | unpaid | | | carrying | | unpaid | | unpaid | | carrying | | unpaid | | unpaid | |
(in millions) | amount | | principal | | principal | | amount | | principal | | principal | | amount | | principal | | principal | | | amount | | principal | | principal | | amount | | principal | | principal | |
|
Mortgages held for sale reported at fair value: | | |
Total loans | | $ | 35,205 | | $ | 34,955 | | $ | 250 | (1) | | $ | 18,754 | | $ | 18,862 | | $ | (108 | )(1) | | $ | 27,927 | | $ | 27,705 | | $ | 222 | (1) | | $ | 40,190 | | 40,505 | | | (315 | ) (1) | | 18,754 | | 18,862 | | | (108 | ) (1) |
Nonaccrual loans | | 211 | | 491 | | | (280 | ) | | 152 | | 344 | | | (192 | ) | | 48 | | 86 | | | (38 | ) | | 201 | | 475 | | | (274 | ) | | 152 | | 344 | | | (192 | ) |
Loans 90 days or more past due and still accruing | | 71 | | 79 | | | (8 | ) | | 58 | | 63 | | | (5 | ) | | 30 | | 31 | | | (1 | ) | | 62 | | 67 | | | (5 | ) | | 58 | | 63 | | | (5 | ) |
| | |
Loans held for sale reported at fair value: | | |
Total loans | | 114 | | 197 | | | (83 | ) | | 398 | | 760 | | | (362 | ) | | - -- | | - -- | | - -- | | | 141 | | 146 | | | (5 | ) | | 398 | | 760 | | | (362 | ) |
Loans 90 days or more past due and still accruing | | | (4 | ) | | 3 | | | (7 | ) | | 1 | | 17 | | | (16 | ) | | - -- | | - -- | | - -- | | | 3 | | 3 | | — | | 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. |
119
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 March 31 | , | |
| | 2009 | | 2008 | | | 2009 | | 2008 | |
| | Loans | | Mortgages | | Other | | Mortgages | | Other | | | Mortgages | | Loans | | Other | | Mortgages | | Other | |
| | held | | held | | interests | | held | | interests | | | held | | held | | interests | | held | | interests | |
(in millions) | for sale | | for sale | | held | | for sale | | held | | | for sale | | for sale | | held | | for sale | | held | |
|
Changes in fair value included in net income: | | |
Quarter ended June 30, | | |
Mortgage banking noninterest income: | | |
Net gains on mortgage loan origination/sales activities (1) | | $ | - -- | | $ | 1,663 | | $ | - -- | | $ | 752 | | $ | - -- | | | $ | 630 | | — | | — | | 97 | | — | |
Other noninterest income | | 44 | | - -- | | | (17 | ) | | - -- | | | (67 | ) | | — | | 48 | | 96 | | — | | 182 | |
| Six months ended June 30, | | |
Mortgage banking noninterest income: | | |
Net gains on mortgage loan origination/sales activities (1) | | | $ | 2,293 | | — | | — | | 849 | | — | |
Other noninterest income | | | — | | 92 | | 79 | | — | | 115 | |
| | |
| | |
(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 in the income statement.
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments, excluding short-term financial assets and liabilities because carrying amounts approximate fair value, and excluding financial instruments recorded at fair value on a recurring basis. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.
In accordance with FAS 107, we have not included assets and liabilities that are not financial instruments in our disclosure, such as the value of the long-term relationships with our deposit, credit card and trust customers, amortized MSRs, premises and equipment, goodwill and other intangibles, deferred taxes and other liabilities. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
| | | | | | | | | | | | | | | | |
|
| | June 30, 2009 | | | December 31, 2008 | |
| | Carrying | | | Estimated | | | Carrying | | | Estimated | |
(in millions) | | amount | | | fair value | | | amount | | | fair value | |
|
Financial assets | | | | | | | | | | | | | | | | |
Mortgages held for sale (1) | | $ | 1,801 | | | | 1,801 | | | | 1,334 | | | | 1,333 | |
Loans held for sale (2) | | | 5,272 | | | | 5,362 | | | | 5,830 | | | | 5,876 | |
Loans, net | | | 798,578 | | | | 764,268 | | | | 843,817 | | | | 829,603 | |
Nonmarketable equity investments (cost method) | | | 8,778 | | | | 8,815 | | | | 9,146 | | | | 9,262 | |
Financial liabilities | | | | | | | | | | | | | | | | |
Deposits | | $ | 813,735 | | | | 814,708 | | | | 781,402 | | | | 781,964 | |
Long-term debt (3) | | | 229,330 | | | | 228,641 | | | | 267,055 | | | | 266,023 | |
|
(1) | | Balance excludes mortgages held for sale for which the fair value option under FAS 159 was elected, and therefore includes nonprime residential and commercial mortgages held for sale. |
|
(2) | | Balance excludes loans held for sale for which the fair value option under FAS 159 was elected. |
|
(3) | | The carrying amount and fair value exclude obligations under capital leases of $86 million at June 30, 2009, and $103 million at December 31, 2008. |
109120
14.13. PREFERRED STOCK
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.
The following table provides detail of preferred stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2009 | | December 31, 2008 | | | June 30, 2009 | | Dec. 31, 2008 | |
| | Shares | | | | | | | | | Shares | | | | | | | |
| | issued and | | Carrying | | Carrying | | | | | issued and | | Carrying | | Carrying | | | |
(in millions, except shares) | | outstanding | | Par value | | value | | Discount | | value | | Discount | | | 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 | | | 25,000 | | $ | 25,000 | | 22,939 | | 2,061 | | 22,741 | | 2,259 | |
| | |
DEP Shares | | |
Dividend Equalization Preferred Shares, $10 liquidation preference per share, 97,000 shares authorized | | 96,546 | | - -- | | - -- | | - -- | | - -- | | - -- | | | 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 | | | 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 | | | 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 | | | 3,968,000 | | 3,968 | | 3,200 | | 768 | | 3,200 | | 768 | |
| | | | | | | | | | | | | | |
Total | | | 9,591,921 | | $ | 34,470 | | 31,010 | | 3,460 | | 30,812 | | 3,658 | |
| | |
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 –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 |
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
Preferred Stock Issued to the Department of the Treasury On October 28, 2008, we issued to the United States Department of the Treasury 25,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value, having a liquidation preference per share equal to $1,000,000. The Series D Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. After three years, we may, at our option, subject to any necessary bank regulatory approval, redeem the Series D Preferred Stock at par value plus accrued and unpaid dividends. The Series D Preferred Stock is generally non-voting. Prior to October 28, 2011, unless we have redeemed the Series D Preferred Stock or the Treasury has transferred all of the Series D Preferred Stock to third parties, the consent of the Treasury will be required for us to declare or pay any dividends or make any distribution on our common stock, other than regular quarterly cash dividends not exceeding $0.34 per share or dividends payable only in shares of our common stock, 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 Agreement with the Treasury. Treasury, as part of the preferred stock issuance, received warrants to purchase approximately 110.3 million shares of Wells Fargo common stock at an initial exercise price of $34.01 (based on the trailing 20-day Wells Fargo average stock price as of October 10, 2008). The proceeds from Treasury were allocated based on the relative fair value of the warrants as compared with the fair value of the preferred stock. The fair value of the warrants was determined using a third party proprietary pricing model that produces results similar to the Black-Scholes model and incorporates a valuation model that incorporates assumptions including our common stock price, dividend yield, stock price volatility and the risk-free interest rate. We determined the fair value of the preferred stock based on assumptions regarding the discount rate (market rate) on the preferred stock, which we estimated to be approximately 13% at the date of issuance. The discount on the preferred stock is being accreted to par value using a constant effective yield of 7.2% over a five-year term, which is the expected life of the preferred stock.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shares issued and outstanding | | Carrying value (in millions) | | | | | Shares issued and outstanding | | Carrying value | | Adjustable | |
| | Adjustable | | | June 30, | | Dec. 31, | | June 30, | | Dec. 31, | | dividend rate | |
(in millions, except shares) | | | 2009 | | 2008 | | 2009 | | 2008 | | Minimum | | Maximum | |
| | 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): | | |
| | |
ESOP Preferred Stock(1) | | |
2008 | | 138,108 | | 156,914 | | 395,494 | | $ | 138 | | $ | 157 | | $ | 396 | | | 10.50 | % | | | 11.50 | % | | 132,129 | | 156,914 | | $ | 132 | | 157 | | | 10.50 | % | | 11.50 | |
| | |
2007 | | 110,159 | | 110,159 | | 126,374 | | 110 | | 110 | | 126 | | 10.75 | | 11.75 | | | 107,784 | | 110,159 | | 108 | | 110 | | 10.75 | | 11.75 | |
| | |
2006 | | 83,249 | | 83,249 | | 95,866 | | 83 | | 83 | | 96 | | 10.75 | | 11.75 | | | 81,449 | | 83,249 | | 81 | | 83 | | 10.75 | | 11.75 | |
| | |
2005 | | 62,484 | | 62,484 | | 73,434 | | 63 | | 63 | | 73 | | 9.75 | | 10.75 | | | 61,109 | | 62,484 | | 61 | | 63 | | 9.75 | | 10.75 | |
| | |
2004 | | 45,950 | | 45,950 | | 55,610 | | 46 | | 46 | | 56 | | 8.50 | | 9.50 | | | 44,925 | | 45,950 | | 45 | | 46 | | 8.50 | | 9.50 | |
| | |
2003 | | 29,218 | | 29,218 | | 37,043 | | 29 | | 29 | | 37 | | 8.50 | | 9.50 | | | 28,568 | | 29,218 | | 29 | | 29 | | 8.50 | | 9.50 | |
| | |
2002 | | 18,889 | | 18,889 | | 25,779 | | 19 | | 19 | | 26 | | 10.50 | | 11.50 | | | 18,459 | | 18,889 | | 18 | | 19 | | 10.50 | | 11.50 | |
| | |
2001 | | 10,393 | | 10,393 | | 16,593 | | 10 | | 10 | | 17 | | 10.50 | | 11.50 | | | 10,178 | | 10,393 | | 10 | | 10 | | 10.50 | | 11.50 | |
| | |
2000 | | 2,620 | | 2,644 | | 9,094 | | 3 | | 3 | | 9 | | 11.50 | | 12.50 | | | 2,596 | | 2,644 | | 3 | | 3 | | 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 | | | 487,197 | | 519,900 | | $ | 487 | | 520 | |
| | | | | | | | | | | | | | | |
| | |
Unearned ESOP shares (2) | | $ | (535 | ) | | $ | (555 | ) | | $ | (891 | ) | | | $ | (520 | ) | | | (555 | ) | |
| | | | | | | | |
| | |
| | |
(1) | | Liquidation preference $1,000. At March 31,June 30, 2009 December 31, 2008, and MarchDecember 31, 2008, additional paid-in capital included $34 million, $35$33 million and $54$35 million, respectively, related to preferred stock. |
|
(2) | | In accordance with the 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. |
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15.14. EMPLOYEE BENEFITS
We sponsor noncontributory qualified defined benefit retirement plans including the Wells Fargo & Company Cash Balance Plan (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 of the Wachovia Corporation.
The net periodic benefit cost was:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | 2009 | | | 2008 | |
| | Pension benefits | | | | | | | Pension benefits | | | | |
| | | | | | Non- | | | Other | | | | | | | Non- | | | Other | |
(in millions) | | Qualified | | | qualified | | | benefits | | | Qualified | | | qualified | | | benefits | |
|
Quarter ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 100 | | | | 4 | | | | 3 | | | | 73 | | | | 3 | | | | 4 | |
Interest cost | | | 149 | | | | 19 | | | | 21 | | | | 69 | | | | 6 | | | | 10 | |
Expected return on plan assets | | | (160 | ) | | | — | | | | (7 | ) | | | (119 | ) | | | — | | | | (10 | ) |
Amortization of net actuarial loss | | | 48 | | | | 1 | | | | 1 | | | | — | | | | 4 | | | | — | |
Amortization of prior service cost | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | (2 | ) | | | (1 | ) |
Curtailment gain | | | (32 | ) | | | (35 | ) | | | — | | | | — | | | | — | | | | — | |
|
Net periodic benefit cost | | $ | 105 | | | | (12 | ) | | | 17 | | | | 23 | | | | 11 | | | | 3 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 207 | | | | 8 | | | | 6 | | | | 146 | | | | 7 | | | | 7 | |
Interest cost | | | 294 | | | | 38 | | | | 42 | | | | 138 | | | | 11 | | | | 20 | |
Expected return on plan assets | | | (323 | ) | | | — | | | | (14 | ) | | | (239 | ) | | | — | | | | (20 | ) |
Amortization of net actuarial loss | | | 154 | | | | 3 | | | | 2 | | | | — | | | | 7 | | | | — | |
Amortization of prior service cost | | | — | | | | (2 | ) | | | (2 | ) | | | — | | | | (3 | ) | | | (2 | ) |
Curtailment gain | | | (32 | ) | | | (35 | ) | | | — | | | | — | | | | — | | | | — | |
|
Net periodic benefit cost | | $ | 300 | | | | 12 | | | | 34 | | | | 45 | | | | 22 | | | | 5 | |
|
On April 28, 2009, the Board of Directors approved amendments to freeze the benefits earned under the Wells Fargo qualified and supplemental Cash Balance Plans and the Pension Plan, and to merge the Pension Plan into the qualified Cash Balance Plan. These actions became effective on July 1, 2009.
Freezing and merging the above plans resulted in a re-measurement of the pension obligations and plan assets as of April 30, 2009. Freezing and re-measuring decreased the pension obligations by approximately $945 million and decreased cumulative other comprehensive income by approximately $725 million pre tax ($456 million after tax) in second quarter 2009. The re-measurement resulted in a decrease in the fair value of plan assets of approximately $150 million. We used a discount rate of 7.75% for the April 30, 2009, re-measurement based on our consistent methodology of determining our discount rate based on an established yield curve developed by our outside actuarial firm. This methodology incorporates a broad group of top quartile Aa or higher rated bonds. We determined the discount rate by matching this yield curve with the timing and amounts of the expected benefit payments for our plans.
As a result of freezing our pension plans, we revised our amortization life for actuarial gains and losses from five years to 13 years to reflect the estimated average remaining participation period.
For second quarter 2009, these actions lowered pension cost by approximately $125 million, which included $67 million of one-time curtailment gains. These actions are expected to reduce pension cost in the second half of 2009 by approximately $375 million.
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We do not expect that we will be required to make a minimum contribution in 2009 for the Cash Balance Plan. The maximum we can contribute in 2009 for the Cash Balance Plan depends on several factors, including the finalization of participant data. Our decision on how much to contribute, if any, depends on other factors, including the actual investment performance of plan assets. Given these uncertainties, we cannot at this time reliably estimate the maximum deductible contribution or the amount that we will contribute in 2009 to the Cash Balance Plan.
The net periodic benefit cost was:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | Quarter ended March 31 | , |
| | 2009 | | | 2008 | |
| | Pension benefits | | | | | | | Pension benefits | | | | |
| | | | | | Non- | | | Other | | | | | | | Non- | | | Other | |
(in millions) | | Qualified | | | qualified | | | benefits | | | Qualified | | | qualified | | | benefits | |
|
Service cost | | $ | 107 | | | $ | 4 | | | $ | 3 | | | $ | 73 | | | $ | 4 | | | $ | 3 | |
Interest cost | | | 145 | | | | 19 | | | | 21 | | | | 69 | | | | 5 | | | | 10 | |
Expected return on plan assets | | | (163 | ) | | | - -- | | | | (7 | ) | | | (120 | ) | | | - -- | | | | (10 | ) |
Amortization of net actuarial loss (1) | | | 106 | | | | 2 | | | | 1 | | | | - -- | | | | 3 | | | | - -- | |
Amortization of prior service cost | | | - -- | | | | (1 | ) | | | (1 | ) | | | - -- | | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 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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16.15. EARNINGS PER COMMON SHARE
The 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 ended March 31 | , | | Quarter ended June 30, | | Six months ended June 30, | |
(in millions, except per share amounts) | | 2009 | | 2008 | | | 2009 | | 2008 | | 2009 | | 2008 | |
|
Wells Fargo net income (numerator) | | $ | 3,045 | | $ | 1,999 | | | $ | 3,172 | | 1,753 | | 6,217 | | 3,752 | |
| | |
Less: Preferred stock dividends and accretion | | 661 | | - -- | | | | (597 | ) | | — | | | (1,258 | ) | | — | |
| | | | | | |
| | |
Wells Fargo net income applicable to common stock (numerator) | | $ | 2,384 | | $ | 1,999 | | | $ | 2,575 | | 1,753 | | 4,959 | | 3,752 | |
| | | | | | |
| | |
EARNINGS PER COMMON SHARE | | |
Earnings per common share | | |
Average common shares outstanding (denominator) | | 4,247.4 | | 3,302.4 | | | 4,483.1 | | 3,309.8 | | 4,365.9 | | 3,306.1 | |
| | | | | | |
| | |
Per share | | $ | 0.56 | | $ | 0.61 | | | $ | 0.58 | | 0.53 | | 1.14 | | 1.13 | |
| | | | | | |
| | |
DILUTED EARNINGS PER COMMON SHARE | | |
Diluted earnings per common share | | |
Average common shares outstanding | | 4,247.4 | | 3,302.4 | | | 4,483.1 | | 3,309.8 | | 4,365.9 | | 3,306.1 | |
Add: Stock options | | 1.8 | | 15.4 | | | 18.2 | | 11.5 | | 9.0 | | 13.4 | |
Restricted share rights | | 0.1 | | 0.1 | | | 0.3 | | 0.1 | | 0.2 | | 0.1 | |
| | | | | | |
Diluted average common shares outstanding (denominator) | | 4,249.3 | | 3,317.9 | | | 4,501.6 | | 3,321.4 | | 4,375.1 | | 3,319.6 | |
| | | | | | |
| | |
Per share | | $ | 0.56 | | $ | 0.60 | | | $ | 0.57 | | 0.53 | | 1.13 | | 1.13 | |
| | | | | | |
| |
At March 31,June 30, 2009, options and warrants to purchase 290.2287.4 million and 110.3 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 were antidilutive. At March 31,June 30, 2008, options to purchase 175.7178.1 million shares were antidilutive.antidilutive and, accordingly, were not included on a share-equivalent basis in the calculation of diluted earnings per common share.
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17.16. OPERATING SEGMENTS
As a result of the combination of Wells Fargo and Wachovia, in first quarter 2009, management realigned its segments into the following three lines of business for management reporting: Community Banking,Banking; Wholesale Banking,Banking; and Wealth, Brokerage and Retirement Services.Retirement. 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.GAAP. 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 segment. If the management structure and/or the allocation process changes, allocations, transfers and assignments may change. We revised prior period information to reflect the first quarter 2009 realignment of our operating segments; however, because the acquisition was completed on December 31, 2008, Wachovia’s results are not included in the income statement andor in average balances beginning infor periods prior to 2009.
Community Bankingoffers 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.affiliates. These products and services include theWells Fargo Advantage FundsSM, a family of mutual funds, as well as personal trust and agency assets.funds. 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 widecomplete range of channels, which includeincluding traditional banking stores, in-store banking centers, business centers, ATMs, and ATMs. Also,Phone BankWells Fargo Customer ConnectionSM centers and the National Business Banking Center provide 24-hour, 24-hours a day, seven days a week 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 real estate loans to individuals in the United States and the Pacific Rim, and also 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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Wholesale Bankingprovides financial solutions to businesses across the United States with annual sales generally in excess of $10 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, trade financing, collection services, 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 and mutual funds, including theWells Fargo Advantage Funds. Wholesale Banking includes the majority ownership interest in the Wells Fargo HSBC Trade 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 services including comprehensive planning and advice, investment management, brokerage, private banking, investment management, trust, estate planning brokerage,strategies, trust, 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), Wachoviaretirement. 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 lines 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 ServicesWealth meets the unique needs of ultra-high net worthultra-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, retirementportfolio monitoring and estate planning as part of one of the largest full-service brokerage firms in the U.S.United States. They also offer access to banking products, insurance, and investment banking services. First Clearing LLC, our correspondent clearing firm, provides technology, product and other business support to broker-dealers across the U.S. TheUnited States. Retirement Group supports individual investors’ retirement needs and is a leader in 401(k) and pension recordkeeping,record keeping, investment services, trust and custody solutions for U.S. companies and their employees. The division also provides investments and executive benefits to institutional clients and delivers reinsurance services to global insurance companies.
Otherincludes integration expenses and the elimination of items that are included in both Community Banking and Wealth, Brokerage and Retirement, Services, largely representing wealth management customers serviced and products sold in the stores.
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| | | | | | | | | | | | | | | | | | Wealth, | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Brokerage | | | | | | | | | | | | |
(income/expense in millions, | | Community | | | Wholesale | | | and Retirement | | | | | | | | | | | Consolidated | |
average balances in billions) | | Banking | | | Banking | | | Services | | | Other | | | Company | |
|
Quarter ended March 31, | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Net interest income (1) | | $ | 8,497 | | | $ | 4,718 | | | $ | 2,367 | | | $ | 1,026 | | | $ | 737 | | | $ | 154 | | | $ | (225 | ) | | $ | (138 | ) | | $ | 11,376 | | | $ | 5,760 | |
Provision for credit losses | | | 4,004 | | | | 1,865 | | | | 545 | | | | 161 | | | | 25 | | | | 2 | | | | (16 | ) | | | - -- | | | | 4,558 | | | | 2,028 | |
Noninterest income | | | 5,456 | | | | 3,482 | | | | 2,540 | | | | 1,151 | | | | 1,902 | | | | 483 | | | | (257 | ) | | | (313 | ) | | | 9,641 | | | | 4,803 | |
Noninterest expense | | | 7,158 | | | | 3,905 | | | | 2,531 | | | | 1,344 | | | | 2,219 | | | | 485 | | | | (90 | ) | | | (292 | ) | | | 11,818 | | | | 5,442 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income tax expense (benefit) | | | 2,791 | | | | 2,430 | | | | 1,831 | | | | 672 | | | | 395 | | | | 150 | | | | (376 | ) | | | (159 | ) | | | 4,641 | | | | 3,093 | |
Income tax expense (benefit) | | | 890 | | | | 897 | | | | 647 | | | | 180 | | | | 158 | | | | 57 | | | | (143 | ) | | | (60 | ) | | | 1,552 | | | | 1,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average loans | | $ | 552.8 | | | $ | 282.7 | | | $ | 271.9 | | | $ | 100.8 | | | $ | 46.7 | | | $ | 13.7 | | | $ | (15.8 | ) | | $ | (13.3 | ) | | $ | 855.6 | | | $ | 383.9 | |
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 | | | 538.0 | | | | 246.6 | | | | 138.5 | | | | 68.2 | | | | 102.6 | | | | 21.0 | | | | (25.2 | ) | | | (18.5 | ) | | | 753.9 | | | | 317.3 | |
|
The following table presents certain financial information and related metrics by operating segment and in total for the consolidated company. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | Community | | | Wholesale | | | Wealth, Brokerage | | | | | | | | | | | Consolidated | |
(income/expense in millions, | | Banking | | | Banking | | | and Retirement | | | Other | | | Company | |
average balances in billions) | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Quarter ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income (1) | | $ | 8,784 | | | | 5,235 | | | | 2,479 | | | | 1,025 | | | | 764 | | | | 199 | | | | (263 | ) | | | (181 | ) | | | 11,764 | | | | 6,278 | |
Provision for credit losses | | | 4,264 | | | | 2,766 | | | | 738 | | | | 246 | | | | 115 | | | | 4 | | | | (31 | ) | | | (4 | ) | | | 5,086 | | | | 3,012 | |
Noninterest income | | | 6,023 | | | | 3,637 | | | | 2,759 | | | | 1,388 | | | | 2,222 | | | | 481 | | | | (261 | ) | | | (324 | ) | | | 10,743 | | | | 5,182 | |
Noninterest expense | | | 7,665 | | | | 4,300 | | | | 2,807 | | | | 1,358 | | | | 2,289 | | | | 497 | | | | (64 | ) | | | (310 | ) | | | 12,697 | | | | 5,845 | |
|
Income (loss) before income tax expense (benefit) | | | 2,878 | | | | 1,806 | | | | 1,693 | | | | 809 | | | | 582 | | | | 179 | | | | (429 | ) | | | (191 | ) | | | 4,724 | | | | 2,603 | |
Income tax expense (benefit) | | | 798 | | | | 604 | | | | 618 | | | | 235 | | | | 222 | | | | 68 | | | | (163 | ) | | | (73 | ) | | | 1,475 | | | | 834 | |
|
Net income (loss) before noncontrolling interests | | | 2,080 | | | | 1,202 | | | | 1,075 | | | | 574 | | | | 360 | | | | 111 | | | | (266 | ) | | | (118 | ) | | | 3,249 | | | | 1,769 | |
Less: Net income (loss) from noncontrolling interests | | | 72 | | | | 18 | | | | 8 | | | | (2 | ) | | | (3 | ) | | | — | | | | — | | | | — | | | | 77 | | | | 16 | |
|
Net income (loss) (2) | | $ | 2,008 | | | | 1,184 | | | | 1,067 | | | | 576 | | | | 363 | | | | 111 | | | | (266 | ) | | | (118 | ) | | | 3,172 | | | | 1,753 | |
|
Average loans | | $ | 540.7 | | | | 283.2 | | | | 263.5 | | | | 107.7 | | | | 45.9 | | | | 14.8 | | | | (16.2 | ) | | | (14.2 | ) | | | 833.9 | | | | 391.5 | |
Average assets | | | 799.2 | | | | 439.9 | | | | 381.7 | | | | 151.4 | | | | 110.2 | | | | 17.8 | | | | (16.2 | ) | | | (14.4 | ) | | | 1,274.9 | | | | 594.7 | |
Average core deposits | | | 543.9 | | | | 251.1 | | | | 138.1 | | | | 64.8 | | | | 113.5 | | | | 22.5 | | | | (29.8 | ) | | | (20.0 | ) | | | 765.7 | | | | 318.4 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income (1) | | $ | 17,281 | | | | 9,953 | | | | 4,846 | | | | 2,051 | | | | 1,501 | | | | 353 | | | | (488 | ) | | | (319 | ) | | | 23,140 | | | | 12,038 | |
Provision for credit losses | | | 8,268 | | | | 4,631 | | | | 1,283 | | | | 407 | | | | 140 | | | | 6 | | | | (47 | ) | | | (4 | ) | | | 9,644 | | | | 5,040 | |
Noninterest income | | | 11,479 | | | | 7,119 | | | | 5,299 | | | | 2,539 | | | | 4,124 | | | | 964 | | | | (518 | ) | | | (637 | ) | | | 20,384 | | | | 9,985 | |
Noninterest expense | | | 14,823 | | | | 8,205 | | | | 5,338 | | | | 2,702 | | | | 4,508 | | | | 982 | | | | (154 | ) | | | (602 | ) | | | 24,515 | | | | 11,287 | |
|
Income (loss) before income tax expense (benefit) | | | 5,669 | | | | 4,236 | | | | 3,524 | | | | 1,481 | | | | 977 | | | | 329 | | | | (805 | ) | | | (350 | ) | | | 9,365 | | | | 5,696 | |
Income tax expense (benefit) | | | 1,688 | | | | 1,501 | | | | 1,265 | | | | 415 | | | | 380 | | | | 125 | | | | (306 | ) | | | (133 | ) | | | 3,027 | | | | 1,908 | |
|
Net income (loss) before noncontrolling interests | | | 3,981 | | | | 2,735 | | | | 2,259 | | | | 1,066 | | | | 597 | | | | 204 | | | | (499 | ) | | | (217 | ) | | | 6,338 | | | | 3,788 | |
Less: Net income (loss) from noncontrolling interests | | | 134 | | | | 29 | | | | 12 | | | | 7 | | | | (25 | ) | | | — | | | | — | | | | — | | | | 121 | | | | 36 | |
|
Net income (loss) (2) | | $ | 3,847 | | | | 2,706 | | | | 2,247 | | | | 1,059 | | | | 622 | | | | 204 | | | | (499 | ) | | | (217 | ) | | | 6,217 | | | | 3,752 | |
|
Average loans | | $ | 546.7 | | | | 282.9 | | | | 267.7 | | | | 104.3 | | | | 46.3 | | | | 14.3 | | | | (16.0 | ) | | | (13.8 | ) | | | 844.7 | | | | 387.7 | |
Average assets | | | 798.6 | | | | 435.9 | | | | 392.7 | | | | 145.7 | | | | 107.1 | | | | 17.3 | | | | (16.1 | ) | | | (14.0 | ) | | | 1,282.3 | | | | 584.9 | |
Average core deposits | | | 540.9 | | | | 248.8 | | | | 138.3 | | | | 66.5 | | | | 108.1 | | | | 21.8 | | | | (27.5 | ) | | | (19.3 | ) | | | 759.8 | | | | 317.8 | |
|
| | |
(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. |
|
(2) | | Represents segment net income (loss) for Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement segments and Wells Fargo net income for the Consolidated Company. |
116127
18.17. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Following are the condensed consolidating financial statements of the Parent and Wells Fargo Financial, Inc. and its wholly-owned subsidiaries (WFFI).
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter ended March 31, 2009 | | | Quarter ended June 30, 2009 | |
| | Other | | | | | Other | | | |
| | consolidating | | Consolidated | | | consolidating | | Consolidated | |
(in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
|
Dividends from subsidiaries: | | |
Bank | | $ | 716 | | $ | - -- | | $ | - -- | | $ | (716 | ) | | $ | - -- | | | $ | 1 | | — | | — | | | (1 | ) | | — | |
Nonbank | | - -- | | - -- | | - -- | | - -- | | - -- | | | 209 | | — | | — | | | (209 | ) | | — | |
Interest income from loans | | - -- | | 985 | | 9,785 | | | (5 | ) | | 10,765 | | | — | | 867 | | 9,669 | | | (4 | ) | | 10,532 | |
Interest income from subsidiaries | | 651 | | - -- | | - -- | | | (651 | ) | | - -- | | | 580 | | — | | — | | | (580 | ) | | — | |
Other interest income | | 113 | | 26 | | 3,412 | | | (3 | ) | | 3,548 | | | 114 | | 27 | | 3,630 | | | (2 | ) | | 3,769 | |
| | | | | | | | | | | | |
Total interest income | | 1,480 | | 1,011 | | 13,197 | | | (1,375 | ) | | 14,313 | | | 904 | | 894 | | 13,299 | | | (796 | ) | | 14,301 | |
| | | | | | | | | | | | |
| | |
Deposits | | - -- | | - -- | | 1,007 | | | (8 | ) | | 999 | | | — | | — | | 970 | | | (13 | ) | | 957 | |
Short-term borrowings | | 64 | | 9 | | 336 | | | (286 | ) | | 123 | | | 50 | | 8 | | 238 | | | (241 | ) | | 55 | |
Long-term debt | | 1,029 | | 368 | | 783 | | | (401 | ) | | 1,779 | | | 860 | | 338 | | 699 | | | (412 | ) | | 1,485 | |
Other interest-expense | | - -- | | - -- | | 36 | | - -- | | 36 | | |
Other interest expense | | | — | | — | | 40 | | — | | 40 | |
| | | | | | | | | | | | |
Total interest expense | | 1,093 | | 377 | | 2,162 | | | (695 | ) | | 2,937 | | | 910 | | 346 | | 1,947 | | | (666 | ) | | 2,537 | |
| | | | | | | | | | | | |
| | |
NET INTEREST INCOME | | 387 | | 634 | | 11,035 | | | (680 | ) | | 11,376 | | |
Net interest income | | | | (6 | ) | | 548 | | 11,352 | | | (130 | ) | | 11,764 | |
Provision for credit losses | | - -- | | 675 | | 3,883 | | - -- | | 4,558 | | | — | | 348 | | 4,738 | | — | | 5,086 | |
| | | | | | | | | | | | |
Net interest income after provision for credit losses | | 387 | | | (41 | ) | | 7,152 | | | (680 | ) | | 6,818 | | | | (6 | ) | | 200 | | 6,614 | | | (130 | ) | | 6,678 | |
| | | | | | | | | | | | |
| | |
NONINTEREST INCOME | | |
Fee income – nonaffiliates | | - -- | | 53 | | 5,310 | | - -- | | 5,363 | | |
Noninterest income | | |
Fee income — nonaffiliates | | | — | | 30 | | 5,717 | | — | | 5,747 | |
Other | | 173 | | 33 | | 4,697 | | | (625 | ) | | 4,278 | | | 141 | | 38 | | 5,328 | | | (511 | ) | | 4,996 | |
| | | | | | | | | | | | |
Total noninterest income | | 173 | | 86 | | 10,007 | | | (625 | ) | | 9,641 | | | 141 | | 68 | | 11,045 | | | (511 | ) | | 10,743 | |
| | | | | | | | | | | | |
| | |
NONINTEREST EXPENSE | | |
Noninterest expense | | |
Salaries and benefits | | 138 | | 19 | | 6,337 | | - -- | | 6,494 | | | 144 | | 31 | | 6,550 | | — | | 6,725 | |
Other | | 110 | | 194 | | 5,645 | | | (625 | ) | | 5,324 | | | 153 | | 177 | | 6,151 | | | (509 | ) | | 5,972 | |
| | | | | | | | | | | | |
Total noninterest expense | | 248 | | 213 | | 11,982 | | | (625 | ) | | 11,818 | | | 297 | | 208 | | 12,701 | | | (509 | ) | | 12,697 | |
| | | | | | | | | | | | |
| | |
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES | | 312 | | | (168 | ) | | 5,177 | | | (680 | ) | | 4,641 | | |
Income before income tax expense (benefit) and equity in undistributed income of subsidiaries | | | | (162 | ) | | 60 | | 4,958 | | | (132 | ) | | 4,724 | |
Income tax expense (benefit) | | | (158 | ) | | | (57 | ) | | 1,767 | | - -- | | 1,552 | | | | (76 | ) | | 22 | | 1,529 | | — | | 1,475 | |
Equity in undistributed income of subsidiaries | | 2,575 | | - -- | | - -- | | | (2,575 | ) | | - -- | | | 3,258 | | — | | — | | | (3,258 | ) | | — | |
| | | | | | | | | | | | |
| | |
NET INCOME (LOSS) BEFORE NONCONTROLLING INTERESTS | | 3,045 | | | (111 | ) | | 3,410 | | | (3,255 | ) | | 3,089 | | |
Net income before noncontrolling interests | | | 3,172 | | 38 | | 3,429 | | | (3,390 | ) | | 3,249 | |
Less: Net income from noncontrolling interests | | - -- | | - -- | | 44 | | - -- | | 44 | | | — | | — | | 77 | | — | | 77 | |
| | | | | | | | | | | | |
Parent, WFFI, Other and Wells Fargo net income | | | $ | 3,172 | | 38 | | 3,352 | | | (3,390 | ) | | 3,172 | |
| | |
PARENT, WFFI, OTHER AND WELLS FARGO NET INCOME (LOSS) | | $ | 3,045 | | $ | (111 | ) | | $ | 3,366 | | $ | (3,255 | ) | | $ | 3,045 | | |
| | | | | | | | | | | | |
| |
117128
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter ended March 31, 2008 | | | Quarter ended June 30, 2008 | |
| | Other | | | | | Other | | | |
| | consolidating | | Consolidated | | | consolidating | | Consolidated | |
(in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
|
Dividends from subsidiaries: | | |
Bank | | $ | 797 | | $ | - -- | | $ | - -- | | $ | (797 | ) | | $ | - -- | | | $ | 358 | | — | | — | | | (358 | ) | | — | |
Nonbank | | 11 | | - -- | | - -- | | | (11 | ) | | - -- | | | — | | — | | — | | — | | — | |
Interest income from loans | | 1 | | 1,407 | | 5,824 | | | (20 | ) | | 7,212 | | | 1 | | 1,339 | | 5,480 | | | (14 | ) | | 6,806 | |
Interest income from subsidiaries | | 859 | | - -- | | - -- | | | (859 | ) | | - -- | | | 711 | | — | | — | | | (711 | ) | | — | |
Other interest income | | 54 | | 29 | | 1,556 | | | (2 | ) | | 1,637 | | | 40 | | 26 | | 1,762 | | | (87 | ) | | 1,741 | |
| | | | | | | | | | | | |
Total interest income | | 1,722 | | 1,436 | | 7,380 | | | (1,689 | ) | | 8,849 | | | 1,110 | | 1,365 | | 7,242 | | | (1,170 | ) | | 8,547 | |
| | | | | | | | | | | | |
| | |
Deposits | | - -- | | - -- | | 1,759 | | | (165 | ) | | 1,594 | | | — | | — | | 1,168 | | | (105 | ) | | 1,063 | |
Short-term borrowings | | 144 | | 83 | | 421 | | | (223 | ) | | 425 | | | 112 | | 56 | | 512 | | | (323 | ) | | 357 | |
Long-term debt | | 858 | | 495 | | 210 | | | (493 | ) | | 1,070 | | | 657 | | 464 | | 112 | | | (384 | ) | | 849 | |
Other interest-expense | | - -- | | - -- | | - -- | | - -- | | - -- | | |
| | | | | | | | | | | | |
Total interest expense | | 1,002 | | 578 | | 2,390 | | | (881 | ) | | 3,089 | | | 769 | | 520 | | 1,792 | | | (812 | ) | | 2,269 | |
| | | | | | | | | | | | |
| | |
NET INTEREST INCOME | | 720 | | 858 | | 4,990 | | | (808 | ) | | 5,760 | | |
Net interest income | | | 341 | | 845 | | 5,450 | | | (358 | ) | | 6,278 | |
Provision for credit losses | | - -- | | 342 | | 1,686 | | - -- | | 2,028 | | | — | | 638 | | 2,374 | | — | | 3,012 | |
| | | | | | | | | | | | |
Net interest income after provision for credit losses | | 720 | | 516 | | 3,304 | | | (808 | ) | | 3,732 | | | 341 | | 207 | | 3,076 | | | (358 | ) | | 3,266 | |
| | | | | | | | | | | | |
| | |
NONINTEREST INCOME | | |
Fee income – nonaffiliates | | - -- | | 116 | | 2,452 | | - -- | | 2,568 | | |
Noninterest income | | |
Fee income — nonaffiliates | | | — | | 104 | | 2,557 | | — | | 2,661 | |
Other | | 293 | | 48 | | 2,310 | | | (416 | ) | | 2,235 | | | 74 | | 52 | | 2,895 | | | (500 | ) | | 2,521 | |
| | | | | | | | | | | | |
Total noninterest income | | 293 | | 164 | | 4,762 | | | (416 | ) | | 4,803 | | | 74 | | 156 | | 5,452 | | | (500 | ) | | 5,182 | |
| | | | | | | | | | | | |
| | |
NONINTEREST EXPENSE | | |
Noninterest expense | | |
Salaries and benefits | | | (103 | ) | | 266 | | 3,052 | | - -- | | 3,215 | | | 18 | | 218 | | 3,193 | | — | | 3,429 | |
Other | | | (105 | ) | | 277 | | 2,471 | | | (416 | ) | | 2,227 | | | 45 | | 276 | | 2,595 | | | (500 | ) | | 2,416 | |
| | | | | | | | | | | | |
Total noninterest expense | | | (208 | ) | | 543 | | 5,523 | | | (416 | ) | | 5,442 | | | 63 | | 494 | | 5,788 | | | (500 | ) | | 5,845 | |
| | | | | | | | | | | | |
| | |
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 | | |
Income (loss) before income tax expense (benefit) and equity in undistributed income of subsidiaries | | | 352 | | | (131 | ) | | 2,740 | | | (358 | ) | | 2,603 | |
Income tax expense (benefit) | | | | (49 | ) | | | (43 | ) | | 926 | | — | | 834 | |
Equity in undistributed income of subsidiaries | | 923 | | - -- | | - -- | | | (923 | ) | | - -- | | | 1,352 | | — | | — | | | (1,352 | ) | | — | |
| | | | | | | | | | | | |
| | |
NET INCOME BEFORE NONCONTROLLING INTERESTS | | 1,999 | | 82 | | 1,669 | | | (1,731 | ) | | 2,019 | | |
Net income (loss) before noncontrolling interests | | | 1,753 | | | (88 | ) | | 1,814 | | | (1,710 | ) | | 1,769 | |
Less: Net income from noncontrolling interests | | - -- | | - -- | | 20 | | - -- | | 20 | | | — | | — | | 16 | | — | | 16 | |
| | | | | | | | | | | | |
Parent, WFFI, Other and Wells Fargo net income (loss) | | | $ | 1,753 | | | (88 | ) | | 1,798 | | | (1,710 | ) | | 1,753 | |
| | |
PARENT, WFFI, OTHER AND WELLS FARGO NET INCOME | | $ | 1,999 | | $ | 82 | | $ | 1,649 | | $ | (1,731 | ) | | $ | 1,999 | | |
| | | | | | | | | | | | |
| |
118129
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | |
|
| | Six months ended June 30, 2009 | |
| | | | | | | | | | Other | | | | | | | | |
| | | | | | | | | | consolidating | | | | | | | Consolidated | |
(in millions) | | Parent | | | WFFI | | | subsidiaries | | | Eliminations | | | Company | |
|
Dividends from subsidiaries: | | | | | | | | | | | | | | | | | | | | |
Bank | | $ | 717 | | | | — | | | | — | | | | (717 | ) | | | — | |
Nonbank | | | 209 | | | | — | | | | — | | | | (209 | ) | | | — | |
Interest income from loans | | | — | | | | 1,852 | | | | 19,454 | | | | (9 | ) | | | 21,297 | |
Interest income from subsidiaries | | | 1,231 | | | | — | | | | — | | | | (1,231 | ) | | | — | |
Other interest income | | | 227 | | | | 53 | | | | 7,042 | | | | (5 | ) | | | 7,317 | |
|
Total interest income | | | 2,384 | | | | 1,905 | | | | 26,496 | | | | (2,171 | ) | | | 28,614 | |
|
Deposits | | | — | | | | — | | | | 1,977 | | | | (21 | ) | | | 1,956 | |
Short-term borrowings | | | 114 | | | | 17 | | | | 574 | | | | (527 | ) | | | 178 | |
Long-term debt | | | 1,889 | | | | 706 | | | | 1,482 | | | | (813 | ) | | | 3,264 | |
Other interest expense | | | — | | | | — | | | | 76 | | | | — | | | | 76 | |
|
Total interest expense | | | 2,003 | | | | 723 | | | | 4,109 | | | | (1,361 | ) | | | 5,474 | |
|
Net interest income | | | 381 | | | | 1,182 | | | | 22,387 | | | | (810 | ) | | | 23,140 | |
Provision for credit losses | | | — | | | | 1,023 | | | | 8,621 | | | | — | | | | 9,644 | |
|
Net interest income after provision for credit losses | | | 381 | | | | 159 | | | | 13,766 | | | | (810 | ) | | | 13,496 | |
|
Noninterest income | | | | | | | | | | | | | | | | | | | | |
Fee income — nonaffiliates | | | — | | | | 83 | | | | 11,027 | | | | — | | | | 11,110 | |
Other | | | 314 | | | | 71 | | | | 10,025 | | | | (1,136 | ) | | | 9,274 | |
|
Total noninterest income | | | 314 | | | | 154 | | | | 21,052 | | | | (1,136 | ) | | | 20,384 | |
|
Noninterest expense | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | 282 | | | | 50 | | | | 12,887 | | | | — | | | | 13,219 | |
Other | | | 263 | | | | 371 | | | | 11,796 | | | | (1,134 | ) | | | 11,296 | |
|
Total noninterest expense | | | 545 | | | | 421 | | | | 24,683 | | | | (1,134 | ) | | | 24,515 | |
|
Income (loss) before income tax expense (benefit) and equity in undistributed income of subsidiaries | | | 150 | | | | (108 | ) | | | 10,135 | | | | (812 | ) | | | 9,365 | |
Income tax expense (benefit) | | | (234 | ) | | | (35 | ) | | | 3,296 | | | | — | | | | 3,027 | |
Equity in undistributed income of subsidiaries | | | 5,833 | | | | — | | | | — | | | | (5,833 | ) | | | — | |
|
Net income (loss) before noncontrolling interests | | | 6,217 | | | | (73 | ) | | | 6,839 | | | | (6,645 | ) | | | 6,338 | |
Less: Net income from noncontrolling interests | | | — | | | | — | | | | 121 | | | | — | | | | 121 | |
|
Parent, WFFI, Other and Wells Fargo net income (loss) | | $ | 6,217 | | | | (73 | ) | | | 6,718 | | | | (6,645 | ) | | | 6,217 | |
|
130
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | |
|
| | Six months ended June 30, 2008 | |
| | | | | | | | | | Other | | | | | | | | |
| | | | | | | | | | consolidating | | | | | | | Consolidated | |
(in millions) | | Parent | | | WFFI | | | subsidiaries | | | Eliminations | | | Company | |
|
Dividends from subsidiaries: | | | | | | | | | | | | | | | | | | | | |
Bank | | $ | 1,155 | | | | — | | | | — | | | | (1,155 | ) | | | — | |
Nonbank | | | 11 | | | | — | | | | — | | | | (11 | ) | | | — | |
Interest income from loans | | | 2 | | | | 2,746 | | | | 11,304 | | | | (34 | ) | | | 14,018 | |
Interest income from subsidiaries | | | 1,570 | | | | — | | | | — | | | | (1,570 | ) | | | — | |
Other interest income | | | 94 | | | | 55 | | | | 3,318 | | | | (89 | ) | | | 3,378 | |
|
Total interest income | | | 2,832 | | | | 2,801 | | | | 14,622 | | | | (2,859 | ) | | | 17,396 | |
|
Deposits | | | — | | | | — | | | | 2,927 | | | | (270 | ) | | | 2,657 | |
Short-term borrowings | | | 256 | | | | 139 | | | | 933 | | | | (546 | ) | | | 782 | |
Long-term debt | | | 1,515 | | | | 959 | | | | 322 | | | | (877 | ) | | | 1,919 | |
|
Total interest expense | | | 1,771 | | | | 1,098 | | | | 4,182 | | | | (1,693 | ) | | | 5,358 | |
|
Net interest income | | | 1,061 | | | | 1,703 | | | | 10,440 | | | | (1,166 | ) | | | 12,038 | |
Provision for credit losses | | | — | | | | 980 | | | | 4,060 | | | | — | | | | 5,040 | |
|
Net interest income after | | | — | | | | — | | | | — | | | | — | | | | | |
provision for credit losses | | | 1,061 | | | | 723 | | | | 6,380 | | | | (1,166 | ) | | | 6,998 | |
|
Noninterest income | | | | | | | | | | | | | | | | | | | | |
Fee income — nonaffiliates | | | — | | | | 220 | | | | 5,009 | | | | — | | | | 5,229 | |
Other | | | 367 | | | | 100 | | | | 5,205 | | | | (916 | ) | | | 4,756 | |
|
Total noninterest income | | | 367 | | | | 320 | | | | 10,214 | | | | (916 | ) | | | 9,985 | |
|
Noninterest expense | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | (85 | ) | | | 484 | | | | 6,245 | | | | — | | | | 6,644 | |
Other | | | (60 | ) | | | 553 | | | | 5,066 | | | | (916 | ) | | | 4,643 | |
|
Total noninterest expense | | | (145 | ) | | | 1,037 | | | | 11,311 | | | | (916 | ) | | | 11,287 | |
|
Income before income tax expense and equity in undistributed income of subsidiaries | | | 1,573 | | | | 6 | | | | 5,283 | | | | (1,166 | ) | | | 5,696 | |
Income tax expense | | | 96 | | | | 12 | | | | 1,800 | | | | — | | | | 1,908 | |
Equity in undistributed income of subsidiaries | | | 2,275 | | | | — | | | | — | | | | (2,275 | ) | | | — | |
|
Net income (loss) before noncontrolling interests | | | 3,752 | | | | (6 | ) | | | 3,483 | | | | (3,441 | ) | | | 3,788 | |
Less: Net income from noncontrolling interests | | | — | | | | — | | | | 36 | | | | — | | | | 36 | |
|
Parent, WFFI, Other and Wells Fargo net income (loss) | | $ | 3,752 | | | | (6 | ) | | | 3,447 | | | | (3,441 | ) | | | 3,752 | |
|
131
Condensed Consolidating Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | March 31, 2009 | | | June 30, 2009 | |
| | Other | | | | | Other | | | |
| | consolidating | | Consolidated | | | consolidating | | Consolidated | |
(in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
| | | |
| | |
Assets | | |
Cash and cash equivalents due from: | | |
Subsidiary banks | | $ | 28,550 | | $ | 211 | | $ | -- | | $ | (28,761 | ) | | $ | -- | | | $ | 33,582 | | 186 | | — | | | (33,768 | ) | | — | |
Nonaffiliates | | -- | | 268 | | 40,543 | | -- | | 40,811 | | | — | | 152 | | 36,456 | | — | | 36,608 | |
Securities available for sale | | 4,731 | | 2,221 | | 171,519 | | | (3 | ) | | 178,468 | | | 4,910 | | 2,304 | | 199,586 | | | (5 | ) | | 206,795 | |
Mortgages and loans held for sale | | -- | | -- | | 45,113 | | -- | | 45,113 | | | — | | — | | 47,404 | | — | | 47,404 | |
| | |
| | 9 | | 37,598 | | 819,483 | | | (13,511 | ) | | 843,579 | | | 8 | | 36,738 | | 798,453 | | | (13,585 | ) | | 821,614 | |
Loans to subsidiaries: | | |
Bank | | 14,597 | | -- | | -- | | | (14,597 | ) | | -- | | | 11,760 | | — | | — | | | (11,760 | ) | | — | |
Nonbank | | 64,161 | | -- | | -- | | | (64,161 | ) | | -- | | | 63,075 | | — | | — | | | (63,075 | ) | | — | |
Allowance for loan losses | | -- | | | (1,723 | ) | | | (20,558 | ) | | -- | | | (22,281 | ) | | — | | | (1,723 | ) | | | (21,312 | ) | | — | | | (23,035 | ) |
| | | | | | | | | | | | |
Net loans | | 78,767 | | 35,875 | | 798,925 | | | (92,269 | ) | | 821,298 | | | 74,843 | | 35,015 | | 777,141 | | | (88,420 | ) | | 798,579 | |
| | | | | | | | | | | | |
Investments in subsidiaries: | | |
Bank | | 113,435 | | -- | | -- | | | (113,435 | ) | | -- | | | 122,703 | | — | | — | | | (122,703 | ) | | — | |
Nonbank | | 19,663 | | -- | | -- | | | (19,663 | ) | | -- | | | 20,316 | | — | | — | | | (20,316 | ) | | — | |
Other assets | | 12,316 | | 1,376 | | 200,163 | | | (13,654 | ) | | 200,201 | | | 10,669 | | 1,428 | | 198,936 | | | (16,243 | ) | | 194,790 | |
| | | | | | | | | | | | |
| | $ | 257,462 | | $ | 39,951 | | $ | 1,256,263 | | $ | (267,785 | ) | | $ | 1,285,891 | | | $ | 267,023 | | 39,085 | | 1,259,523 | | | (281,455 | ) | | 1,284,176 | |
| | | | | | | | | | | | |
| | |
Liabilities and equity | | |
Deposits | | $ | -- | | $ | -- | | $ | 823,550 | | $ | (26,281 | ) | | $ | 797,269 | | | $ | — | | — | | 844,784 | | | (31,049 | ) | | 813,735 | |
Short-term borrowings | | 5,294 | | 8,237 | | 105,010 | | | (46,457 | ) | | 72,084 | | | 7,022 | | 10,473 | | 84,437 | | | (46,449 | ) | | 55,483 | |
Accrued expenses and other liabilities | | 6,984 | | 1,182 | | 65,219 | | | (14,554 | ) | | 58,831 | | | 6,710 | | 1,102 | | 73,262 | | | (16,914 | ) | | 64,160 | |
Long-term debt | | 133,679 | | 29,110 | | 124,221 | | | (36,360 | ) | | 250,650 | | | 127,359 | | 26,039 | | 108,933 | | | (32,915 | ) | | 229,416 | |
Indebtedness to subsidiaries | | 11,210 | | -- | | -- | | | (11,210 | ) | | -- | | | 11,309 | | — | | — | | | (11,309 | ) | | — | |
| | | | | | | | | | | | |
Total liabilities | | 157,167 | | 38,529 | | 1,118,000 | | | (134,862 | ) | | 1,178,834 | | | 152,400 | | 37,614 | | 1,111,416 | | | (138,636 | ) | | 1,162,794 | |
Parent, WFFI, Other and Wells Fargo stockholders’ equity | | 100,295 | | 1,407 | | 131,516 | | | (132,923 | ) | | 100,295 | | |
| | | | | | | | | | | | |
Parent, WFFI, other and Wells Fargo stockholders’ equity | | | 114,623 | | 1,456 | | 141,363 | | | (142,819 | ) | | 114,623 | |
Noncontrolling interests | | -- | | 15 | | 6,747 | | -- | | 6,762 | | | — | | 15 | | 6,744 | | — | | 6,759 | |
| | | | | | | | | | | | |
Total equity | | 100,295 | | 1,422 | | 138,263 | | | (132,923 | ) | | 107,057 | | | 114,623 | | 1,471 | | 148,107 | | | (142,819 | ) | | 121,382 | |
| | | | | | | | | | | | |
Total liabilities and equity | | $ | 257,462 | | $ | 39,951 | | $ | 1,256,263 | | $ | (267,785 | ) | | $ | 1,285,891 | | | $ | 267,023 | | 39,085 | | 1,259,523 | | | (281,455 | ) | | 1,284,176 | |
| | | | | | | | | | | | |
| | |
119132
Condensed Consolidating Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | March 31, 2008 | | | Dec. 31, 2008 | |
| | Other | | | | | Other | | | |
| | consolidating | | Consolidated | | | consolidating | | Consolidated | |
(in millions) | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | | | Parent | | WFFI | | subsidiaries | | Eliminations | | Company | |
| | | |
| | |
Assets | | |
Cash and cash equivalents due from: | | |
Subsidiary banks | | $ | 15,105 | | $ | 306 | | $ | -- | | $ | (15,411 | ) | | $ | -- | | | $ | 15,658 | | 246 | | — | | | (15,904 | ) | | — | |
Nonaffiliates | | -- | | 214 | | 17,103 | | -- | | 17,317 | | | — | | 180 | | 73,016 | | — | | 73,196 | |
Securities available for sale | | 2,270 | | 2,023 | | 77,499 | | | (5 | ) | | 81,787 | | | 4,950 | | 2,130 | | 144,494 | | | (5 | ) | | 151,569 | |
Mortgages and loans held for sale | | -- | | -- | | 30,521 | | -- | | 30,521 | | | — | | — | | 26,316 | | — | | 26,316 | |
| | |
| | 10 | | 51,060 | | 344,624 | | | (9,361 | ) | | 386,333 | | | 9 | | 45,930 | | 827,242 | | | (8,351 | ) | | 864,830 | |
Loans to subsidiaries: | | |
Bank | | 11,400 | | -- | | -- | | | (11,400 | ) | | -- | | | 21,745 | | — | | — | | | (21,745 | ) | | — | |
Nonbank | | 54,260 | | -- | | -- | | | (54,260 | ) | | -- | | | 68,527 | | — | | — | | | (68,527 | ) | | — | |
Allowance for loan losses | | -- | | | (1,025 | ) | | | (4,778 | ) | | -- | | | (5,803 | ) | | — | | | (2,359 | ) | | | (18,654 | ) | | — | | | (21,013 | ) |
| | | | | | | | | | | | |
Net loans | | 65,670 | | 50,035 | | 339,846 | | | (75,021 | ) | | 380,530 | | | 90,281 | | 43,571 | | 808,588 | | | (98,623 | ) | | 843,817 | |
| | | | | | | | | | | | |
Investments in subsidiaries: | | |
Bank | | 49,371 | | -- | | -- | | | (49,371 | ) | | -- | | | 105,721 | | — | | — | | | (105,721 | ) | | — | |
Nonbank | | 5,568 | | -- | | -- | | | (5,568 | ) | | -- | | | 24,094 | | — | | — | | | (24,094 | ) | | — | |
Other assets | | 11,417 | | 1,574 | | 78,323 | | | (6,248 | ) | | 85,066 | | | 34,949 | | 1,756 | | 213,099 | | | (35,063 | ) | | 214,741 | |
| | | | | | | | | | | | |
| | $ | 149,401 | | $ | 54,152 | | $ | 543,292 | | $ | (151,624 | ) | | $ | 595,221 | | | $ | 275,653 | | 47,883 | | 1,265,513 | | | (279,410 | ) | | 1,309,639 | |
| | | | | | | | | | | | |
| | |
Liabilities and equity | | |
Deposits | | $ | -- | | $ | -- | | $ | 373,555 | | $ | (15,411 | ) | | $ | 358,144 | | | $ | — | | — | | 791,728 | | | (10,326 | ) | | 781,402 | |
Short-term borrowings | | 5,023 | | 10,804 | | 69,075 | | | (30,919 | ) | | 53,983 | | | 23,434 | | 12,911 | | 150,156 | | | (78,427 | ) | | 108,074 | |
Accrued expenses and other liabilities | | 4,921 | | 1,497 | | 29,054 | | | (3,992 | ) | | 31,480 | | | 7,426 | | 1,179 | | 55,721 | | | (13,637 | ) | | 50,689 | |
Long-term debt | | 80,991 | | 38,579 | | 19,821 | | | (36,216 | ) | | 103,175 | | | 134,026 | | 31,704 | | 137,118 | | | (35,690 | ) | | 267,158 | |
Indebtedness to subsidiaries | | 10,307 | | -- | | -- | | | (10,307 | ) | | -- | | | 11,683 | | — | | — | | | (11,683 | ) | | — | |
| | | | | | | | | | | | |
Total liabilities | | 101,242 | | 50,880 | | 491,505 | | | (96,845 | ) | | 546,782 | | | 176,569 | | 45,794 | | 1,134,723 | | | (149,763 | ) | | 1,207,323 | |
Parent, WFFI, Other and Wells Fargo stockholders’ equity | | 48,159 | | 3,258 | | 51,521 | | | (54,779 | ) | | 48,159 | | |
| | | | | | | | | | | | |
Parent, WFFI, other and Wells Fargo stockholders’ equity | | | 99,084 | | 2,074 | | 127,573 | | | (129,647 | ) | | 99,084 | |
Noncontrolling interests | | -- | | 14 | | 266 | | -- | | 280 | | | — | | 15 | | 3,217 | | — | | 3,232 | |
| | | | | | | | | | | | |
Total equity | | 48,159 | | 3,272 | | 51,787 | | | (54,779 | ) | | 48,439 | | | 99,084 | | 2,089 | | 130,790 | | | (129,647 | ) | | 102,316 | |
| | | | | | | | | | | | |
Total liabilities and equity | | $ | 149,401 | | $ | 54,152 | | $ | 543,292 | | $ | (151,624 | ) | | $ | 595,221 | | | $ | 275,653 | | 47,883 | | 1,265,513 | | | (279,410 | ) | | 1,309,639 | |
| | | | | | | | | | | | |
| | |
120133
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | Quarter ended March 31, 2009 | | | Six months ended June 30, 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 (used) by operating activities | | $ | (828 | ) | | $ | 612 | | $ | 16,051 | | $ | 15,835 | | |
Net cash provided by operating activities | | | $ | 721 | | 801 | | 16,327 | | 17,849 | |
| | | | | | | | | | |
Cash flows from investing activities: | | |
Securities available for sale: | | |
Sales proceeds | | 97 | | 193 | | 10,470 | | 10,760 | | | 562 | | 363 | | 17,946 | | 18,871 | |
Prepayments and maturities | | -- | | 39 | | 7,304 | | 7,343 | | | — | | 84 | | 18,400 | | 18,484 | |
Purchases | | | (283 | ) | | | (317 | ) | | | (38,573 | ) | | | (39,173 | ) | | | (308 | ) | | | (597 | ) | | | (80,018 | ) | | | (80,923 | ) |
Loans: | | |
Decrease in banking subsidiaries’ loan originations, net of collections | | -- | | 17 | | 10,891 | | 10,908 | | |
Decrease (increase) in banking subsidiaries’ loan originations, net of collections | | | — | | | (217 | ) | | 28,687 | | 28,470 | |
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries | | -- | | -- | | 419 | | 419 | | | — | | — | | 3,179 | | 3,179 | |
Purchases (including participations) of loans by banking subsidiaries | | -- | | -- | | | (301 | ) | | | (301 | ) | | — | | — | | | (1,563 | ) | | | (1,563 | ) |
Principal collected on nonbank entities’ loans | | -- | | 2,310 | | 865 | | 3,175 | | | — | | 4,853 | | 1,618 | | 6,471 | |
Loans originated by nonbank entities | | -- | | | (991 | ) | | | (1,004 | ) | | | (1,995 | ) | | — | | | (2,307 | ) | | | (2,012 | ) | | | (4,319 | ) |
Net repayments from (advances to) subsidiaries | | 9,976 | | -- | | | (9,976 | ) | | -- | | | 10,246 | | — | | | (10,246 | ) | | — | |
Capital notes and term loans made to subsidiaries | | | (22 | ) | | -- | | 22 | | -- | | | | (64 | ) | | — | | 64 | | — | |
Principal collected on notes/loans made to subsidiaries | | 1,560 | | -- | | | (1,560 | ) | | -- | | | 5,202 | | — | | | (5,202 | ) | | — | |
Net decrease (increase) in investment in subsidiaries | | | (436 | ) | | -- | | 436 | | -- | | | | (5,011 | ) | | — | | 5,011 | | — | |
Net cash paid for acquisitions | | -- | | -- | | | (123 | ) | | | (123 | ) | | — | | — | | | (132 | ) | | | (132 | ) |
Net change in noncontrolling interests | | -- | | -- | | | (186 | ) | | | (186 | ) | | — | | — | | | (315 | ) | | | (315 | ) |
Other, net | | 22,264 | | 140 | | 5,284 | | 27,688 | | | 22,460 | | 151 | | 13,333 | | 35,944 | |
| | | | | | | | | | |
Net cash provided (used) by investing activities | | 33,156 | | 1,391 | | | (16,032 | ) | | 18,515 | | | 33,087 | | 2,330 | | | (11,250 | ) | | 24,167 | |
| | | | | | | | | | |
Cash flows from financing activities: | | |
Net change in: | | |
Deposits | | -- | | -- | | 15,725 | | 15,725 | | | — | | — | | 32,192 | | 32,192 | |
Short-term borrowings | | | (16,187 | ) | | | (426 | ) | | | (19,377 | ) | | | (35,990 | ) | | | (14,426 | ) | | 1,781 | | | (39,946 | ) | | | (52,591 | ) |
Long-term debt: | | |
Proceeds from issuance | | 3,522 | | -- | | 289 | | 3,811 | | | 3,538 | | — | | 338 | | 3,876 | |
Repayment | | | (5,175 | ) | | | (1,524 | ) | | | (11,178 | ) | | | (17,877 | ) | | | (11,500 | ) | | | (5,000 | ) | | | (18,662 | ) | | | (35,162 | ) |
Preferred stock: | | |
Cash dividends paid and accretion | | | (623 | ) | | -- | | -- | | | (623 | ) | |
Cash dividends paid | | | | (1,053 | ) | | — | | — | | | (1,053 | ) |
Common stock: | | |
Proceeds from issuance | | 524 | | -- | | -- | | 524 | | | 9,308 | | — | | — | | 9,308 | |
Repurchased | | | (54 | ) | | -- | | -- | | | (54 | ) | | | (63 | ) | | — | | — | | | (63 | ) |
Cash dividends paid | | | (1,443 | ) | | -- | | -- | | | (1,443 | ) | | | (1,657 | ) | | — | | — | | | (1,657 | ) |
Excess tax benefits related to stock option payments | | | 3 | | — | | — | | 3 | |
Other, net | | | | (34 | ) | | — | | 34 | | — | |
| | | | | | | | | | |
Net cash used by financing activities | | | (19,436 | ) | | | (1,950 | ) | | | (14,541 | ) | | | (35,927 | ) | | | (15,884 | ) | | | (3,219 | ) | | | (26,044 | ) | | | (45,147 | ) |
| | | | | | | | | | |
Net change in cash and due from banks | | 12,892 | | 53 | | | (14,522 | ) | | | (1,577 | ) | | 17,924 | | | (88 | ) | | | (20,967 | ) | | | (3,131 | ) |
Cash and due from banks at beginning of quarter | | 15,658 | | 426 | | 7,679 | | 23,763 | | |
Cash and due from banks at beginning of period | | | 15,658 | | 426 | | 7,679 | | 23,763 | |
| | | | | | | | | | |
Cash and due from banks at end of quarter | | $ | 28,550 | | $ | 479 | | $ | (6,843 | ) | | $ | 22,186 | | |
Cash and due from banks at end of period | | | $ | 33,582 | | 338 | | | (13,288 | ) | | 20,632 | |
| | | | | | | | | | |
| | |
121134
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | Quarter ended March 31, 2008 | | | Six months ended June 30, 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 | | $ | 499 | | $ | 668 | | $ | (1,557 | ) | | $ | (390 | ) | | $ | (1,190 | ) | | 974 | | 12,993 | | 12,777 | |
| | | | | | | | | | |
Cash flows from investing activities: | | |
Securities available for sale: | | |
Sales proceeds | | 882 | | 359 | | 14,972 | | 16,213 | | | 1,584 | | 541 | | 18,981 | | 21,106 | |
Prepayments and maturities | | -- | | 78 | | 5,388 | | 5,466 | | | — | | 139 | | 10,288 | | 10,427 | |
Purchases | | | (792 | ) | | | (357 | ) | | | (29,798 | ) | | | (30,947 | ) | | | (2,462 | ) | | | (687 | ) | | | (49,048 | ) | | | (52,197 | ) |
Loans: | | |
Increase in banking subsidiaries’ loan originations, net of collections | | -- | | | (171 | ) | | | (3,348 | ) | | | (3,519 | ) | | — | | | (513 | ) | | | (17,079 | ) | | | (17,592 | ) |
Proceeds from sales (including participations) of loans originated for investment by banking subsidiaries | | -- | | -- | | 325 | | 325 | | | — | | — | | 1,556 | | 1,556 | |
Purchases (including participations) of loans by banking subsidiaries | | -- | | -- | | | (2,656 | ) | | | (2,656 | ) | | — | | — | | | (5,956 | ) | | | (5,956 | ) |
Principal collected on nonbank entities’ loans | | -- | | 4,194 | | 821 | | 5,015 | | | — | | 8,239 | | 3,488 | | 11,727 | |
Loans originated by nonbank entities | | -- | | | (4,439 | ) | | | (834 | ) | | | (5,273 | ) | | — | | | (8,466 | ) | | | (1,661 | ) | | | (10,127 | ) |
Net repayments from (advances to) subsidiaries | | | (2,858 | ) | | -- | | 2,858 | | -- | | | | (2,979 | ) | | — | | 2,979 | | — | |
Capital notes and term loans made to subsidiaries | | | (630 | ) | | -- | | 630 | | -- | | | | (677 | ) | | — | | 677 | | — | |
Principal collected on notes/loans made to subsidiaries | | 2,500 | | -- | | | (2,500 | ) | | -- | | | 4,101 | | — | | | (4,101 | ) | | — | |
Net decrease (increase) in investment in subsidiaries | | | (48 | ) | | -- | | 48 | | -- | | | | (295 | ) | | — | | 295 | | — | |
Net cash paid for acquisitions | | -- | | -- | | | (46 | ) | | | (46 | ) | | — | | — | | | (386 | ) | | | (386 | ) |
Net change in noncontrolling interests | | -- | | -- | | 6 | | 6 | | | — | | — | | | (21 | ) | | | (21 | ) |
Other, net | | 439 | | | (52 | ) | | | (3,391 | ) | | | (3,004 | ) | | 431 | | | (85 | ) | | | (932 | ) | | | (586 | ) |
| | | | | | | | | | |
Net cash used by investing activities | | | (507 | ) | | | (388 | ) | | | (17,525 | ) | | | (18,420 | ) | | | (297 | ) | | | (832 | ) | | | (40,920 | ) | | | (42,049 | ) |
| | | | | | | | | | |
Cash flows from financing activities: | | |
Net change in: | | |
Deposits | | -- | | -- | | 13,684 | | 13,684 | | | — | | — | | | (5,336 | ) | | | (5,336 | ) |
Short-term borrowings | | 1,506 | | 1,687 | | | (2,465 | ) | | 728 | | | 7,367 | | 3,578 | | 21,939 | | 32,884 | |
Long-term debt: | | |
Proceeds from issuance | | 7,075 | | 1,105 | | | (43 | ) | | 8,137 | | | 10,570 | | 1,109 | | 804 | | 12,483 | |
Repayment | | | (7,414 | ) | | | (3,037 | ) | | 2,882 | | | (7,569 | ) | | | (8,685 | ) | | | (4,890 | ) | | 3,612 | | | (9,963 | ) |
Common stock: | | |
Proceeds from issuance | | 317 | | -- | | -- | | 317 | | | 608 | | — | | — | | 608 | |
Repurchased | | | (351 | ) | | -- | | -- | | | (351 | ) | | | (520 | ) | | — | | — | | | (520 | ) |
Cash dividends paid | | | (1,024 | ) | | -- | | -- | | | (1,024 | ) | | | (2,050 | ) | | — | | — | | | (2,050 | ) |
Excess tax benefits related to stock option payments | | 15 | | -- | | -- | | 15 | | | 19 | | — | | — | | 19 | |
Other, net | | -- | | 2 | | 3,260 | | 3,262 | | |
| | | | | | | | | | |
Net cash provided (used) by financing activities | | 124 | | | (243 | ) | | 17,318 | | 17,199 | | | 7,309 | | | (203 | ) | | 21,019 | | 28,125 | |
| | | | | | | | | | |
Net change in cash and due from banks | | 116 | | 37 | | | (1,764 | ) | | | (1,611 | ) | | 5,822 | | | (61 | ) | | | (6,908 | ) | | | (1,147 | ) |
Cash and due from banks at beginning of quarter | | 14,989 | | 483 | | | (715 | ) | | 14,757 | | |
Cash and due from banks at beginning of period | | | 14,989 | | 483 | | | (715 | ) | | 14,757 | |
| | | | | | | | | | |
Cash and due from banks at end of quarter | | $ | 15,105 | | $ | 520 | | $ | (2,479 | ) | | $ | 13,146 | | |
Cash and due from banks at end of period | | | $ | 20,811 | | 422 | | | (7,623 | ) | | 13,610 | |
| | | | | | | | | | |
| | |
122135
19.18. 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), 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 March 31,June 30, 2009, the amount of trust preferred securities and perpetual preferred purchase securities issued by the Trusts that was includable in Tier 1 capital in accordance with FRB risk-based capital guidelines was approximately $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 June 30, 2009: | | |
Total capital (to risk-weighted assets) | | |
Wells Fargo & Company | | | | $ | 131.8 | | | | 12.30 | % | | ³ | | $ | 85.7 | | ³ | | 8.00 | % | | | $ | 145.0 | | | 13.84 | % | > | $ | 83.8 | | > | | 8.00 | % | |
Wells Fargo Bank, N.A. | | 53.7 | | 11.87 | | ³ | | 36.2 | | ³ | | 8.00 | | ³ | | $ | 45.3 | | ³ | | 10.00 | % | | 57.1 | | 12.61 | | > | | 36.2 | | > | | 8.00 | | > | $ | 45.3 | | > | | 10.00 | % |
Wachovia Bank, N.A. | | 57.5 | | 12.02 | | ³ | | 38.2 | | ³ | | 8.00 | | ³ | | 47.8 | | ³ | | 10.00 | | | 60.6 | | 13.03 | | > | | 37.2 | | > | | 8.00 | | > | | 46.5 | | > | | 10.00 | |
| | |
Tier 1 capital (to risk-weighted assets) | | |
Wells Fargo & Company | | $ | 89.0 | | 8.30 | % | | ³ | | $ | 42.9 | | ³ | | 4.00 | % | | | 102.7 | | 9.80 | | > | | 41.9 | | > | | 4.00 | |
Wells Fargo Bank, N.A. | | 34.8 | | 7.70 | | ³ | | 18.1 | | ³ | | 4.00 | | ³ | | $ | 27.2 | | ³ | | 6.00 | % | | 38.3 | | 8.47 | | > | | 18.1 | | > | | 4.00 | | > | | 27.2 | | > | | 6.00 | |
Wachovia Bank, N.A. | | 35.4 | | 7.41 | | ³ | | 19.1 | | ³ | | 4.00 | | ³ | | 28.7 | | ³ | | 6.00 | | | 38.9 | | 8.37 | | > | | 18.6 | | > | | 4.00 | | > | | 27.9 | | > | | 6.00 | |
Tier 1 capital (to average assets) (Leverage ratio) | | |
| | |
Tier 1 capital (to average assets) | | |
(Leverage ratio) | | |
Wells Fargo & Company | | $ | 89.0 | | 7.09 | % | | ³ | | $ | 50.2 | | ³ | | 4.00 | %(1) | | | 102.7 | | 8.32 | | > | | 49.4 | | > | | 4.00 | (1) | |
Wells Fargo Bank, N.A. | | 34.8 | | 6.53 | | ³ | | 21.3 | | ³ | | 4.00 | (1) | | ³ | | $ | 26.7 | | ³ | | 5.00 | % | | 38.3 | | 7.12 | | > | | 21.5 | | > | | 4.00 | (1) | > | | 26.9 | | > | | 5.00 | |
Wachovia Bank, N.A. | | 35.4 | | 6.20 | | ³ | | 22.9 | | ³ | | 4.00 | (1) | | ³ | | 28.6 | | ³ | | 5.00 | | | 38.9 | | 7.18 | | > | | 21.7 | | > | | 4.00 | (1) | > | | 27.1 | | > | | 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. |
Certain subsidiaries of the Company are approved seller/servicers, 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 March 31,June 30, 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 responseCertain broker-dealer subsidiaries of the Company are subject to this item can be found under “Financial Review — Risk Factors” in this ReportSEC Rule 15c3-1 (the Net Capital Rule), which information is incorporated by reference into this item.requires that we maintain minimum levels of net capital, as defined. At June 30, 2009, each of these subsidiaries met these requirements.
123136
PART II – OTHER INFORMATION
Information in response to this item can be found in Note 10 (Guarantees and Legal Actions) to Financial Statements in this Report which information is incorporated by reference into this item.
Information in response to this item can be found under the “Risk Factors” section in this Report which information is incorporated by reference into this item.
| | |
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 March 31,June 30, 2009.
| | | | | | | | | | | | |
| |
| | | | | | | | | Maximum number of | |
| Total number | | | | | | shares that may yet | |
Calendar | of shares | | Weighted-average | | be repurchased under | |
month | repurchased | (1) | price paid per share | | the authorizations | |
| |
| | | 2,228,293 | | | $ | 24.00 | | | | 12,128,427 | |
| | | 10,458 | | | | 14.77 | | | | 12,117,969 | |
| | | 55,995 | | | | 10.31 | | | | 12,061,974 | |
| | | | | | | | | | | |
Total | | | 2,294,746 | | | | | | | | | |
| | | | | | | | | | | |
| |
| | | | | | | | | | | | |
|
| | | | | | | | | | Maximum number of | |
| | Total number | | | | | | | shares that may yet | |
| | of shares | | | Weighted-average | | | be repurchased under | |
Calendar month | | repurchased (1) | | | price paid per share | | | the authorizations | |
|
April | | | 222,161 | | | $ | 15.97 | | | | 11,839,813 | |
May | | | 185,410 | | | | 25.85 | | | | 11,654,403 | |
June | | | 29,438 | | | | 24.44 | | | | 11,624,965 | |
| | | | | | | | |
Total | | | 437,009 | | | | | | | | | |
| | | | | | | | |
|
| | |
(1) | | All shares were repurchased under the authorization covering up to 25 million shares of common stock approved by the Board of Directors and publicly announced by the Company on September 23, 2008. Unless modified or revoked by the Board, this authorization does not expire. |
Item 6. | | |
Item 4. | | Submission of Matters to a Vote of Security Holders |
The Company held its Annual Meeting of Stockholders on April 28, 2009. There were 4,243,848,473 shares of common stock outstanding and entitled to vote at the meeting. A total of 3,663,521,048 shares of common stock were represented at the meeting in person or by proxy, representing 86.3% of the shares outstanding and entitled to vote at the meeting.
At the meeting, stockholders:
(1) | | elected all 19 of the directors nominated by the Board of Directors; |
|
(2) | | approved the non-binding advisory resolution regarding compensation of our named executives as disclosed in our 2009 proxy statement; |
|
(3) | | ratified the appointment of KPMG LLP as our independent auditors for 2009; |
|
(4) | | approved an amendment to the Long-Term Incentive Compensation Plan; |
|
(5) | | rejected the stockholder proposal regarding a By-Laws amendment to require an independent chairman; and |
|
(6) | | rejected the stockholder proposal regarding a report on political contributions. |
137
The voting results for each matter were:
| | | | | | | | | | | | |
|
| | For | | | Against | | | Abstentions | |
John D. Baker II | | | 3,435,633,262 | | | | 211,841,563 | | | | 16,046,223 | |
John S. Chen | | | 2,947,304,856 | | | | 697,865,034 | | | | 18,351,158 | |
Lloyd H. Dean | | | 3,435,345,703 | | | | 211,935,383 | | | | 16,239,962 | |
Susan E. Engel | | | 3,062,917,429 | | | | 582,383,022 | | | | 18,220,597 | |
Enrique Hernandez, Jr. | | | 3,389,162,005 | | | | 257,464,656 | | | | 16,894,387 | |
Donald M. James | | | 2,788,711,431 | | | | 856,234,662 | | | | 18,574,955 | |
Robert L. Joss | | | 3,434,635,399 | | | | 212,415,168 | | | | 16,470,481 | |
Richard M. Kovacevich | | | 3,526,862,097 | | | | 123,606,940 | | | | 13,052,011 | |
Richard D. McCormick | | | 3,064,512,427 | | | | 580,365,962 | | | | 18,642,659 | |
Mackey J. McDonald | | | 2,966,971,078 | | | | 677,585,319 | | | | 18,964,651 | |
Cynthia H. Milligan | | | 2,470,353,859 | | | | 1,176,161,113 | | | | 17,006,076 | |
Nicholas G. Moore | | | 3,560,304,978 | | | | 87,010,059 | | | | 16,206,011 | |
Philip J. Quigley | | | 2,461,724,053 | | | | 1,184,213,856 | | | | 17,583,139 | |
Donald B. Rice | | | 2,412,890,756 | | | | 1,231,667,728 | | | | 18,962,564 | |
Judith M. Runstad | | | 3,552,568,317 | | | | 95,372,101 | | | | 15,580,630 | |
Stephen W. Sanger | | | 3,066,616,310 | | | | 578,721,033 | | | | 18,183,705 | |
Robert K. Steel | | | 3,547,660,972 | | | | 99,900,362 | | | | 15,959,714 | |
John G. Stumpf | | | 3,547,506,827 | | | | 103,112,381 | | | | 12,901,840 | |
Susan G. Swenson | | | 3,453,168,565 | | | | 195,132,635 | | | | 15,219,848 | |
|
| | |
(2) | | Proposal to Approve a Non-Binding Advisory Resolution Regarding the Compensation of the Company’s Named Executives |
| | | | |
For | | Against | | Abstentions |
| | | | |
3,400,103,857 | | 176,518,053 | | 86,899,138 |
(3) | | Proposal to Ratify Appointment of KPMG LLP as Independent Auditors for 2009 |
| | | | |
For | | Against | | Abstentions |
| | | | |
3,578,107,722 | | 73,567,896 | | 11,845,430 |
(4) | | Proposal to Approve Amended Long-Term Incentive Compensation Plan |
| | | | | | |
| | | | | | Broker |
For | | Against | | Abstentions | | Non-Votes |
| | | | | | |
2,114,115,130 | | 985,312,415 | | 21,822,848 | | 542,270,655 |
(5) | | Stockholder Proposal Regarding By-Laws Amendment to Require Independent Chairman |
| | | | | | |
| | | | | | Broker |
For | | Against | | Abstentions | | Non-Votes |
| | | | | | |
952,307,141 | | 2,108,895,555 | | 60,047,697 | | 542,270,655 |
(6) | | Stockholder Proposal Regarding a Report on Political Contributions |
| | | | | | |
| | | | | | Broker |
For | | Against | | Abstentions | | Non-Votes |
| | | | | | |
719,820,122 | | 1,925,869,627 | | 475,560,644 | | 542,270,655 |
138
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: May 11, 2009 | WELLS FARGO & COMPANY | |
Dated: August 7, 2009 | By: | /s/ RICHARD D. LEVY | |
| | Richard D. Levy | |
| | Executive Vice President and Controller (Principal Accounting Officer) | |
|
124139
EXHIBIT INDEX
| | | | | | | | | | | | |
Exhibit | | | | |
Number | | Description | | | | | Location |
Number | | Description | | Location |
| | | | | | | | | | | | |
3(a) | | Restated Certificate of Incorporation. | | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed September 28, 2006. |
| | | | | | | | | | | | |
3(b) | | Certificate of Designations for the Company’s 2007 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed March 19, 2007. |
| | | | | | | | | | | | |
3(c) | | Certificate Eliminating the Certificate of Designations for the Company’s 1997 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed March 19, 2007. |
| | | | | | | | | | | | |
3(d) | | Certificate of Designations for the Company’s 2008 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed March 18, 2008. |
| | | | | | | | | | | | |
3(e) | | Certificate Eliminating the Certificate of Designations for the Company’s 1998 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(b) to the Company’s Current Report on Form 8-K filed March 18, 2008. |
| | | | | | | | | | | | |
3(f) | | Certificate of Designations for the Company’s Non-Cumulative Perpetual Preferred Stock, Series A. | | Incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed May 19, 2008. |
| | | | | | | | | | | | |
3(g) | | Certificate of Designations for the Company’s Non-Cumulative Perpetual Preferred Stock, Series B. | | Incorporated by reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed September 10, 2008. |
| | | | | | | | | | | | |
3(h) | | Certificate of Designations for the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D. | | Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed October 30, 2008. |
| | | | | | | | | | | | |
3(i) | | Certificate of Designations for the Company’s Dividend Equalization Preferred Shares. | | Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | | | | | | | | |
3(j) | | Certificate of Designations for the Company’s Class A Preferred Stock, Series G. | | Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | | | | | | | | |
3(k) | | Certificate of Designations for the Company’s Class A Preferred Stock, Series H. | | Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | | | | | | | | |
3(l) | | Certificate of Designations for the Company’s Class A Preferred Stock, Series I. | | Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | | | | | | | | |
3(m) | | Certificate of Designations for the Company’s 8.00% Non-Cumulative Perpetual Class A Preferred Stock, Series J. | | Incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | | | | | | | | |
3(n) | | Certificate of Designations for the Company’s Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series K. | | Incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | | | | | | | | | |
3(o) | | Certificate of Designations for the Company’s 7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock, Series L. | | Incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed December 30, 2008. |
| | | | |
3(p) | | Certificate Eliminating the Certificate of Designations for the Company’s 1999 ESOP Cumulative Convertible Preferred Stock. | | Incorporated by reference to Exhibit 3(a) to the Company’s Current Report on Form 8-K filed April 13, 2009. |
125140
| | | | | | | | | | | | |
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. |
| | | | |
Exhibit | | | | |
Number | | Description | | Location |
3(q) | | 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(q). | | |
| | | | |
4(b) | | Instrument of Removal, Appointment and Acceptance, dated as of July 6, 2009, by and among the Company, U.S. Bank National Association, and Wells Fargo Bank, National Association. | | Filed herewith. |
| | | | |
4(c) | | 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 Long-Term Incentive Compensation Plan, as amended through April 28, 2009. | | Filed herewith. |
| | | | |
10(b) | | Supplemental Cash Balance Plan, as amended through April 28, 2009. | | Incorporated by reference to Exhibit 10(b) to the Company’s Current Report on Form 8-K filed May 4, 2009. |
| | | | |
10(c) | | Supplemental 401(k) Plan, as amended through April 28, 2009. | | Incorporated by reference to Exhibit 10(c) to the Company’s Current Report on Form 8-K filed May 4, 2009. |
| | | | |
12(a) | | Computation of Ratios of Earnings to Fixed Charges: | | Filed herewith. |
| | | | | | | | | | | | | | | | |
| | Quarter ended | | | Six months ended | |
| | June 30, | | | June 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Including interest on deposits | | | 2.74 | | | | 2.11 | | | | 2.61 | | | | 2.03 | |
| | | | | | | | | | | | | | | | |
Excluding interest on deposits | | | 3.72 | | | | 3.04 | | | | 3.45 | | | | 3.01 | |
(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 | | | Six months ended | |
| | June 30, | | | June 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Including interest on deposits | | | 2.06 | | | | 2.11 | | | | 1.97 | | | | 2.03 | |
| | | | | | | | | | | | | | | | |
Excluding interest on deposits | | | 2.46 | | | | 3.04 | | | | 2.30 | | | | 3.01 | |
(Computation is based on Wells Fargo net income.)
126141
| | | | |
Exhibit | | | | |
Number | | Description | | Location |
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. |
| | | | |
101* | | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2009, is formatted in XBRL interactive data files: (i) Consolidated Statement of Income for the three months and six months ended June 30, 2009 and 2008; (ii) Consolidated Balance Sheet at June 30, 2009 and December 31, 2008; (iii) Consolidated Statement of Changes in Equity and Comprehensive Income for the six months ended June 30, 2009 and 2008; (iv) Consolidated Statement of Cash Flows for the six months ended June 30, 2009 and 2008; and (v) Notes to Financial Statements, tagged as blocks of text. | | Furnished herewith. |
* | | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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