e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Commission file number 001-2979
WELLS FARGO & COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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No. 41-0449260 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
420 Montgomery Street, San Francisco, California 94163
(Address of principal executive offices) (Zip Code)
Registrants 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.
Yes þ No o
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
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þ
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Accelerated filer o |
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Non-accelerated filer
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o
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(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Shares Outstanding |
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October 27, 2008 |
Common stock, $1-2/3 par value
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3,325,244,156 |
FORM 10-Q
CROSS-REFERENCE INDEX
1
PART I
FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA
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% Change |
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Quarter ended |
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Sept. 30, 2008 from |
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Nine months ended |
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Sept. 30 |
, |
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June 30 |
, |
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Sept. 30 |
, |
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June 30 |
, |
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Sept. 30 |
, |
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Sept. 30 |
, |
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Sept. 30 |
, |
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% |
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($ in millions, except per share amounts) |
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2008 |
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2008 |
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2007 |
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2008 |
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2007 |
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2008 |
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2007 |
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Change |
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Net income |
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$ |
1,637 |
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$ |
1,753 |
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$ |
2,173 |
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(7 |
)% |
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(25 |
)% |
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$ |
5,389 |
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$ |
6,696 |
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(20 |
)% |
Diluted earnings per common share |
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0.49 |
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0.53 |
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0.64 |
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(8 |
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(23 |
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1.62 |
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1.97 |
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(18 |
) |
Profitability ratios (annualized): |
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Net income to average total assets (ROA) |
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1.06 |
% |
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1.19 |
% |
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1.59 |
% |
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(11 |
) |
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(33 |
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1.21 |
% |
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1.76 |
% |
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(31 |
) |
Net income to average stockholders equity (ROE) |
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13.63 |
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14.58 |
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18.22 |
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(7 |
) |
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(25 |
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15.02 |
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19.15 |
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(22 |
) |
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53.2 |
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51.1 |
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57.5 |
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4 |
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(7 |
) |
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52.0 |
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58.0 |
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(10 |
) |
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$ |
10,379 |
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$ |
11,459 |
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$ |
9,853 |
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(9 |
) |
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5 |
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$ |
32,401 |
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$ |
29,185 |
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11 |
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Dividends declared per common share |
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0.34 |
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0.31 |
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0.31 |
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10 |
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10 |
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0.96 |
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0.87 |
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10 |
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Average common shares outstanding |
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3,316.4 |
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3,309.8 |
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3,339.6 |
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(1 |
) |
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3,309.6 |
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3,355.5 |
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(1 |
) |
Diluted average common shares outstanding |
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3,331.0 |
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3,321.4 |
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3,374.0 |
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(1 |
) |
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3,323.4 |
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3,392.9 |
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(2 |
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$ |
404,203 |
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$ |
391,545 |
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$ |
350,683 |
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3 |
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15 |
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$ |
393,262 |
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$ |
334,801 |
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17 |
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Average assets |
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614,194 |
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594,749 |
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541,533 |
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3 |
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13 |
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594,717 |
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508,992 |
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17 |
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Average core deposits (2) |
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320,074 |
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318,377 |
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306,135 |
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1 |
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5 |
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318,582 |
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299,142 |
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6 |
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Average retail core deposits (3) |
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234,140 |
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230,365 |
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220,984 |
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2 |
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6 |
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230,935 |
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219,356 |
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5 |
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4.79 |
% |
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4.92 |
% |
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4.55 |
% |
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(3 |
) |
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5 |
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4.80 |
% |
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4.79 |
% |
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Securities available for sale |
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$ |
86,882 |
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$ |
91,331 |
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$ |
57,440 |
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(5 |
) |
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51 |
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$ |
86,882 |
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$ |
57,440 |
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51 |
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Loans |
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411,049 |
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399,237 |
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362,922 |
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3 |
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13 |
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411,049 |
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362,922 |
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13 |
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Allowance for loan losses |
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7,865 |
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7,375 |
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3,829 |
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7 |
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105 |
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7,865 |
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3,829 |
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105 |
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Goodwill |
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13,520 |
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13,191 |
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12,018 |
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2 |
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12 |
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13,520 |
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12,018 |
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12 |
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Assets |
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622,361 |
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609,074 |
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548,727 |
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2 |
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13 |
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622,361 |
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548,727 |
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13 |
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Core deposits (2) |
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334,076 |
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310,410 |
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303,853 |
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8 |
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10 |
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334,076 |
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303,853 |
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10 |
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Stockholders equity |
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46,957 |
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47,964 |
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47,566 |
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(2 |
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(1 |
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46,957 |
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47,566 |
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(1 |
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Tier 1 capital (4) |
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45,182 |
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42,471 |
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38,107 |
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6 |
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19 |
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45,182 |
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38,107 |
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19 |
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Total capital (4) |
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60,525 |
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57,909 |
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51,625 |
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5 |
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17 |
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60,525 |
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51,625 |
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17 |
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Stockholders equity to assets |
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7.54 |
% |
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7.87 |
% |
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8.67 |
% |
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(4 |
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(13 |
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7.54 |
% |
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8.67 |
% |
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(13 |
) |
Risk-based capital (4) |
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Tier 1 capital |
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8.59 |
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8.24 |
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8.17 |
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4 |
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5 |
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8.59 |
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8.17 |
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5 |
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Total capital |
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11.51 |
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11.23 |
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11.07 |
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2 |
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4 |
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11.51 |
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11.07 |
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4 |
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Tier 1 leverage (4) |
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7.54 |
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7.35 |
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7.26 |
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3 |
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4 |
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7.54 |
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7.26 |
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4 |
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Book value per common share |
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$ |
14.14 |
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$ |
14.48 |
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$ |
14.30 |
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(2 |
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(1 |
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$ |
14.14 |
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$ |
14.30 |
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(1 |
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Team members (active, full-time equivalent) |
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159,000 |
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160,500 |
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158,800 |
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(1 |
) |
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159,000 |
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158,800 |
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High |
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$ |
44.68 |
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$ |
32.40 |
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$ |
37.99 |
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38 |
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18 |
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$ |
44.68 |
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$ |
37.99 |
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18 |
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Low |
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20.46 |
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23.46 |
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32.66 |
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(13 |
) |
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(37 |
) |
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20.46 |
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32.66 |
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(37 |
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Period end |
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37.53 |
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23.75 |
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35.62 |
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58 |
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5 |
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37.53 |
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35.62 |
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5 |
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(1) |
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The efficiency ratio is noninterest expense divided by total revenue (net interest income
and noninterest income). |
(2) |
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Core deposits are noninterest-bearing deposits, interest-bearing checking, savings
certificates, market rate and other savings, and certain foreign deposits (Eurodollar sweep
balances). |
(3) |
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Retail core deposits are total core deposits excluding Wholesale Banking core deposits and
retail mortgage escrow deposits. To reflect the realignment of our corporate trust business
from Community Banking into Wholesale Banking in first quarter 2008, balances for prior
periods have been revised. |
(4) |
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See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this
Report for additional information. |
2
This Report on Form 10-Q for the quarter ended September 30, 2008, including the Financial Review
and the Financial Statements and related Notes, has forward-looking statements, which may include
forecasts of our financial results and condition, expectations for our operations and business, and
our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking
statements. Actual results might differ significantly from our forecasts and expectations due to
several factors. Some of these factors are described in the Financial Review and in the Financial
Statements and related Notes. For a discussion of other factors, refer to the Risk Factors
section in this Report and to the Risk Factors and Regulation and Supervision sections of our
Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K), filed with the
Securities and Exchange Commission (SEC) and available on the SECs website at www.sec.gov.
OVERVIEW
Wells Fargo & Company is a $622 billion diversified financial services company providing banking,
insurance, investments, mortgage banking and consumer finance through banking stores, the internet
and other distribution channels to consumers, businesses and institutions in all 50 states and in
other countries. We ranked fifth in assets and third in market value
of our common stock among our peers at September 30, 2008. When we refer to the Company, we, our or us
in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the
Parent, we mean Wells Fargo & Company.
We earned $1.64 billion, or $0.49 per share, in third quarter 2008, after incurring $0.13 per share
of previously announced write-downs for investments in Fannie Mae, Freddie Mac and Lehman Brothers.
We built our credit reserves by an additional $500 million ($0.10 per share), bringing the
allowance for credit losses to $8.0 billion, a $4.0 billion increase in the allowance since the
disruption in credit markets began a year ago. Business momentum remained strong in the quarter,
with double-digit loan and earning asset growth (both up 15% year over year), double-digit growth
in core deposits (up 10% from September 30, 2007, and 30% (annualized) from June 30, 2008), growth
in assets under management, primarily mutual funds (up 12% year over year), and a record 5.7
cross-sell in our retail banking business.
Our net interest margin remained among the best of the large bank holding companies at 4.79%,
reflecting the decline in our funding costs since last year and continued above-market growth in
core deposits. Finally, despite the strong growth in earning assets, investment write-downs and
higher credit costs in the quarter, our capital ratios increased, with Tier 1 capital rising to
8.59%, among the strongest capital positions in the industry.
On October 3, 2008, we announced that we had signed a definitive agreement to acquire all
outstanding shares of Wachovia Corporation (Wachovia) in a stock-for-stock transaction. Wachovia,
based in Charlotte, North Carolina, had total assets of $764 billion at September 30, 2008, and is
one of the nations largest diversified financial services companies, providing a broad range of
retail banking and brokerage, asset and wealth management, and corporate and investment banking
products and services to customers through 3,300 financial centers in 21 states from Connecticut to
Florida and west to Texas and California, and nationwide retail brokerage, mortgage lending and
auto finance businesses. Under terms of the agreement, Wachovia shareholders will receive 0.1991
shares of Wells Fargo common stock in exchange for each share of Wachovia common stock. The
agreement is subject to approval of Wachovia shareholders and the merger is expected to be
completed by the end of 2008. For more
3
information about the pending merger with Wachovia, refer to the Companys Current Report on Form
8-K, including exhibits, filed on October 9, 2008, with the SEC and available on the SECs website
at www.sec.gov.
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 Americas great
companies. Our primary strategy to achieve this vision is to increase the number of products our
customers buy from us and to give them all of the financial products that fulfill their needs. Our
cross-sell strategy and diversified business model facilitate growth in strong and weak economic
cycles, as we can grow by expanding the number of products our current customers have with us. Our
average retail banking household now has a record 5.7 products with us. Our goal is eight products
per customer, which is currently half of our estimate of potential demand. Our core products grew
this quarter from a year ago, with average loans up 15%, average core deposits up 5% and assets
under management or administration up 4%.
We believe it is important to maintain a well-controlled environment as we continue to grow our
businesses. We manage our credit risk by setting what we believe are sound credit policies for
underwriting new business, while monitoring and reviewing the performance of our loan portfolio. We
manage the interest rate and market risks inherent in our asset and liability balances within
prudent ranges, while ensuring adequate liquidity and funding. We have maintained strong capital
levels to provide for future growth. Our stockholder value has increased over time due to customer
satisfaction, strong financial results, investment in our businesses, consistent execution of our
business model and the management of our business risks.
Our financial results included the following:
Net income for third quarter 2008 was $1.64 billion ($0.49 per share), compared with $2.17 billion
($0.64 per share) for third quarter 2007. Return on assets (ROA) was 1.06% and return on equity
(ROE) was 13.63% for third quarter 2008, compared with 1.59% and 18.22%, respectively, for third
quarter 2007.
Net income for the first nine months of 2008 was $5.39 billion, or $1.62 per share, down from $6.70
billion, or $1.97 per share, for the first nine months of 2007. ROA was 1.21% and ROE was 15.02%
for the first nine months of 2008, and 1.76% and 19.15%, respectively, for the first nine months of
2007.
Net interest income on a taxable-equivalent basis was $6.44 billion for third quarter 2008, up 21%
from $5.32 billion for third quarter 2007, driven by 15% earning asset growth combined with a 24
basis point increase in the net interest margin to 4.79%.
Noninterest income was $4.0 billion for third quarter 2008 down from $4.57 billion for third
quarter 2007, including a $756 million decline in net investment gains. Net investment losses of
$423 million in third quarter 2008 consisted of previously announced other-than-temporary
impairment charges of $646 million for Fannie Mae, Freddie Mac and Lehman Brothers, an additional
$247 million of other-than-temporary write-downs and $470 million of net realized gains.
Despite the 24% decline in third quarter 2008 in the S&P500® from a year ago, trust and
investment fees declined only 5%. Card fees were up 7% in third quarter 2008 from a year ago
4
due to continued growth in new accounts and higher credit and debit card transaction volume.
Insurance revenue was up 33% in third quarter 2008 from a year ago due to customer growth, higher
crop insurance revenues and the fourth quarter 2007 acquisition of ABD Insurance. Charges and fees
on loans were up 8% in third quarter 2008, primarily reflecting strong commercial loan demand.
Mortgage banking noninterest income was $892 million in third quarter 2008, up $69 million from
third quarter 2007. The owned mortgage servicing portfolio was $1.56 trillion at September 30,
2008, up 6% from a year ago. Mortgage applications of $83 billion in third quarter 2008 were down
13% from a year ago but at wider margins. Mortgage originations declined as a result of the
combined slowdown in home purchase and refinance activities, and mortgage servicing benefited from
the decline in mortgage prepayments. Third quarter 2008 results included a $75 million net gain
related to changes in the value of our mortgage servicing rights (MSRs), net of hedge results
(reflected in net servicing income).
Net unrealized losses on securities available for sale were $4.9 billion at September 30, 2008,
compared with net unrealized gains of $680 million at December 31, 2007. The change in value was
largely due to wider spreads on mortgage-backed securities, and an increase in market yields for
the first nine months of 2008.
Revenue, the sum of net interest income and noninterest income, was $10.38 billion in third quarter
2008, up 5% from $9.85 billion in third quarter 2007. The write-downs for investments in Fannie
Mae, Freddie Mac and Lehman Brothers reduced revenue growth by 7 percentage points. Revenue was up
11% to $32.4 billion for the first nine months of 2008. Many of our businesses continued to
generate double-digit revenue growth from third quarter 2007, including asset-based lending,
commercial banking, credit cards, mortgage banking, insurance, international and wealth management.
Noninterest expense was $5.52 billion for third quarter 2008, down $154 million, or 3%, from $5.67
billion for the same period of 2007. We continued to make investments in distribution and sales and
service team members, adding over 1,000 platform bankers since last year end and adding 12 new
banking stores in third quarter 2008 alone. We continued to be disciplined about our efforts to
restrict expenses to revenue-creating opportunities while at the same time paring down other unit
costs. The efficiency ratio was 53.2% in third quarter 2008 even after taking into account the
other-than-temporary impairment charges on debt and equity investment securities.
Net charge-offs for third quarter 2008 were $2.0 billion (1.96% of average total loans
outstanding, annualized), compared with $1.5 billion (1.55%) for second quarter 2008 and $892
million (1.01%) for third quarter 2007. During the first nine months of 2008, net charge-offs were
$5.04 billion (1.71%), compared with $2.33 billion (0.93%) for the first nine months of 2007. Total
provision expense in third quarter 2008 was $2.5 billion, including a $500 million credit reserve
build, primarily related to higher projected losses in several consumer credit businesses and
commercial real estate, as well as growth in the wholesale portfolios, bringing the allowance for
credit losses to $8.0 billion, double its level from just before the disruption in credit markets
began a year ago. As expected, consumer behavior continued to be influenced by weakness in
residential real estate values. Additionally, the effects of higher energy prices and higher
unemployment levels impacted the performance of the consumer loan portfolios during the quarter.
Loan requests in our wholesale businesses have increased as quality borrowers are providing attractive
business opportunities that are both well-structured and
appropriately priced for risk.
5
Net charge-offs in the real estate 1-4 family first mortgage portfolio increased $123 million in
third quarter 2008 from a year ago, including an increase of $53 million from Wells Fargo
Financials residential real estate portfolio. Credit card net charge-offs increased $185 million
in third quarter 2008 from a year ago due to the effect of the current economic environment on
consumers. Loss levels continued to increase in this credit cycle as the impacts from lower
disposable income and unemployment weigh on the consumer. Net charge-offs in the auto portfolio in
third quarter 2008 were up $58 million from a year ago and up $74 million linked quarter. While we
remain optimistic about the positive impacts of process improvements and underwriting changes we
made in the auto business in prior quarters, as well as our robust loss mitigation efforts, the
economic environment continued to stress the consumer and influence loan performance.
Net credit losses in the real estate 1-4 family junior lien category were up $488 million for third
quarter 2008 compared with third quarter 2007 and up $307 million linked quarter. A significant
part of the sequential increase reflected the change in the National Home Equity Group (Home
Equity) charge-off policy in second quarter 2008, which deferred an estimated $265 million of
charge-offs from second quarter 2008. The fact that property values continued to drop in many
markets directly impacted loss levels in this portfolio. Until residential real estate values
stabilize, the Home Equity portfolio is expected to produce higher than normal loss levels.
Commercial and commercial real estate charge-offs increased $213 million in third quarter 2008 from
third quarter 2007. Commercial and commercial real estate charge-offs include Business Direct
(primarily unsecured lines of credit to small businesses), which increased $98 million in third
quarter 2008 from a year ago and decreased $7 million linked quarter. The wholesale businesses
continued to weather the turbulent credit environment. Commercial credits related to residential
real estate and the consumer segment have shown some weakness, but remained within our
expectations.
The provision for credit losses was $2.5 billion in third quarter 2008, $3.0 billion in second
quarter 2008 and $892 million in third quarter 2007. The provision for third quarter 2008 included
an additional $500 million in credit reserve build, primarily related to higher projected losses in
several consumer credit businesses and commercial real estate, as well as growth in the wholesale
portfolios. We have provided $3.9 billion in excess of net charge-offs since the beginning of
fourth quarter 2007, including $2.5 billion in the first nine months of 2008. The allowance for
credit losses, which consists of the allowance for loan losses and the reserve for unfunded credit
commitments, was $8.03 billion (1.95% of total loans) at September 30, 2008, compared with $5.52
billion (1.44%) at December 31, 2007, and $4.02 billion (1.11%) at September 30, 2007.
Total nonaccrual loans were $5.00 billion (1.22% of total loans) at September 30, 2008, up from
$2.68 billion (0.70%) at December 31, 2007, and $2.09 billion (0.58%) at September 30, 2007,
reflecting economic conditions, primarily in portfolios affected by residential real estate
conditions and the associated impact on the consumer. A portion of the increase in nonaccrual loans
from a year ago continued to relate to our active loss mitigation strategies at Home Equity, Wells
Fargo Home Mortgage (Home Mortgage) and Wells Fargo Financial as we are aggressively working with
customers to keep them in their homes or find alternative solutions to their financial challenges.
Home builders, mortgage service providers, contractors, suppliers and others in the residential
real estate-related segments continued to be stressed during this credit
cycle. Additionally, as consumers cut back on discretionary spending, we are seeing some of the
commercial loan portfolios dependent on their spending weaken. The $2.9 billion increase in
6
nonaccrual loans at September 30, 2008, from a year ago included $681 million in Wells Fargo
Financial real estate, $578 million in Home Equity and $333 million in Home Mortgage.
Total nonperforming assets (NPAs) were $6.29 billion (1.53% of total loans) at September 30, 2008,
compared with $3.87 billion (1.01%) at December 31, 2007, and $3.18 billion (0.88%) at September
30, 2007. Foreclosed assets were $1,240 million at September 30, 2008, $1,184 million at December
31, 2007, and $1,090 million at September 30, 2007. Foreclosed assets, a component of total NPAs,
included $596 million, $535 million and $487 million of foreclosed real estate securing Government
National Mortgage Association (GNMA) loans at September 30, 2008, December 31, 2007 and September
30, 2007, respectively, consistent with regulatory reporting requirements. The foreclosed real
estate securing GNMA loans of $596 million represented 14 basis points of the ratio of NPAs to
loans at September 30, 2008. Both principal and interest for GNMA loans secured by the foreclosed
real estate are collectible because the GNMA loans are insured by the Federal Housing
Administration (FHA) or guaranteed by the Department of Veterans Affairs. Until conditions improve
in the residential real estate and liquidity markets, we will continue to hold more nonperforming
assets on our balance sheet as it is currently the most economic option available. Increases in
commercial nonperforming assets were also a direct result of the conditions in the residential real
estate markets and general consumer economy.
The Company and each of its subsidiary banks continued to remain well-capitalized. The ratio of
stockholders equity to total assets was 7.54% at September 30, 2008, 8.28% at December 31, 2007,
and 8.67% at September 30, 2007. Our total risk-based capital (RBC) ratio at September 30, 2008,
was 11.51% and our Tier 1 RBC ratio was 8.59%, exceeding the minimum regulatory guidelines of 8%
and 4%, respectively, for bank holding companies. Our total RBC ratio was 10.68% and 11.07% at
December 31, 2007 and September 30, 2007, respectively, and our Tier 1 RBC ratio was 7.59% and
8.17% for the same periods. Our Tier 1 leverage ratio was 7.54%, 6.83% and 7.26% at September 30,
2008, December 31, 2007 and September 30, 2007, respectively, exceeding the minimum regulatory
guideline of 3% for bank holding companies.
Current Accounting Developments
On January 1, 2008, we adopted the following new accounting pronouncements:
|
|
FSP FIN 39-1 Financial Accounting Standards Board (FASB) Staff Position on
Interpretation No. 39, Amendment of FASB Interpretation No. 39; |
|
|
EITF 06-4 Emerging Issues Task Force (EITF) Issue No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements; |
|
|
EITF 06-10 EITF Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements; and |
|
|
SAB 109 Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair
Value Through Earnings. |
On July 1, 2008, we adopted the following new accounting pronouncement:
|
|
FSP FAS 157-3 FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. |
7
On April 30, 2007, the FASB issued FSP FIN 39-1, which amends Interpretation No. 39 to permit a
reporting entity to offset the right to reclaim cash collateral (a receivable), or the obligation
to return cash collateral (a payable), against derivative instruments executed with the same
counterparty under the same master netting arrangement. The provisions of this FSP are effective
for the year beginning on January 1, 2008, with early adoption permitted. We adopted FSP FIN 39-1
on January 1, 2008, and it did not have a material effect on our consolidated financial statements.
On September 20, 2006, the FASB ratified the consensus reached by the EITF at its September 7,
2006, meeting with respect to EITF 06-4. On March 28, 2007, the FASB ratified the consensus reached
by the EITF at its March 15, 2007, meeting with respect to EITF 06-10. These pronouncements require
that for endorsement split-dollar life insurance arrangements and collateral split-dollar life
insurance arrangements where the employee is provided benefits in postretirement periods, the
employer should recognize the cost of providing that insurance over the employees service period
by accruing a liability for the benefit obligation. Additionally, for collateral assignment
split-dollar life insurance arrangements, an employer is required to recognize and measure an asset
based upon the nature and substance of the agreement. EITF 06-4 and EITF 06-10 are effective for
the year beginning on January 1, 2008, with early adoption permitted. We adopted EITF 06-4 and EITF
06-10 on January 1, 2008, and reduced beginning retained earnings for 2008 by $20 million (after
tax), primarily related to split-dollar life insurance arrangements from the acquisition of Greater
Bay Bancorp.
On November 5, 2007, the Securities and Exchange Commission (SEC) issued SAB 109, which provides
the staffs views on the accounting for written loan commitments recorded at fair value under U.S.
generally accepted accounting principles (GAAP). To make the staffs views consistent with current
authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB 105, Application of
Accounting Principles to Loan Commitments. Specifically, SAB 109 states the expected net future
cash flows associated with the servicing of a loan should be included in the measurement of all
written loan commitments that are accounted for at fair value through earnings. The provisions of
SAB 109, which we adopted on January 1, 2008, are applicable to written loan commitments recorded
at fair value that are entered into beginning on or after January 1, 2008. The implementation of
SAB 109 did not have a material impact on our results or the valuation of our loan commitments.
On October 10, 2008, the FASB issued Staff Position No. 157-3, which clarifies the application of
FAS 157, Fair Value Measurements, in an inactive market and illustrates how an entity would
determine fair value when the market for a financial asset is not active. The FSP states that an
entity should not automatically conclude that a particular transaction price is determinative of
fair value. In a dislocated market, judgment is required to evaluate whether individual
transactions are forced liquidations or distressed sales. When relevant observable market
information is not available, a valuation approach that incorporates managements judgments about
the assumptions that market participants would use in pricing the asset in a current sale
transaction would be acceptable. The FSP also indicates that quotes from brokers or pricing
services may be relevant inputs when measuring fair value, but are not necessarily determinative in
the absence of an active market for the asset. In weighing a broker quote as an input to a fair
value measurement, an entity should place less reliance on quotes that do not reflect the result of
market transactions. Further, the nature of the quote (for example, whether the quote is an
indicative price or a binding offer) should be considered when weighing the available evidence. The
FSP is effective immediately and applies to prior periods for which financial statements
8
have not been issued, including interim or annual periods ending on or before September 30, 2008.
Accordingly, we adopted the FSP prospectively, beginning July 1, 2008. The adoption of the FSP did
not have a material impact on our financial results or fair value determinations.
On October 14, 2008, the SECs Office of the Chief Accountant (OCA), clarified its views on the
application of other-than-temporary impairment guidance in FAS 115, Accounting for Certain
Investments in Debt and Equity Securities, to certain perpetual preferred securities. The OCA
concluded that it would not object to a registrant applying an other-than-temporary impairment
model to investments in perpetual preferred securities that possess significant debt-like
characteristics that is similar to the impairment model applied to debt securities, provided there
has been no evidence of deterioration in credit of the issuer. An entity is permitted to apply the
OCAs views in its financial statements included in filings subsequent to the date of the letter.
At September 30, 2008, based on the OCA guidance, we recorded no other-than-temporary impairment
for our investments in investment-grade perpetual preferred securities that had no evidence of
credit deterioration and that we have the intent and ability to hold to recovery.
On December 4, 2007, the FASB issued FAS 141R, Business Combinations. This statement requires an
acquirer to recognize the assets acquired (including loan receivables), the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date, to be measured at their
fair values as of that date, with limited exceptions. The acquirer is not permitted to recognize a
separate valuation allowance as of the acquisition date for loans and other assets acquired in a
business combination. The revised statement requires acquisition-related costs to be expensed
separately from the acquisition. It also requires restructuring costs that the acquirer expected,
but was not obligated to incur, to be expensed separately from the business combination. FAS 141R
shall be applied prospectively to business combinations completed on or after January 1, 2009.
Early adoption is not permitted.
On December 4, 2007, the FASB issued FAS 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. FAS 160 specifies that noncontrolling interests in a
subsidiary are to be treated as a separate component of equity and, as such, increases and
decreases in the parents ownership interest that leave control intact are accounted for as capital
transactions. It changes the way the consolidated income statement is presented by requiring that
an entitys consolidated net income include the amounts attributable to both the parent and the
noncontrolling interest. FAS 160 requires that a parent recognize a gain or loss in net income when
a subsidiary is deconsolidated. This statement should be applied prospectively to all
noncontrolling interests, including any that arose before the effective date. The statement is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Early adoption is not permitted. We are currently evaluating the impact that FAS
160 may have on our consolidated financial statements.
On February 20, 2008, the FASB issued Staff Position FAS No. 140-3, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. FSP FAS 140-3 requires an initial
transfer of a financial asset and a repurchase financing that was entered into contemporaneously or
in contemplation of the initial transfer to be evaluated as a linked transaction under FAS 140
unless certain criteria are met, including that the transferred asset must be readily obtainable in
the marketplace. The provisions of this FSP are effective beginning on January 1, 2009, and shall
be applied prospectively to initial transfers and repurchase
9
financings for which the initial transfer is executed on or after this date. Early application is
not permitted.
On March 19, 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133. FAS 161 changes the disclosure requirements
for derivative instruments and hedging activities. It requires enhanced disclosures about how and
why an entity uses derivatives, how derivatives and related hedged items are accounted for, and how
derivatives and hedged items affect an entitys financial position, performance, and cash flows.
The provisions of FAS 161 are effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early adoption encouraged. Because FAS 161
amends only the disclosure requirements for derivative instruments and hedged items, the adoption
of FAS 161 will not affect our consolidated financial results.
On September 12, 2008, the FASB issued Staff Position No. 133-1 and FIN 45-4, Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP
is intended to improve disclosures about credit derivatives by requiring more information about the
potential adverse effects of changes in credit risk on the financial position, financial
performance, and cash flows of the sellers of credit derivatives. It amends FAS 133, Accounting for
Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit
derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others (FIN 45), to require an additional disclosure about
the current status of the payment/performance risk of a guarantee. The provisions of the FSP that
amend FAS 133 and FIN 45 are effective for reporting periods (annual or interim) ending after
November 15, 2008. Because the FSP amends only the disclosure requirements for credit derivatives
and certain guarantees, the adoption of the FSP will not affect our consolidated financial results.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are fundamental to understanding our results of operations and
financial condition, because some accounting policies require that we use estimates and assumptions
that may affect the value of our assets or liabilities and financial results. Five of these
policies are critical because they require management to make difficult, subjective and complex
judgments about matters that are inherently uncertain and because it is likely that materially
different amounts would be reported under different conditions or using different assumptions.
These policies govern the allowance for credit losses, the valuation of residential mortgage
servicing rights (MSRs) and financial instruments, pension accounting and income taxes. Management
has reviewed and approved these critical accounting policies and has discussed these policies with
the Audit and Examination Committee of the Board of Directors. These policies are described in
Financial Review Critical Accounting Policies and Note 1 (Summary of Significant Accounting
Policies) to Financial Statements in our 2007 Form 10-K.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We use fair value measurements to record fair value adjustments to certain financial instruments
and determine fair value disclosures. (See our 2007 Form 10-K for the complete critical accounting
policy related to fair value of financial instruments.)
10
Approximately 22% of total assets ($134.7 billion) at September 30, 2008, and 22% of total assets
($123.8 billion) at December 31, 2007, consisted of financial instruments recorded at fair value on
a recurring basis. At September 30, 2008, approximately 74% of these financial instruments used
valuation methodologies involving market-based or market-derived information, collectively Level 1
and 2 measurements, to measure fair value. The remaining 26% of these financial instruments (6% of
total assets) were measured using model-based techniques, with primarily unobservable inputs.
Our financial assets valued using Level 3 measurements consisted of MSRs, asset-backed securities
collateralized by auto leases and cash reserves, certain mortgages held for sale (MHFS) and certain
debt securities available for sale. While MSRs and our asset-backed securities collateralized by
auto leases and cash reserves do not have observable market data and therefore are classified as
Level 3, significant judgment may be required to determine whether certain other assets measured at
fair value are included in Level 2 or Level 3. For example, we closely monitor market conditions
involving assets that have become less actively traded, such as MHFS, non-agency mortgage-backed
securities and certain other debt securities, including collateralized debt obligations. If fair
value measurement is based upon recent observable market activity of such assets or comparable
assets (other than forced or distressed transactions) that occur in sufficient volume, and do not
require significant adjustment using unobservable inputs, those assets are classified as Level 2;
if not, they are classified as Level 3. Making this assessment requires significant judgment. In
third quarter 2008, $456 million of debt securities available for sale and, in the first nine
months of 2008, $2.2 billion of debt securities available for sale and $4.3 billion of mortgages
held for sale were transferred from Level 2 to Level 3 because significant inputs to the valuation
became unobservable, largely due to reduced levels of market liquidity.
We use prices from independent pricing services and to a lesser extent, indicative (non-binding)
quotes from independent brokers, to measure fair value of our investment securities. See Note 13
(Fair Values of Assets and Liabilities) for the amount and fair value hierarchy classification of
those securities. We validate prices received from pricing services or brokers using a variety of
methods, including, but not limited to, comparison to secondary pricing services, corroboration of
pricing by reference to other independent market data such as secondary broker quotes and relevant
benchmark indices, and review of pricing by Company personnel familiar with market liquidity and
other market related conditions. Generally, we do not adjust prices received from pricing services
or brokers, unless it is evident the fair value measurement is not consistent with FAS 157.
Approximately 2% of total liabilities ($10.8 billion) at September 30, 2008, and 0.5% ($2.6
billion) at December 31, 2007, consisted of financial instruments recorded at fair value on a
recurring basis. Liabilities valued using Level 3 measurements were $550 million at September 30,
2008. See Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report
for additional detail for third quarter 2008. See Note 8 (Securitizations and Variable Interest
Entities) to Financial Statements in our 2007 Form 10-K for a detailed discussion of the key
assumptions used to determine the fair value of our MSRs and the related sensitivity analysis.
11
EARNINGS PERFORMANCE
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30 |
, |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Average |
|
|
Yields |
/ |
|
income |
/ |
|
Average |
|
|
Yields |
/ |
|
income |
/ |
(in millions) |
|
balance |
|
|
rates |
|
|
expense |
|
|
balance |
|
|
rates |
|
|
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold, securities purchased under
resale agreements and other short-term investments |
|
$ |
3,463 |
|
|
|
2.09 |
% |
|
$ |
18 |
|
|
$ |
4,219 |
|
|
|
5.01 |
% |
|
$ |
53 |
|
Trading assets |
|
|
4,838 |
|
|
|
3.72 |
|
|
|
46 |
|
|
|
4,043 |
|
|
|
3.69 |
|
|
|
37 |
|
Debt securities available for sale (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
|
1,141 |
|
|
|
3.99 |
|
|
|
11 |
|
|
|
871 |
|
|
|
4.27 |
|
|
|
10 |
|
Securities of U.S. states and political subdivisions |
|
|
7,211 |
|
|
|
6.65 |
|
|
|
124 |
|
|
|
5,021 |
|
|
|
7.31 |
|
|
|
90 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
50,528 |
|
|
|
5.83 |
|
|
|
731 |
|
|
|
52,681 |
|
|
|
6.03 |
|
|
|
794 |
|
Private collateralized mortgage obligations |
|
|
21,358 |
|
|
|
5.82 |
|
|
|
346 |
|
|
|
4,026 |
|
|
|
6.22 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
71,886 |
|
|
|
5.83 |
|
|
|
1,077 |
|
|
|
56,707 |
|
|
|
6.05 |
|
|
|
856 |
|
Other debt securities (4) |
|
|
12,622 |
|
|
|
7.17 |
|
|
|
248 |
|
|
|
5,822 |
|
|
|
7.67 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities available for sale (4) |
|
|
92,860 |
|
|
|
6.06 |
|
|
|
1,460 |
|
|
|
68,421 |
|
|
|
6.26 |
|
|
|
1,070 |
|
Mortgages held for sale (5) |
|
|
24,990 |
|
|
|
6.31 |
|
|
|
394 |
|
|
|
35,552 |
|
|
|
6.59 |
|
|
|
586 |
|
Loans held for sale (5) |
|
|
677 |
|
|
|
6.95 |
|
|
|
12 |
|
|
|
960 |
|
|
|
7.79 |
|
|
|
19 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
100,688 |
|
|
|
5.92 |
|
|
|
1,496 |
|
|
|
79,713 |
|
|
|
8.24 |
|
|
|
1,655 |
|
Other real estate mortgage |
|
|
43,616 |
|
|
|
5.60 |
|
|
|
615 |
|
|
|
32,641 |
|
|
|
7.42 |
|
|
|
610 |
|
Real estate construction |
|
|
19,715 |
|
|
|
4.82 |
|
|
|
238 |
|
|
|
16,914 |
|
|
|
7.94 |
|
|
|
338 |
|
Lease financing |
|
|
7,250 |
|
|
|
5.48 |
|
|
|
100 |
|
|
|
6,026 |
|
|
|
5.78 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
171,269 |
|
|
|
5.69 |
|
|
|
2,449 |
|
|
|
135,294 |
|
|
|
7.90 |
|
|
|
2,690 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
76,197 |
|
|
|
6.64 |
|
|
|
1,265 |
|
|
|
63,929 |
|
|
|
7.26 |
|
|
|
1,162 |
|
Real estate 1-4 family junior lien mortgage |
|
|
75,379 |
|
|
|
6.36 |
|
|
|
1,206 |
|
|
|
73,476 |
|
|
|
8.19 |
|
|
|
1,515 |
|
Credit card |
|
|
19,948 |
|
|
|
12.19 |
|
|
|
609 |
|
|
|
16,261 |
|
|
|
13.68 |
|
|
|
557 |
|
Other revolving credit and installment |
|
|
54,104 |
|
|
|
8.64 |
|
|
|
1,175 |
|
|
|
54,165 |
|
|
|
9.79 |
|
|
|
1,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
225,628 |
|
|
|
7.52 |
|
|
|
4,255 |
|
|
|
207,831 |
|
|
|
8.75 |
|
|
|
4,570 |
|
Foreign |
|
|
7,306 |
|
|
|
10.28 |
|
|
|
188 |
|
|
|
7,558 |
|
|
|
11.62 |
|
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (5) |
|
|
404,203 |
|
|
|
6.79 |
|
|
|
6,892 |
|
|
|
350,683 |
|
|
|
8.48 |
|
|
|
7,481 |
|
Other |
|
|
2,126 |
|
|
|
4.64 |
|
|
|
24 |
|
|
|
1,396 |
|
|
|
5.01 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
$ |
533,157 |
|
|
|
6.57 |
|
|
|
8,846 |
|
|
$ |
465,274 |
|
|
|
7.92 |
|
|
|
9,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
|
$ |
5,483 |
|
|
|
0.87 |
|
|
|
12 |
|
|
$ |
5,160 |
|
|
|
3.20 |
|
|
|
42 |
|
Market rate and other savings |
|
|
166,710 |
|
|
|
1.18 |
|
|
|
495 |
|
|
|
149,194 |
|
|
|
2.89 |
|
|
|
1,085 |
|
Savings certificates |
|
|
37,192 |
|
|
|
2.57 |
|
|
|
240 |
|
|
|
41,080 |
|
|
|
4.38 |
|
|
|
454 |
|
Other time deposits |
|
|
7,930 |
|
|
|
2.59 |
|
|
|
53 |
|
|
|
10,948 |
|
|
|
5.10 |
|
|
|
140 |
|
Deposits in foreign offices |
|
|
49,054 |
|
|
|
1.78 |
|
|
|
219 |
|
|
|
41,326 |
|
|
|
4.77 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
266,369 |
|
|
|
1.52 |
|
|
|
1,019 |
|
|
|
247,708 |
|
|
|
3.55 |
|
|
|
2,218 |
|
Short-term borrowings |
|
|
83,458 |
|
|
|
2.35 |
|
|
|
492 |
|
|
|
36,415 |
|
|
|
5.06 |
|
|
|
464 |
|
Long-term debt |
|
|
103,745 |
|
|
|
3.43 |
|
|
|
892 |
|
|
|
94,686 |
|
|
|
5.33 |
|
|
|
1,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
453,572 |
|
|
|
2.11 |
|
|
|
2,403 |
|
|
|
378,809 |
|
|
|
4.14 |
|
|
|
3,949 |
|
Portion of noninterest-bearing funding sources |
|
|
79,585 |
|
|
|
|
|
|
|
|
|
|
|
86,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources |
|
$ |
533,157 |
|
|
|
1.78 |
|
|
|
2,403 |
|
|
$ |
465,274 |
|
|
|
3.37 |
|
|
|
3,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin and net interest income on
a taxable-equivalent basis (6) |
|
|
|
|
|
|
4.79 |
% |
|
$ |
6,443 |
|
|
|
|
|
|
|
4.55 |
% |
|
$ |
5,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
11,024 |
|
|
|
|
|
|
|
|
|
|
$ |
11,579 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
13,531 |
|
|
|
|
|
|
|
|
|
|
|
12,008 |
|
|
|
|
|
|
|
|
|
Other |
|
|
56,482 |
|
|
|
|
|
|
|
|
|
|
|
52,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets |
|
$ |
81,037 |
|
|
|
|
|
|
|
|
|
|
$ |
76,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING FUNDING SOURCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
87,095 |
|
|
|
|
|
|
|
|
|
|
$ |
88,991 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
25,762 |
|
|
|
|
|
|
|
|
|
|
|
26,413 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
47,765 |
|
|
|
|
|
|
|
|
|
|
|
47,320 |
|
|
|
|
|
|
|
|
|
Noninterest-bearing funding sources used to
fund earning assets |
|
|
(79,585 |
) |
|
|
|
|
|
|
|
|
|
|
(86,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noninterest-bearing funding sources |
|
$ |
81,037 |
|
|
|
|
|
|
|
|
|
|
$ |
76,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
614,194 |
|
|
|
|
|
|
|
|
|
|
$ |
541,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our average prime rate was 5.00% and 8.18% for the quarters ended September 30, 2008 and
2007, respectively, and 5.43% and 8.23% for the nine months ended September 30, 2008 and
2007, respectively. The average three-month London Interbank Offered Rate (LIBOR) was 2.91%
and 5.44% for the quarters ended September 30, 2008 and 2007, respectively, and 2.98% and
5.39% for the nine months ended September 30, 2008 and 2007, respectively. |
(2) |
|
Interest rates and amounts include the effects of hedge and risk management activities
associated with the respective asset and liability categories. |
(3) |
|
Yields are based on amortized cost balances computed on a
settlement date basis. |
(4) |
|
Includes certain preferred securities. |
(5) |
|
Nonaccrual loans and related income are included in their respective loan categories. |
(6) |
|
Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain
loans and securities. The federal statutory tax rate was 35% for the periods presented. |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
, |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Average |
|
|
Yields |
/ |
|
income |
/ |
|
Average |
|
|
Yields |
/ |
|
income |
/ |
|
|
balance |
|
|
rates |
|
|
expense |
|
|
balance |
|
|
rates |
|
|
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,734 |
|
|
|
2.59 |
% |
|
$ |
72 |
|
|
$ |
4,972 |
|
|
|
5.09 |
% |
|
$ |
189 |
|
|
|
|
4,960 |
|
|
|
3.57 |
|
|
|
133 |
|
|
|
4,306 |
|
|
|
4.70 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,055 |
|
|
|
3.88 |
|
|
|
30 |
|
|
|
821 |
|
|
|
4.29 |
|
|
|
27 |
|
|
|
|
6,848 |
|
|
|
6.88 |
|
|
|
362 |
|
|
|
4,318 |
|
|
|
7.36 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,448 |
|
|
|
5.93 |
|
|
|
1,854 |
|
|
|
39,656 |
|
|
|
6.08 |
|
|
|
1,794 |
|
|
|
|
21,589 |
|
|
|
5.92 |
|
|
|
1,010 |
|
|
|
3,945 |
|
|
|
6.32 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,037 |
|
|
|
5.92 |
|
|
|
2,864 |
|
|
|
43,601 |
|
|
|
6.10 |
|
|
|
1,979 |
|
|
|
|
12,351 |
|
|
|
6.78 |
|
|
|
670 |
|
|
|
5,564 |
|
|
|
7.57 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,291 |
|
|
|
6.11 |
|
|
|
3,926 |
|
|
|
54,304 |
|
|
|
6.32 |
|
|
|
2,554 |
|
|
|
|
26,417 |
|
|
|
6.11 |
|
|
|
1,211 |
|
|
|
34,664 |
|
|
|
6.52 |
|
|
|
1,694 |
|
|
|
|
686 |
|
|
|
6.66 |
|
|
|
34 |
|
|
|
873 |
|
|
|
7.78 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,697 |
|
|
|
6.29 |
|
|
|
4,509 |
|
|
|
74,934 |
|
|
|
8.28 |
|
|
|
4,641 |
|
|
|
|
40,351 |
|
|
|
5.91 |
|
|
|
1,788 |
|
|
|
31,663 |
|
|
|
7.44 |
|
|
|
1,762 |
|
|
|
|
19,288 |
|
|
|
5.29 |
|
|
|
763 |
|
|
|
16,404 |
|
|
|
7.97 |
|
|
|
978 |
|
|
|
|
7,055 |
|
|
|
5.63 |
|
|
|
298 |
|
|
|
5,698 |
|
|
|
5.82 |
|
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162,391 |
|
|
|
6.05 |
|
|
|
7,358 |
|
|
|
128,699 |
|
|
|
7.92 |
|
|
|
7,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,064 |
|
|
|
6.77 |
|
|
|
3,761 |
|
|
|
58,920 |
|
|
|
7.31 |
|
|
|
3,228 |
|
|
|
|
75,220 |
|
|
|
6.78 |
|
|
|
3,820 |
|
|
|
70,998 |
|
|
|
8.19 |
|
|
|
4,348 |
|
|
|
|
19,256 |
|
|
|
12.11 |
|
|
|
1,749 |
|
|
|
15,262 |
|
|
|
13.89 |
|
|
|
1,590 |
|
|
|
|
54,949 |
|
|
|
8.84 |
|
|
|
3,637 |
|
|
|
53,725 |
|
|
|
9.77 |
|
|
|
3,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,489 |
|
|
|
7.74 |
|
|
|
12,967 |
|
|
|
198,905 |
|
|
|
8.79 |
|
|
|
13,092 |
|
|
|
|
7,382 |
|
|
|
10.72 |
|
|
|
592 |
|
|
|
7,197 |
|
|
|
11.72 |
|
|
|
631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393,262 |
|
|
|
7.10 |
|
|
|
20,917 |
|
|
|
334,801 |
|
|
|
8.52 |
|
|
|
21,353 |
|
|
|
|
1,995 |
|
|
|
4.55 |
|
|
|
68 |
|
|
|
1,351 |
|
|
|
5.11 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
515,345 |
|
|
|
6.81 |
|
|
|
26,361 |
|
|
$ |
435,271 |
|
|
|
8.00 |
|
|
|
26,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,399 |
|
|
|
1.31 |
|
|
|
53 |
|
|
$ |
4,991 |
|
|
|
3.23 |
|
|
|
121 |
|
|
|
|
162,792 |
|
|
|
1.45 |
|
|
|
1,765 |
|
|
|
145,135 |
|
|
|
2.83 |
|
|
|
3,070 |
|
|
|
|
38,907 |
|
|
|
3.23 |
|
|
|
940 |
|
|
|
39,784 |
|
|
|
4.40 |
|
|
|
1,308 |
|
|
|
|
6,163 |
|
|
|
2.87 |
|
|
|
133 |
|
|
|
8,284 |
|
|
|
5.06 |
|
|
|
313 |
|
|
|
|
49,192 |
|
|
|
2.13 |
|
|
|
785 |
|
|
|
33,988 |
|
|
|
4.73 |
|
|
|
1,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262,453 |
|
|
|
1.87 |
|
|
|
3,676 |
|
|
|
232,182 |
|
|
|
3.46 |
|
|
|
6,016 |
|
|
|
|
67,714 |
|
|
|
2.51 |
|
|
|
1,274 |
|
|
|
23,084 |
|
|
|
5.01 |
|
|
|
865 |
|
|
|
|
101,668 |
|
|
|
3.71 |
|
|
|
2,825 |
|
|
|
91,569 |
|
|
|
5.22 |
|
|
|
3,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431,835 |
|
|
|
2.40 |
|
|
|
7,775 |
|
|
|
346,835 |
|
|
|
4.03 |
|
|
|
10,460 |
|
|
|
|
83,510 |
|
|
|
|
|
|
|
|
|
|
|
88,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
515,345 |
|
|
|
2.01 |
|
|
|
7,775 |
|
|
$ |
435,271 |
|
|
|
3.21 |
|
|
|
10,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.80 |
% |
|
$ |
18,586 |
|
|
|
|
|
|
|
4.79 |
% |
|
$ |
15,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,182 |
|
|
|
|
|
|
|
|
|
|
$ |
11,698 |
|
|
|
|
|
|
|
|
|
|
|
|
13,289 |
|
|
|
|
|
|
|
|
|
|
|
11,575 |
|
|
|
|
|
|
|
|
|
|
|
|
54,901 |
|
|
|
|
|
|
|
|
|
|
|
50,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,372 |
|
|
|
|
|
|
|
|
|
|
$ |
73,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,676 |
|
|
|
|
|
|
|
|
|
|
$ |
89,673 |
|
|
|
|
|
|
|
|
|
|
|
|
28,268 |
|
|
|
|
|
|
|
|
|
|
|
25,726 |
|
|
|
|
|
|
|
|
|
|
|
|
47,938 |
|
|
|
|
|
|
|
|
|
|
|
46,758 |
|
|
|
|
|
|
|
|
|
|
|
|
(83,510 |
) |
|
|
|
|
|
|
|
|
|
|
(88,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,372 |
|
|
|
|
|
|
|
|
|
|
$ |
73,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
594,717 |
|
|
|
|
|
|
|
|
|
|
$ |
508,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
NET INTEREST INCOME
Net interest income is the interest earned on debt securities, loans (including yield-related loan
fees) and other interest-earning assets minus the interest paid for deposits and long-term and
short-term debt. The net interest margin is the average yield on earning assets minus the average
interest rate paid for deposits and our other sources of funding. Net interest income and the net
interest margin are presented on a taxable-equivalent basis to consistently reflect income from
taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
Net interest income on a taxable-equivalent basis increased 21% to $6.44 billion in third quarter
2008 from $5.32 billion in third quarter 2007. The increase was driven by 15% earning asset growth
combined with an increase in the net interest margin to 4.79%, up 24 basis points from a year ago.
The improvement in the net interest margin reflects our focus on higher risk-adjusted yields on new
loans and securities, a decline in funding costs, our disciplined deposit pricing, and the high
percentage of checking and transaction accounts in our core deposit mix. Net interest income on a
taxable-equivalent basis increased $3.0 billion to $18.59 billion for the first nine months of 2008
from $15.59 billion for the same period a year ago. For the first nine months of 2008, growth in
net interest income has largely offset the impact of the credit crisis on charge-offs.
Average earning assets increased $67.9 billion (15%) to $533.2 billion in third quarter 2008 from
$465.3 billion in third quarter 2007. Average loans increased to $404.2 billion in third quarter
2008 from $350.7 billion a year ago. Average mortgages held for sale decreased to $25.0 billion in
third quarter 2008 from $35.6 billion a year ago. Average debt securities available for sale
increased to $92.9 billion in third quarter 2008 from $68.4 billion a year ago.
Core deposits are an important contributor to growth in net interest income and the net interest
margin, and are a low-cost source of funding. Core deposits are noninterest-bearing deposits,
interest-bearing checking, savings certificates, market rate and other savings, and certain foreign
deposits (Eurodollar sweep balances). Average core deposits rose 5% to $320.1 billion for third
quarter 2008 from $306.1 billion for third quarter 2007 and funded 79% and 87% of average loans in
third quarter 2008 and 2007, respectively. Total average retail core deposits, which exclude
Wholesale Banking core deposits and retail mortgage escrow deposits, grew $13.2 billion (6%) to
$234.1 billion for third quarter 2008 from a year ago. Average mortgage escrow deposits were $21.2
billion for third quarter 2008, down $1.2 billion from a year ago. Average savings certificates of
deposits decreased to $37.2 billion in third quarter 2008 from $41.1 billion a year ago and average
noninterest-bearing checking accounts and other core deposit categories (interest-bearing checking
and market rate and other savings) increased to $259.3 billion in third quarter 2008 from $243.3
billion a year ago. Total average interest-bearing deposits increased to $266.4 billion in third
quarter 2008 from $247.7 billion a year ago.
The previous table presents the individual components of net interest income and the net interest
margin.
14
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
ended Sept. 30 |
, |
|
% |
|
|
ended Sept. 30 |
, |
|
% |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Service charges on deposit accounts |
|
$ |
839 |
|
|
$ |
837 |
|
|
|
|
% |
|
$ |
2,387 |
|
|
$ |
2,262 |
|
|
|
6 |
% |
Trust and investment fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust, investment and IRA fees |
|
|
549 |
|
|
|
573 |
|
|
|
(4 |
) |
|
|
1,674 |
|
|
|
1,720 |
|
|
|
(3 |
) |
Commissions and all other fees |
|
|
189 |
|
|
|
204 |
|
|
|
(7 |
) |
|
|
589 |
|
|
|
627 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trust and investment fees |
|
|
738 |
|
|
|
777 |
|
|
|
(5 |
) |
|
|
2,263 |
|
|
|
2,347 |
|
|
|
(4 |
) |
|
|
|
601 |
|
|
|
561 |
|
|
|
7 |
|
|
|
1,747 |
|
|
|
1,548 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash network fees |
|
|
48 |
|
|
|
51 |
|
|
|
(6 |
) |
|
|
143 |
|
|
|
146 |
|
|
|
(2 |
) |
Charges and fees on loans |
|
|
266 |
|
|
|
246 |
|
|
|
8 |
|
|
|
765 |
|
|
|
737 |
|
|
|
4 |
|
All other fees |
|
|
238 |
|
|
|
269 |
|
|
|
(12 |
) |
|
|
654 |
|
|
|
832 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other fees |
|
|
552 |
|
|
|
566 |
|
|
|
(2 |
) |
|
|
1,562 |
|
|
|
1,715 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing income, net |
|
|
525 |
|
|
|
797 |
|
|
|
(34 |
) |
|
|
1,019 |
|
|
|
968 |
|
|
|
5 |
|
Net gains (losses) on mortgage loan origination/
sales activities |
|
|
276 |
|
|
|
(61 |
) |
|
NM |
|
|
|
1,419 |
|
|
|
1,069 |
|
|
|
33 |
|
All other |
|
|
91 |
|
|
|
87 |
|
|
|
5 |
|
|
|
282 |
|
|
|
265 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking |
|
|
892 |
|
|
|
823 |
|
|
|
8 |
|
|
|
2,720 |
|
|
|
2,302 |
|
|
|
18 |
|
|
|
|
102 |
|
|
|
171 |
|
|
|
(40 |
) |
|
|
365 |
|
|
|
550 |
|
|
|
(34 |
) |
Insurance |
|
|
439 |
|
|
|
329 |
|
|
|
33 |
|
|
|
1,493 |
|
|
|
1,160 |
|
|
|
29 |
|
Net gains (losses) from trading activities |
|
|
65 |
|
|
|
(43 |
) |
|
NM |
|
|
|
684 |
|
|
|
482 |
|
|
|
42 |
|
Net gains on debt securities available for sale |
|
|
84 |
|
|
|
160 |
|
|
|
(48 |
) |
|
|
316 |
|
|
|
149 |
|
|
|
112 |
|
Net gains (losses) from equity investments |
|
|
(507 |
) |
|
|
173 |
|
|
NM |
|
|
|
(148 |
) |
|
|
512 |
|
|
NM |
|
All other |
|
|
193 |
|
|
|
219 |
|
|
|
(12 |
) |
|
|
593 |
|
|
|
672 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,998 |
|
|
$ |
4,573 |
|
|
|
(13 |
) |
|
$ |
13,982 |
|
|
$ |
13,699 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM - Not meaningful
We earn trust, investment and IRA fees from managing and administering assets, including mutual
funds, corporate trust, personal trust, employee benefit trust and agency assets. At September 30,
2008, these assets totaled $1.17 trillion, up 4% from $1.12 trillion at September 30, 2007. Trust,
investment and IRA fees are primarily based on a tiered scale relative to the market value of the
assets under management or administration. These fees declined 4% in third quarter 2008 from a year
ago, while the S&P 500® declined 24% over the same period.
We also receive commissions and other fees for providing services to full-service and discount
brokerage customers. Generally, these fees include transactional commissions, which are based on
the number of transactions executed at the customers direction, or asset-based fees, which are
based on the market value of the customers assets. At September 30, 2008 and 2007, brokerage
balances totaled $123 billion and $132 billion, respectively.
Card fees increased 7% to $601 million in third quarter 2008 from $561 million in third quarter
2007, due to continued growth in new accounts and higher credit and debit card transaction volume.
Purchase volume on these cards was up 8% from a year ago and average card balances were up 26%.
15
Mortgage banking noninterest income was $892 million in third quarter 2008, compared with $823
million in third quarter 2007. In addition to servicing fees, net servicing income includes both
changes in the fair value of MSRs during the period as well as changes in the value of derivatives
(economic hedges) used to hedge the MSRs. Net servicing income for third quarter 2008 included a
$75 million net MSRs valuation gain that was recorded to earnings ($546 million fair value loss
offsetting a $621 million economic hedging gain) and for third quarter 2007 included a $562 million
net MSRs valuation gain ($638 million fair value loss offsetting a $1.20 billion economic hedging
gain). Our portfolio of loans serviced for others was $1.46 trillion at September 30, 2008, up 6%
from $1.38 trillion at September 30, 2007. At September 30, 2008, the ratio of MSRs to related
loans serviced for others was 1.34%.
Net gains on mortgage loan origination/sales activities were $276 million in third quarter 2008,
compared with $61 million in net losses in third quarter 2007. The year-over-year increase
reflected wider margins and decreased losses from spread widening caused by changes in liquidity.
Residential real estate originations totaled $51 billion in third quarter 2008 and $68 billion in
third quarter 2007. (For additional detail, see Asset/Liability and Market Risk Management
Mortgage Banking Interest Rate and Market Risk, Note 8 (Mortgage Banking Activities) and Note 13
(Fair Values of Assets and Liabilities) to Financial Statements in this Report.)
The 1-4 family first mortgage unclosed pipeline was $41 billion at September 30, 2008, $43 billion
at December 31, 2007, and $45 billion at September 30, 2007.
Insurance revenue was up 33% in third quarter 2008 from third quarter 2007, due to customer growth,
higher crop insurance revenues and the fourth quarter 2007 acquisition of ABD Insurance.
Income from trading activities was $65 million and $684 million in the third quarter and first nine
months of 2008, respectively. Income from trading activities was a loss of $43 million and a gain
of $482 million in the third quarter and first nine months of 2007, respectively. Income from
trading activities and all other income collectively included a $106 million charge in third
quarter 2008 related to unsecured counterparty exposure on derivative contracts with Lehman
Brothers. Net investment losses (debt and equity) totaled $423 million for third quarter 2008 and
included previously announced other-than-temporary impairment charges of $646 million for Fannie
Mae, Freddie Mac and Lehman Brothers, an additional $247 million of other-than-temporary
write-downs and $470 million of net realized investment gains. Net gains on debt securities
available for sale were $84 million and $316 million in the third quarter and first nine months of
2008, and $160 million and $149 million, respectively, in the same periods of the prior year. Net
gains (losses) from equity investments were $(507) million and $(148) million in the third quarter
and first nine months of 2008, respectively, and $173 million and $512 million in the same periods
of 2007. (For additional detail, see Balance Sheet Analysis Securities Available for Sale in
this Report.)
16
NONINTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
ended Sept. 30 |
, |
|
% |
|
|
ended Sept. 30 |
, |
|
% |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
|
$ |
2,078 |
|
|
$ |
1,933 |
|
|
|
8 |
% |
|
$ |
6,092 |
|
|
$ |
5,707 |
|
|
|
7 |
% |
Incentive compensation |
|
|
555 |
|
|
|
802 |
|
|
|
(31 |
) |
|
|
2,005 |
|
|
|
2,444 |
|
|
|
(18 |
) |
Employee benefits |
|
|
486 |
|
|
|
518 |
|
|
|
(6 |
) |
|
|
1,666 |
|
|
|
1,764 |
|
|
|
(6 |
) |
Equipment |
|
|
302 |
|
|
|
295 |
|
|
|
2 |
|
|
|
955 |
|
|
|
924 |
|
|
|
3 |
|
Net occupancy |
|
|
402 |
|
|
|
398 |
|
|
|
1 |
|
|
|
1,201 |
|
|
|
1,132 |
|
|
|
6 |
|
Operating leases |
|
|
90 |
|
|
|
136 |
|
|
|
(34 |
) |
|
|
308 |
|
|
|
437 |
|
|
|
(30 |
) |
Outside professional services |
|
|
206 |
|
|
|
222 |
|
|
|
(7 |
) |
|
|
589 |
|
|
|
649 |
|
|
|
(9 |
) |
Outside data processing |
|
|
122 |
|
|
|
123 |
|
|
|
(1 |
) |
|
|
353 |
|
|
|
355 |
|
|
|
(1 |
) |
Travel and entertainment |
|
|
113 |
|
|
|
113 |
|
|
|
|
|
|
|
330 |
|
|
|
340 |
|
|
|
(3 |
) |
Contract services |
|
|
88 |
|
|
|
103 |
|
|
|
(15 |
) |
|
|
300 |
|
|
|
334 |
|
|
|
(10 |
) |
Operating losses |
|
|
63 |
|
|
|
225 |
|
|
|
(72 |
) |
|
|
46 |
|
|
|
369 |
|
|
|
(88 |
) |
Insurance |
|
|
144 |
|
|
|
81 |
|
|
|
78 |
|
|
|
511 |
|
|
|
357 |
|
|
|
43 |
|
Advertising and promotion |
|
|
96 |
|
|
|
108 |
|
|
|
(11 |
) |
|
|
285 |
|
|
|
312 |
|
|
|
(9 |
) |
Postage |
|
|
83 |
|
|
|
88 |
|
|
|
(6 |
) |
|
|
256 |
|
|
|
260 |
|
|
|
(2 |
) |
Telecommunications |
|
|
78 |
|
|
|
79 |
|
|
|
(1 |
) |
|
|
238 |
|
|
|
241 |
|
|
|
(1 |
) |
Stationery and supplies |
|
|
53 |
|
|
|
54 |
|
|
|
(2 |
) |
|
|
159 |
|
|
|
159 |
|
|
|
|
|
Security |
|
|
45 |
|
|
|
42 |
|
|
|
7 |
|
|
|
134 |
|
|
|
129 |
|
|
|
4 |
|
Core deposit intangibles |
|
|
32 |
|
|
|
28 |
|
|
|
14 |
|
|
|
94 |
|
|
|
81 |
|
|
|
16 |
|
All other |
|
|
481 |
|
|
|
323 |
|
|
|
49 |
|
|
|
1,317 |
|
|
|
930 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,517 |
|
|
$ |
5,671 |
|
|
|
(3 |
) |
|
$ |
16,839 |
|
|
$ |
16,924 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense in third quarter 2008 was down 3% from the prior year, reflecting continued
emphasis on expense management and disciplined efforts to restrict expenses to revenue-creating
opportunities. In the last 12 months, we opened 71 retail banking stores, including 12 stores this
quarter, and converted 21 stores from acquisitions. The efficiency ratio was 53.2% in third quarter
2008, even after taking into account the other-than-temporary impairment charges on debt and
equity investment securities.
INCOME TAX EXPENSE
Our effective income tax rate was 30.8% for third quarter 2008, down from 34.0% for third quarter
2007, primarily due to a lower level of pre-tax income and higher amounts of tax credits and
tax-exempt income in 2008. For the first nine months of 2008, our effective tax rate was 32.9%,
compared with 32.6% for the first nine months of 2007.
17
OPERATING SEGMENT RESULTS
We have three lines of business for management reporting: Community Banking, Wholesale Banking and
Wells Fargo Financial. For a more complete description of our operating segments, including
additional financial information and the underlying management accounting process, see Note 17
(Operating Segments) to Financial Statements in this Report. To reflect the realignment of our
corporate trust business from Community Banking into Wholesale Banking in first quarter 2008,
results for prior periods have been revised.
Community Bankings net income increased 10% to $1.59 billion in third quarter 2008 from $1.45
billion in third quarter 2007. Net income decreased 4% to $4.25 billion in the first nine months of
2008 from $4.45 billion in the first nine months of 2007. Revenue increased 14% to $7.20 billion in
third quarter 2008 from $6.32 billion a year ago, driven by strong balance sheet growth and strong
fee income growth in retail banking and mortgage. Net interest income increased 27% to $4.21
billion in third quarter 2008 from $3.30 billion a year ago. Average loans were up 12% to $220.5
billion in third quarter 2008 from $197.4 billion a year ago and average core deposits were up 5%
to $254.9 billion in third quarter 2008 from $243.0 billion a year ago with a portion of the growth
due to acquisitions. The provision for credit losses increased to $1.43 billion in third
quarter 2008 from $446 million a year ago, with over half of the increase related to Home Equity.
Noninterest income was $3.00 billion in third quarter 2008, flat compared with $3.02 billion a year
ago, and included $486 million of other-than-temporary impairment charges. This was partially
offset by strong retail banking fee revenue growth, including growth in card fees, deposit service
charges and mortgage banking. Noninterest expense decreased 7% to $3.45 billion in third quarter
2008 from $3.71 billion a year ago, driven by continued expense management, partially offset by
investments in technology, distribution and sales staff.
Wholesale Bankings net income decreased 86% to $83 million in third quarter 2008 from $591 million
in third quarter 2007, including other-than-temporary impairment charges on debt and equity
securities. Net income decreased 40% to $1.12 billion in the first nine months of 2008 from $1.85
billion in the first nine months of 2007. Revenue decreased 17% to $1.78 billion in third quarter
2008 from $2.16 billion a year ago, including impairment charges of $407 million. Net interest
income increased 15% to $1.05 billion for third quarter 2008 from $918 million a year ago driven by
strong loan and deposit growth. Average loans increased 33% to $116.2 billion in third quarter 2008
from $87.5 billion a year ago, with double-digit increases across nearly all wholesale lending
businesses. Average total deposits were $84 billion, up 10% from a year ago, all in
interest-bearing balances. The increase in the provision for credit losses to $294 million in third
quarter 2008 from $19 million a year ago included $115 million from higher net charge-offs and an
additional $178 million in credit reserve build. Noninterest income decreased 41% to $728 million
in third quarter 2008 from a year ago, primarily due to impairment charges. Noninterest income from
foreign exchange, loan fees, institutional brokerage and insurance all increased. Noninterest
expense increased 13% to $1.39 billion in third quarter 2008 from $1.23 billion a year ago, mainly
due to higher personnel-related costs, including expenses due to the fourth quarter 2007
acquisition of ABD Insurance and higher agent commissions in the crop insurance business due to
higher commodity prices.
Wells Fargo Financial reported a net loss of $33 million in third quarter 2008 compared with net
income of $135 million in third quarter 2007, reflecting higher credit costs, including a $162
million credit reserve build as a result of continued softening in the real estate, auto and
18
credit card markets. For the first nine months of 2008, net income was $26 million, compared with $403
million for the same period a year ago. Revenue was $1.39 billion in third quarter 2008, flat from
a year ago. Net interest income increased 6% to $1.12 billion in third quarter 2008 from $1.06
billion a year ago due to 3% growth in average loans to $67.5 billion in third quarter 2008 from
$65.8 billion a year ago. The increase in the provision for credit losses to $770 million in third
quarter 2008 from $427 million a year ago included $181 million from higher net charge-offs and an
additional $162 million in credit reserve build. Noninterest expense decreased $51 million, or 7%,
to $677 million in third quarter 2008 from $728 million a year ago primarily due to lower lease
expenses from the run off of the auto lease portfolio.
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Our securities available for sale consists 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 primarily includes very liquid,
high-quality federal agency debt, as well as privately issued mortgage-backed securities. At
September 30, 2008, we held $84.6 billion of debt securities available for sale, with net
unrealized losses of $4.1 billion, compared with $70.2 billion at December 31, 2007, with net
unrealized gains of $775 million. We also held $2.3 billion of marketable equity securities
available for sale at September 30, 2008, and $2.8 billion at December 31, 2007, with net
unrealized losses of $739 million and $95 million for the same periods, respectively. The increase
in net unrealized losses for the total securities available-for-sale portfolio to $4.9 billion at
September 30, 2008, from net unrealized gains of $680 million at December 31, 2007, was largely due
to wider spreads on mortgage-backed securities and an increase in market yields in the first nine
months of 2008.
We conduct other-than-temporary impairment analysis on a quarterly basis. The initial indication of
other-than-temporary impairment 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 of its industry, and our
ability and intent to hold the investment for a period of time sufficient to allow for any
anticipated recovery. For marketable equity securities, we also consider the issuers financial
condition, capital strength, and near-term prospects. For debt securities and for perpetual
preferred securities that are treated as debt securities for the purpose of other-than-temporary
analysis, we also consider the cause of the price decline (general level of interest rates and
industry- and issuer-specific factors), the issuers financial condition, near-term prospects and
current ability to make future payments in a timely manner, the issuers ability to service debt,
and any change in agencies ratings at evaluation date from acquisition date and any likely
imminent action.
Based on our evaluation at September 30, 2008, we recorded other-than-temporary impairment of $893
million in third quarter 2008, including $646 million related to investments in Fannie Mae, Freddie
Mac and Lehman Brothers. See Note 4 (Securities Available for Sale) to Financial Statements in this
Report for additional information.
19
The weighted-average expected maturity of debt securities available for sale was 6.0 years at
September 30, 2008. Since 77% of this portfolio is mortgage-backed securities, the expected
remaining maturity may differ from contractual maturity because borrowers may have the right to
prepay obligations before the underlying mortgages mature. The estimated effect of a 200 basis
point increase or decrease in interest rates on the fair value and the expected remaining maturity
of the mortgage-backed securities available for sale is shown in the following table.
MORTGAGE-BACKED SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Net unrealized |
|
|
Remaining |
|
(in billions) |
|
value |
|
|
gain (loss) |
|
|
maturity |
|
|
|
|
$ |
64.9 |
|
|
$ |
(2.8 |
) |
|
4.4 yrs. |
At September 30, 2008, assuming a 200 basis point: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in interest rates |
|
|
59.2 |
|
|
|
(8.5 |
) |
|
6.1 yrs. |
Decrease in interest rates |
|
|
69.2 |
|
|
|
1.5 |
|
|
2.2 yrs. |
|
LOAN PORTFOLIO
A
discussion of average loan balances is included in Earnings Performance Net Interest Income
on page 14 and a comparative schedule of average loan balances is included in the table on page 12;
quarter-end balances are in Note 5 (Loans and Allowance for Credit Losses) to Financial Statements
in this Report.
Total loans at September 30, 2008, were $411.0 billion, up $48.1 billion (13%) from $362.9 billion
at September 30, 2007. Commercial and commercial real estate loans were $176.0 billion at September
30, 2008, up $36.8 billion (26%) from $139.2 billion a year ago. Consumer loans were $228.1 billion
at September 30, 2008, up $12.4 billion (6%) from $215.8 billion a year ago. Mortgages held for
sale were $18.7 billion at September 30, 2008, down $11.0 billion from $29.7 billion a year ago.
DEPOSITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
|
|
$ |
89,446 |
|
|
$ |
84,348 |
|
|
$ |
82,365 |
|
Interest-bearing checking |
|
|
5,398 |
|
|
|
5,277 |
|
|
|
4,376 |
|
Market rate and other savings |
|
|
172,542 |
|
|
|
153,924 |
|
|
|
153,116 |
|
Savings certificates |
|
|
38,909 |
|
|
|
42,708 |
|
|
|
41,863 |
|
Foreign deposits (1) |
|
|
27,781 |
|
|
|
25,474 |
|
|
|
22,133 |
|
|
|
|
|
|
|
|
|
|
|
Core deposits |
|
|
334,076 |
|
|
|
311,731 |
|
|
|
303,853 |
|
Other time deposits |
|
|
9,052 |
|
|
|
3,654 |
|
|
|
2,448 |
|
Other foreign deposits |
|
|
10,446 |
|
|
|
29,075 |
|
|
|
28,655 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
353,574 |
|
|
$ |
344,460 |
|
|
$ |
334,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects Eurodollar sweep balances included in core deposits. |
Core deposits of $334.1 billion at September 30, 2008, increased $30.2 billion (10%) from $303.9
billion a year ago. Average core deposits increased $13.9 billion (5%) to $320.1 billion in third
quarter 2008 from third quarter 2007, predominantly due to growth in market rate and other savings.
20
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
In the ordinary course of business, we engage in financial transactions that are not recorded in
the balance sheet, or may be recorded in the balance sheet in amounts that are different than 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, or (4) optimize capital, and are accounted for in accordance with U.S. GAAP.
Almost all of our off-balance sheet arrangements result from securitizations. Based on market
conditions, from time to time we may securitize home mortgage loans and other financial assets,
including commercial mortgages. We normally structure loan securitizations as sales, in accordance
with FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities a replacement of FASB Statement No. 125. This involves the transfer of financial
assets to certain qualifying special-purpose entities (QSPEs) that we are not required to
consolidate. We also enter into certain contractual obligations. For additional information on
off-balance sheet arrangements and other contractual obligations see
Financial Review
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations in our 2007 Form 10-K and
Note 11 (Guarantees and Legal Actions) to Financial Statements in this Report.
RISK MANAGEMENT
CREDIT RISK MANAGEMENT PROCESS
Our credit risk management process provides for decentralized management and accountability by our
lines of business. Our overall credit process includes comprehensive credit policies, judgmental or
statistical credit underwriting, frequent and detailed risk measurement and modeling, extensive
credit training programs and a continual loan review and audit process. In addition, regulatory
examiners review and perform detailed tests of our credit underwriting, loan administration and
allowance processes. We continually evaluate and modify our credit policies to address unacceptable
levels of risk as they are identified. Beginning in 2007 and continuing in 2008, we updated our
credit policies related to residential real estate lending to reflect the deteriorating economic
conditions in the industry and decisions were made to exit certain underperforming indirect
channels. In addition to these steps we have made adjustments to the credit criteria across the
breadth of our consumer business segments to eliminate originations with unacceptable levels of
risk given the challenges and uncertainty in the credit market.
Nonaccrual Loans and Other Assets
The
following table shows the comparative data for nonaccrual loans and other assets. We generally
place loans on nonaccrual status when:
|
|
the full and timely collection of interest or principal becomes uncertain; |
|
|
they are 90 days (120 days with respect to real estate 1-4 family first and junior lien
mortgages and auto loans) past due for interest or principal (unless both well-secured and in
the process of collection); or |
|
|
part of the principal balance has been charged off. |
21
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2007 Form 10-K
describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
846 |
|
|
$ |
432 |
|
|
$ |
399 |
|
Other real estate mortgage |
|
|
296 |
|
|
|
128 |
|
|
|
133 |
|
Real estate construction |
|
|
736 |
|
|
|
293 |
|
|
|
188 |
|
Lease financing |
|
|
69 |
|
|
|
45 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
1,947 |
|
|
|
898 |
|
|
|
758 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage (1) |
|
|
1,975 |
|
|
|
1,272 |
|
|
|
886 |
|
Real estate 1-4 family junior lien mortgage |
|
|
780 |
|
|
|
280 |
|
|
|
238 |
|
Other revolving credit and installment |
|
|
232 |
|
|
|
184 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
2,987 |
|
|
|
1,736 |
|
|
|
1,284 |
|
Foreign |
|
|
61 |
|
|
|
45 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (2) |
|
|
4,995 |
|
|
|
2,679 |
|
|
|
2,088 |
|
As a percentage of total loans |
|
|
1.22 |
% |
|
|
0.70 |
% |
|
|
0.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans (3) |
|
|
596 |
|
|
|
535 |
|
|
|
487 |
|
Other |
|
|
644 |
|
|
|
649 |
|
|
|
603 |
|
Real estate and other nonaccrual investments (4) |
|
|
56 |
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans and other assets |
|
$ |
6,291 |
|
|
$ |
3,868 |
|
|
$ |
3,183 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total loans |
|
|
1.53 |
% |
|
|
1.01 |
% |
|
|
0.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes nonaccrual mortgages held for sale. |
(2) |
|
Includes impaired loans of $1,550 million, $469 million and $394 million at September 30,
2008, December 31, 2007, and September 30, 2007, respectively. See Note 5 to Financial
Statements in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial
Statements in our 2007 Form 10-K for further information on impaired loans. |
(3) |
|
Consistent with regulatory reporting requirements, foreclosed real estate securing 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 FHA or
guaranteed by the Department of Veterans Affairs. |
(4) |
|
Includes real estate investments (contingent interest loans accounted for as investments)
that would be classified as nonaccrual if these assets were recorded as loans. |
Nonaccrual loans increased $2.9 billion to $5.0 billion at September 30, 2008, from $2.1 billion at
September 30, 2007, reflecting economic conditions, primarily in portfolios affected by residential
real estate conditions and the associated impact on the consumer. A portion of the increase in
nonaccrual loans from a year ago continued to relate to our active loss mitigation strategies at
Home Equity, Home Mortgage and Wells Fargo Financial as we are aggressively working with customers
to keep them in their homes or find alternative solutions to their financial challenges. Home
builders, mortgage service providers, contractors, suppliers and others in the residential real
estate-related segments continued to be stressed during this credit cycle. Additionally, as
consumers cut back on discretionary spending, we are seeing some of the commercial loan portfolios
dependent on their spending weaken. The $2.9 billion increase from a year ago included $681 million
in Wells Fargo Financial real estate, $578 million in Home Equity and $333 million in Home
Mortgage. Nonaccrual real estate 1-4 family loans included approximately $251 million of loans at
September 30, 2008, that have been modified. Our policy requires six consecutive months of payments
on modified loans before they are returned to accrual status. Until conditions improve in the
residential real estate and liquidity markets, we
22
will continue to hold more nonperforming assets on our balance sheet as it is currently the most
economic option available. As a result, foreclosed asset balances increased $150 million to $1,240
million at September 30, 2008, from a year ago, including an increase of $138 million from Home
Mortgage. Increases in commercial nonperforming assets were also a direct result of the conditions
in the residential real estate markets and general consumer economy.
We expect that the amount of nonaccrual loans will change due to portfolio growth, economic
conditions, portfolio seasoning, routine problem loan recognition and resolution through
collections, sales or charge-offs. (See Financial Review Allowance for Credit Losses in this
Report for additional discussion.) The performance of any one loan can be affected by external
factors, such as economic or market conditions, or factors affecting a particular borrower.
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.
The total of loans 90 days or more past due and still accruing was $8,439 million, $6,393 million
and $5,526 million at September 30, 2008, December 31, 2007, and September 30, 2007, respectively.
The total included $6,295 million, $4,834 million and $4,263 million for the same periods,
respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools and similar
loans whose repayments are insured by the FHA or guaranteed by the Department of Veterans Affairs.
The table below reflects loans 90 days or more past due and still accruing excluding the
insured/guaranteed GNMA advances.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA AND SIMILAR LOANS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
46 |
|
|
$ |
32 |
|
|
$ |
14 |
|
Other real estate mortgage |
|
|
111 |
|
|
|
10 |
|
|
|
22 |
|
Real estate construction |
|
|
146 |
|
|
|
24 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
303 |
|
|
|
66 |
|
|
|
46 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage (1) |
|
|
429 |
|
|
|
286 |
|
|
|
225 |
|
Real estate 1-4 family junior lien mortgage |
|
|
257 |
|
|
|
201 |
|
|
|
127 |
|
Credit card |
|
|
498 |
|
|
|
402 |
|
|
|
303 |
|
Other revolving credit and installment |
|
|
617 |
|
|
|
552 |
|
|
|
520 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
1,801 |
|
|
|
1,441 |
|
|
|
1,175 |
|
Foreign |
|
|
40 |
|
|
|
52 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,144 |
|
|
$ |
1,559 |
|
|
$ |
1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage loans held for sale 90 days or more past due and still accruing. |
23
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 managements estimate of credit losses inherent in the loan
portfolio at the balance sheet date. We assume that our allowance for credit losses as a percentage
of charge-offs and nonaccrual loans will change at different points in time based on credit
performance, loan mix and collateral values. The detail of the changes in the allowance for credit
losses, including charge-offs and recoveries by loan category, is in Note 5 (Loans and Allowance
for Credit Losses) to Financial Statements in this Report.
Net charge-offs for third quarter 2008 were $2.0 billion (1.96% of average total loans outstanding,
annualized), compared with $1.5 billion (1.55%) for second quarter 2008 and $892 million (1.01%)
for third quarter 2007. A significant part of the sequential increase reflected the change in the
Home Equity charge-off policy in second quarter 2008, which deferred an estimated $265 million of
charge-offs from second quarter 2008. Total provision expense in third quarter 2008 was $2.5
billion, including a $500 million credit reserve build, primarily related to higher projected
losses in several consumer credit businesses and commercial real estate, as well as growth in the
wholesale portfolios. The $1.1 billion increase in net credit losses from a year ago included $488
million in the real estate 1-4 family junior lien category. Net credit losses in the commercial
category increased $213 million (a major portion from Business Direct) from a year ago.
Because of our responsible lending and risk management practices, we have largely avoided many of
the products others in the mortgage industry have offered. We have not offered certain mortgage
products such as negative amortizing mortgages or option ARMs. We continually evaluate and modify
our credit policies to address unacceptable levels of risk as they are identified. In the past
year, for example, we have tightened underwriting standards as we believed appropriate. Home
Mortgage closed its nonprime wholesale channel early in third quarter 2007, after closing its
nonprime correspondent channel in second quarter 2007. In addition, rates were increased for
non-conforming mortgage loans during third quarter 2007 reflecting the reduced liquidity in the
capital markets. As a result of these underwriting and policy changes, as well as overall market
changes, Home Mortgage has shifted its loan origination production mix to significantly more
government and conforming loans than a year ago, when production included a higher level of
non-conforming and nonprime loans.
Although credit quality in Wells Fargo Financials real estate-secured lending business has
deteriorated, we have not experienced the level of credit degradation that many nonprime lenders
have because of our disciplined underwriting practices. Wells Fargo Financial has continued its
long-standing practice not to use brokers or correspondents in its U.S. debt consolidation
business. We endeavor to ensure that there is a tangible benefit to the borrower before we make a
loan.
The deterioration in segments of the Home Equity portfolio required a targeted approach to managing
these assets. We segregated into a liquidating portfolio all Home Equity loans generated through
the wholesale channel not behind a Wells Fargo first mortgage, and all home equity loans acquired
through correspondents. While the $10.7 billion of loans in this liquidating portfolio represented
about 3% of total loans outstanding at September 30, 2008, these loans experienced a significant
portion of the credit losses in our $83.9 billion Home Equity portfolio,
24
with an annualized loss rate of 7.59% for third quarter 2008, compared with 2.43% for the remaining
core portfolio. In this challenging real estate market it is necessary to have more time to work
with our customers to identify ways to help resolve their financial difficulties and keep them in
their homes. In order to provide this additional time to assist our customers, beginning April 1,
2008, we changed our Home Equity charge-off policy, consistent with Federal Financial Institutions
Examination Council (FFIEC) guidelines. The core portfolio consisted of $73.3 billion of loans in
the Home Equity portfolio at September 30, 2008. The following table includes the credit attributes
of these two portfolios.
HOME EQUITY PORTFOLIO (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
two payments |
|
|
Annualized loss rate |
|
|
|
Outstanding balances |
|
|
or more past due |
|
|
Quarter ended |
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
|
Dec. 31 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
$ |
4,146 |
|
|
$ |
4,387 |
|
|
|
5.18 |
% |
|
|
2.94 |
% |
|
|
11.88 |
% |
|
|
7.34 |
% |
Florida |
|
|
534 |
|
|
|
582 |
|
|
|
6.74 |
|
|
|
4.98 |
|
|
|
14.57 |
|
|
|
7.08 |
|
Arizona |
|
|
255 |
|
|
|
274 |
|
|
|
5.02 |
|
|
|
2.67 |
|
|
|
10.45 |
|
|
|
5.84 |
|
Texas |
|
|
199 |
|
|
|
221 |
|
|
|
0.96 |
|
|
|
0.83 |
|
|
|
1.64 |
|
|
|
0.78 |
|
Minnesota |
|
|
130 |
|
|
|
141 |
|
|
|
3.29 |
|
|
|
3.18 |
|
|
|
6.25 |
|
|
|
4.09 |
|
Other |
|
|
5,390 |
|
|
|
6,296 |
|
|
|
2.68 |
|
|
|
2.00 |
|
|
|
3.72 |
|
|
|
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,654 |
|
|
|
11,901 |
|
|
|
3.89 |
|
|
|
2.50 |
|
|
|
7.59 |
|
|
|
4.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
27,640 |
|
|
|
25,991 |
|
|
|
2.50 |
|
|
|
1.63 |
|
|
|
3.61 |
|
|
|
1.27 |
|
Florida |
|
|
2,536 |
|
|
|
2,614 |
|
|
|
5.20 |
|
|
|
2.92 |
|
|
|
6.28 |
|
|
|
2.57 |
|
Arizona |
|
|
3,814 |
|
|
|
3,821 |
|
|
|
2.52 |
|
|
|
1.54 |
|
|
|
3.21 |
|
|
|
0.90 |
|
Texas |
|
|
2,735 |
|
|
|
2,842 |
|
|
|
1.19 |
|
|
|
1.03 |
|
|
|
0.41 |
|
|
|
0.19 |
|
Minnesota |
|
|
4,465 |
|
|
|
4,668 |
|
|
|
1.21 |
|
|
|
1.08 |
|
|
|
1.24 |
|
|
|
0.88 |
|
Other |
|
|
32,105 |
|
|
|
32,393 |
|
|
|
1.55 |
|
|
|
1.43 |
|
|
|
1.35 |
|
|
|
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
73,295 |
|
|
|
72,329 |
|
|
|
2.05 |
|
|
|
1.52 |
|
|
|
2.43 |
|
|
|
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
83,949 |
|
|
$ |
84,230 |
|
|
|
2.29 |
|
|
|
1.66 |
|
|
|
3.09 |
|
|
|
1.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the impact of the April 1, 2008, change in the Home Equity charge-off policy. |
(2) |
|
Annualized loss rate for December 31, 2007, data is based on loss rate for month of December
2007. |
Other consumer portfolios performed as expected during the quarter. Net charge-offs in the real
estate 1-4 family first mortgage portfolio increased $123 million in third quarter 2008 from third
quarter 2007, including an increase of $53 million in Wells Fargo Financials residential real
estate portfolio. The increase in mortgage loss rates was consistent with the continued decline in
home prices. Credit card net charge-offs increased $185 million from a year ago due to the effect
of the current economic environment on consumers. Loss levels continued to increase in this credit
cycle as the impacts from lower disposable income and unemployment weigh on the consumer. Net
charge-offs in the auto portfolio in third quarter 2008 were up $58 million from a year ago and up
$74 million linked quarter. While we remain optimistic about the positive impacts of process
improvements and underwriting changes we made in the auto business in prior quarters, as well as
our robust loss mitigation efforts, the economic environment continued to stress the consumer and
influence loan performance.
25
Because of our Wholesale Banking business model, focused primarily on long-term relationships with
business customers, we have not participated significantly in certain higher-risk activities. We
have not sponsored any SIVs. On the investment side of this business, we operate within disciplined
credit standards and regularly monitor and manage our securities portfolios. We have not
participated in the underwriting of any of the large leveraged buyouts that were covenant lite,
and we have minimal direct exposure to hedge funds. Similarly, we have not made a market in
subprime securities.
Commercial and commercial real estate net charge-offs increased $213 million to $338 million in
third quarter 2008 from $125 million in third quarter 2007. Commercial and commercial real estate
charge-offs include Business Direct (primarily unsecured lines of credit to small businesses),
which increased $98 million in third quarter from a year ago and decreased $7 million linked
quarter.
We believe the allowance for credit losses of $8.03 billion was adequate to cover credit losses
inherent in the loan portfolio, including unfunded credit commitments, at September 30, 2008. 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 Financial Review
Critical Accounting Policies Allowance for Credit Losses in our 2007 Form 10-K.) Therefore, we
cannot provide assurance that, in any particular period, we will not have sizeable credit losses in
relation to the amount reserved. We may need to significantly adjust the allowance for credit
losses, considering current factors at the time, including economic or market conditions and
ongoing internal and external examination processes. Our process for determining the adequacy of
the allowance for credit losses is discussed in Financial
Review Critical Accounting Policies
Allowance for Credit Losses and Note 6 (Loans and Allowance for Credit Losses) to Financial
Statements in our 2007 Form 10-K.
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); |
26
|
|
short-term and long-term market interest rates may change by different amounts (for
example, the shape of the yield curve may affect new loan yields and funding costs
differently); or |
|
|
the remaining maturity of various assets or liabilities may shorten or lengthen as interest
rates change (for example, if long-term mortgage interest rates decline sharply,
mortgage-backed securities held in the securities available-for-sale portfolio may prepay
significantly earlier than anticipated which could reduce portfolio income). |
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage
origination volume, the fair value of MSRs and other financial instruments, the value of the
pension liability and other items affecting earnings.
We assess interest rate risk by comparing our most likely earnings plan with various earnings
simulations using many interest rate scenarios that differ in the direction of interest rate
changes, the degree of change over time, the speed of change and the projected shape of the yield
curve. For example, as of September 30, 2008, our most recent simulation indicated estimated
earnings at risk of approximately 5.6% of our most likely earnings plan over the next 12 months
using a scenario in which both the federal funds rate and the 10-year Constant Maturity Treasury
bond yield rise to 5.50%. Simulation estimates depend on, and will change with, the size and mix of
our actual and projected balance sheet at the time of each simulation. Due to timing differences
between the quarterly valuation of MSRs and the eventual impact of interest rates on mortgage
banking volumes, earnings at risk in any particular quarter could be higher than the average
earnings at risk over the 12-month simulation period, depending on the path of interest rates and
on our hedging strategies for MSRs. See Mortgage Banking Interest Rate and Market Risk below.
We use exchange-traded and over-the-counter interest rate derivatives to hedge our interest rate
exposures. The credit risk amount and estimated net fair value of these derivatives as of September
30, 2008, and December 31, 2007, are presented in Note 12 (Derivatives) to Financial Statements in
this Report. We use derivatives for asset/liability management in three main ways:
|
|
to convert a major portion of our long-term fixed-rate debt, which we issue to finance the
Company, from fixed-rate payments to floating-rate payments by entering into receive-fixed
swaps; |
|
|
to convert the cash flows from selected asset and/or liability instruments/portfolios from
fixed-rate payments to floating-rate payments or vice versa; and |
|
|
to hedge our mortgage origination pipeline, funded mortgage loans, MSRs and other interests
held using interest rate swaps, swaptions, futures, forwards and options. |
Mortgage Banking Interest Rate and Market Risk
We originate, fund and service mortgage loans, which subjects us to various risks, including
credit, liquidity and interest rate risks. Based on market conditions and other factors, we may
reduce unwanted credit and liquidity risks by selling or securitizing some or all of the long-term
fixed-rate mortgage loans and ARMs we originate. On the other hand, we may hold originated ARMs and
fixed-rate mortgage loans in our loan portfolio as an investment for our growing base of core
deposits. We determine whether the loans will be held for investment or held for sale at the time
of commitment. We may subsequently change our intent to hold loans for investment and sell some or
all of our ARMs or fixed-rate mortgage loans as part of our corporate
27
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.
Interest rate and market risk can be substantial in the mortgage business. Changes in interest
rates may potentially impact total origination and servicing fees, the value of our residential
MSRs measured at fair value, the value of mortgages held for sale (MHFS) and the associated income
and loss reflected in mortgage banking noninterest income, the income and expense associated with
instruments (economic hedges) used to hedge changes in the fair value of residential MSRs, new
prime residential MHFS, other interests held and the value of derivative loan commitments (interest
rate locks) extended to mortgage applicants.
Interest rates impact the amount and timing of origination and servicing fees because consumer
demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage
interest rates. Typically, a decline in mortgage interest rates will lead to an increase in
mortgage originations and fees and may also lead to an increase in servicing fee income, depending
on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes
for consumer behavior to fully react to interest rate changes, as well as the time 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, we elected to measure MHFS at fair value prospectively for new
prime MHFS originations for which an active secondary market and readily available market prices
generally exist to reliably support fair value pricing models used for these loans. Loan
origination fees on these loans are recorded when earned, and related direct loan origination costs
and fees are recognized when incurred. We also elected to measure at fair value certain of our
other interests held related to residential loan sales and securitizations. We believe that the
election for new prime MHFS and other interests held (which are now hedged with free-standing
derivatives (economic hedges) along with our MSRs) will reduce certain timing differences and
better match changes in the value of these assets with changes in the value of derivatives used as
economic hedges for these assets. During third quarter 2008, in response to continued secondary
market illiquidity, we continued to originate certain prime non-agency loans to be held for
investment for the foreseeable future rather than to be held for sale.
Under FAS
156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No.
140, we elected to use the fair value measurement method to initially measure and carry our
residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are
recorded at fair value at the time we sell or securitize the related mortgage loans. The carrying
value of MSRs reflects changes in fair value at the end of each quarter and changes are included in
net servicing income, a component of mortgage banking noninterest income. If the fair value of the
MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is
recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs and
periodically benchmark our estimates to independent appraisals. While 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. Assumptions affected
28
include prepayment speed, expected returns and potential risks on the servicing asset portfolio,
the value of escrow balances and other servicing valuation elements impacted by interest rates.
A decline in interest rates generally increases the propensity for refinancing, reduces the
expected duration of the servicing portfolio and therefore reduces the estimated fair value of
MSRs. This reduction in fair value causes a charge to income (net of any gains on free-standing
derivatives (economic hedges) used to hedge MSRs). We may choose not to fully hedge all of the
potential decline in the value of our MSRs resulting from a decline in interest rates because the
potential increase in origination/servicing fees in that scenario provides a partial natural
business hedge. An increase in interest rates generally reduces the propensity for refinancing,
increases 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 third quarter 2008, a $546 million decrease in the fair
value of our MSRs and $621 million of gains on the free-standing derivatives used to hedge the
MSRs, resulted in a net gain of $75 million.
Hedging the various sources of interest rate risk in mortgage banking is a complex process that
requires sophisticated modeling and constant monitoring. While we attempt to balance these various
aspects of the mortgage business, there are several potential risks to earnings:
|
|
MSRs valuation changes associated with interest rate changes are recorded in earnings
immediately within the accounting period in which those interest rate changes occur, whereas
the impact of those same changes in interest rates on origination and servicing fees occur
with a lag and over time. Thus, the mortgage business could be protected from adverse changes
in interest rates over a period of time on a cumulative basis but still display large
variations in income from one accounting period to the next. |
|
|
The degree to which the natural business hedge offsets changes in MSRs valuations is
imperfect, varies at different points in the interest rate cycle, and depends not just on the
direction of interest rates but on the pattern of quarterly interest rate changes. |
|
|
Origination volumes, the valuation of MSRs and hedging results and associated costs are
also impacted by many factors. Such factors include the mix of new business between ARMs and
fixed-rated mortgages, the relationship between short-term and long-term interest rates, the
degree of volatility in interest rates, the relationship between mortgage interest rates and
other interest rate markets, and other interest rate factors. Many of these factors are hard
to predict and we may not be able to directly or perfectly hedge their effect. |
|
|
While our hedging activities are designed to balance our mortgage banking interest rate
risks, the financial instruments we use may not perfectly correlate with the values and income
being hedged. For example, the change in the value of ARMs production held for sale from
changes in mortgage interest rates may or may not be fully offset by Treasury and LIBOR
index-based financial instruments used as economic hedges for such ARMs. |
The total carrying value of our residential and commercial MSRs was $19.6 billion at September 30,
2008, and $17.2 billion at December 31, 2007. The weighted-average note rate on the owned servicing
portfolio was 5.98% at September 30, 2008, and 6.01% at December 31, 2007. Our total MSRs were
1.34% of mortgage loans serviced for others at September 30, 2008, compared with 1.20% at December
31, 2007.
As part of our mortgage banking activities, we enter into commitments to fund residential mortgage
loans at specified times in the future. A mortgage loan commitment is an interest rate
29
lock that binds us to lend funds to a potential borrower at a specified interest rate and within a
specified period of time, generally up to 60 days after inception of the rate lock. These loan
commitments are derivative loan commitments if the loans that will result from the exercise of the
commitments will be held for sale. These derivative loan commitments are recognized at fair value
in the balance sheet with changes in their fair values recorded as part of mortgage banking
noninterest income. For interest rate lock commitments issued prior to January 1, 2008, we recorded
a zero fair value for the derivative loan commitment at inception consistent with SAB 105.
Effective January 1, 2008, we were required by SAB 109 to include, at inception and during the life
of the loan commitment, the expected net future cash flows related to the associated servicing of
the loan as part of the fair value measurement of derivative loan commitments. The implementation
of SAB 109 did not have a material impact on our results or the valuation of our loan commitments.
Changes subsequent to inception are based on changes in fair value of the underlying loan resulting
from the exercise of the commitment and changes in the probability that the loan will not fund
within the terms of the commitment (referred to as a fall-out factor). The value of the underlying
loan commitment is affected primarily by changes in interest rates and the passage of time.
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 options contracts as
economic hedges against the potential decreases in the values of the loans. We expect that these
derivative financial instruments will experience changes in fair value that will either fully or
partially offset the changes in fair value of the derivative loan commitments. However, changes in
investor demand, such as concerns about credit risk, can also cause changes in the spread
relationships between underlying loan value and the derivative financial instruments that cannot be
hedged.
Market
Risk Trading Activities
From a market risk perspective, our net income is exposed to changes in interest rates, credit
spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The
primary purpose of our trading businesses is to accommodate customers in the management of their
market price risks. Also, we take positions based on market expectations or to benefit from price
differences between financial instruments and markets, subject to risk limits established and
monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions
and derivatives used in our trading businesses are carried at fair value. The Institutional Risk
Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated
net fair value of all customer accommodation derivatives at September 30, 2008, and December 31,
2007, are included in Note 12 (Derivatives) to Financial Statements in this Report. Open, at risk
positions for all trading business are monitored by Corporate ALCO.
The standardized approach for monitoring and reporting market risk for the trading activities
consists of value-at-risk (VAR) metrics complemented with factor analysis and stress testing. VAR
measures the worst expected loss over a given time interval and within a given confidence interval.
We measure and report daily VAR at a 99% confidence interval based on actual changes in rates and
prices over the past 250 trading days. The analysis captures all financial
30
instruments that are
considered trading positions. The average one-day VAR throughout third
quarter 2008 was $25 million, with a lower bound of $18 million and an upper bound of $52 million.
Market
Risk Equity Markets
We are directly and indirectly affected by changes in the equity markets. We make and manage direct
equity investments in start-up businesses, emerging growth companies, management buy-outs,
acquisitions and corporate recapitalizations. We also invest in non-affiliated funds that make
similar private equity investments. These private equity investments are made within capital
allocations approved by management and the Board of Directors (the Board). The Boards policy is to
review business developments, key risks and historical returns for the private equity investment
portfolio at least annually. Management reviews 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
investments cash flows and capital needs, the viability of its business model and our exit
strategy. Private equity investments totaled $2.21 billion at September 30, 2008, and $2.02 billion
at December 31, 2007.
We also have marketable equity securities in the securities available-for-sale portfolio, including
common stock, perpetual preferred securities, and securities relating to our venture capital
activities. We manage these securities within investment risk limits approved by management and the
Board and monitored by Corporate ALCO. Gains and losses on these securities are recognized in net
income when realized and periodically include other-than-temporary impairment charges, which are
recorded when determined. The fair value of marketable equity securities was $2.31 billion and cost
was $3.05 billion at September 30, 2008, and $2.78 billion and $2.88 billion, respectively, at
December 31, 2007. (For additional detail, see Balance
Sheet Analysis Securities Available for
Sale in this Report.)
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.
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
31
purchased under resale agreements and other short-term investments. Asset liquidity is further
enhanced by our ability to sell or securitize loans in secondary markets and to pledge loans to
access secured borrowing facilities through the Federal Home Loan Banks, the Federal Reserve Board,
or the U.S. Treasury.
Core customer deposits have historically provided a sizeable source of relatively stable and
low-cost funds. Additional funding is provided by long-term debt (including trust preferred
securities), other foreign deposits and short-term borrowings (federal funds purchased, securities
sold under repurchase agreements, commercial paper and other short-term borrowings).
Liquidity is also available through our ability to raise funds in a variety of domestic and
international money and capital markets. We access capital markets for long-term funding through
issuances of registered debt securities, private placements and asset-backed secured funding.
Rating agencies base their ratings on many quantitative and qualitative factors, including capital
adequacy, liquidity, asset quality, business mix, and level and quality of earnings. Moodys
Investors Service rates Wells Fargo Bank, N.A. as Aaa, its highest investment grade, and rates
the Companys senior debt as Aa1. Standard & Poors Ratings Services rates Wells Fargo Bank, N.A.
as AAA and the Companys senior debt rating as AA+. Wells Fargo Bank, N.A. is the only U.S.
bank to have the highest possible credit rating from both Moodys and S&P.
Parent. Under SEC rules, the Parent is classified as a well-known seasoned issuer, which allows
it to file a registration statement that does not have a limit on issuance capacity. Well-known
seasoned issuers generally include those companies with a public float of common equity of at
least $700 million or those companies that have issued at least $1 billion in aggregate principal
amount of non-convertible securities, other than common equity, in the last three years. In June
2006, the Parents registration statement with the SEC for issuance of senior and subordinated
notes, preferred stock and other securities became effective. However, the Parents ability to
issue debt and other securities under this registration statement is limited by the debt issuance
authority granted by the Board. The Parent is currently authorized by the Board to issue $30
billion in outstanding short-term debt and $105 billion in outstanding long-term debt, subject to a
total outstanding debt limit of $135 billion. During the first nine months of 2008, the Parent
issued a total of $6.8 billion in registered senior notes. The Parent also issued capital
securities in the form of $6.5 billion in junior subordinated debt to statutory business trusts
formed by the Parent, which, in turn, issued trust preferred and perpetual preferred purchase
securities. We used the proceeds from securities issued in the first nine months of 2008 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.
Securities are issued under this program as private placements in accordance with Office of the
Comptroller of the Currency (OCC) regulations. In the first nine months of 2008, Wells Fargo Bank,
N.A. issued $43.1 billion in short-term and long-term senior notes.
32
Wells Fargo Financial. In February 2008, Wells Fargo Financial Canada Corporation (WFFCC), an
indirect wholly-owned Canadian subsidiary of the Parent, qualified with the Canadian provincial
securities commissions CAD$7.0 billion in medium-term notes for distribution from time to time in
Canada. In the first nine months of 2008, WFFCC issued CAD$500 million in medium-term notes,
leaving CAD$6.5 billion available for future issuance. All medium-term notes issued by WFFCC are
unconditionally guaranteed by the Parent.
CAPITAL MANAGEMENT
We have an active program for managing stockholder capital. We use capital to fund organic growth,
acquire banks and other financial services companies, pay dividends and repurchase our shares. Our
objective is to produce above-market long-term returns by opportunistically using capital when
returns are perceived to be high and issuing/accumulating capital when such costs are perceived to
be low.
From time to time the Board of Directors authorizes the Company to repurchase shares of our common
stock. Although we announce when the Board authorizes share repurchases, we typically do not give
any public notice before we repurchase our shares. Various factors determine the amount and timing
of our share repurchases, including our capital requirements, the number of shares we expect to
issue for acquisitions and employee benefit plans, market conditions (including the trading price
of our stock), and legal considerations. These factors can change at any time, and there can be no
assurance as to the number of shares we will repurchase or when we will repurchase them.
Historically, our policy has been to repurchase shares under the safe harbor conditions of Rule
10b-18 of the 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.
In 2007, the Board authorized the repurchase of up to 200 million additional shares of our
outstanding common stock and, in September 2008, the repurchase of up to 25 million additional
shares. During the first nine months of 2008, we repurchased approximately 37 million shares of our
common stock, all from our employee benefit plans. In the first nine months of 2008, we issued
approximately 61 million shares of common stock (including shares issued for our ESOP plan) under
various employee benefit and director plans and under our dividend reinvestment and direct stock
repurchase programs. At September 30, 2008, the total remaining common stock repurchase authority
was approximately 29 million shares. (For additional information regarding share repurchases and
repurchase authorizations, see Part II Item 2 of this Report.)
The Board of Directors approved a 10% increase in our common stock dividend to $0.34 per share for
third quarter 2008 from $0.31 per share for second quarter 2008.
33
Our potential sources of capital include retained earnings and issuances of common and preferred
stock. In the first nine months of 2008, retained earnings increased $1.9 billion, predominantly
resulting from net income of $5.4 billion, less dividends of $3.2 billion. In the first nine months
of 2008, we issued $1.6 billion of common stock under various employee benefit and director plans.
The Emergency Economic Stabilization Act of 2008 authorizes the United States Treasury Department
(Treasury Department) to use appropriated funds to restore liquidity and stability to the U.S.
financial system. As part of this authority, on October 28, 2008, at the request of the Treasury
Department and pursuant to a Letter Agreement and related Securities Purchase Agreement dated
October 26, 2008 (the Securities Purchase Agreements), we issued 25,000 shares of Wells Fargos
Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value, having a liquidation
amount per share equal to $1,000,000, for a total price of $25 billion. The shares of these
preferred securities may be evidenced by depositary shares, with each depositary share representing
1/1,000 interest in one share of preferred stock. The preferred securities pay cumulative dividends
at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. We may
not redeem the preferred securities during the first three years except with the proceeds from a
qualifying equity offering. After three years, we may, at our option, redeem the preferred
securities at par value plus accrued and unpaid dividends. The preferred securities are generally
non-voting. Prior to October 28, 2011, unless we have redeemed the preferred securities or the
Treasury Department has transferred the preferred securities to a third party, the consent of the
Treasury Department will be required for us to increase our common stock dividend or repurchase our
common stock or other equity or capital securities, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the Securities Purchase
Agreements. A consequence of the preferred securities purchase includes certain restrictions on
executive compensation that could limit the tax deductibility of compensation we pay to executive
management. As part of its purchase of the preferred securities, the Treasury Department received
warrants to purchase 110,261,688 shares of our common stock at an initial per share exercise price
of $34.01. The warrants provide for the adjustment of the exercise price and the number of shares
of our common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as
upon stock splits or distributions of securities or other assets to holders of our common stock,
and upon certain issuances of our common stock at or below a specified price relative to the
initial exercise price. The warrants expire ten years from the issuance date. Both the preferred
securities and warrants will be accounted for as components of Tier 1 capital.
At September 30, 2008, the Company and each of our subsidiary banks were well capitalized under
the applicable regulatory capital adequacy guidelines. Our Tier 1 capital ratio was 8.59%, up 100
basis points from year end 2007. For additional information see Note 19 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
34
LEGAL PROCEEDINGS
For information regarding legal proceedings, refer to Note 11 (Guarantees and Legal Actions) to
Financial Statements in this Report.
RISK FACTORS
An investment in the Company has risk. In addition, in accordance with the Private Securities
Litigation Reform Act of 1995, we caution you that actual results may differ from forward-looking
statements about our future financial and business performance contained in this Report and other
reports we file with the SEC and in other Company communications. We make forward-looking
statements when we use words such as believe, expect, anticipate, estimate, will, may,
can and similar expressions. Do not unduly rely on forward-looking statements. Actual results may
differ significantly from expectations. Forward-looking statements speak only as of the date made.
We do not undertake to update them to reflect changes or events that occur after that date.
In this Report we make forward-looking statements that:
|
|
we expect the pending merger with Wachovia to be completed by the end of this year; |
|
|
until residential real estate values stabilize, the Home Equity portfolio is expected to
produce higher than normal loss levels; |
|
|
until conditions improve in the residential real estate and liquidity markets, we will
continue to hold more nonperforming assets on our balance sheet; |
|
|
the adoption of FAS 161, Staff Position No. 133-1 and FIN 45-4 will not affect our
consolidated financial results; |
|
|
we expect the amount of nonaccrual loans will change due to portfolio growth, portfolio
seasoning, routine problem loan recognition and resolution through collections, sales or
charge-offs; |
|
|
we believe the election to measure at fair value new prime MHFS and other interests held
will reduce certain timing differences and better match changes in the value of these assets
with changes in the value of derivatives used to hedge these assets; |
|
|
we expect changes in the fair value of derivative financial instruments used to hedge
derivative loan commitments will fully or partially offset changes in the fair value of such
commitments; |
|
|
we expect the proceeds of securities issued in the future will be used for general
corporate purposes; |
|
|
three pending business combination transactions, in addition to the pending merger with
Wachovia, will close in fourth quarter 2008; |
|
|
we expect to recover our investments in entities formed to invest in affordable housing and
sustainable energy projects over time through realization of federal tax credits; |
|
|
the amount of any additional consideration that may be payable in connection with previous
acquisitions will not be significant to our financial statements; and |
|
|
we expect $39 million of deferred net gains on derivatives in other comprehensive income at
September 30, 2008, will be reclassified as earnings in the next 12 months. |
35
This Report includes various statements about the estimated impact on our earnings from simulated
changes in interest rates and on expected losses in our loan portfolio from assumed changes in loan
credit quality. This Report also includes the statement that we believe the allowance for credit
losses at September 30, 2008, was adequate to cover credit losses inherent in the loan portfolio,
including unfunded credit commitments. There is no assurance that our allowance for credit losses
at September 30, 2008, will be sufficient to cover future credit losses. As described below and
elsewhere in this Report and in our 2007 Form 10-K, increases in loan charge-offs, changes in the
allowance for credit losses or the related provision expense, or other effects of credit
deterioration after September 30, 2008, could materially adversely affect our results of operations
and financial condition.
This Report also includes various statements about the evaluation for other-than-temporary
impairment of securities held in our available-for-sale portfolio, including certain perpetual
preferred securities. We may be required to recognize other-than-temporary impairment in future
periods with respect to these and other securities held in our available-for-sale portfolio. For
more information, refer to Overview Current Accounting Developments, Balance Sheet Analysis
Securities Available for Sale and Note 4 (Securities Available for Sale) to Financial
Statements in this Report.
As discussed elsewhere in this Report, we have agreed to acquire Wachovia in a stock-for-stock
transaction that is expected to close by the end of 2008. In the merger, Wells Fargo will acquire
all of the assets and liabilities (including loan portfolios) of Wachovia and its subsidiaries.
Some of these assets could become nonperforming or could default, increasing our credit costs and
requiring us to write-down the value of the assets. This could materially adversely affect our
results of operations and financial condition. We are not receiving any loan guarantees or other
financial assistance from the government, thus after the merger we will be fully responsible for
all credit losses, write-downs and impairments relating to Wachovias assets and liabilities
acquired in the merger.
Our results of operations and financial condition could also be materially adversely affected if we
fail to realize the expected benefits of the merger or it takes longer than expected to realize the
benefits. The merger will involve the integration of the businesses of Wachovia and Wells Fargo. It
is possible that the integration process could result in the loss of key Wachovia employees, the
disruption of Wachovias ongoing business or inconsistencies in standards, controls, procedures and
policies that adversely affect Wachovias ability to maintain relationships with customers and
employees. As with any financial institution merger, there also may be disruptions that cause
Wachovia to lose customers or cause customers to take deposits out of Wachovias banks. The
integration of the two companies may also divert management attention and resources away from other
operations and limit Wells Fargos ability to pursue other acquisitions.
Also, as discussed under Capital Management in this Report, on October 28, 2008, at the request
of the Treasury Department we issued certain preferred securities and common stock warrants to the
Treasury Department. Prior to October 28, 2011, unless we have redeemed the preferred securities or
the Treasury Department has transferred the preferred securities to a third party, the consent of
the Treasury Department will be required for us to, among other actions, increase our common stock
dividend or repurchase our common stock other than in connection with benefit plans consistent with
past practice. The warrants provide for the adjustment of the
36
exercise price and the number of shares of our common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or distributions of securities or
other assets to holders of our common stock, and upon certain issuances of our common stock at or
below a specified price relative to the initial exercise price.
For a discussion of certain risk factors that could cause our financial results and condition to
vary materially from period to period or cause actual results to differ from our expectations for
our future financial and business performance, refer to our 2007 Form 10-K, including the Risk
Factors and Regulation and Supervision sections, and to the Financial Review section and
Financial Statements and related Notes included in this Report. Additional factors are described
below:
|
|
lower or negative revenue growth because of our inability to cross-sell more products to
our existing customers; |
|
|
decreased demand for our products and services and lower revenue and earnings because of an
economic recession; |
|
|
reduced fee income from our brokerage and asset management businesses because of a fall in
stock market prices; |
|
|
lower net interest margin, decreased mortgage loan originations and reductions in the value
of our MSRs and MHFS because of changes in interest rates; |
|
|
increased funding costs due to market illiquidity and increased competition for funding; |
|
|
the election to provide capital support to our mutual funds relating to investments in
credit products; |
|
|
reduced earnings due to higher credit losses generally and specifically because: |
|
o |
|
losses in our residential real estate loan portfolio (including home equity) are
greater than expected due to economic factors, including declining home values, increasing
interest rates, increasing unemployment, or changes in payment behavior, or other factors;
and/or |
|
o |
|
our loans are concentrated by loan type, industry segment, borrower type, or location
of the borrower or collateral; |
|
|
higher credit losses because of federal or state legislation or regulatory action that
reduces the amount that our borrowers are required to pay us; |
|
|
higher credit losses because of federal or state legislation or regulatory action that
limits our ability to foreclose on properties or other collateral or makes foreclosure less
economically feasible; |
|
|
changes to our allowance for credit losses following periodic examinations by our banking
regulators; |
|
|
negative effect on our servicing and investment portfolios because of financial
difficulties or credit downgrades of mortgage and bond issuers; |
|
|
reduced earnings because we write-down the carrying value of securities held in our
securities available-for-sale portfolio following a determination that the securities are
other-than-temporarily impaired; |
|
|
reduced earnings because of changes in the value of our venture capital investments; |
|
|
changes in our accounting policies or in accounting standards, and changes in how
accounting standards are interpreted or applied; |
|
|
reduced earnings because actual returns on our pension plan assets are lower than expected,
resulting in an increase in future net periodic benefit expense; |
|
|
reduced earnings from not realizing the expected benefits of acquisitions or from
unexpected difficulties integrating acquisitions; |
37
|
|
reduced earnings because of the inability or unwillingness of counterparties to perform
their obligations with respect to derivative financial instruments; |
|
|
federal and state regulations; |
|
|
reputational damage from negative publicity; |
|
|
fines, penalties and other negative consequences from regulatory violations, even
inadvertent or unintentional violations; |
|
|
the loss of checking and savings account deposits to alternative investments such as the
stock market and higher-yielding fixed income investments; and |
|
|
fiscal and monetary policies of the Federal Reserve Board. |
As
described in our 2007 Form 10-K under Regulation and Supervision Deposit Insurance
Assessments, our bank subsidiaries, including Wells Fargo Bank, N.A., are members of the Deposit
Insurance Fund (DIF). The Federal Deposit Insurance Corporation (FDIC) uses the DIF to cover
insured deposits in the event of a bank failure, and maintains the fund by assessing member banks
an insurance premium. Recent failures have caused the DIF to fall below the minimum balance
required by law, forcing the FDIC to consider action to rebuild the fund by raising the insurance
premiums assessed member banks. Depending on the frequency and severity of bank failures, the
increase in premiums could be significant and negatively affect our earnings.
38
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Companys management evaluated the effectiveness, as of September 30,
2008, of the Companys disclosure controls and procedures. The Companys chief executive officer
and chief financial officer participated in the evaluation. Based on this evaluation, the Companys
chief executive officer and chief financial officer concluded that the Companys disclosure
controls and procedures were effective as of September 30, 2008.
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
companys principal executive and principal financial officers and effected by the companys 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 companys assets that could have a material effect on
the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. No change occurred during
third quarter 2008 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
39
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions, except per share amounts) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
$ |
41 |
|
|
$ |
37 |
|
|
$ |
126 |
|
|
$ |
137 |
|
Securities available for sale |
|
|
1,397 |
|
|
|
1,032 |
|
|
|
3,753 |
|
|
|
2,470 |
|
Mortgages held for sale |
|
|
394 |
|
|
|
586 |
|
|
|
1,211 |
|
|
|
1,694 |
|
Loans held for sale |
|
|
12 |
|
|
|
19 |
|
|
|
34 |
|
|
|
51 |
|
Loans |
|
|
6,888 |
|
|
|
7,477 |
|
|
|
20,906 |
|
|
|
21,341 |
|
Other interest income |
|
|
42 |
|
|
|
72 |
|
|
|
140 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
8,774 |
|
|
|
9,223 |
|
|
|
26,170 |
|
|
|
25,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,019 |
|
|
|
2,218 |
|
|
|
3,676 |
|
|
|
6,016 |
|
Short-term borrowings |
|
|
492 |
|
|
|
464 |
|
|
|
1,274 |
|
|
|
865 |
|
Long-term debt |
|
|
882 |
|
|
|
1,261 |
|
|
|
2,801 |
|
|
|
3,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,393 |
|
|
|
3,943 |
|
|
|
7,751 |
|
|
|
10,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,381 |
|
|
|
5,280 |
|
|
|
18,419 |
|
|
|
15,486 |
|
Provision for credit losses |
|
|
2,495 |
|
|
|
892 |
|
|
|
7,535 |
|
|
|
2,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
|
3,886 |
|
|
|
4,388 |
|
|
|
10,884 |
|
|
|
13,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
839 |
|
|
|
837 |
|
|
|
2,387 |
|
|
|
2,262 |
|
Trust and investment fees |
|
|
738 |
|
|
|
777 |
|
|
|
2,263 |
|
|
|
2,347 |
|
Card fees |
|
|
601 |
|
|
|
561 |
|
|
|
1,747 |
|
|
|
1,548 |
|
Other fees |
|
|
552 |
|
|
|
566 |
|
|
|
1,562 |
|
|
|
1,715 |
|
Mortgage banking |
|
|
892 |
|
|
|
823 |
|
|
|
2,720 |
|
|
|
2,302 |
|
Operating leases |
|
|
102 |
|
|
|
171 |
|
|
|
365 |
|
|
|
550 |
|
Insurance |
|
|
439 |
|
|
|
329 |
|
|
|
1,493 |
|
|
|
1,160 |
|
Net gains on debt securities available for sale |
|
|
84 |
|
|
|
160 |
|
|
|
316 |
|
|
|
149 |
|
Net gains (losses) from equity investments |
|
|
(507 |
) |
|
|
173 |
|
|
|
(148 |
) |
|
|
512 |
|
Other |
|
|
258 |
|
|
|
176 |
|
|
|
1,277 |
|
|
|
1,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
3,998 |
|
|
|
4,573 |
|
|
|
13,982 |
|
|
|
13,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
2,078 |
|
|
|
1,933 |
|
|
|
6,092 |
|
|
|
5,707 |
|
Incentive compensation |
|
|
555 |
|
|
|
802 |
|
|
|
2,005 |
|
|
|
2,444 |
|
Employee benefits |
|
|
486 |
|
|
|
518 |
|
|
|
1,666 |
|
|
|
1,764 |
|
Equipment |
|
|
302 |
|
|
|
295 |
|
|
|
955 |
|
|
|
924 |
|
Net occupancy |
|
|
402 |
|
|
|
398 |
|
|
|
1,201 |
|
|
|
1,132 |
|
Operating leases |
|
|
90 |
|
|
|
136 |
|
|
|
308 |
|
|
|
437 |
|
Other |
|
|
1,604 |
|
|
|
1,589 |
|
|
|
4,612 |
|
|
|
4,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
5,517 |
|
|
|
5,671 |
|
|
|
16,839 |
|
|
|
16,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX EXPENSE |
|
|
2,367 |
|
|
|
3,290 |
|
|
|
8,027 |
|
|
|
9,934 |
|
Income tax expense |
|
|
730 |
|
|
|
1,117 |
|
|
|
2,638 |
|
|
|
3,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,637 |
|
|
$ |
2,173 |
|
|
$ |
5,389 |
|
|
$ |
6,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
$ |
0.49 |
|
|
$ |
0.65 |
|
|
$ |
1.63 |
|
|
$ |
1.99 |
|
DILUTED EARNINGS PER COMMON SHARE |
|
$ |
0.49 |
|
|
$ |
0.64 |
|
|
$ |
1.62 |
|
|
$ |
1.97 |
|
DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
0.34 |
|
|
$ |
0.31 |
|
|
$ |
0.96 |
|
|
$ |
0.87 |
|
Average common shares outstanding |
|
|
3,316.4 |
|
|
|
3,339.6 |
|
|
|
3,309.6 |
|
|
|
3,355.5 |
|
Diluted average common shares outstanding |
|
|
3,331.0 |
|
|
|
3,374.0 |
|
|
|
3,323.4 |
|
|
|
3,392.9 |
|
|
The accompanying notes are an integral part of these statements.
40
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
, |
|
December 31 |
, |
|
September 30 |
, |
(in millions, except shares) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
12,861 |
|
|
$ |
14,757 |
|
|
$ |
12,200 |
|
Federal funds sold, securities purchased under
resale agreements and other short-term investments |
|
|
8,093 |
|
|
|
2,754 |
|
|
|
4,546 |
|
Trading assets |
|
|
9,097 |
|
|
|
7,727 |
|
|
|
7,298 |
|
Securities available for sale |
|
|
86,882 |
|
|
|
72,951 |
|
|
|
57,440 |
|
Mortgages held for sale (includes $17,290, $24,998 and
$26,714 carried at fair value) |
|
|
18,739 |
|
|
|
26,815 |
|
|
|
29,699 |
|
Loans held for sale |
|
|
635 |
|
|
|
948 |
|
|
|
1,011 |
|
|
|
|
411,049 |
|
|
|
382,195 |
|
|
|
362,922 |
|
Allowance for loan losses |
|
|
(7,865 |
) |
|
|
(5,307 |
) |
|
|
(3,829 |
) |
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
403,184 |
|
|
|
376,888 |
|
|
|
359,093 |
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights: |
|
|
|
|
|
|
|
|
|
|
|
|
Measured at fair value (residential MSRs) |
|
|
19,184 |
|
|
|
16,763 |
|
|
|
18,223 |
|
Amortized |
|
|
433 |
|
|
|
466 |
|
|
|
460 |
|
Premises and equipment, net |
|
|
5,054 |
|
|
|
5,122 |
|
|
|
5,002 |
|
Goodwill |
|
|
13,520 |
|
|
|
13,106 |
|
|
|
12,018 |
|
Other assets |
|
|
44,679 |
|
|
|
37,145 |
|
|
|
41,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
622,361 |
|
|
$ |
575,442 |
|
|
$ |
548,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
89,446 |
|
|
$ |
84,348 |
|
|
$ |
82,365 |
|
Interest-bearing deposits |
|
|
264,128 |
|
|
|
260,112 |
|
|
|
252,591 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
353,574 |
|
|
|
344,460 |
|
|
|
334,956 |
|
Short-term borrowings |
|
|
85,187 |
|
|
|
53,255 |
|
|
|
41,729 |
|
Accrued expenses and other liabilities |
|
|
29,293 |
|
|
|
30,706 |
|
|
|
28,884 |
|
Long-term debt |
|
|
107,350 |
|
|
|
99,393 |
|
|
|
95,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575,404 |
|
|
|
527,814 |
|
|
|
501,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
625 |
|
|
|
450 |
|
|
|
545 |
|
Common stock
$1-2/3 par value, authorized
6,000,000,000 shares; issued 3,472,762,050 shares |
|
|
5,788 |
|
|
|
5,788 |
|
|
|
5,788 |
|
Additional paid-in capital |
|
|
8,348 |
|
|
|
8,212 |
|
|
|
8,089 |
|
Retained earnings |
|
|
40,853 |
|
|
|
38,970 |
|
|
|
38,645 |
|
Cumulative other comprehensive income (loss) |
|
|
(2,783 |
) |
|
|
725 |
|
|
|
291 |
|
Treasury
stock 151,543,421 shares, 175,659,842 shares
and 147,535,970 shares |
|
|
(5,207 |
) |
|
|
(6,035 |
) |
|
|
(5,209 |
) |
Unearned ESOP shares |
|
|
(667 |
) |
|
|
(482 |
) |
|
|
(583 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
46,957 |
|
|
|
47,628 |
|
|
|
47,566 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
622,361 |
|
|
$ |
575,442 |
|
|
$ |
548,727 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
41
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Unearned |
|
|
Total |
|
|
|
Number of |
|
|
Preferred |
|
|
Common |
|
|
paid-in |
|
|
Retained |
|
|
comprehensive |
|
|
Treasury |
|
|
ESOP |
|
|
stockholders |
|
(in millions, except shares) |
|
common shares |
|
|
stock |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
income |
|
|
stock |
|
|
shares |
|
|
equity |
|
|
BALANCE DECEMBER 31, 2006 |
|
|
3,377,149,861 |
|
|
$ |
384 |
|
|
$ |
5,788 |
|
|
$ |
7,739 |
|
|
$ |
35,215 |
|
|
$ |
302 |
|
|
$ |
(3,203 |
) |
|
$ |
(411 |
) |
|
$ |
45,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FSP13-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE JANUARY 1, 2007 |
|
|
3,377,149,861 |
|
|
|
384 |
|
|
|
5,788 |
|
|
|
7,739 |
|
|
|
35,144 |
|
|
|
302 |
|
|
|
(3,203 |
) |
|
|
(411 |
) |
|
|
45,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,696 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Net unrealized losses on securities available
for sale and other interests held, net of
reclassification of $133 million of net gains
included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226 |
) |
|
|
|
|
|
|
|
|
|
|
(226 |
) |
Net unrealized gains on derivatives and
hedging activities, net of reclassification of
$61 million of net gains on cash flow
hedges included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
174 |
|
Defined benefit pension plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss and
prior service cost included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,685 |
|
Common stock issued |
|
|
58,568,656 |
|
|
|
|
|
|
|
|
|
|
|
(99 |
) |
|
|
(276 |
) |
|
|
|
|
|
|
1,906 |
|
|
|
|
|
|
|
1,531 |
|
Common stock issued for acquisitions |
|
|
17,705,418 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
581 |
|
|
|
|
|
|
|
649 |
|
Common stock repurchased |
|
|
(137,404,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,765 |
) |
|
|
|
|
|
|
(4,765 |
) |
Preferred stock (484,000) issued to ESOP |
|
|
|
|
|
|
484 |
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518 |
) |
|
|
|
|
Preferred stock released to ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346 |
|
|
|
323 |
|
Preferred stock (323,069) converted to common
shares |
|
|
9,206,535 |
|
|
|
(323 |
) |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
303 |
|
|
|
|
|
|
|
|
|
Common stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,919 |
) |
Tax benefit upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199 |
|
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
Net change in deferred compensation and
related plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
|
(51,923,781 |
) |
|
|
161 |
|
|
|
|
|
|
|
350 |
|
|
|
3,501 |
|
|
|
(11 |
) |
|
|
(2,006 |
) |
|
|
(172 |
) |
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SEPTEMBER 30, 2007 |
|
|
3,325,226,080 |
|
|
$ |
545 |
|
|
$ |
5,788 |
|
|
$ |
8,089 |
|
|
$ |
38,645 |
|
|
$ |
291 |
|
|
$ |
(5,209 |
) |
|
$ |
(583 |
) |
|
$ |
47,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2007 |
|
|
3,297,102,208 |
|
|
$ |
450 |
|
|
$ |
5,788 |
|
|
$ |
8,212 |
|
|
$ |
38,970 |
|
|
$ |
725 |
|
|
$ |
(6,035 |
) |
|
$ |
(482 |
) |
|
$ |
47,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of EITF 06-4
and EITF 06-10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
FAS 158 change of measurement date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE JANUARY 1, 2008 |
|
|
3,297,102,208 |
|
|
|
450 |
|
|
|
5,788 |
|
|
|
8,212 |
|
|
|
38,942 |
|
|
|
725 |
|
|
|
(6,035 |
) |
|
|
(482 |
) |
|
|
47,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,389 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
Net unrealized losses on securities
available for sale and other interests
held, net of reclassification of
$107 million of net losses included
in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,485 |
) |
|
|
|
|
|
|
|
|
|
|
(3,485 |
) |
Net unrealized losses on derivatives and
hedging activities, net of reclassification
of $115 million of net gains on cash
flow hedges included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Defined benefit pension plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and
prior service cost included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,881 |
|
Common stock issued |
|
|
49,454,756 |
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
1,610 |
|
|
|
|
|
|
|
1,269 |
|
Common stock repurchased |
|
|
(37,327,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,162 |
) |
|
|
|
|
|
|
(1,162 |
) |
Preferred stock (520,500) issued to ESOP |
|
|
|
|
|
|
521 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(551 |
) |
|
|
|
|
Preferred stock released to ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366 |
|
|
|
346 |
|
Preferred stock (344,860) converted to
common shares |
|
|
11,988,925 |
|
|
|
(346 |
) |
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
392 |
|
|
|
|
|
|
|
|
|
Common stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,178 |
) |
Tax benefit upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
Net change in deferred compensation and
related plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
20 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
|
24,116,421 |
|
|
|
175 |
|
|
|
|
|
|
|
136 |
|
|
|
1,911 |
|
|
|
(3,508 |
) |
|
|
828 |
|
|
|
(185 |
) |
|
|
(643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SEPTEMBER 30, 2008 |
|
|
3,321,218,629 |
|
|
$ |
625 |
|
|
$ |
5,788 |
|
|
$ |
8,348 |
|
|
$ |
40,853 |
|
|
$ |
(2,783 |
) |
|
$ |
(5,207 |
) |
|
$ |
(667 |
) |
|
$ |
46,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
42
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,389 |
|
|
$ |
6,696 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
7,535 |
|
|
|
2,327 |
|
Changes in fair value of MSRs (residential) and MHFS carried at fair value |
|
|
(1,301 |
) |
|
|
474 |
|
Depreciation and amortization |
|
|
1,154 |
|
|
|
1,141 |
|
Other net gains |
|
|
(999 |
) |
|
|
(1,337 |
) |
Preferred stock released to ESOP |
|
|
346 |
|
|
|
323 |
|
Stock option compensation expense |
|
|
134 |
|
|
|
107 |
|
Excess tax benefits related to stock option payments |
|
|
(104 |
) |
|
|
(185 |
) |
Originations of MHFS |
|
|
(163,797 |
) |
|
|
(176,135 |
) |
Proceeds from sales of and principal collected on mortgages originated for sale |
|
|
171,809 |
|
|
|
172,905 |
|
Net change in: |
|
|
|
|
|
|
|
|
Trading assets |
|
|
(1,360 |
) |
|
|
(2,959 |
) |
Loans originated for sale |
|
|
(361 |
) |
|
|
(285 |
) |
Deferred income taxes |
|
|
1,146 |
|
|
|
632 |
|
Accrued interest receivable |
|
|
63 |
|
|
|
(446 |
) |
Accrued interest payable |
|
|
(176 |
) |
|
|
(59 |
) |
Other assets, net |
|
|
(7,958 |
) |
|
|
(5,516 |
) |
Other accrued expenses and liabilities, net |
|
|
631 |
|
|
|
3,169 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
12,151 |
|
|
|
852 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Federal funds sold, securities purchased under resale agreements
and other short-term investments |
|
|
(5,301 |
) |
|
|
1,539 |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Sales proceeds |
|
|
39,698 |
|
|
|
37,297 |
|
Prepayments and maturities |
|
|
15,879 |
|
|
|
6,868 |
|
Purchases |
|
|
(74,381 |
) |
|
|
(54,192 |
) |
Loans: |
|
|
|
|
|
|
|
|
Increase in banking subsidiaries loan originations, net of collections |
|
|
(32,006 |
) |
|
|
(34,020 |
) |
Proceeds from sales (including participations) of loans originated for
investment by banking subsidiaries |
|
|
1,843 |
|
|
|
2,611 |
|
Purchases (including participations) of loans by banking subsidiaries |
|
|
(4,329 |
) |
|
|
(7,543 |
) |
Principal collected on nonbank entities loans |
|
|
15,462 |
|
|
|
16,461 |
|
Loans originated by nonbank entities |
|
|
(13,880 |
) |
|
|
(19,190 |
) |
Net cash paid for acquisitions |
|
|
(590 |
) |
|
|
(2,862 |
) |
Proceeds from sales of foreclosed assets |
|
|
1,299 |
|
|
|
1,014 |
|
Changes in MSRs from purchases and sales |
|
|
71 |
|
|
|
1,124 |
|
Other, net |
|
|
(1,325 |
) |
|
|
(5,662 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(57,560 |
) |
|
|
(56,555 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
7,370 |
|
|
|
22,954 |
|
Short-term borrowings |
|
|
31,798 |
|
|
|
28,760 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
Proceeds from issuance |
|
|
22,751 |
|
|
|
22,569 |
|
Repayment |
|
|
(15,439 |
) |
|
|
(14,846 |
) |
Common stock: |
|
|
|
|
|
|
|
|
Proceeds from issuance |
|
|
1,269 |
|
|
|
1,531 |
|
Repurchased |
|
|
(1,162 |
) |
|
|
(4,765 |
) |
Cash dividends paid |
|
|
(3,178 |
) |
|
|
(2,919 |
) |
Excess tax benefits related to stock option payments |
|
|
104 |
|
|
|
185 |
|
Other, net |
|
|
|
|
|
|
(594 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
43,513 |
|
|
|
52,875 |
|
|
|
|
|
|
|
|
Net change in cash and due from banks |
|
|
(1,896 |
) |
|
|
(2,828 |
) |
Cash and due from banks at beginning of period |
|
|
14,757 |
|
|
|
15,028 |
|
|
|
|
|
|
|
|
Cash and due from banks at end of period |
|
$ |
12,861 |
|
|
$ |
12,200 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
7,927 |
|
|
$ |
10,508 |
|
Income taxes |
|
|
2,431 |
|
|
|
2,613 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Net transfers from loans held for sale to loans |
|
$ |
677 |
|
|
$ |
|
|
Transfers from MHFS to securities available for sale |
|
|
544 |
|
|
|
|
|
Transfers from trading assets to securities available for sale |
|
|
|
|
|
|
1,268 |
|
Transfers from MHFS to loans |
|
|
507 |
|
|
|
1,522 |
|
Transfers from MHFS to MSRs |
|
|
2,659 |
|
|
|
2,841 |
|
Transfers from MHFS to foreclosed assets |
|
|
105 |
|
|
|
69 |
|
Transfers from loans to foreclosed assets |
|
|
2,203 |
|
|
|
1,978 |
|
|
The accompanying notes are an integral part of these statements.
43
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 and consumer finance through banking stores, the internet and other
distribution channels to consumers, businesses and institutions in all 50 states of the U.S. and in
other countries. When we refer to 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.
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 and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and income and expenses
during the reporting period.
The information furnished in these unaudited interim statements reflects all adjustments that are,
in the opinion of management, necessary for a fair statement of the results for the periods
presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this
Form 10-Q. The results of operations in the interim statements do not necessarily indicate the
results that may be expected for the full year. The interim financial information should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form
10-K).
On January 1, 2008, we adopted the following new accounting pronouncements:
|
|
FSP FIN 39-1 Financial Accounting Standards Board (FASB) Staff Position on
Interpretation No. 39, Amendment of FASB Interpretation No. 39; |
|
|
EITF 06-4 Emerging Issues Task Force (EITF) Issue No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements; |
|
|
EITF 06-10 EITF Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements; and |
|
|
SAB 109 Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair
Value Through Earnings. |
On July 1, 2008, we adopted the following new accounting pronouncement:
|
|
FSP FAS 157-3 FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. |
On April 30, 2007, the FASB issued FSP FIN 39-1, which amends Interpretation No. 39 to permit a
reporting entity to offset the right to reclaim cash collateral (a receivable), or the obligation
to return cash collateral (a payable), against derivative instruments executed with the same
counterparty under the same master netting arrangement. The provisions of this FSP are effective
for the year beginning on January 1, 2008, with early adoption permitted. We adopted FSP FIN 39-1
on January 1, 2008, and it did not have a material effect on our consolidated financial statements.
44
On September 20, 2006, the FASB ratified the consensus reached by the EITF at its September 7,
2006, meeting with respect to EITF 06-4. On March 28, 2007, the FASB ratified the consensus reached
by the EITF at its March 15, 2007, meeting with respect to EITF 06-10. These pronouncements require
that for endorsement split-dollar life insurance arrangements and collateral split-dollar life
insurance arrangements where the employee is provided benefits in postretirement periods, the
employer should recognize the cost of providing that insurance over the employees service period
by accruing a liability for the benefit obligation. Additionally, for collateral assignment
split-dollar life insurance arrangements, an employer is required to recognize and measure an asset
based upon the nature and substance of the agreement. EITF 06-4 and EITF 06-10 are effective for
the year beginning on January 1, 2008, with early adoption permitted. We adopted EITF 06-4 and EITF
06-10 on January 1, 2008, and reduced beginning retained earnings for 2008 by $20 million (after
tax), primarily related to split-dollar life insurance arrangements from the acquisition of Greater
Bay Bancorp.
On November 5, 2007, the Securities and Exchange Commission (SEC) issued SAB 109, which provides
the staffs views on the accounting for written loan commitments recorded at fair value under GAAP.
To make the staffs views consistent with current authoritative accounting guidance, SAB 109
revises and rescinds portions of SAB 105, Application of Accounting Principles to Loan Commitments.
Specifically, SAB 109 states the expected net future cash flows associated with the servicing of a
loan should be included in the measurement of all written loan commitments that are accounted for
at fair value through earnings. The provisions of SAB 109, which we adopted on January 1, 2008, are
applicable to written loan commitments recorded at fair value that are entered into beginning on or
after January 1, 2008. The implementation of SAB 109 did not have a material impact on our results
or the valuation of our loan commitments.
On October 10, 2008, the FASB issued Staff Position No. 157-3, which clarifies the application of
FAS 157, Fair Value Measurements, in an inactive market and illustrates how an entity would
determine fair value when the market for a financial asset is not active. The FSP states that an
entity should not automatically conclude that a particular transaction price is determinative of
fair value. In a dislocated market, judgment is required to evaluate whether individual
transactions are forced liquidations or distressed sales. When relevant observable market
information is not available, a valuation approach that incorporates managements judgments about
the assumptions that market participants would use in pricing the asset in a current sale
transaction would be acceptable. The FSP also indicates that quotes from brokers or pricing
services may be relevant inputs when measuring fair value, but are not necessarily determinative in
the absence of an active market for the asset. In weighing a broker quote as an input to a fair
value measurement, an entity should place less reliance on quotes that do not reflect the result of
market transactions. Further, the nature of the quote (for example, whether the quote is an
indicative price or a binding offer) should be considered when weighing the available evidence. The
FSP is effective immediately and applies to prior periods for which financial statements have not
been issued, including interim or annual periods ending on or before September 30, 2008.
Accordingly, we adopted the FSP prospectively, beginning July 1, 2008. The adoption of the FSP did
not have a material impact on our financial results or fair value determinations.
45
Statement of Cash Flows
In the first nine months of 2007, our consolidated statement of cash flows reflected mortgage
servicing rights (MSRs) from securitizations and asset transfers, as separately detailed in Note 8
in this Report, of $2,841 million as an increase to cash flows from operating activities with a
corresponding decrease to cash flows from investing activities. Upon filing our 2007 Form 10-K we
revised our consolidated statement of cash flows to appropriately reflect the proceeds from sales
of mortgages held for sale (MHFS) and the related investment in MSRs as noncash transfers from MHFS
to MSRs. The impact of the adjustments on the consolidated statement of cash flows for the first
nine months of 2007 was to decrease net cash provided by operating activities from $3,693 million
to $852 million and decrease net cash used by investing activities from $59,396 million to $56,555
million. These revisions to the historical financial statements were not considered to be material.
Descriptions of our significant accounting policies are included in Note 1 (Summary of Significant
Accounting Policies) to Financial Statements in our 2007 Form 10-K.
We regularly explore opportunities to acquire financial services companies and businesses.
Generally, we do not make a public announcement about an acquisition opportunity until a definitive
agreement has been signed.
At September 30, 2008, we had three pending business combinations with total assets of
approximately $1.6 billion. Transactions completed in the first nine months of 2008 were:
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Date |
|
|
Assets |
|
|
Flatiron Credit Company, Inc., Denver, Colorado
|
|
April 30 |
|
|
$ |
332 |
|
Transcap Associates, Inc., Chicago, Illinois |
|
June 27 |
|
|
|
22 |
|
United Bancorporation of Wyoming, Inc., Jackson, Wyoming (1) |
|
July 1 |
|
|
|
2,110 |
|
Other (2) |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of five affiliated banks of United Bancorporation of Wyoming, Inc., located in
Wyoming and Idaho, and certain assets and liabilities of United Bancorporation of Wyoming,
Inc. |
(2) |
|
Consists of nine acquisitions of insurance brokerage businesses. |
On October 3, 2008, we announced that we had signed a definitive agreement to acquire all
outstanding shares of Wachovia Corporation (Wachovia) in a stock-for-stock transaction. Wachovia,
based in Charlotte, North Carolina, had total assets of $764 billion at September 30, 2008, and is
one of the nations largest diversified financial services companies, providing a broad range of
retail banking and brokerage, asset and wealth management, and corporate and investment banking
products and services to customers through 3,300 financial centers in 21 states from Connecticut to
Florida and west to Texas and California, and nationwide retail brokerage, mortgage lending and
auto finance businesses. Under terms of the agreement, Wachovia shareholders will receive 0.1991
shares of Wells Fargo common stock in exchange for each share of Wachovia common stock. The
agreement is subject to approval of Wachovia shareholders and the merger is expected to be
completed by the end of 2008.
46
|
|
|
3. |
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Federal funds sold and securities purchased under
resale agreements |
|
$ |
5,562 |
|
|
$ |
1,700 |
|
|
$ |
3,436 |
|
Interest-earning deposits |
|
|
1,775 |
|
|
|
460 |
|
|
|
499 |
|
Other short-term investments |
|
|
756 |
|
|
|
594 |
|
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,093 |
|
|
$ |
2,754 |
|
|
$ |
4,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There were no securities classified as held to maturity
as of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2008 |
|
|
Dec. 31, 2007 |
|
|
Sept. 30, 2007 |
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
(in millions) |
|
Cost |
|
|
value |
|
|
Cost |
|
|
value |
|
|
Cost |
|
|
value |
|
|
Securities of U.S. Treasury and
federal agencies |
|
$ |
1,162 |
|
|
$ |
1,170 |
|
|
$ |
962 |
|
|
$ |
982 |
|
|
$ |
859 |
|
|
$ |
860 |
|
Securities of U.S. states and
political subdivisions |
|
|
8,011 |
|
|
|
7,336 |
|
|
|
6,128 |
|
|
|
6,152 |
|
|
|
5,698 |
|
|
|
5,786 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
43,074 |
|
|
|
43,904 |
|
|
|
34,092 |
|
|
|
34,987 |
|
|
|
29,470 |
|
|
|
29,902 |
|
Private collateralized mortgage obligations (1) |
|
|
24,582 |
|
|
|
21,033 |
|
|
|
20,026 |
|
|
|
19,982 |
|
|
|
12,083 |
|
|
|
12,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
67,656 |
|
|
|
64,937 |
|
|
|
54,118 |
|
|
|
54,969 |
|
|
|
41,553 |
|
|
|
41,988 |
|
Other |
|
|
11,883 |
|
|
|
11,131 |
|
|
|
8,185 |
|
|
|
8,065 |
|
|
|
6,377 |
|
|
|
6,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
88,712 |
|
|
|
84,574 |
|
|
|
69,393 |
|
|
|
70,168 |
|
|
|
54,487 |
|
|
|
54,946 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
2,531 |
|
|
|
1,653 |
|
|
|
2,082 |
|
|
|
1,852 |
|
|
|
1,605 |
|
|
|
1,525 |
|
Other marketable equity securities |
|
|
516 |
|
|
|
655 |
|
|
|
796 |
|
|
|
931 |
|
|
|
767 |
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
3,047 |
|
|
|
2,308 |
|
|
|
2,878 |
|
|
|
2,783 |
|
|
|
2,372 |
|
|
|
2,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91,759 |
|
|
$ |
86,882 |
|
|
$ |
72,271 |
|
|
$ |
72,951 |
|
|
$ |
56,859 |
|
|
$ |
57,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A majority of the private collateralized mortgage obligations are AAA-rated bonds
collateralized by 1-4 family residential first mortgages. |
The following table provides the components of the net unrealized gains (losses) on securities
available for sale. The net unrealized gains and losses on securities available for sale are
reported on an after-tax basis as a component of cumulative other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Gross unrealized gains
|
|
$ |
1,176 |
|
|
$ |
1,352 |
|
|
$ |
857 |
|
Gross unrealized losses |
|
|
(6,053 |
) |
|
|
(672 |
) |
|
|
(276 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) |
|
$ |
(4,877 |
) |
|
$ |
680 |
|
|
$ |
581 |
|
|
|
|
|
|
|
|
|
|
|
|
47
Net unrealized losses were $4,877 million at September 30, 2008, compared with net unrealized gains
of $680 million at December 31, 2007. The increase in net unrealized losses was largely due to
wider spreads on mortgage-backed securities and an increase in market yields for the first nine
months of 2008.
The following table shows the gross unrealized losses and fair value of securities available for
sale at September 30, 2008, and December 31, 2007, by length of time that individual securities in
each category had been in a continuous loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
(in millions) |
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and
federal agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Securities of U.S. states and
political subdivisions |
|
|
(98 |
) |
|
|
1,957 |
|
|
|
(13 |
) |
|
|
70 |
|
|
|
(111 |
) |
|
|
2,027 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
(1 |
) |
|
|
39 |
|
|
|
(2 |
) |
|
|
150 |
|
|
|
(3 |
) |
|
|
189 |
|
Private collateralized mortgage obligations |
|
|
(124 |
) |
|
|
7,722 |
|
|
|
(2 |
) |
|
|
54 |
|
|
|
(126 |
) |
|
|
7,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
(125 |
) |
|
|
7,761 |
|
|
|
(4 |
) |
|
|
204 |
|
|
|
(129 |
) |
|
|
7,965 |
|
Other |
|
|
(140 |
) |
|
|
2,425 |
|
|
|
(25 |
) |
|
|
491 |
|
|
|
(165 |
) |
|
|
2,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
(363 |
) |
|
|
12,143 |
|
|
|
(42 |
) |
|
|
765 |
|
|
|
(405 |
) |
|
|
12,908 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
(236 |
) |
|
|
1,404 |
|
|
|
|
|
|
|
9 |
|
|
|
(236 |
) |
|
|
1,413 |
|
Other marketable equity securities |
|
|
(30 |
) |
|
|
284 |
|
|
|
(1 |
) |
|
|
27 |
|
|
|
(31 |
) |
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
(266 |
) |
|
|
1,688 |
|
|
|
(1 |
) |
|
|
36 |
|
|
|
(267 |
) |
|
|
1,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(629 |
) |
|
$ |
13,831 |
|
|
$ |
(43 |
) |
|
$ |
801 |
|
|
$ |
(672 |
) |
|
$ |
14,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and
federal agencies |
|
$ |
(7 |
) |
|
$ |
514 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(7 |
) |
|
$ |
514 |
|
Securities of U.S. states and
political subdivisions |
|
|
(384 |
) |
|
|
4,186 |
|
|
|
(345 |
) |
|
|
1,367 |
|
|
|
(729 |
) |
|
|
5,553 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
(29 |
) |
|
|
3,568 |
|
|
|
(1 |
) |
|
|
31 |
|
|
|
(30 |
) |
|
|
3,599 |
|
Private collateralized mortgage obligations |
|
|
(3,529 |
) |
|
|
20,331 |
|
|
|
(42 |
) |
|
|
145 |
|
|
|
(3,571 |
) |
|
|
20,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
(3,558 |
) |
|
|
23,899 |
|
|
|
(43 |
) |
|
|
176 |
|
|
|
(3,601 |
) |
|
|
24,075 |
|
Other |
|
|
(509 |
) |
|
|
7,885 |
|
|
|
(280 |
) |
|
|
531 |
|
|
|
(789 |
) |
|
|
8,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
(4,458 |
) |
|
|
36,484 |
|
|
|
(668 |
) |
|
|
2,074 |
|
|
|
(5,126 |
) |
|
|
38,558 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
(452 |
) |
|
|
1,137 |
|
|
|
(428 |
) |
|
|
426 |
|
|
|
(880 |
) |
|
|
1,563 |
|
Other marketable equity securities |
|
|
(46 |
) |
|
|
212 |
|
|
|
(1 |
) |
|
|
2 |
|
|
|
(47 |
) |
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
(498 |
) |
|
|
1,349 |
|
|
|
(429 |
) |
|
|
428 |
|
|
|
(927 |
) |
|
|
1,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,956 |
) |
|
$ |
37,833 |
|
|
$ |
(1,097 |
) |
|
$ |
2,502 |
|
|
$ |
(6,053 |
) |
|
$ |
40,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the debt securities that had been in a continuous loss position for 12 months or more
at September 30, 2008, was due to changes in market interest rates and spreads and not due to the
credit quality of the securities. As of September 30, 2008, we have received all principal and
interest payments, we believe that the principal and interest on these securities are fully
collectible and we have the intent and ability to retain our investment for a period of time to
allow for any anticipated recovery in market value. We evaluated these securities for impairment in
accordance with our policy and determined that they were not other-than-temporarily impaired as of
September 30, 2008.
48
Our marketable equity securities included approximately $1.7 billion of investments in perpetual
preferred securities at September 30, 2008. These securities were issued by credit-worthy companies
and underwent an extensive credit evaluation at purchase. They provide very attractive
tax-equivalent yields and were current as to periodic distributions in accordance with their
respective terms as of September 30, 2008. We have opportunistically increased our holdings in
these securities over the past 12 months in response to increased yields available in the
marketplace, driven by a significant widening in credit spreads caused by the mortgage and credit
crises. The market value of our holdings in these securities declined during this period in direct
correlation with the continued widening of credit spreads. Unlike common stock whose return is
mostly in the form of price appreciation, these securities were purchased for their high yields,
with purchase decisions underwritten like bonds and debt securities. We evaluated these hybrid
financial instruments for impairment in accordance with our policy and consistent with our
impairment model used for debt securities. We determined that these securities were not
other-than-temporarily impaired as of September 30, 2008, because there was no evidence of credit
deterioration or investment rating downgrades of any issuers to below investment grade, and it was
probable we would continue to receive full contractual payments. We will continue to evaluate the
prospects for recovery in their market value in accordance with our policy for determining
other-than-temporary impairment.
The following table shows the net realized gains (losses) on the sales of securities from the
securities available-for-sale portfolio, including marketable equity securities. Gross realized
losses include other-than-temporary impairment of $893 million and $1,095 million for the third
quarter and first nine months of 2008, respectively, and $3 million and $7 million for the third
quarter and first nine months of 2007. Other-than-temporary impairment for the third quarter and
first nine months of 2008 included $594 million and $627 million, respectively, related to
perpetual preferred securities that were either downgraded to less than investment grade or
evidenced other significant credit deterioration events.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Nine months |
|
|
|
ended Sept. 30 |
, |
|
ended Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
$ |
549 |
|
|
$ |
212 |
|
|
$ |
1,003 |
|
|
$ |
292 |
|
Gross realized losses |
|
|
(948 |
) |
|
|
(23 |
) |
|
|
(1,175 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
(399 |
) |
|
$ |
189 |
|
|
$ |
(172 |
) |
|
$ |
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
5. |
|
LOANS AND ALLOWANCE FOR CREDIT LOSSES |
A summary of the major categories of loans outstanding is shown in the following table. Outstanding
loan balances reflect unearned income, net deferred loan fees, and unamortized discount and premium
totaling $4,528 million, $4,083 million and $3,562 million, at September 30, 2008, December 31,
2007, and September 30, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
104,281 |
|
|
$ |
90,468 |
|
|
$ |
82,598 |
|
Other real estate mortgage |
|
|
44,741 |
|
|
|
36,747 |
|
|
|
33,227 |
|
Real estate construction |
|
|
19,681 |
|
|
|
18,854 |
|
|
|
17,301 |
|
Lease financing |
|
|
7,271 |
|
|
|
6,772 |
|
|
|
6,089 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
175,974 |
|
|
|
152,841 |
|
|
|
139,215 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
77,870 |
|
|
|
71,415 |
|
|
|
66,877 |
|
Real estate 1-4 family junior lien mortgage |
|
|
75,617 |
|
|
|
75,565 |
|
|
|
74,632 |
|
Credit card |
|
|
20,358 |
|
|
|
18,762 |
|
|
|
17,129 |
|
Other revolving credit and installment |
|
|
54,327 |
|
|
|
56,171 |
|
|
|
57,180 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
228,172 |
|
|
|
221,913 |
|
|
|
215,818 |
|
Foreign |
|
|
6,903 |
|
|
|
7,441 |
|
|
|
7,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
411,049 |
|
|
$ |
382,195 |
|
|
$ |
362,922 |
|
|
|
|
|
|
|
|
|
|
|
|
We consider a loan to be impaired when, based on current information and events, we determine that
we will not be able to collect all amounts due according to the loan contract, including scheduled
interest payments. We assess and account for as impaired certain nonaccrual commercial and
commercial real estate loans that are over $3 million and certain consumer, commercial and
commercial real estate loans whose terms have been modified in a troubled debt restructuring. The
recorded investment in impaired loans and the methodology used to measure impairment was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Impairment measurement based on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral value method |
|
$ |
49 |
|
|
$ |
285 |
|
|
$ |
267 |
|
Discounted cash flow method |
|
|
2,159 |
|
|
|
184 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
|
$ |
2,208 |
|
|
$ |
469 |
|
|
$ |
394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $2,097 million, $369 million and $221 million of impaired loans with a related
allowance of $415 million, $50 million and $24 million at September 30, 2008, December 31,
2007, and September 30, 2007, respectively. |
The average recorded investment in impaired loans was $1,826 million and $308 million in third
quarter 2008 and 2007, respectively, and $1,414 million and $273 million in the first nine months
of 2008 and 2007, respectively.
50
The allowance for credit losses consists of the allowance for loan losses and the reserve for
unfunded credit commitments. Changes in the allowance for credit losses were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Nine months |
|
|
|
ended Sept. 30 |
, |
|
ended Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Balance, beginning of period |
|
$ |
7,517 |
|
|
$ |
4,007 |
|
|
$ |
5,518 |
|
|
$ |
3,964 |
|
Provision for credit losses |
|
|
2,495 |
|
|
|
892 |
|
|
|
7,535 |
|
|
|
2,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
(305 |
) |
|
|
(155 |
) |
|
|
(897 |
) |
|
|
(408 |
) |
Other real estate mortgage |
|
|
(9 |
) |
|
|
|
|
|
|
(19 |
) |
|
|
(2 |
) |
Real estate construction |
|
|
(36 |
) |
|
|
(3 |
) |
|
|
(93 |
) |
|
|
(5 |
) |
Lease financing |
|
|
(19 |
) |
|
|
(8 |
) |
|
|
(44 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
(369 |
) |
|
|
(166 |
) |
|
|
(1,053 |
) |
|
|
(439 |
) |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
(146 |
) |
|
|
(22 |
) |
|
|
(330 |
) |
|
|
(71 |
) |
Real estate 1-4 family junior lien mortgage |
|
|
(669 |
) |
|
|
(167 |
) |
|
|
(1,476 |
) |
|
|
(357 |
) |
Credit card |
|
|
(396 |
) |
|
|
(205 |
) |
|
|
(1,078 |
) |
|
|
(579 |
) |
Other revolving credit and installment |
|
|
(586 |
) |
|
|
(473 |
) |
|
|
(1,617 |
) |
|
|
(1,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
(1,797 |
) |
|
|
(867 |
) |
|
|
(4,501 |
) |
|
|
(2,388 |
) |
Foreign |
|
|
(59 |
) |
|
|
(69 |
) |
|
|
(185 |
) |
|
|
(195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan charge-offs |
|
|
(2,225 |
) |
|
|
(1,102 |
) |
|
|
(5,739 |
) |
|
|
(3,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
27 |
|
|
|
35 |
|
|
|
90 |
|
|
|
84 |
|
Other real estate mortgage |
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
7 |
|
Real estate construction |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
Lease financing |
|
|
3 |
|
|
|
3 |
|
|
|
9 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
31 |
|
|
|
41 |
|
|
|
105 |
|
|
|
105 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
7 |
|
|
|
6 |
|
|
|
20 |
|
|
|
18 |
|
Real estate 1-4 family junior lien mortgage |
|
|
28 |
|
|
|
14 |
|
|
|
63 |
|
|
|
39 |
|
Credit card |
|
|
35 |
|
|
|
29 |
|
|
|
113 |
|
|
|
90 |
|
Other revolving credit and installment |
|
|
117 |
|
|
|
105 |
|
|
|
363 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
187 |
|
|
|
154 |
|
|
|
559 |
|
|
|
540 |
|
Foreign |
|
|
12 |
|
|
|
15 |
|
|
|
40 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan recoveries |
|
|
230 |
|
|
|
210 |
|
|
|
704 |
|
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
|
(1,995 |
) |
|
|
(892 |
) |
|
|
(5,035 |
) |
|
|
(2,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances related to business combinations/other |
|
|
10 |
|
|
|
11 |
|
|
|
9 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,027 |
|
|
$ |
4,018 |
|
|
$ |
8,027 |
|
|
$ |
4,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
7,865 |
|
|
$ |
3,829 |
|
|
$ |
7,865 |
|
|
$ |
3,829 |
|
Reserve for unfunded credit commitments |
|
|
162 |
|
|
|
189 |
|
|
|
162 |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
8,027 |
|
|
$ |
4,018 |
|
|
$ |
8,027 |
|
|
$ |
4,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs (annualized) as a
percentage of average total loans |
|
|
1.96 |
% |
|
|
1.01 |
% |
|
|
1.71 |
% |
|
|
0.93 |
% |
Allowance for loan losses as a percentage of total loans |
|
|
1.91 |
% |
|
|
1.06 |
% |
|
|
1.91 |
% |
|
|
1.06 |
% |
Allowance for credit losses as a percentage of total loans |
|
|
1.95 |
|
|
|
1.11 |
|
|
|
1.95 |
|
|
|
1.11 |
|
|
51
The components of other assets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Nonmarketable equity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments |
|
$ |
2,210 |
|
|
$ |
2,024 |
|
|
$ |
1,982 |
|
Federal bank stock |
|
|
2,556 |
|
|
|
1,925 |
|
|
|
1,637 |
|
All other |
|
|
3,437 |
|
|
|
2,981 |
|
|
|
2,672 |
|
|
|
|
|
|
|
|
|
|
|
Total nonmarketable equity investments |
|
|
8,203 |
|
|
|
6,930 |
|
|
|
6,291 |
|
|
|
|
1,442 |
|
|
|
2,218 |
|
|
|
2,526 |
|
Accounts receivable |
|
|
14,650 |
|
|
|
10,913 |
|
|
|
16,750 |
|
Interest receivable |
|
|
2,914 |
|
|
|
2,977 |
|
|
|
3,016 |
|
Core deposit intangibles |
|
|
395 |
|
|
|
435 |
|
|
|
362 |
|
Credit card and other intangibles |
|
|
283 |
|
|
|
319 |
|
|
|
260 |
|
Foreclosed assets: |
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans (1) |
|
|
596 |
|
|
|
535 |
|
|
|
487 |
|
Other |
|
|
644 |
|
|
|
649 |
|
|
|
603 |
|
Due from customers on acceptances |
|
|
111 |
|
|
|
62 |
|
|
|
83 |
|
Other |
|
|
15,441 |
|
|
|
12,107 |
|
|
|
11,359 |
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
44,679 |
|
|
$ |
37,145 |
|
|
$ |
41,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consistent with regulatory reporting requirements, foreclosed assets include foreclosed real
estate securing Government National Mortgage Association (GNMA) loans. Both principal and
interest for GNMA loans secured by the foreclosed real estate are collectible because the
GNMA loans are insured by the Federal Housing Administration or guaranteed by the Department
of Veterans Affairs. |
Income related to nonmarketable equity investments was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Nine months |
|
|
|
ended Sept. 30 |
, |
|
ended Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Net gains (losses) from private equity investments |
|
$ |
(24 |
) |
|
$ |
144 |
|
|
$ |
340 |
(1) |
|
$ |
446 |
|
Net gains (losses) from all other nonmarketable equity investments |
|
|
26 |
|
|
|
(7 |
) |
|
|
36 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains from nonmarketable equity investments |
|
$ |
2 |
|
|
$ |
137 |
|
|
$ |
376 |
|
|
$ |
422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $334 million gain for first quarter 2008 from our ownership in Visa, which completed
its initial public offering in March 2008. See Note 11 in this Report for additional
information. |
52
|
|
|
7. |
|
VARIABLE INTEREST ENTITIES |
We are a primary beneficiary in certain special-purpose entities that are consolidated because we
absorb a majority of each entitys expected losses, receive a majority of each entitys expected
returns, or both. We do not hold a majority voting interest in these entities. Our consolidated
variable interest entities, substantially all of which were formed to invest in securities and to
securitize real estate investment trust securities, had approximately $4.3 billion and $3.5 billion
in total assets at September 30, 2008, and December 31, 2007, respectively. The primary activities
of these entities consist of acquiring and disposing of, and investing and reinvesting in
securities, and issuing beneficial interests secured by those securities to investors. The
creditors of substantially all of these consolidated entities have recourse against us.
We also hold variable interests greater than 20% but less than 50% in certain special-purpose
entities predominantly formed to invest in affordable housing and sustainable energy projects, and
to securitize corporate debt that had approximately $8.0 billion and $5.8 billion in total assets
at September 30, 2008, and December 31, 2007, respectively. We are not required to consolidate
these entities. Our maximum exposure to loss as a result of our involvement with these
unconsolidated variable interest entities was approximately $2.8 billion and $2.0 billion at
September 30, 2008, and December 31, 2007, respectively, primarily representing investments in
entities formed to invest in affordable housing and sustainable energy projects. However, we expect
to recover our investment in these entities over time, primarily through realization of federal tax
credits. We also held investments in asset-backed securities of approximately $7.3 billion and $4.7
billion collateralized by auto leases and cash reserves of $10.6 billion and $6.4 billion at
September 30, 2008, and December 31, 2007, respectively, issued by certain special-purpose entities
where the third-party issuer of the securities is the primary beneficiary.
53
|
|
|
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 Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Fair value, beginning of period |
|
$ |
19,333 |
|
|
$ |
18,733 |
|
|
$ |
16,763 |
|
|
$ |
17,591 |
|
Purchases |
|
|
57 |
|
|
|
188 |
|
|
|
191 |
|
|
|
489 |
|
Servicing from securitizations or asset transfers |
|
|
851 |
|
|
|
951 |
|
|
|
2,642 |
|
|
|
2,808 |
|
Sales |
|
|
|
|
|
|
(292 |
) |
|
|
(269 |
) |
|
|
(1,714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net additions |
|
|
908 |
|
|
|
847 |
|
|
|
2,564 |
|
|
|
1,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to changes in valuation model
inputs or assumptions (1) |
|
|
(546 |
) |
|
|
(638 |
) |
|
|
1,788 |
|
|
|
1,364 |
|
Other changes in fair value (2) |
|
|
(511 |
) |
|
|
(719 |
) |
|
|
(1,931 |
) |
|
|
(2,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total changes in fair value |
|
|
(1,057 |
) |
|
|
(1,357 |
) |
|
|
(143 |
) |
|
|
(951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
19,184 |
|
|
$ |
18,223 |
|
|
$ |
19,184 |
|
|
$ |
18,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principally reflects changes in discount rates and prepayment speed assumptions, mostly due
to changes in interest rates. |
(2) |
|
Represents changes due to collection/realization of expected cash flows over time. |
The changes in amortized MSRs were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Balance, beginning of period |
|
$ |
442 |
|
|
$ |
418 |
|
|
$ |
466 |
|
|
$ |
377 |
|
Purchases (1) |
|
|
2 |
|
|
|
46 |
|
|
|
7 |
|
|
|
101 |
|
Servicing from securitizations or asset transfers (1) |
|
|
8 |
|
|
|
12 |
|
|
|
17 |
|
|
|
33 |
|
Amortization |
|
|
(19 |
) |
|
|
(16 |
) |
|
|
(57 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period (2) |
|
$ |
433 |
|
|
$ |
460 |
|
|
$ |
433 |
|
|
$ |
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of amortized MSRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
$ |
595 |
|
|
$ |
561 |
|
|
$ |
573 |
|
|
$ |
457 |
|
End of period |
|
|
622 |
|
|
|
602 |
|
|
|
622 |
|
|
|
602 |
|
|
|
|
|
(1) |
|
Based on September 30, 2008, assumptions, the weighted-average amortization period for MSRs
added during the third quarter and the first nine months of 2008 was approximately 18.3 years
and 17.1 years, respectively. |
(2) |
|
There was no valuation allowance recorded for the periods presented. |
54
The components of our managed servicing portfolio were:
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
, |
(in billions) |
|
2008 |
|
|
2007 |
|
|
Loans serviced for others (1) |
|
$ |
1,464 |
|
|
$ |
1,380 |
|
Owned loans serviced (2) |
|
|
97 |
|
|
|
97 |
|
|
|
|
|
|
|
|
Total owned servicing |
|
|
1,561 |
|
|
|
1,477 |
|
Sub-servicing |
|
|
19 |
|
|
|
22 |
|
|
|
|
|
|
|
|
Total managed servicing portfolio |
|
$ |
1,580 |
|
|
$ |
1,499 |
|
|
|
|
|
|
|
|
Ratio of MSRs to related loans serviced for others |
|
|
1.34 |
% |
|
|
1.35 |
% |
|
|
|
|
(1) |
|
Consists of 1-4 family first mortgage and commercial mortgage loans.
|
(2) |
|
Consists of mortgages held for sale and 1-4 family first mortgage loans. |
The components of mortgage banking noninterest income were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees (1) |
|
$ |
980 |
|
|
$ |
970 |
|
|
$ |
2,903 |
|
|
$ |
3,031 |
|
Changes in fair value of residential MSRs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to changes in valuation model inputs
or assumptions (2) |
|
|
(546 |
) |
|
|
(638 |
) |
|
|
1,788 |
|
|
|
1,364 |
|
Other changes in fair value (3) |
|
|
(511 |
) |
|
|
(719 |
) |
|
|
(1,931 |
) |
|
|
(2,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total changes in fair value of residential MSRs |
|
|
(1,057 |
) |
|
|
(1,357 |
) |
|
|
(143 |
) |
|
|
(951 |
) |
|
|
|
(19 |
) |
|
|
(16 |
) |
|
|
(57 |
) |
|
|
(51 |
) |
Net derivative gains (losses) from economic hedges (4) |
|
|
621 |
|
|
|
1,200 |
|
|
|
(1,684 |
) |
|
|
(1,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing income, net |
|
|
525 |
|
|
|
797 |
|
|
|
1,019 |
|
|
|
968 |
|
Net gains (losses) on mortgage loan origination/sales
activities |
|
|
276 |
|
|
|
(61 |
) |
|
|
1,419 |
|
|
|
1,069 |
|
All other |
|
|
91 |
|
|
|
87 |
|
|
|
282 |
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking noninterest income |
|
$ |
892 |
|
|
$ |
823 |
|
|
$ |
2,720 |
|
|
$ |
2,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market-related valuation changes to MSRs, net of
economic hedge results (2) + (4) |
|
$ |
75 |
|
|
$ |
562 |
|
|
$ |
104 |
|
|
$ |
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes contractually specified servicing fees, late charges and other ancillary revenues. |
(2) |
|
Principally reflects changes in discount rates and prepayment speed assumptions, mostly due
to changes in interest rates. |
(3) |
|
Represents changes due to collection/realization of expected cash flows over time. |
(4) |
|
Represents results from free-standing derivatives (economic hedges) used to hedge the risk of
changes in fair value of MSRs. See Note 12 Free-Standing Derivatives in this Report for
additional information. |
55
The gross carrying amount of intangible assets and accumulated amortization was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
, |
|
|
2008 |
|
|
2007 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
(in millions) |
|
carrying amount |
|
|
amortization |
|
|
carrying amount |
|
|
amortization |
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSRs (1) |
|
$ |
641 |
|
|
$ |
208 |
|
|
$ |
592 |
|
|
$ |
132 |
|
Core deposit intangibles |
|
|
2,558 |
|
|
|
2,163 |
|
|
|
2,434 |
|
|
|
2,072 |
|
Credit card and other intangibles |
|
|
740 |
|
|
|
471 |
|
|
|
656 |
|
|
|
410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
3,939 |
|
|
$ |
2,842 |
|
|
$ |
3,682 |
|
|
$ |
2,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,184 |
|
|
|
|
|
|
$ |
18,223 |
|
|
|
|
|
Trademark |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 8 in this Report for additional information on MSRs. |
The current year and estimated future amortization expense for intangible assets as of September
30, 2008, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
|
|
|
|
|
|
|
|
deposit |
|
|
|
|
|
|
|
(in millions) |
|
intangibles |
|
|
Other |
(1) |
|
Total |
|
|
Nine months ended September 30, 2008 (actual) |
|
$ |
94 |
|
|
$ |
103 |
|
|
$ |
197 |
|
|
|
|
|
|
|
|
|
|
|
Estimate for year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
126 |
|
|
$ |
132 |
|
|
$ |
258 |
|
2009 |
|
|
120 |
|
|
|
118 |
|
|
|
238 |
|
2010 |
|
|
106 |
|
|
|
106 |
|
|
|
212 |
|
2011 |
|
|
44 |
|
|
|
92 |
|
|
|
136 |
|
2012 |
|
|
23 |
|
|
|
82 |
|
|
|
105 |
|
2013 |
|
|
20 |
|
|
|
71 |
|
|
|
91 |
|
|
|
|
|
(1) |
|
Includes amortized MSRs, and credit card and other intangibles. |
We based our projections of amortization expense shown above on existing asset balances at
September 30, 2008. Future amortization expense will vary based on additional core deposit or other
intangibles acquired through business combinations.
56
The changes in the carrying amount of goodwill as allocated to our operating segments for goodwill
impairment analysis were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
Wholesale |
|
|
Wells Fargo |
|
|
Consolidated |
|
(in millions) |
|
Banking |
(1) |
|
Banking |
(1) |
|
Financial |
|
|
Company |
|
|
|
|
$ |
7,357 |
|
|
$ |
3,552 |
|
|
$ |
366 |
|
|
$ |
11,275 |
|
Goodwill from business combinations |
|
|
473 |
|
|
|
262 |
|
|
|
|
|
|
|
735 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
$ |
7,830 |
|
|
$ |
3,814 |
|
|
$ |
374 |
|
|
$ |
12,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
$ |
8,581 |
|
|
$ |
4,102 |
|
|
$ |
423 |
|
|
$ |
13,106 |
|
Reduction in goodwill related
to divested businesses |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Goodwill from business combinations |
|
|
322 |
|
|
|
97 |
|
|
|
|
|
|
|
419 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
8,903 |
|
|
$ |
4,198 |
|
|
$ |
419 |
|
|
$ |
13,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
To reflect the realignment of our corporate trust business from Community Banking into
Wholesale Banking in first quarter 2008, balances for prior periods have been revised. |
For our goodwill impairment analysis, we allocate all of the goodwill to the individual operating
segments. For management reporting we do not allocate all of the goodwill to the individual
operating segments; some is allocated at the enterprise level. See Note 17 in this Report for
further information on management reporting. The balances of goodwill for management reporting
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
Wholesale |
|
|
Wells Fargo |
|
|
|
|
|
|
Consolidated |
|
(in millions) |
|
Banking |
(1) |
|
Banking |
(1) |
|
Financial |
|
|
Enterprise |
|
|
Company |
|
|
|
|
$ |
3,983 |
|
|
$ |
1,864 |
|
|
$ |
374 |
|
|
$ |
5,797 |
|
|
$ |
12,018 |
|
|
|
|
5,056 |
|
|
|
2,248 |
|
|
|
419 |
|
|
|
5,797 |
|
|
|
13,520 |
|
|
|
|
|
(1) |
|
To reflect the realignment of our corporate trust business from Community Banking into
Wholesale Banking in first quarter 2008, balances for prior periods have been revised. |
11. GUARANTEES AND LEGAL ACTIONS
Guarantees
The guarantees we provide to third parties primarily include standby letters of credit, various
indemnification agreements, guarantees accounted for as derivatives, additional consideration
related to business combinations and contingent performance guarantees.
We issue standby letters of credit, which include performance and financial guarantees, for
customers in connection with contracts between the customers and third parties. Standby letters of
credit assure that the third parties will receive specified funds if customers fail to meet their
contractual obligations. We are obligated to make payment if a customer defaults. Standby letters
of credit were $15.3 billion at September 30, 2008, and $12.5 billion at December 31, 2007,
57
including financial guarantees of $8.9 billion and $6.5 billion, respectively, that we had issued
or purchased participations in. Standby letters of credit are net of participations sold to other
institutions of $2.5 billion at September 30, 2008, and $1.4 billion at December 31, 2007. We also
had commitments for commercial and similar letters of credit of $1.0 billion at September 30, 2008,
and $955 million at December 31, 2007. We consider the credit risk in standby letters of credit,
and commercial and similar letters of credit in determining the allowance for credit losses.
We enter into indemnification agreements in the ordinary course of business under which we agree to
indemnify third parties against any damages, losses and expenses incurred in connection with legal
and other proceedings arising from relationships or transactions with us. These relationships or
transactions include those arising from service as a director or officer of the Company,
underwriting agreements relating to our securities, securities lending, acquisition agreements, and
various other business transactions or arrangements. Because the extent of our obligations under
these agreements depends entirely upon the occurrence of future events, our potential future
liability under these agreements is not determinable.
We write options, floors and caps. Periodic settlements occur on floors and caps based on market
conditions. The fair value of the written options liability in our balance sheet was $1,522 million
at September 30, 2008, and $700 million at December 31, 2007. The aggregate fair value of the
written floors and caps liability was $474 million and $280 million for the same periods,
respectively. Our ultimate obligation under written options, floors and caps is based on future
market conditions and is only quantifiable at settlement. The notional value related to written
options was $78.5 billion at September 30, 2008, and $30.7 billion at December 31, 2007, and the
aggregate notional value related to written floors and caps was $24.9 billion and $26.5 billion for
the same periods, respectively. We offset substantially all options written to customers with
purchased options.
We also enter into credit default swaps under which we buy loss protection from or sell loss
protection to a counterparty in the event of default of a reference obligation. The fair value of
the contracts sold was a liability of $42 million at September 30, 2008, and $20 million at
December 31, 2007. The maximum amount we would be required to pay under the swaps in which we sold
protection, assuming all reference obligations default at a total loss, without recoveries, was
$712 million and $873 million, based on notional value, at September 30, 2008 and December 31,
2007, respectively. We purchased credit default swaps of comparable notional amounts to mitigate
the exposure of the written credit default swaps at September 30, 2008 and December 31, 2007. These
purchased credit default swaps had terms (i.e., the same reference obligation and maturity) that
would offset our exposure from the written default swap contracts in which we are providing
protection to a counterparty.
In connection with certain brokerage, asset management, insurance agency and other acquisitions we
have made, the terms of the acquisition agreements provide for deferred payments or additional
consideration, based on certain performance targets. At September 30, 2008, and December 31, 2007,
the amount of additional consideration we expected to pay was not significant to our financial
statements.
We have entered into various contingent performance guarantees through credit risk participation
arrangements with remaining terms up to 21 years. We will be required to make payments under
58
these
guarantees if a customer defaults on its obligation to perform under certain credit agreements with third parties. The extent of our obligations under these guarantees depends
entirely on future events and was contractually limited to an aggregate liability of approximately
$30 million at September 30, 2008, and $50 million at December 31, 2007.
Wells Fargo is a Class B common shareholder of Visa Inc. (Visa). Based on agreements previously
executed among Wells Fargo, Visa and its predecessors and certain member banks of the Visa USA
network, we may be required to indemnify Visa with respect to certain covered litigation. In
conjunction with its initial public offering, Visa deposited $3 billion of the proceeds of the
offering into a litigation escrow account to be used to satisfy settlement obligations with respect
to prior litigation and to make payments with respect to the future resolution of the covered
litigation. The extent of our future obligations, if any, under these arrangements depends on the
ultimate resolution of the covered litigation. In October of 2008, Visa entered into an agreement
in principle to settle with Discover Financial Services (Discover). We had previously established a
reserve to reflect the fair value of our possible indemnification obligation to Visa for the
Discover litigation.
To maintain a credit rating of AAA for certain funds, we entered into a capital support agreement
in first quarter 2008 for up to $130 million related to one structured investment vehicle (SIV)
held by our AAA-rated non-government money market mutual funds. In third quarter 2008 we fulfilled
our obligation under this agreement by purchasing the SIV from the funds. At September 30, 2008,
the SIV was recorded as a debt security in our securities available-for-sale portfolio. We are
generally not responsible for investment losses incurred by our funds, and we do not have a
contractual or implicit obligation to indemnify such losses or provide additional support to the
funds. While we elected to enter into the capital support agreement for the AAA-rated funds, we are
not obligated and may elect not to provide additional support to these funds or other funds in the
future.
Legal Actions
The following supplements and amends our discussion of certain matters previously reported in Note
15 (Guarantees and Legal Actions) of our 2007 Form 10-K for events occurring in the most recent
quarter.
Citigroup Litigation. On or about October 4, 2008, Citigroup, Inc. (Citigroup) commenced an action
in New York state court against Wells Fargo, Wachovia, and their respective directors alleging, in
part, that our agreement to merge with Wachovia constitutes tortious interference by Wells Fargo of
an agreement between Citigroup and Wachovia. The complaint has been removed to the United States
District Court for the Southern District of New York. After the case was removed, Citigroup
purported to amend the complaint to seek $20 billion in compensatory damages, $20 billion in
restitutionary and unjust enrichment damages, and $40 billion in punitive damages. We believe that
we have valid defenses with respect to Citigroups claims for any damages and will vigorously
defend our position.
Auction Rate Securities. We are engaged in discussions with regulators concerning investigations
into the sale of auction rate securities by Wells Fargo Investments, LLC, Wells Fargo Brokerage
Services, LLC, and Wells Fargo Institutional Securities, LLC, and liquidity solutions for
purchasers.
59
Taking into consideration information currently available, advice of counsel, and established
reserves, we believe that the outcome of pending and threatened legal actions, including the
matters described above, will not have a material adverse effect on the results of operations or
stockholders equity. However, in the event of unexpected future developments, it is possible that
the ultimate resolution of those matters, if unfavorable, may be material to our results of
operations and financial condition for any particular period.
12. DERIVATIVES
Fair Value Hedges
We use interest rate swaps to convert certain of our fixed-rate long-term debt and certificates of
deposit to floating rates to hedge our exposure to interest rate risk. We also enter into
cross-currency swaps and cross-currency interest rate swaps 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. The ineffective portion of these fair value hedges is recorded as part of
noninterest income. In addition, we use derivatives, such as Treasury futures and LIBOR swaps, to
hedge changes in fair value due to changes in interest rates of our commercial real estate mortgage
loans held for sale. Finally, we use interest rate swaps to hedge against changes in fair value of
certain municipal debt securities classified as available for sale and, beginning in
fourth quarter 2007, commercial mortgage-backed securities, due to changes in interest rates.
The ineffective portion of these fair value hedges is recorded in Net gains (losses) on debt
securities available for sale in the income statement. For fair value hedges of long-term debt and
certificates of deposit, commercial real estate loans, franchise loans and debt securities, all
parts of each derivatives gain or loss due to the hedged risk are included in the assessment of
hedge effectiveness.
From time to time, we enter into equity collars to lock in share prices between specified levels
for certain equity securities. As permitted, we include the intrinsic value only (excluding time
value) when assessing hedge effectiveness. We assess hedge effectiveness based on a dollar-offset
ratio, at inception of the hedging relationship and on an ongoing basis, by comparing cumulative
changes in the intrinsic value of the equity collar with changes in the fair value of the hedged
equity securities. The net derivative gain or loss related to the equity collars is recorded in
other noninterest income in the income statement.
At September 30, 2008, all designated fair value hedges continued to qualify as fair value hedges.
Cash Flow Hedges
We hedge floating-rate senior debt against future interest rate increases by using interest rate
swaps to convert floating-rate senior debt to fixed rates and by using interest rate caps and
floors to limit variability of rates. We also use interest rate swaps and floors to hedge the
variability in interest payments received on certain floating-rate commercial loans, due to changes
in interest rates. 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
items effect in earnings is recorded. All parts of gain or loss on these derivatives are included
in the assessment of hedge effectiveness. As of September 30, 2008, all designated cash flow hedges
continued to qualify as cash flow hedges.
60
We expect that $39 million of deferred net gains on derivatives in other comprehensive income at
September 30, 2008, will be reclassified as earnings during the next twelve months, compared with
$34 million of deferred net gains at September 30, 2007. We are hedging our exposure to the
variability of future cash flows for all forecasted transactions for a maximum of six years for
hedges of both floating-rate senior debt and floating-rate commercial loans.
The following table provides net derivative gains and losses related to fair value and cash flow
hedges resulting from the change in value of the derivatives excluded from the assessment of hedge
effectiveness and the change in value of the ineffective portion of the derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30 |
, |
|
Nine months ended Sept. 30 |
, |
(in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Net gains from fair value hedges from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in value of derivatives excluded from
the assessment of hedge effectiveness |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
8 |
|
Ineffective portion of change in value
of derivatives |
|
|
73 |
|
|
|
12 |
|
|
|
116 |
|
|
|
13 |
|
Net gains (losses) from ineffective portion of change
in the value of cash flow hedges |
|
|
(3 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
25 |
|
|
Free-Standing Derivatives
We use free-standing derivatives (economic hedges), in addition to debt securities available for
sale, to hedge the risk of changes in the fair value of residential MSRs, new prime residential
MHFS, derivative loan commitments and other interests held, with the resulting gain or loss
reflected in income.
The derivatives used to hedge residential MSRs include swaps, swaptions, forwards, Eurodollar and
Treasury futures, and options contracts. Net derivative gains (losses) of $621 million and $(1,684)
million for the third quarter and first nine months of 2008, respectively, and $1,200 million and
$(1,061) million for the third quarter and first nine months of 2007, respectively, from economic
hedges related to our mortgage servicing activities are included in mortgage banking noninterest
income. The aggregate fair value of these derivatives used as economic hedges was a net asset of
$685 million at September 30, 2008, $1,652 million at December 31, 2007, and $596 million at
September 30, 2007. Changes in fair value of debt securities available for sale (unrealized gains
and losses) are not included in servicing income, but are reported in cumulative other
comprehensive income (net of tax) or, upon sale, are reported in net gains (losses) on debt
securities available for sale.
Interest rate lock commitments for residential mortgage loans that we intend to sell are considered
free-standing derivatives. Our interest rate exposure on these derivative loan commitments, as well
as new prime residential MHFS carried at fair value under FAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (FAS
159), is hedged with free-standing derivatives (economic hedges) such as forwards and options,
Eurodollar futures and options, and Treasury futures, forwards and options contracts. The
commitments, free-standing derivatives and residential MHFS are carried at fair value with changes
in fair value included in mortgage banking noninterest income. For interest rate lock commitments
issued prior to January 1, 2008, we recorded a zero fair value for the derivative loan commitment
at inception consistent with SAB 105. Effective January 1, 2008,
61
we were required by SAB 109 to include, at inception and during the life of the loan commitment,
the expected net future cash flows related to the associated servicing of the loan as part of the
fair value measurement of derivative loan commitments. The implementation of SAB 109 did not have a
material impact on our results or the valuation of our loan commitments. Changes subsequent to
inception are based on changes in fair value of the underlying loan resulting from the exercise of
the commitment and changes in the probability that the loan will not fund within the terms of the
commitment (referred to as a fall-out factor). The value of the underlying loan is affected
primarily by changes in interest rates and the passage of time. However, changes in investor
demand, such as concerns about credit risk, can also cause changes in the spread relationships
between underlying loan value and the derivative financial instruments that cannot be hedged. The
aggregate fair value of derivative loan commitments in the balance sheet was a net liability of
$114 million at September 30, 2008, a net asset of $6 million at December 31, 2007, and a net
liability of $26 million at September 30, 2007, and is included in the caption Interest rate
contracts under Customer Accommodation, Trading and Other Free-Standing Derivatives in the
following table.
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.
Additionally, free-standing derivatives include embedded derivatives that are required to be
accounted for separate from their host contract. We periodically issue 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.
Counterparty Credit Risk
By using derivatives, we are exposed to credit risk if counterparties to the derivative contracts
do not perform as expected. If a counterparty fails to perform, our counterparty credit risk is
equal to the amount reported as a derivative asset in our balance sheet. The
amount 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. Counterparty credit risk related to derivatives is considered and,
if material, provided for separately.
62
In connection with the bankruptcy filing by Lehman Brothers in September 2008, we recognized a $106
million charge in noninterest income related to unsecured counterparty exposure on our derivative
contracts with Lehman Brothers. The bankruptcy filing triggered an early termination of the
derivative contracts that after consideration of the master netting arrangement and posted cash
collateral, resulted in a net amount due to us of $106 million. We assessed the collectability of
this receivable and determined it was not realizable. We took appropriate actions to replace, as
necessary, the terminated derivative contracts in order to maintain our various risk management
strategies that previously involved the Lehman Brothers derivative contracts.
Derivative Financial Instruments Summary Information
The gross positive fair value and net fair value for derivatives at September 30, 2008, and
December 31, 2007, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
positive |
|
Net fair |
|
|
positive |
|
Net fair |
|
(in millions) |
|
fair value(2 |
) |
|
value |
|
fair value(2 |
) |
|
value |
|
|
ASSET/LIABILITY MANAGEMENT HEDGES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedge contracts accounted
for under FAS 133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
$ |
1,311 |
|
$ |
747 |
|
|
|
$ |
1,419 |
|
$ |
1,147 |
|
Equity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Foreign exchange contracts |
|
|
|
862 |
|
|
629 |
|
|
|
|
1,399 |
|
|
1,376 |
|
Free-standing derivatives (economic hedges) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1) |
|
|
|
4,007 |
|
|
622 |
|
|
|
|
2,183 |
|
|
1,455 |
|
Equity contracts |
|
|
|
1 |
|
|
1 |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
150 |
|
|
150 |
|
|
|
|
202 |
|
|
202 |
|
CUSTOMER ACCOMMODATION, TRADING AND
OTHER FREE-STANDING DERIVATIVES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
5,192 |
|
|
673 |
|
|
|
|
3,893 |
|
|
444 |
|
Commodity contracts |
|
|
|
1,399 |
|
|
127 |
|
|
|
|
731 |
|
|
116 |
|
Equity contracts |
|
|
|
771 |
|
|
63 |
|
|
|
|
571 |
|
|
86 |
|
Foreign exchange contracts |
|
|
|
1,062 |
|
|
58 |
|
|
|
|
726 |
|
|
72 |
|
Credit contracts |
|
|
|
117 |
|
|
67 |
|
|
|
|
75 |
|
|
51 |
|
|
|
|
|
(1) |
|
Includes free-standing derivatives (economic hedges) used to hedge the risk of changes in
the fair value of residential MSRs, MHFS, interest rate lock commitments and other
interests held. |
(2) |
|
Gross positive fair value represents those derivatives in a gain position prior to the
consideration of derivatives in a loss position under master netting agreements, and related cash
collateral. Including these effects, our net derivative assets (or amount of credit risk) at
September 30,2008, totaled $5.7 billion. Cash collateral netted under the master netting
arrangements totaled $2.5 billion. |
63
13. FAIR VALUES OF ASSETS AND LIABILITIES
We use fair value measurements to record fair value adjustments to certain assets and liabilities
and to determine fair value disclosures. Trading assets, securities available for sale,
derivatives, prime residential mortgages held for sale (MHFS) and residential MSRs are recorded at
fair value on a recurring basis. Additionally, from time to time, we may be required to record at
fair value other assets on a nonrecurring basis, such as nonprime residential and commercial MHFS,
loans held for sale, 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.
Under FAS 159, we elected to measure MHFS at fair value prospectively for new prime residential
MHFS originations, for which an active secondary market and readily available market prices
generally exist to reliably support fair value pricing models used for these loans. We also elected
to remeasure at fair value certain of our other interests held related to residential loan sales
and securitizations. We believe the election for MHFS and other interests held (which are now
hedged with free-standing derivatives (economic hedges) along with our MSRs) will reduce certain
timing differences and better match changes in the value of these assets with changes in the value
of derivatives used as economic hedges for these assets.
Under FAS 159, we were also required to adopt FAS 157, Fair Value Measurements (FAS 157). FAS 157
defines fair value, establishes a consistent framework for measuring fair value and expands
disclosure requirements for fair value measurements. The disclosures required under FAS 159 and FAS
157 are included in this Note.
Fair Value Hierarchy
Under FAS 157, we group our assets and liabilities at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used
to determine fair value. These levels are:
|
|
Level 1 Valuation is based upon quoted prices for identical instruments traded in active
markets. |
|
|
Level 2 Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in the
market. |
|
|
Level 3 Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect estimates of
assumptions that market participants would use in pricing the asset or liability. Valuation
techniques include use of option pricing models, discounted cash flow models and similar
techniques. |
64
The table below presents the balances of assets and liabilities measured at fair value on a
recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Balance at September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,298 |
|
|
$ |
1,403 |
|
|
$ |
5,385 |
|
|
$ |
510 |
|
Securities available for sale |
|
|
57,440 |
|
|
|
32,734 |
|
|
|
20,969 |
|
|
|
3,737 |
(2) |
Mortgages held for sale |
|
|
26,714 |
|
|
|
|
|
|
|
26,636 |
|
|
|
78 |
|
Mortgage servicing rights (residential) |
|
|
18,223 |
|
|
|
|
|
|
|
|
|
|
|
18,223 |
|
Other assets (1) |
|
|
1,060 |
|
|
|
791 |
|
|
|
249 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
110,735 |
|
|
$ |
34,928 |
|
|
$ |
53,239 |
|
|
$ |
22,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,079 |
) |
|
$ |
(1,936 |
) |
|
$ |
(822 |
) |
|
$ |
(321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,097 |
|
|
$ |
1,492 |
|
|
$ |
7,150 |
|
|
$ |
455 |
|
Securities available for sale |
|
|
86,882 |
|
|
|
46,545 |
|
|
|
30,385 |
|
|
|
9,952 |
(2) |
Mortgages held for sale |
|
|
17,290 |
|
|
|
|
|
|
|
12,135 |
|
|
|
5,155 |
|
Mortgage servicing rights (residential) |
|
|
19,184 |
|
|
|
|
|
|
|
|
|
|
|
19,184 |
|
Other assets (1) |
|
|
2,259 |
|
|
|
1,940 |
|
|
|
294 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
134,712 |
|
|
$ |
49,977 |
|
|
$ |
49,964 |
|
|
$ |
34,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,767 |
) |
|
$ |
(7,455 |
) |
|
$ |
(2,762 |
) |
|
$ |
(550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Derivatives are included in this category. |
(2) |
|
Non-rated asset-backed securities collateralized by auto leases and cash reserves represent
most of this balance. |
We continue to invest in asset-backed securities collateralized by auto leases and cash reserves
that provide attractive yields and are structured equivalent to investment-grade securities. Based
on our experience with underwriting auto leases and the significant overcollateralization of our
interests, which results in retention by the counterparty of a significant amount of the primary
risks of the investments (credit risk and residual value risk of the autos), we consider these
assets to be of high credit quality. The securities are relatively short duration, therefore not as
sensitive to market interest rate movements.
At September 30, 2008, trading assets included securities of $1,091 million and $1,058 million in
Level 1 and Level 2, respectively, and securities available for sale included $45,075 million,
$29,824 million and $1,726 million in Level 1, Level 2 and Level 3, respectively, for which the
fair value measurement is obtained from independent brokers or pricing services.
65
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Net |
|
|
Other |
|
|
|
assets |
|
|
Securities |
|
|
Mortgages |
|
|
servicing |
|
|
derivative |
|
|
liabilities |
|
|
|
(excluding |
|
|
available |
|
|
held for |
|
|
rights |
|
|
assets and |
|
|
(excluding |
|
(in millions) |
|
derivatives) |
|
|
for sale |
|
|
sale |
|
|
(residential) |
|
|
liabilities |
|
|
derivatives) |
|
|
Quarter ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
$ |
466 |
|
|
$ |
2,014 |
|
|
$ |
|
|
|
$ |
18,733 |
|
|
$ |
(79 |
) |
|
$ |
(277 |
) |
Total net gains (losses) for the quarter included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
(52 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1,357 |
) |
|
|
124 |
|
|
|
(19 |
) |
Other comprehensive income |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances and settlements, net |
|
|
96 |
|
|
|
1,731 |
|
|
|
16 |
|
|
|
847 |
|
|
|
(71 |
) |
|
|
21 |
|
Transfer into Level 3 |
|
|
|
|
|
|
|
|
|
|
63 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of quarter |
|
$ |
510 |
|
|
$ |
3,737 |
|
|
$ |
78 |
|
|
$ |
18,223 |
|
|
$ |
(26 |
) |
|
$ |
(275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses included in net income
for the quarter relating to assets and liabilities
held at September 30, 2007 (1) |
|
$ |
(37 |
)(2) |
|
$ |
|
|
|
$ |
(1 |
)(4) |
|
$ |
(603 |
)(4)(5) |
|
$ |
(17 |
)(4) |
|
$ |
(20 |
)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of quarter |
|
$ |
547 |
|
|
$ |
8,604 |
|
|
$ |
5,276 |
|
|
$ |
19,333 |
|
|
$ |
(47 |
) |
|
$ |
(357 |
) |
Total net gains (losses) for the quarter included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
(90 |
) |
|
|
(181 |
) |
|
|
14 |
|
|
|
(1,057 |
) |
|
|
(41 |
) |
|
|
(83 |
) |
Other comprehensive income |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Purchases, sales, issuances and settlements, net |
|
|
(4 |
) |
|
|
1,092 |
|
|
|
(76 |
) |
|
|
908 |
|
|
|
(24 |
) |
|
|
28 |
|
Transfers into (out of) Level 3 |
|
|
|
|
|
|
456 |
(3) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of quarter |
|
$ |
453 |
|
|
$ |
9,952 |
|
|
$ |
5,155 |
|
|
$ |
19,184 |
|
|
$ |
(111 |
) |
|
$ |
(412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) included in net income
for the quarter relating to assets and liabilities
held at September 30, 2008 (1) |
|
$ |
(72 |
)(2) |
|
$ |
(26 |
) |
|
$ |
12 |
(4) |
|
$ |
(546 |
)(4)(5) |
|
$ |
(105 |
)(4) |
|
$ |
(82 |
)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
360 |
|
|
$ |
3,447 |
|
|
$ |
|
|
|
$ |
17,591 |
|
|
$ |
(68 |
) |
|
$ |
(282 |
) |
Total net losses for the period included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
(31 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(951 |
) |
|
|
(259 |
) |
|
|
(47 |
) |
Other comprehensive income |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances and settlements, net |
|
|
181 |
|
|
|
298 |
|
|
|
16 |
|
|
|
1,583 |
|
|
|
297 |
|
|
|
54 |
|
Transfers into Level 3 |
|
|
|
|
|
|
|
|
|
|
63 |
(3) |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
510 |
|
|
$ |
3,737 |
|
|
$ |
78 |
|
|
$ |
18,223 |
|
|
$ |
(26 |
) |
|
$ |
(275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) included in net income
for the period relating to assets and liabilities
held at September 30, 2007 (1) |
|
$ |
15 |
(2) |
|
$ |
|
|
|
$ |
(1 |
)(4) |
|
$ |
1,341 |
(4)(5) |
|
$ |
(22 |
)(4) |
|
$ |
(48 |
)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
418 |
|
|
$ |
5,381 |
|
|
$ |
146 |
|
|
$ |
16,763 |
|
|
$ |
6 |
|
|
$ |
(280 |
) |
Total net gains (losses) for the period included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
23 |
|
|
|
(258 |
) |
|
|
(34 |
) |
|
|
(143 |
) |
|
|
(531 |
) |
|
|
(184 |
) |
Other comprehensive income |
|
|
|
|
|
|
(359 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Purchases, sales, issuances and settlements, net |
|
|
12 |
|
|
|
2,999 |
|
|
|
714 |
|
|
|
2,564 |
|
|
|
413 |
|
|
|
52 |
|
Transfers into Level 3 |
|
|
|
|
|
|
2,189 |
(3) |
|
|
4,329 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
453 |
|
|
$ |
9,952 |
|
|
$ |
5,155 |
|
|
$ |
19,184 |
|
|
$ |
(111 |
) |
|
$ |
(412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) included in net income
for the period relating to assets and liabilities
held at September 30, 2008 (1) |
|
$ |
93 |
(2) |
|
$ |
(94 |
) |
|
$ |
(33 |
)(4) |
|
$ |
1,796 |
(4)(5) |
|
$ |
(113 |
)(4) |
|
$ |
(184 |
)(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents only net losses that are due to changes in economic conditions and managements
estimates of fair value and excludes changes due to the collection/realization of cash flows
over time. |
(2) |
|
Included in other noninterest income. |
(3) |
|
Represents transfers from Level 2 of residential mortgages held for sale and debt securities
(including collateralized debt obligations) for which significant inputs to the valuation
became unobservable, largely due to reduced levels of market liquidity. Related gains and
losses for the period are included in above table. |
(4) |
|
Included in mortgage banking noninterest income. |
(5) |
|
Represents total unrealized losses of $546 million and $638 million, net of losses of nil and
$35 million related to sales, for third quarter 2008 and 2007, respectively, and total
unrealized gains of $1,788 million and $1,364 million, net of gains (losses) of $(8) million
and $23 million related to sales, for the nine months ended September 30, 2008 and 2007,
respectively. These unrealized gains/losses relating to MSRs are substantially offset by
losses/gains on derivatives economically hedging the risk in fair value changes of residential
MSRs, as discussed further in Note 8 in this Report. |
66
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring
basis in accordance with GAAP. These adjustments to fair value usually result from application of
lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair
value on a nonrecurring basis that were still held in the balance sheet at quarter end, the
following table provides the level of valuation assumptions used to determine each adjustment and
the carrying value of the related individual assets or portfolios at quarter end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses |
|
|
|
Carrying value at quarter end |
|
|
for nine |
|
(in millions) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,984 |
|
|
$ |
|
|
|
$ |
2,984 |
|
|
$ |
|
|
|
$ |
(131 |
) |
Loans held for sale |
|
|
668 |
|
|
|
|
|
|
|
668 |
|
|
|
|
|
|
|
(20 |
) |
Loans (1) |
|
|
602 |
|
|
|
|
|
|
|
583 |
|
|
|
19 |
|
|
|
(2,134 |
) |
Private equity investments |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
(31 |
) |
Foreclosed assets (2) |
|
|
362 |
|
|
|
|
|
|
|
362 |
|
|
|
|
|
|
|
(142 |
) |
Operating lease assets |
|
|
46 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
` |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,393 |
|
|
$ |
|
|
|
$ |
1,220 |
|
|
$ |
173 |
|
|
$ |
(153 |
) |
Loans held for sale |
|
|
400 |
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
(25 |
) |
Loans (1) |
|
|
1,118 |
|
|
|
|
|
|
|
1,054 |
|
|
|
64 |
|
|
|
(4,167 |
) |
Private equity investments |
|
|
25 |
|
|
|
19 |
|
|
|
|
|
|
|
6 |
|
|
|
(29 |
) |
Foreclosed assets (2) |
|
|
298 |
|
|
|
|
|
|
|
241 |
|
|
|
57 |
|
|
|
(136 |
) |
Operating lease assets |
|
|
69 |
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents carrying value and related write-downs of loans for which adjustments are
predominantly based on the appraised value of the collateral. The carrying value of loans
fully charged-off, which includes unsecured lines and loans, is zero. |
(2) |
|
Represents the fair value and related losses of foreclosed real estate and other collateral
owned that were measured at fair value subsequent to their initial classification as
foreclosed assets. |
67
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
|
Fair value |
|
|
Aggregate |
|
|
carrying amount |
|
|
Fair value |
|
|
Aggregate |
|
|
carrying amount |
|
|
|
carrying |
|
|
unpaid |
|
|
less aggregate |
|
|
carrying |
|
|
unpaid |
|
|
less aggregate |
|
(in millions) |
|
amount |
|
|
principal |
|
|
unpaid principal |
|
|
amount |
|
|
principal |
|
|
unpaid principal |
|
|
Mortgages held for sale reported at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
17,290 |
|
|
$ |
17,305 |
|
|
$ |
(15 |
)(1) |
|
$ |
26,714 |
|
|
$ |
26,403 |
|
|
$ |
311 |
(1) |
Nonaccrual loans |
|
|
104 |
|
|
|
216 |
|
|
|
(112 |
) |
|
|
21 |
|
|
|
29 |
|
|
|
(8 |
) |
Loans 90 days or more past due and still accruing |
|
|
41 |
|
|
|
48 |
|
|
|
(7 |
) |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
(1) |
|
The difference between fair value carrying amount and aggregate unpaid principal includes
changes in fair value recorded at and subsequent to funding, gains and losses on the related
loan commitment prior to funding, and premiums on acquired loans. |
The assets accounted for under FAS 159 are initially measured at fair value. Gains and losses from
initial measurement and subsequent changes in fair value are recognized in earnings. The changes in
fair values related to initial measurement and subsequent changes in fair value included in
earnings for these assets measured at fair value are shown, by income statement line item, below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30 |
, |
|
Nine months ended September 30 |
, |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Mortgages |
|
|
Other |
|
|
Mortgages |
|
|
Other |
|
|
Mortgages |
|
|
Other |
|
|
Mortgages |
|
|
Other |
|
|
|
held |
|
|
interests |
|
|
held |
|
|
interests |
|
|
held |
|
|
interests |
|
|
held |
|
|
interests |
|
(in millions) |
|
for sale |
|
|
held |
|
|
for sale |
|
|
held |
|
|
for sale |
|
|
held |
|
|
for sale |
|
|
held |
|
|
Changes in fair value included in net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on mortgage loan
origination/sales activities (1) |
|
$ |
595 |
|
|
$ |
|
|
|
$ |
355 |
|
|
$ |
|
|
|
$ |
1,444 |
|
|
$ |
|
|
|
$ |
477 |
|
|
$ |
|
|
Other noninterest income |
|
|
|
|
|
|
(88 |
) |
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
(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.
68
We are authorized to issue 20 million shares of preferred stock and 4 million shares of preference
stock, both without par value. Preferred shares outstanding rank senior to common shares both as to
dividends and liquidation preference but have no general voting rights. We have not issued any
preference shares under this authorization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued and outstanding |
|
|
Carrying amount (in millions) |
|
|
Adjustable |
|
|
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
|
Sept. 30 |
, |
|
Dec. 31 |
, |
|
Sept. 30 |
, |
|
dividends rate |
|
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Minimum |
|
|
Maximum |
|
|
ESOP Preferred Stock (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,708 |
|
|
|
|
|
|
|
|
|
|
$ |
198 |
|
|
$ |
|
|
|
$ |
|
|
|
|
10.50 |
% |
|
|
11.50 |
% |
|
|
|
122,659 |
|
|
|
135,124 |
|
|
|
181,016 |
|
|
|
122 |
|
|
|
135 |
|
|
|
181 |
|
|
|
10.75 |
|
|
|
11.75 |
|
|
|
|
92,749 |
|
|
|
95,866 |
|
|
|
104,966 |
|
|
|
93 |
|
|
|
96 |
|
|
|
105 |
|
|
|
10.75 |
|
|
|
11.75 |
|
|
|
|
70,834 |
|
|
|
73,434 |
|
|
|
81,134 |
|
|
|
71 |
|
|
|
73 |
|
|
|
81 |
|
|
|
9.75 |
|
|
|
10.75 |
|
|
|
|
53,750 |
|
|
|
55,610 |
|
|
|
62,960 |
|
|
|
54 |
|
|
|
56 |
|
|
|
63 |
|
|
|
8.50 |
|
|
|
9.50 |
|
|
|
|
35,718 |
|
|
|
37,043 |
|
|
|
43,143 |
|
|
|
36 |
|
|
|
37 |
|
|
|
43 |
|
|
|
8.50 |
|
|
|
9.50 |
|
|
|
|
24,889 |
|
|
|
25,779 |
|
|
|
31,679 |
|
|
|
25 |
|
|
|
26 |
|
|
|
32 |
|
|
|
10.50 |
|
|
|
11.50 |
|
|
|
|
16,073 |
|
|
|
16,593 |
|
|
|
21,593 |
|
|
|
16 |
|
|
|
17 |
|
|
|
21 |
|
|
|
10.50 |
|
|
|
11.50 |
|
|
|
|
8,844 |
|
|
|
9,094 |
|
|
|
13,744 |
|
|
|
9 |
|
|
|
9 |
|
|
|
14 |
|
|
|
11.50 |
|
|
|
12.50 |
|
|
|
|
1,220 |
|
|
|
1,261 |
|
|
|
3,961 |
|
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
10.30 |
|
|
|
11.30 |
|
|
|
|
|
|
|
|
|
|
|
|
539 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
10.75 |
|
|
|
11.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP Preferred Stock |
|
|
625,444 |
|
|
|
449,804 |
|
|
|
544,735 |
|
|
$ |
625 |
|
|
$ |
450 |
|
|
$ |
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(667 |
) |
|
$ |
(482 |
) |
|
$ |
(583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Liquidation preference $1,000. At September 30, 2008, December 31, 2007, and September 30,
2007, additional paid-in capital included $42 million, $32 million and $38 million,
respectively, related to preferred stock. |
(2) |
|
In accordance with the American Institute of Certified Public Accountants (AICPA) Statement
of Position 93-6, Employers Accounting for Employee Stock Ownership Plans, we recorded a
corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP
Preferred Stock. The unearned ESOP shares are reduced as shares of the ESOP Preferred Stock
are committed to be released. |
The Emergency Economic Stabilization Act of 2008 authorizes the United States Treasury Department
(Treasury Department) to use appropriated funds to restore liquidity and stability to the U.S.
financial system. As part of this authority, on October 28, 2008, at the request of the Treasury
Department and pursuant to a Letter Agreement and related Securities Purchase Agreement dated
October 26, 2008, we issued 25,000 shares of Wells Fargos
Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value, having a liquidation
amount per share equal to $1,000,000, for a total price of $25 billion. The shares of these
preferred securities may be evidenced by depositary shares, with each depositary share representing
1/1,000 interest in one share of preferred stock. The preferred securities pay cumulative dividends
at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. We may
not redeem the preferred securities during the first three years except with the proceeds from a
qualifying equity offering. After three years, we may, at our option, redeem the preferred
securities at par value plus accrued and unpaid dividends. The preferred securities are generally
non-voting. The preferred securities will be accounted for as a component of Tier 1 capital.
69
We sponsor noncontributory qualified defined benefit retirement plans including the Cash Balance
Plan. The Cash Balance Plan is an active plan that covers eligible employees (except employees of
certain subsidiaries).
Although we will not be required to make a contribution in 2008 for the Cash Balance Plan, our
decision on how much to contribute, if any, will be based on the maximum deductible contribution
under the Internal Revenue Code and other factors, including the actual investment performance of
plan assets during 2008. Given these uncertainties, we cannot estimate at this time the amount, if
any, that we will contribute in 2008 to the Cash Balance Plan.
Under FAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
an amendment of FASB Statements No. 87, 88, 106, and 132(R), we are required to change our
measurement date for our pension and postretirement plan assets and benefit obligations from
November 30 to December 31 beginning in 2008. To reflect this change, we recorded an $8 million
(after tax) adjustment to the 2008 beginning balance of retained earnings.
The net periodic benefit cost was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits |
|
|
|
|
|
|
Pension benefits |
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Other |
|
|
|
|
|
|
Non- |
|
|
Other |
|
(in millions) |
|
Qualified |
|
|
qualified |
|
|
benefits |
|
|
Qualified |
|
|
qualified |
|
|
benefits |
|
Quarter ended September 30, |
|
2008 |
|
|
2007 |
|
|
|
$ |
73 |
|
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
71 |
|
|
$ |
4 |
|
|
$ |
4 |
|
Interest cost |
|
|
69 |
|
|
|
5 |
|
|
|
10 |
|
|
|
60 |
|
|
|
4 |
|
|
|
10 |
|
Expected return on plan assets |
|
|
(119 |
) |
|
|
|
|
|
|
(10 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
(9 |
) |
Amortization of net actuarial loss (1) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
8 |
|
|
|
4 |
|
|
|
1 |
|
Amortization of prior service cost |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
23 |
|
|
$ |
11 |
|
|
$ |
2 |
|
|
$ |
27 |
|
|
$ |
11 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
219 |
|
|
$ |
11 |
|
|
$ |
10 |
|
|
$ |
211 |
|
|
$ |
12 |
|
|
$ |
12 |
|
Interest cost |
|
|
207 |
|
|
|
16 |
|
|
|
30 |
|
|
|
182 |
|
|
|
12 |
|
|
|
30 |
|
Expected return on plan assets |
|
|
(358 |
) |
|
|
|
|
|
|
(30 |
) |
|
|
(337 |
) |
|
|
|
|
|
|
(27 |
) |
Amortization of net actuarial loss (1) |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
24 |
|
|
|
10 |
|
|
|
4 |
|
Amortization of prior service cost |
|
|
|
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
68 |
|
|
$ |
33 |
|
|
$ |
7 |
|
|
$ |
80 |
|
|
$ |
32 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net actuarial loss is generally amortized over five years. |
70
|
|
|
16. |
|
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 |
|
|
|
|
|
|
Nine months |
|
|
|
ended September 30 |
, |
|
ended September 30 |
, |
(in millions, except per share amounts) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
$ |
1,637 |
|
|
$ |
2,173 |
|
|
$ |
5,389 |
|
|
$ |
6,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding (denominator) |
|
|
3,316.4 |
|
|
|
3,339.6 |
|
|
|
3,309.6 |
|
|
|
3,355.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.49 |
|
|
$ |
0.65 |
|
|
$ |
1.63 |
|
|
$ |
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
3,316.4 |
|
|
|
3,339.6 |
|
|
|
3,309.6 |
|
|
|
3,355.5 |
|
Add: Stock options |
|
|
14.5 |
|
|
|
34.3 |
|
|
|
13.7 |
|
|
|
37.3 |
|
Restricted share rights |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average common shares outstanding (denominator) |
|
|
3,331.0 |
|
|
|
3,374.0 |
|
|
|
3,323.4 |
|
|
|
3,392.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.49 |
|
|
$ |
0.64 |
|
|
$ |
1.62 |
|
|
$ |
1.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008 and 2007, options to purchase 173.7 million and 8.9 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 they were
antidilutive.
71
We have three lines of business for management reporting: Community Banking, Wholesale Banking and
Wells Fargo Financial. The results for these lines of business are based on our management
accounting process, which assigns balance sheet and income statement items to each responsible
operating segment. This process is dynamic and, unlike financial accounting, there is no
comprehensive, authoritative guidance for management accounting equivalent to generally accepted
accounting principles. The management accounting process measures the performance of the operating
segments based on our management structure and is not necessarily comparable with similar
information for other financial services companies. We define our operating segments by product
type and customer segments. If the management structure and/or the allocation process changes,
allocations, transfers and assignments may change. To reflect the realignment of our corporate
trust business from Community Banking into Wholesale Banking in first quarter 2008, balances for
prior periods have been revised.
The Community Banking Group offers a complete line of diversified financial products and services
to consumers and small businesses with annual sales generally up to $20 million in which the owner
generally is the financial decision maker. Community Banking also offers investment management and
other services to retail customers and high net worth individuals, securities brokerage through
affiliates and venture capital financing. These products and services include the Wells Fargo
Advantage FundsSM, a family of mutual funds, as well as personal trust and agency
assets. Loan products include lines of credit, equity lines and loans, equipment and transportation
(recreational vehicle and marine) loans, education loans, origination and purchase of residential
mortgage loans and servicing of mortgage loans and credit cards. Other credit products and
financial services available to small businesses and their owners include receivables and inventory
financing, equipment leases, real estate financing, Small Business Administration financing,
venture capital financing, cash management, payroll services, retirement plans, Health Savings
Accounts and merchant payment processing. Consumer and business deposit products include checking
accounts, savings deposits, market rate accounts, Individual Retirement Accounts (IRAs), time
deposits and debit cards.
Community Banking serves customers through a wide range of channels, which include traditional
banking stores, in-store banking centers, business centers and ATMs. Also, Phone BankSM
centers and the National Business Banking Center provide 24-hour telephone service. Online banking
services include single sign-on to online banking, bill pay and brokerage, as well as online
banking for small business.
The Wholesale Banking Group serves businesses across the United States with annual sales generally
in excess of $10 million. Wholesale Banking provides a complete line of commercial, corporate and
real estate banking products and services. These include traditional commercial loans and lines of
credit, letters of credit, asset-based lending, equipment leasing, mezzanine financing, high-yield
debt, international trade facilities, foreign exchange services, treasury management, investment
management, institutional fixed-income sales, interest rate, commodity and equity risk management,
online/electronic products such as the Commercial Electronic Office® (CEO®)
portal, insurance, corporate trust fiduciary and agency services, and investment banking services.
Wholesale Banking manages and administers institutional investments, employee benefit trusts and
mutual funds, including the Wells Fargo Advantage Funds. Wholesale Banking includes the majority
ownership interest in the Wells Fargo HSBC Trade
72
Bank, which provides trade financing, letters of credit and collection services and is sometimes
supported by the Export-Import Bank of the United States (a public agency of the United States
offering export finance support for American-made products). Wholesale Banking also supports the
commercial real estate market with products and services such as construction loans for commercial
and residential development, land acquisition and development loans, secured and unsecured lines of
credit, interim financing arrangements for completed structures, rehabilitation loans, affordable
housing loans and letters of credit, permanent loans for securitization, commercial real estate
loan servicing and real estate and mortgage brokerage services.
Wells Fargo Financial includes consumer finance and auto finance operations. Consumer finance
operations make direct consumer and real estate loans to individuals and purchase sales finance
contracts from retail merchants from offices throughout the United States, and in Canada and the
Pacific Rim. Auto finance operations specialize in purchasing sales finance contracts directly from
auto dealers and making loans secured by autos in the United States, Canada and Puerto Rico. Wells
Fargo Financial also provides credit cards and lease and other commercial financing.
The Consolidated Company total of average assets includes unallocated goodwill balances held at the
enterprise level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(income/expense in millions, |
|
|
|
|
|
Community |
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
Wells Fargo |
|
|
|
|
|
|
Consolidated |
|
average balances in billions) |
|
|
|
|
|
Banking |
|
|
|
|
|
|
Banking |
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
Company |
|
Quarter ended September 30, |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
$ |
4,205 |
|
|
$ |
3,303 |
|
|
$ |
1,054 |
|
|
$ |
918 |
|
|
$ |
1,122 |
|
|
$ |
1,059 |
|
|
$ |
6,381 |
|
|
$ |
5,280 |
|
Provision for credit losses |
|
|
1,431 |
|
|
|
446 |
|
|
|
294 |
|
|
|
19 |
|
|
|
770 |
|
|
|
427 |
|
|
|
2,495 |
|
|
|
892 |
|
Noninterest income |
|
|
2,998 |
|
|
|
3,020 |
|
|
|
728 |
|
|
|
1,239 |
|
|
|
272 |
|
|
|
314 |
|
|
|
3,998 |
|
|
|
4,573 |
|
Noninterest expense |
|
|
3,447 |
|
|
|
3,713 |
|
|
|
1,393 |
|
|
|
1,230 |
|
|
|
677 |
|
|
|
728 |
|
|
|
5,517 |
|
|
|
5,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
tax expense (benefit) |
|
|
2,325 |
|
|
|
2,164 |
|
|
|
95 |
|
|
|
908 |
|
|
|
(53 |
) |
|
|
218 |
|
|
|
2,367 |
|
|
|
3,290 |
|
Income tax expense (benefit) |
|
|
738 |
|
|
|
717 |
|
|
|
12 |
|
|
|
317 |
|
|
|
(20 |
) |
|
|
83 |
|
|
|
730 |
|
|
|
1,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,587 |
|
|
$ |
1,447 |
|
|
$ |
83 |
|
|
$ |
591 |
|
|
$ |
(33 |
) |
|
$ |
135 |
|
|
$ |
1,637 |
|
|
$ |
2,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
220.5 |
|
|
$ |
197.4 |
|
|
$ |
116.2 |
|
|
$ |
87.5 |
|
|
$ |
67.5 |
|
|
$ |
65.8 |
|
|
$ |
404.2 |
|
|
$ |
350.7 |
|
Average
assets (2) |
|
|
380.4 |
|
|
|
348.1 |
|
|
|
156.6 |
|
|
|
115.9 |
|
|
|
71.4 |
|
|
|
71.7 |
|
|
|
614.2 |
|
|
|
541.5 |
|
Average core deposits |
|
|
254.9 |
|
|
|
243.0 |
|
|
|
65.2 |
|
|
|
63.1 |
|
|
|
|
|
|
|
|
|
|
|
320.1 |
|
|
|
306.1 |
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,977 |
|
|
$ |
9,678 |
|
|
$ |
3,106 |
|
|
$ |
2,661 |
|
|
$ |
3,336 |
|
|
$ |
3,147 |
|
|
$ |
18,419 |
|
|
$ |
15,486 |
|
Provision for credit losses |
|
|
4,739 |
|
|
|
1,105 |
|
|
|
700 |
|
|
|
33 |
|
|
|
2,096 |
|
|
|
1,189 |
|
|
|
7,535 |
|
|
|
2,327 |
|
Noninterest income |
|
|
9,632 |
|
|
|
8,731 |
|
|
|
3,458 |
|
|
|
4,007 |
|
|
|
892 |
|
|
|
961 |
|
|
|
13,982 |
|
|
|
13,699 |
|
Noninterest expense |
|
|
10,520 |
|
|
|
10,873 |
|
|
|
4,228 |
|
|
|
3,783 |
|
|
|
2,091 |
|
|
|
2,268 |
|
|
|
16,839 |
|
|
|
16,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
6,350 |
|
|
|
6,431 |
|
|
|
1,636 |
|
|
|
2,852 |
|
|
|
41 |
|
|
|
651 |
|
|
|
8,027 |
|
|
|
9,934 |
|
Income tax expense |
|
|
2,102 |
|
|
|
1,983 |
|
|
|
521 |
|
|
|
1,007 |
|
|
|
15 |
|
|
|
248 |
|
|
|
2,638 |
|
|
|
3,238 |
|
|
|
|
|
|
|
|
|
|