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 March 31, 2009
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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þ
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Accelerated filer o |
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Non-accelerated filer
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o (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).
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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April 30, 2009 |
Common stock, $1-2/3 par value |
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4,263,860,323 |
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FORM 10-Q
CROSS-REFERENCE INDEX
1
PART I FINANCIAL INFORMATION
FINANCIAL REVIEW
SUMMARY FINANCIAL DATA (1)(2)
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Quarter ended |
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Mar. 31 |
, |
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Dec. 31 |
, |
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Mar. 31 |
, |
($ in millions, except per share amounts) |
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2009 |
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2008 |
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2008 |
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Wells Fargo net income (loss) |
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$ |
3,045 |
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$ |
(2,734 |
) |
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$ |
1,999 |
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Wells Fargo net income (loss) applicable to common stock |
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2,384 |
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(3,020 |
) |
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1,999 |
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Diluted earnings (loss) per common share |
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0.56 |
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(0.84 |
) |
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0.60 |
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Profitability ratios (annualized): |
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Wells Fargo net income (loss) to average assets (ROA) |
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0.96 |
% |
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(1.72 |
)% |
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1.40 |
% |
Net income (loss) to average assets |
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0.97 |
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(1.72 |
) |
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1.41 |
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Wells Fargo net income (loss) applicable to common stock to
average Wells Fargo common stockholders equity (ROE) |
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14.49 |
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(22.32 |
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16.86 |
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Net income (loss) to average total equity |
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11.97 |
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(15.53 |
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16.93 |
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56.2 |
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61.3 |
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51.5 |
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$ |
21,017 |
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$ |
9,477 |
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$ |
10,563 |
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Pre-tax pre-provision profit (4) |
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9,199 |
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3,667 |
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5,121 |
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Dividends declared per common share |
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0.34 |
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0.34 |
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0.31 |
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Average common shares outstanding |
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4,247.4 |
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3,582.4 |
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3,302.4 |
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Diluted average common shares outstanding |
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4,249.3 |
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3,593.6 |
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3,317.9 |
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$ |
855,591 |
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$ |
413,940 |
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$ |
383,919 |
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Average assets |
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1,289,716 |
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633,223 |
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574,994 |
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Average core deposits (5) |
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753,928 |
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344,957 |
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317,278 |
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Average retail core deposits (6) |
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590,502 |
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243,464 |
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228,448 |
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4.16 |
% |
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4.90 |
% |
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4.69 |
% |
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Securities available for sale |
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$ |
178,468 |
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$ |
151,569 |
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$ |
81,787 |
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Loans |
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843,579 |
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864,830 |
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386,333 |
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Allowance for loan losses |
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22,281 |
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21,013 |
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5,803 |
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Goodwill |
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23,825 |
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22,627 |
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13,148 |
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Assets |
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1,285,891 |
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1,309,639 |
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595,221 |
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Core deposits (5) |
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756,183 |
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745,432 |
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327,360 |
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Wells Fargo stockholders equity |
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100,295 |
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99,084 |
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48,159 |
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Total equity |
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107,057 |
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102,316 |
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48,439 |
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Tier 1 capital (7) |
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88,977 |
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86,397 |
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39,211 |
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Total capital (7) |
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131,820 |
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130,318 |
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54,522 |
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Wells Fargo common stockholders equity to assets |
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5.40 |
% |
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5.21 |
% |
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8.09 |
% |
Total equity to assets |
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8.33 |
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7.81 |
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8.14 |
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Average Wells Fargo common stockholders equity to average assets |
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5.17 |
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8.50 |
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8.29 |
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Average total equity to average assets |
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8.11 |
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11.09 |
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8.34 |
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Risk-based capital (7)
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Tier 1 capital |
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8.30 |
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7.84 |
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7.92 |
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Total capital |
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12.30 |
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11.83 |
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11.01 |
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Tier 1 leverage (7) |
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7.09 |
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14.52 |
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7.04 |
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Book value per common share |
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$ |
16.28 |
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$ |
16.15 |
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$ |
14.58 |
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Team members (active, full-time equivalent) |
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272,800 |
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270,800 |
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160,900 |
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High |
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$ |
30.47 |
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$ |
38.95 |
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$ |
34.56 |
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Low |
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7.80 |
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19.89 |
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24.38 |
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Period end |
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14.24 |
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29.48 |
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29.10 |
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(1) |
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Wells Fargo & Company (Wells Fargo) acquired Wachovia Corporation (Wachovia) on December 31,
2008. Because the acquisition was completed on December 31, 2008, Wachovias results are
included in the income statement, average balances and related metrics beginning in 2009.
Wachovias assets and liabilities are included in the consolidated balance sheet beginning on
December 31, 2008. |
(2) |
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On January 1, 2009, we adopted Statement of Financial Accounting Standards (FAS) No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51,
on a retrospective basis for disclosure and, accordingly, prior period information reflects
the adoption. FAS 160 requires that noncontrolling interests be reported as a component of
total equity. |
(3) |
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The efficiency ratio is noninterest expense divided by total revenue (net interest income and
noninterest income). |
(4) |
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Total revenue less noninterest expense. |
(5) |
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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). |
(6) |
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Retail core deposits are total core deposits excluding Wholesale Banking core deposits and
retail mortgage escrow deposits. |
(7) |
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Because the Wachovia acquisition was completed on December 31, 2008, the Tier 1 leverage
ratio at December 31, 2008, which considers period-end Tier 1 capital and quarterly average
assets in the computation of the ratio, does not reflect average assets of Wachovia for 2008.
See Note 19 (Regulatory and Agency Capital Requirements) to Financial Statements in this
Report for additional information. |
2
This Report on Form 10-Q for the quarter ended March 31, 2009, including the Financial Review and
the Financial Statements and related Notes, has forward-looking statements, which may include
forecasts of our financial results and condition, expectations for our operations and business, and
our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking
statements. Actual results might differ significantly from our forecasts and expectations due to
several factors. Some of these factors are described in the Financial Review and in the Financial
Statements and related Notes. For a discussion of other factors, refer to the Risk Factors
section in this Report and to the Risk Factors and Regulation and Supervision sections of our
Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K), filed with the
Securities and Exchange Commission (SEC) and available on the SECs website at www.sec.gov.
OVERVIEW
Wells Fargo & Company is a $1.3 trillion diversified financial services company providing banking,
insurance, investments, mortgage banking, investment banking, retail banking, brokerage and
consumer finance through banking stores, the internet and other distribution channels to consumers,
businesses and institutions in all 50 states, the District of Columbia and in other countries. We
ranked fourth in assets and second in market value of our common stock among our peers at March 31,
2009. When we refer to Wells Fargo, the Company, we, our or us in this Report, we mean
Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the Parent, we mean Wells
Fargo & Company. When we refer to legacy Wells Fargo, we mean Wells Fargo excluding Wachovia
Corporation (Wachovia).
Wells Fargo net income was a record $3.05 billion in first quarter 2009, with net income applicable
to common stock of $2.38 billion. Earnings per common share were $0.56, after merger-related and
restructuring expense of $206 million ($0.03 per common share) and a $1.3 billion credit reserve
build ($0.19 per common share).
On December 31, 2008, Wells Fargo acquired Wachovia. Because the acquisition was completed at the
end of 2008, Wachovias results are included in the income statement, average balances and related
metrics beginning in 2009. Wachovias assets and liabilities are included, at fair value, in the
consolidated balance sheet beginning on December 31, 2008, but not in averages.
On January 1, 2009, we adopted Statement of Financial Accounting Standards (FAS) No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51, on a
retrospective basis for disclosure and, accordingly, prior period information reflects the
adoption. FAS 160 requires that noncontrolling interests be reported as a component of total
equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts
attributable to both Wells Fargo interests and the noncontrolling interests.
Our vision is to satisfy all our customers financial needs, help them succeed financially, be
recognized as the premier financial services company in our markets and be one of 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 both strong and
weak economic cycles, as we can grow by expanding the number of products our current
3
customers have with us. We continued to earn more of our customers business in 2009 in both our retail and
commercial banking businesses.
Despite the continuing turmoil in the credit markets, we continued to lend to credit-worthy
customers. We extended significant credit to U.S. taxpayers in first quarter 2009, $190 billion in
mortgage applications and $101 billion in mortgage originations
we helped over 450,000
homeowners purchase a home or refinance. We have extended more than $225 billion in credit to U.S.
taxpayers since last October. The fundamentals of our time-tested business model are as sound as
ever. In first quarter 2009, our average core deposits were $754 billion. Our cross-sell at legacy
Wells Fargo set records for the tenth consecutive year our average retail banking household now
has 5.81 products, almost one of every four has eight or more products, 6.4 products for Wholesale
Banking customers, and our average middle-market commercial banking customer has almost eight
products. Business banking cross-sell reached 3.66 products at legacy Wells Fargo. Our goal is
eight products per customer, which is currently half of our estimate of potential demand.
We have stated in the past that to consistently grow over the long term, successful companies must
invest in their core businesses and maintain strong balance sheets. In first quarter 2009, we
opened 14 banking stores throughout the combined Company for a retail network total of 6,638
stores. Conversion of Wachovia stores to the Wells Fargo platform is scheduled to begin later this
year.
We believe it is important to maintain a well-controlled environment as we continue to grow our
businesses and integrate the Wachovia businesses. We manage our credit risk by setting what we
believe are sound credit policies for underwriting new business, while monitoring and reviewing the
performance of our loan portfolio. We manage the interest rate and market risks inherent in our
asset and liability balances within prudent ranges, while ensuring adequate liquidity and funding.
We maintain strong capital levels to provide for future growth.
Wachovia Merger
On December 31, 2008, Wells Fargo acquired Wachovia, one of the nations largest diversified
financial services companies. Wachovias assets and
liabilities were included in the December 31, 2008, consolidated balance sheet at their respective
acquisition date fair values. Because the acquisition was completed on December 31, 2008,
Wachovias results of operations were not included in our 2008 income statement, and Wachovias
assets and liabilities did not contribute to the consolidated averages. Beginning in 2009, our
consolidated results and our consolidated average balances include Wachovia.
Because the transaction closed on the last day of the annual reporting period, certain fair value
purchase accounting adjustments were based on preliminary data as of an interim period with
estimates through year end. Accordingly, we are re-validating and, where necessary, refining our
December 31, 2008, fair value estimates and other purchase accounting adjustments. The impact of
these refinements was recorded as an adjustment to goodwill in first quarter 2009. Based on the
purchase price of $23.1 billion and the $13.1 billion fair value of net assets acquired,
inclusive of refinements identified in first quarter 2009, the transaction resulted in goodwill of
$9.9 billion.
4
The more significant fair value adjustments in our purchase accounting for the Wachovia acquisition
were to loans. Certain of the loans acquired from Wachovia have evidence of credit deterioration
since origination, and it is probable that we will not collect all contractually required principal
and interest payments. Such loans are accounted for under American Institute of Certified Public
Accountants (AICPA) Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer (SOP 03-3). SOP 03-3 requires that acquired credit-impaired loans be
recorded at fair value and prohibits carryover of the related allowance for loan losses.
Loans subject to SOP 03-3 are written down to an amount estimated to be collectible. Accordingly,
such loans are not classified as nonaccrual even though they may be contractually past due because
we expect to fully collect the new carrying values of such loans (that is, the new cost basis
arising out of our purchase accounting). Loans subject to SOP 03-3 are also excluded from the
disclosure of loans 90 days or more past due and still accruing interest even though certain of
them are 90 days or more contractually past due.
As a result of the application of SOP 03-3 to certain of Wachovias loans, certain ratios of the
combined Company cannot be used to compare a portfolio that includes acquired credit-impaired loans
accounted for under SOP 03-3 against ones that do not, for example, in comparing peer companies,
and cannot be used to compare ratios across periods such as periods that include the Wachovia
acquisition against prior periods that do not. The ratios particularly affected by the accounting
under SOP 03-3 include the allowance for loan losses and allowance for credit losses as percentages
of loans, of nonaccrual loans and of nonperforming assets; nonaccrual loans and nonperforming
assets as a percentage of total loans; and net charge-offs as a percentage of average loans.
For further detail on the merger see Loan Portfolio in this section and Note 2 (Business
Combinations) to Financial Statements in this Report.
Summary Results
Wells Fargo net income in first quarter 2009 was $3.05 billion ($0.56 per share), compared with
$2.00 billion ($0.60 per share) in first quarter 2008. Wells Fargo return on average total assets
(ROA) was 0.96% and return on average common stockholders equity (ROE) was 14.49% in first quarter
2009, compared with 1.40% and 16.86%, respectively, in first quarter 2008. Revenue, the sum of net
interest income and noninterest income, of $21.02 billion in first quarter 2009 included another
quarter of record, double-digit revenue growth at legacy Wells Fargo, up 16% year over year, as
well as a strong contribution from Wachovia, which accounted for 41% of the Companys combined
revenue. Our results also reflected growth at legacy Wells Fargo in both net interest income and
fee income resulting from our diversified business model. The breadth and depth of our business
model resulted in strong and balanced growth in loans, deposits and fee-based products.
Our balance sheet is well positioned given the current economic environment. Our allowance for
credit losses was $22.8 billion at March 31, 2009, compared with $21.7 billion at December 31,
2008. Our allowance was adequate to cover expected consumer losses for at least the next
12 months and to provide approximately 24 months of anticipated loss coverage for the commercial
and commercial real estate portfolios. We reduced risk in our balance sheet
5
through write-downs taken at December 31, 2008, on Wachovias higher-risk loan and securities portfolios. We recorded
$516 million of other-than-temporary impairment on securities in first quarter 2009. Our ratio of
capitalized mortgage servicing rights (MSRs) to owned servicing declined to 74 basis points, the
lowest ratio since 2003. Since year-end 2008, our higher risk portfolios (home equity loans
originated through third party channels, Pick-a-Pay and indirect auto at legacy Wells Fargo) were
reduced by $4.5 billion and trading assets by $8.4 billion.
Our financial results included the following:
Net interest income on a taxable-equivalent basis was $11.55 billion in first quarter 2009, with
approximately 40% contributed by Wachovia, up from $5.81 billion in first quarter 2008, reflecting
a strong combined net interest margin on average earnings assets of $1.11 trillion. At 4.16% in
first quarter 2009, our net interest margin remained strong and the highest among our large bank
peers, due in part to continued growth in core deposits and deposit pricing discipline.
Noninterest income reached $9.6 billion in first quarter 2009, up from $4.8 billion a year ago,
driven by continued success in satisfying customers financial needs and the combined Companys
expanded breadth of products and services. Noninterest income included:
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Mortgage banking noninterest income of $2.5 billion: |
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$1.6 billion in revenue from mortgage loan originations/sales activities on $101
billion in new originations, includes a reduction to revenue of $138 million to increase
the mortgage repurchase reserve and a write-down of the mortgage warehouse for spread and
other liquidity-related valuation adjustments |
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Unclosed application pipeline of $100 billion, up 41% from prior quarter, indicates
solid origination momentum heading into second quarter 2009 |
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$875 million MSRs mark-to-market net of hedge results, reflecting a $2.8 billion
reduction in the fair value of the MSRs offset by a $3.7 billion hedge gain, with the net
difference largely due to hedge carry income due to low short-term interest rates |
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Trust and investment fees of $2.2 billion reflected solid results in retail brokerage
commissions, managed account fees and asset management fees |
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Service charges on deposit accounts of $1.4 billion reflected continued growth in checking
accounts and the effect of higher average checking account balances |
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Trading revenue of $787 million; approximately two-thirds from customer business, including
revenue earned on sales of foreign exchange and interest rate products and services |
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$516 million write-down through earnings for other-than-temporary impairment on debt and
equity securities, with an additional $334 million (pre tax) of non-credit-related impairment
on debt securities charged directly to equity through other comprehensive income |
Net unrealized losses on securities available for sale declined to $4.7 billion at March 31, 2009,
from $9.9 billion at December 31, 2008. Of the improvement, $4.5 billion was due to the early
adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) No. 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which clarified the
use of trading prices in determining fair value for securities in illiquid markets, thus moderating
the need to use distressed prices in valuing these securities in illiquid markets as we had done in
prior periods. See Current Accounting Developments in this Report for more information on
6
FSP
157-4. The remaining $700 million of the improvement was due to declining interest rates and
narrower credit spreads.
Noninterest expense was $11.82 billion in first quarter 2009, up from $5.44 billion in first
quarter 2008, largely attributable to the Wachovia acquisition. Noninterest expense reflected our
expanded geographic platform and capabilities in businesses such as retail brokerage, asset
management and investment banking, which, like mortgage banking, typically include higher
revenue-based incentive expense than the more traditional banking businesses. Our efficiency ratio
was 56.2% in first quarter 2009.
We expect to generate $5 billion of annual merger-related expense savings, which will begin to
emerge in the second quarter and are expected to be fully realized upon completion of the
integration. We further expect additional efficiency initiatives to lower expenses over the
remainder of 2009. After refining our initial models, we now expect total integration expense to be
less than our original estimate of $7.9 billion and to be spread over the integration period rather
than all by year-end 2009.
Net charge-offs in first quarter 2009 were $3.3 billion (1.54% of average total loans outstanding,
annualized), including $371 million in the Wachovia portfolio, compared with $2.8 billion (2.69%)
in fourth quarter 2008 and $1.5 billion (1.60%) in first quarter 2008. Wachovia loans accounted for
under SOP 03-3 were written down to fair value at December 31, 2008, and accordingly charge-offs on
that portfolio will only occur if the portfolio deteriorates subsequent to the acquisition. All
first quarter 2009 charge-offs were on non-SOP 03-3 loans. Commercial and commercial real estate
loan losses remained at relatively low levels reflecting the historically disciplined underwriting
standards applied by Wells Fargo and the customer-relationship focus in this portfolio. Losses in
residential real estate and credit cards rose modestly in the quarter, in line with expectations,
while other credit losses, principally in indirect auto lending, declined due to seasonality and
our risk reduction actions in indirect auto over the last two years.
As long as the U.S. economy remains weak, losses on the combined portfolio will increase. Over the
last two years, we have taken and will continue to take actions to enable us to navigate through
this current economic and credit cycle. In addition to the significant write-downs taken to reduce
risk in the Wachovia portfolio at close, we ceased originations and are liquidating certain
higher-risk, lower-return portfolios, such as Pick-a-Pay and legacy Wells Fargo indirect auto and
liquidating home equity portfolios. In addition, during first quarter 2009, we incorporated Wells
Fargos risk policies and procedures into Wachovia, which is essential to our ability to properly
manage risk as we continue to meet our customers needs. We believe these risk reduction actions
better position us for continued credit deterioration and economic headwinds.
The provision for credit losses was $4.6 billion in first quarter 2009, $8.4 billion in fourth
quarter 2008 and $2.0 billion in first quarter 2008. The provision in first quarter 2009 included a
$1.3 billion credit reserve build due to higher credit losses inherent in the loan portfolio. The
allowance for credit losses, which consists of the allowance for loan losses and the reserve for
unfunded credit commitments, was $22.8 billion (2.71% of total loans) at March 31, 2009, compared
with $21.7 billion (2.51%) at December 31, 2008, and $6.0 billion (1.56%) at March 31, 2008.
Wachovias allowance related to loans not within the scope of SOP 03-3 of $9.3 billion was carried
over and was included in our allowance as of December 31, 2008.
7
Total nonaccrual loans were $10.52 billion (1.25% of total loans) at March 31, 2009, compared with
$6.80 billion (0.79%) at December 31, 2008, and $3.26 billion (0.84%) at March 31, 2008. Nonaccrual
loans exclude loans acquired from Wachovia accounted for under SOP 03-3. The $3.7 billion increase
in nonaccrual loans from December 31, 2008, represented increases in both the commercial and retail
segments, with $1.5 billion related to Wachovia. The increases in nonaccrual loans were
concentrated in portfolios secured by real estate or with borrowers dependent on the housing
industry. Total nonperforming assets (NPAs) were $12.61 billion (1.50% of total loans) at March 31,
2009, compared with $9.01 billion (1.04%) at December 31, 2008, and $4.50 billion (1.16%) at March
31, 2008. Foreclosed assets were $2.06 billion at March 31, 2009, $2.19 billion at December 31,
2008, and $1.22 billion at March 31, 2008.
We have strengthened our capital position in first quarter 2009. Tangible common equity (TCE) was
$41.1 billion at quarter end, an increase of $4.5 billion. The ratio of TCE to tangible assets was
3.28%, up from 2.86% at December 31, 2008. TCE was 3.84% of risk-weighted assets. At March 31,
2009, Tier 1 capital was $89.0 billion and the Tier 1 capital ratio was 8.30%, up from 7.84% at
December 31, 2008.
The Company and each of its subsidiary banks continued to remain well-capitalized. Our total
risk-based capital (RBC) ratio at March 31, 2009, was 12.30% and our Tier 1 RBC ratio was 8.30%,
exceeding the minimum regulatory guidelines of 8% and 4%, respectively, for bank holding companies.
Our total RBC ratio was 11.83% and our Tier 1 RBC ratio was 7.84% at December 31, 2008. Our Tier 1
leverage ratio was 7.09% and 14.52% at March 31, 2009, and December 31, 2008, respectively,
exceeding the minimum regulatory guideline of 3% for bank holding companies.
On May 7, 2009, the Federal Reserve confirmed that under its adverse stress test scenario the
Companys Tier 1 capital exceeded the minimum level needed for well-capitalized institutions. In
conjunction with the stress test, the Company has agreed with the Federal Reserve to increase
common equity by $13.7 billion by November 9, 2009. On May 8, 2009, the Company agreed to issue 341
million shares of its common stock at a price of $22 per share. Also on May 8, 2009, the
underwriters in the offering exercised their option to purchase up to an additional 51.15 million
shares of common stock from the Company at $22 per share to cover over-allotments. The Company
will receive net proceeds of $8.4 billion from the offering including the exercise of the
over-allotment option. The Company expects to satisfy the remainder of the capital requirement
through profits and other internally generated sources. The Company can satisfy any part of the
capital requirement by exchanging up to $13.7 billion of its $25 billion of Capital Purchase
Program (CPP) funds for the Treasurys Capital Assistance Program (CAP) on a dollar-for-dollar
basis.
8
Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
|
|
FAS 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of
FASB Statement No. 133; |
|
|
FAS 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of
ARB No. 51; |
|
|
FAS 141R (revised 2007), Business Combinations; |
|
|
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly; |
|
|
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments; and |
|
|
FASB Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities. |
In addition, FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments, was issued by the FASB, but is not yet effective. Each of these pronouncements is
described in more detail below.
FAS 161 changes the disclosure requirements for derivative instruments and hedging
activities. It requires enhanced disclosures about how and why an entity uses derivatives, how
derivatives and related hedged items are accounted for, and how derivatives and hedged items affect
an entitys financial position, performance and cash flows. We adopted FAS 161 for first quarter
2009 reporting. See Note 12 (Derivatives) to Financial Statements in this Report for complete
disclosures under FAS 161. Because FAS 161 amends only the disclosure requirements for derivative
instruments and hedged items, the adoption of FAS 161 does not affect our consolidated financial
results.
FAS 160 requires that noncontrolling interests (previously referred to as minority
interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160,
they were classified outside of equity. This new standard also changes the way a noncontrolling
interest is presented in the income statement such that a parents consolidated income statement
includes amounts attributable to both the parents interest and the noncontrolling interest. FAS
160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The
remaining interest is initially recorded at fair value. Other changes in ownership interest where
the parent continues to have a majority ownership interest in the subsidiary are accounted for as
capital transactions. FAS 160 was effective for us on January 1, 2009. Adoption is applied
prospectively to all noncontrolling interests including those that arose prior to the adoption of
FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of
the adoption date.
We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). For
more information, see Contractual Obligations in our 2008 Form 10-K. In connection with the
adoption of FAS 160 on January 1, 2009, we reclassified Prudentials noncontrolling interest to
equity. Under the terms of the original agreement under which the joint venture was established
between Wachovia and Prudential, each party has certain rights such that changes in our ownership
interest can occur. Prudential has stated its intention to exercise its option to put its
9
noncontrolling interest to us at a date in the future, but has not yet done so. As a result of the
issuance of FAS 160 and related interpretive guidance, along with this stated intention, on January
1, 2009, we increased the carrying value of Prudentials noncontrolling interest in the joint
venture to the estimated maximum redemption amount, with the offset recorded to additional paid-in
capital.
FAS 141R requires an acquirer in a business combination to recognize the assets acquired
(including loan receivables), the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, at their fair values as of that date, with limited exceptions.
The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition
date for loans and other assets acquired in a business combination. The revised statement requires
acquisition-related costs to be expensed separately from the acquisition. It also requires
restructuring costs that the acquirer expected but was not obligated to incur, to be expensed
separately from the business combination. FAS 141R is applicable prospectively to business
combinations completed on or after January 1, 2009. We will account for business combinations with
acquisition dates on or after January 1, 2009, under FAS 141R.
FSP FAS 157-4 addresses measuring fair value under FAS 157 in situations where markets are
inactive and transactions are not orderly. The FSP acknowledges that in these circumstances quoted
prices may not be determinative of fair value. The FSP emphasizes, however, that even if there has
been a significant decrease in the volume and level of activity for an asset or liability and
regardless of the valuation technique(s) used, the objective of a fair value measurement has not
changed. Prior to issuance of this FSP, FAS 157 had been interpreted by many companies, including
Wells Fargo, to emphasize that fair value must be measured based on the most recently available
quoted market prices, even for markets that have experienced a significant decline in the volume
and level of activity relative to normal conditions and therefore could have increased frequency of
transactions that are not orderly. Under the provisions of the FSP, price quotes for assets or
liabilities in inactive markets may require adjustment due to uncertainty as to whether the
underlying transactions are orderly. For inactive markets, we note there is little information, if
any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate,
based upon all available facts and circumstances, the degree to which orderly transactions are
occurring. The FSP does not prescribe a specific method for adjusting transaction or quoted prices,
however, it does provide guidance for determining how much weight to give transaction or quoted
prices. Price quotes based upon transactions that are not orderly are not considered to be
determinative of fair value and should be given little, if any, weight in measuring fair value.
Price quotes based upon transactions that are orderly shall be considered in determining fair value
and the weight given is based upon the facts and circumstances. If sufficient information is not
available to determine if price quotes are based upon orderly transactions, less weight should be
given to the price quote relative to other transactions that are known to be orderly.
The provisions of FSP FAS 157-4 are effective in second quarter 2009; however, as permitted under
the pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted
in an increase in the valuation of securities available for sale of $4.5
billion ($2.8 billion after tax), which is included in other comprehensive income, and trading
assets of $18 million, which is reflected in earnings. See Critical Accounting Policies in this
Report for more information.
10
FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment (OTTI)
write-down of debt securities, where fair value is below amortized cost, is triggered in
circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not
that the entity will be required to sell the security before recovery of its amortized cost basis,
or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an
entity intends to sell a security or if it is more likely than not the entity will be required to
sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire
difference between the securitys amortized cost basis and its fair value. If an entity does not
intend to sell the security or it is not more likely than not that it will be required to sell the
security before recovery, the OTTI write-down is separated into an amount representing the credit
loss, which is recognized in earnings, and the amount related to all other factors, which is
recognized in other comprehensive income. The provisions of this FSP are effective in second
quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009,
and increased the beginning balance of retained earnings by $85 million ($53 million after tax)
with a corresponding adjustment to accumulated other comprehensive income for OTTI recorded in
previous periods on securities in our portfolio at January 1, 2009, that would not have been
required had the FSP been effective for those periods.
EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable
rights to dividends or dividend equivalents be treated as participating securities and, therefore,
included in the computation of earnings per share under the two-class method described in FAS 128,
Earnings per Share. This pronouncement is effective on January 1, 2009, with retrospective adoption
required. The adoption of EITF 03-6-1 did not have a material effect on our consolidated financial
statements.
FSP FAS 107-1 and APB 28-1 requires disclosures about fair value of financial instruments
for interim reporting periods as well as in annual financial statements. The provisions of the FSP
are effective for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. We will adopt this FSP for June 30, 2009,
reporting. Because the FSP amends only the disclosure requirements related to the fair value of
financial instruments, the adoption of the FSP will not affect our consolidated financial results.
11
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are fundamental to understanding our results of operations and
financial condition because they require that we use estimates and assumptions that may affect the
value of our assets or liabilities, and our financial results. Six of these policies are critical
because they require management to make difficult, subjective and complex judgments about matters
that are inherently uncertain and because it is likely that materially different amounts would be
reported under different conditions or using different assumptions. These policies govern:
|
|
the allowance for credit losses; |
|
|
acquired loans accounted for under SOP 03-3; |
|
|
the valuation of residential mortgage servicing rights (MSRs); |
|
|
the fair valuation of financial instruments; |
|
|
pension accounting; and |
|
|
income taxes. |
Management has reviewed and approved these critical accounting policies and has discussed these
policies with the Audit and Examination Committee. These policies are described in Financial
Review Critical Accounting Policies and Note 1 (Summary of Significant Accounting Policies) to
Financial Statements in our 2008 Form 10-K. Due to the adoption of FSP FAS 157-4, which affects the
measurement of fair value of certain assets, principally securities and trading assets, we have
updated and provided herein the policy on the fair value of financial instruments, as described
below.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We use fair value measurements to record fair value adjustments to certain financial instruments
and to develop fair value disclosures. See our 2008 Form 10-K for the complete critical accounting
policy related to fair value of financial instruments.
In connection with the adoption of FSP FAS 157-4, we developed policies and procedures to determine
when the level and volume of activity for our assets and liabilities requiring fair value
measurements have declined significantly relative to normal conditions. For items that use price
quotes, such as certain security classes within securities available for sale, the degree of market
inactivity and distressed transactions is estimated to determine the appropriate adjustment to the
price quotes. The methodology we use to adjust the quotes generally involves weighting the price
quotes and results of internal pricing techniques, such as the net present value of future expected
cash flows (with observable inputs, where available) discounted at a rate of return market
participants require. The more active and orderly markets for particular security classes were
determined to be, the more weighting we assign to price quotes. The less active and the orderly
markets were determined to be, the less weighting we assign to price quotes. Applying these
policies to securities available for sale within the scope of the FSP of $40.0 billion (22% of the
securities available-for-sale portfolio) at March 31, 2009, resulted in a $4.5 billion ($2.8
billion after tax) reduction in the net unrealized loss, which is reflected in equity. The more
significant components of the $4.5 billion included $2.3 billion related to residential
mortgage-backed securities and $1.3 billion related to commercial mortgage-backed securities. In
addition, applying these policies to trading assets resulted in an $18 million increase in the fair value of
certain trading assets, which is reflected in first quarter earnings.
12
Approximately 22% of total assets ($285.3 billion) at March 31, 2009, and 19% of total assets
($247.5 billion) at December 31, 2008, consisted of financial instruments recorded at fair value on
a recurring basis. Assets for which fair values were measured using significant Level 3 inputs
(before derivative netting adjustments) represented approximately 22% of these financial
instruments (5% of total assets) at March 31, 2009, and approximately 22% (4% of total assets) at
December 31, 2008. The fair value of the remaining assets were measured using valuation
methodologies involving market-based or market-derived information, collectively Level 1 and 2
measurements.
In first quarter 2009, $5.6 billion of debt securities available for sale were transferred from
Level 2 to Level 3 because significant inputs to the valuation became unobservable, largely due to
reduced levels of market liquidity.
Approximately 2% of total liabilities ($20.6 billion) at March 31, 2009, and 2% ($18.8 billion)
at December 31, 2008, consisted of financial instruments recorded at fair value on a recurring
basis. Liabilities valued using Level 3 measurements (before derivative netting adjustments) were
$8.6 billion and $9.3 billion at March 31, 2009, and December 31, 2008, respectively.
13
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income is the interest earned on debt securities, loans (including yield-related loan
fees) and other interest-earning assets minus the interest paid for deposits and long-term and
short-term debt. The net interest margin is the average yield on earning assets minus the average
interest rate paid for deposits and our other sources of funding. Net interest income and the net
interest margin are presented on a taxable-equivalent basis to consistently reflect income from
taxable and tax-exempt loans and securities based on a 35% federal statutory tax rate.
Net interest income on a taxable-equivalent basis was $11.55 billion in first quarter 2009, with
approximately 40% contributed by Wachovia, and $5.81 billion in first quarter 2008. Net interest
income reflected a strong combined net interest margin of 4.16%, due in part to continued growth in
core deposits and deposit pricing discipline.
Average earning assets increased to $1.1 trillion in first quarter 2009 from $496.9 billion in
first quarter 2008. Average loans increased to $855.6 billion in first quarter 2009 from $383.9
billion a year ago. Average mortgages held for sale increased to $31.1 billion in first quarter
2009 from $26.3 billion a year ago. Average debt securities available for sale increased to $160.4
billion in first quarter 2009 from $75.2 billion a year ago.
Core deposits are a low-cost source of funding and thus an important contributor to growth in net
interest income and the net interest margin. Core deposits include noninterest-bearing deposits,
interest-bearing checking, savings certificates, market rate and other savings, and certain foreign
deposits (Eurodollar sweep balances). Average core deposits rose to $753.9 billion in first quarter
2009 from $317.3 billion in first quarter 2008, with over half of the increase from Wachovia, and
funded 88% and 83% of average loans in first quarter 2009 and 2008, respectively. Total average
retail core deposits, which exclude Wholesale Banking core deposits and retail mortgage escrow
deposits, grew $362.1 billion to $590.5 billion for first quarter 2009 from $228.4 billion a year
ago. Average mortgage escrow deposits were $24.7 billion in first quarter 2009, up $4.3 billion
from $20.4 billion a year ago. Average savings certificates of deposits increased to $170.1 billion
in first quarter 2009 from $41.9 billion a year ago and average noninterest-bearing checking
accounts and other core deposit categories (interest-bearing checking and market rate and other
savings) increased to $554.1 billion in first quarter 2009 from $250.0 billion a year ago. Total
average interest-bearing deposits increased to $635.4 billion in first quarter 2009 from $258.4
billion a year ago.
The following table presents the individual components of net interest income and the net interest
margin.
14
AVERAGE BALANCES, YIELDS AND RATES PAID (TAXABLE-EQUIVALENT BASIS) (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31 |
, |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
24,074 |
|
|
|
0.84 |
% |
|
$ |
50 |
|
|
$ |
3,888 |
|
|
|
3.30 |
% |
|
$ |
32 |
|
Trading assets |
|
|
22,203 |
|
|
|
4.97 |
|
|
|
275 |
|
|
|
5,129 |
|
|
|
3.73 |
|
|
|
48 |
|
Debt securities available for sale (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
|
2,899 |
|
|
|
0.93 |
|
|
|
7 |
|
|
|
975 |
|
|
|
3.86 |
|
|
|
9 |
|
Securities of U.S. states and political subdivisions |
|
|
12,213 |
|
|
|
6.43 |
|
|
|
213 |
|
|
|
6,290 |
|
|
|
7.43 |
|
|
|
120 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
76,545 |
|
|
|
5.71 |
|
|
|
1,068 |
|
|
|
36,097 |
|
|
|
6.10 |
|
|
|
535 |
|
Residential and commercial |
|
|
38,690 |
|
|
|
8.57 |
|
|
|
1,017 |
|
|
|
20,994 |
|
|
|
6.08 |
|
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
115,235 |
|
|
|
6.82 |
|
|
|
2,085 |
|
|
|
57,091 |
|
|
|
6.09 |
|
|
|
859 |
|
Other debt securities (4) |
|
|
30,080 |
|
|
|
6.81 |
|
|
|
551 |
|
|
|
10,825 |
|
|
|
6.93 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities available for sale (4) |
|
|
160,427 |
|
|
|
6.69 |
|
|
|
2,856 |
|
|
|
75,181 |
|
|
|
6.30 |
|
|
|
1,184 |
|
Mortgages held for sale (5) |
|
|
31,058 |
|
|
|
5.34 |
|
|
|
415 |
|
|
|
26,273 |
|
|
|
6.00 |
|
|
|
394 |
|
Loans held for sale (5) |
|
|
7,949 |
|
|
|
3.40 |
|
|
|
67 |
|
|
|
647 |
|
|
|
7.54 |
|
|
|
12 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
196,923 |
|
|
|
3.87 |
|
|
|
1,884 |
|
|
|
91,085 |
|
|
|
6.92 |
|
|
|
1,569 |
|
Other real estate mortgage |
|
|
104,271 |
|
|
|
3.47 |
|
|
|
894 |
|
|
|
37,426 |
|
|
|
6.44 |
|
|
|
600 |
|
Real estate construction |
|
|
34,493 |
|
|
|
3.03 |
|
|
|
258 |
|
|
|
18,932 |
|
|
|
6.06 |
|
|
|
285 |
|
Lease financing |
|
|
15,810 |
|
|
|
8.77 |
|
|
|
347 |
|
|
|
6,825 |
|
|
|
5.77 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
351,497 |
|
|
|
3.89 |
|
|
|
3,383 |
|
|
|
154,268 |
|
|
|
6.65 |
|
|
|
2,552 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
245,494 |
|
|
|
5.64 |
|
|
|
3,444 |
|
|
|
72,308 |
|
|
|
6.90 |
|
|
|
1,246 |
|
Real estate 1-4 family junior lien mortgage |
|
|
110,128 |
|
|
|
5.05 |
|
|
|
1,375 |
|
|
|
75,263 |
|
|
|
7.31 |
|
|
|
1,368 |
|
Credit card |
|
|
23,295 |
|
|
|
12.10 |
|
|
|
704 |
|
|
|
18,776 |
|
|
|
12.33 |
|
|
|
579 |
|
Other revolving credit and installment |
|
|
92,820 |
|
|
|
6.68 |
|
|
|
1,527 |
|
|
|
55,910 |
|
|
|
9.09 |
|
|
|
1,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
471,737 |
|
|
|
6.03 |
|
|
|
7,050 |
|
|
|
222,257 |
|
|
|
8.05 |
|
|
|
4,457 |
|
Foreign |
|
|
32,357 |
|
|
|
4.36 |
|
|
|
349 |
|
|
|
7,394 |
|
|
|
11.27 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (5) |
|
|
855,591 |
|
|
|
5.09 |
|
|
|
10,782 |
|
|
|
383,919 |
|
|
|
7.55 |
|
|
|
7,216 |
|
Other |
|
|
6,140 |
|
|
|
2.87 |
|
|
|
43 |
|
|
|
1,825 |
|
|
|
4.54 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
$ |
1,107,442 |
|
|
|
5.22 |
|
|
|
14,488 |
|
|
$ |
496,862 |
|
|
|
7.19 |
|
|
|
8,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUNDING SOURCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
|
$ |
80,393 |
|
|
|
0.15 |
|
|
|
30 |
|
|
$ |
5,226 |
|
|
|
1.92 |
|
|
|
25 |
|
Market rate and other savings |
|
|
313,445 |
|
|
|
0.54 |
|
|
|
419 |
|
|
|
159,865 |
|
|
|
1.97 |
|
|
|
784 |
|
Savings certificates |
|
|
170,122 |
|
|
|
0.92 |
|
|
|
387 |
|
|
|
41,915 |
|
|
|
3.96 |
|
|
|
413 |
|
Other time deposits |
|
|
25,555 |
|
|
|
1.97 |
|
|
|
124 |
|
|
|
4,763 |
|
|
|
3.53 |
|
|
|
42 |
|
Deposits in foreign offices |
|
|
45,896 |
|
|
|
0.35 |
|
|
|
39 |
|
|
|
46,641 |
|
|
|
2.84 |
|
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
635,411 |
|
|
|
0.64 |
|
|
|
999 |
|
|
|
258,410 |
|
|
|
2.48 |
|
|
|
1,594 |
|
Short-term borrowings |
|
|
76,068 |
|
|
|
0.66 |
|
|
|
123 |
|
|
|
52,970 |
|
|
|
3.23 |
|
|
|
425 |
|
Long-term debt |
|
|
258,957 |
|
|
|
2.77 |
|
|
|
1,783 |
|
|
|
100,686 |
|
|
|
4.29 |
|
|
|
1,077 |
|
Other liabilities |
|
|
3,778 |
|
|
|
3.88 |
|
|
|
36 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
974,214 |
|
|
|
1.22 |
|
|
|
2,941 |
|
|
|
412,066 |
|
|
|
3.02 |
|
|
|
3,096 |
|
Portion of noninterest-bearing funding sources |
|
|
133,228 |
|
|
|
-- |
|
|
|
-- |
|
|
|
84,796 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding sources |
|
$ |
1,107,442 |
|
|
|
1.06 |
|
|
|
2,941 |
|
|
$ |
496,862 |
|
|
|
2.50 |
|
|
|
3,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin and net interest income on
a taxable-equivalent basis (6) |
|
|
|
|
|
|
4.16 |
% |
|
$ |
11,547 |
|
|
|
|
|
|
|
4.69 |
% |
|
$ |
5,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
20,255 |
|
|
|
|
|
|
|
|
|
|
$ |
11,648 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
23,183 |
|
|
|
|
|
|
|
|
|
|
|
13,161 |
|
|
|
|
|
|
|
|
|
Other |
|
|
138,836 |
|
|
|
|
|
|
|
|
|
|
|
53,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets |
|
$ |
182,274 |
|
|
|
|
|
|
|
|
|
|
$ |
78,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING FUNDING SOURCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
160,308 |
|
|
|
|
|
|
|
|
|
|
$ |
84,886 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
50,566 |
|
|
|
|
|
|
|
|
|
|
|
30,062 |
|
|
|
|
|
|
|
|
|
Total equity |
|
|
104,628 |
|
|
|
|
|
|
|
|
|
|
|
47,980 |
|
|
|
|
|
|
|
|
|
Noninterest-bearing
funding sources used to
fund earning assets |
|
|
(133,228 |
) |
|
|
|
|
|
|
|
|
|
|
(84,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noninterest-bearing funding sources |
|
$ |
182,274 |
|
|
|
|
|
|
|
|
|
|
$ |
78,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,289,716 |
|
|
|
|
|
|
|
|
|
|
$ |
574,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our average prime rate was 3.25% and 6.22% for the quarters ended March 31, 2009 and 2008,
respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.24% and
3.29% for the same quarters, 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. |
15
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
ended March 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
|
Service charges on deposit accounts |
|
$ |
1,394 |
|
|
$ |
748 |
|
|
|
|
|
|
|
|
|
|
Trust and investment fees: |
|
|
|
|
|
|
|
|
Trust, investment and IRA fees |
|
|
722 |
|
|
|
559 |
|
Commissions and all other fees |
|
|
1,493 |
|
|
|
204 |
|
|
|
|
|
|
|
|
Total trust and investment fees |
|
|
2,215 |
|
|
|
763 |
|
|
|
|
|
|
|
|
|
|
Card fees |
|
|
853 |
|
|
|
558 |
|
Other fees: |
|
|
|
|
|
|
|
|
Cash network fees |
|
|
58 |
|
|
|
48 |
|
Charges and fees on loans |
|
|
433 |
|
|
|
248 |
|
All other fees |
|
|
410 |
|
|
|
203 |
|
|
|
|
|
|
|
|
Total other fees |
|
|
901 |
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
Mortgage banking: |
|
|
|
|
|
|
|
|
Servicing income, net |
|
|
843 |
|
|
|
273 |
|
Net gains on mortgage loan origination/sales activities |
|
|
1,582 |
|
|
|
267 |
|
All other |
|
|
79 |
|
|
|
91 |
|
|
|
|
|
|
|
|
Total mortgage banking |
|
|
2,504 |
|
|
|
631 |
|
|
|
|
|
|
|
|
|
|
Insurance |
|
|
581 |
|
|
|
504 |
|
Net gains from trading activities |
|
|
787 |
|
|
|
103 |
|
Net gains (losses) on debt securities available for sale |
|
|
(119 |
) |
|
|
323 |
|
Net gains (losses) from equity investments |
|
|
(157 |
) |
|
|
313 |
|
Operating leases |
|
|
130 |
|
|
|
143 |
|
All other |
|
|
552 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,641 |
|
|
$ |
4,803 |
|
|
|
|
|
|
|
|
|
|
We earn trust, investment and IRA fees from managing and administering assets, including mutual
funds, corporate trust, personal trust, employee benefit trust and agency assets. At March 31,
2009, these assets totaled $1.53 trillion, including $474 billion from Wachovia, up from $1.13
trillion at March 31, 2008. Trust, investment and IRA fees are primarily based on a tiered scale
relative to the market value of the assets under management or administration. The fees increased
to $722 million in first quarter 2009 from $559 million a year ago.
We also receive commissions and other fees for providing services to full-service and discount
brokerage customers. Generally, these fees include transactional commissions, which are based on
the number of transactions executed at the customers direction, or asset-based fees, which are
based on the market value of the customers assets. At March 31, 2009, brokerage balances totaled
$910 billion, including $812 billion from Wachovia, compared with $126 billion at March 31, 2008.
The fees increased to $1,493 million from $204 million a year ago.
Card fees increased to $853 million in first quarter 2009 from $558 million a year ago,
predominantly due to $268 million in card fees from the Wachovia portfolio.
Mortgage banking noninterest income was $2,504 million in first quarter 2009, compared with $631
million a year ago. Net gains on mortgage loan origination/sales activities of $1,582 million in
first quarter 2009 were up from $267 million a year ago. Business performance was very strong in
first quarter 2009, reflecting strong refinance activity due to the low interest rate environment,
with residential real estate originations of $101 billion compared with $66 billion a
16
year ago. The
1-4 family first mortgage unclosed pipeline was $100 billion (including $4 billion from Wachovia)
at March 31, 2009, $71 billion (including $5 billion from Wachovia) at December 31, 2008, and $61
billion at March 31, 2008. For additional detail, see Asset/Liability and Market Risk Management
Mortgage Banking Interest Rate and Market Risk and Note 8 (Mortgage Banking Activities) and
Note 13 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.
Net gains on mortgage loan origination/sales activities include changes in the fair value of loans
in the mortgage warehouse and additions to the mortgage repurchase reserve. Mortgage loans are
repurchased based on standard representations and warranties. A $78 million increase in the
repurchase reserve in first quarter 2009 from December 31, 2008, was due to higher defaults and
loss severities and overall deterioration in the market. To the extent the market does not recover,
the residential mortgage business could continue to have increased loss severity on repurchases,
causing future increases in the repurchase reserve. In addition, there were $60 million in
warehouse valuation adjustments in first quarter 2009 related to credit and liquidity losses. Due
to the deterioration in the overall credit market and related secondary market liquidity
challenges, losses on unsalable loans have been significant. Similar losses on unsalable loans
could be possible in the future until the housing market recovers.
Within mortgage banking noninterest income, servicing income includes both changes in the fair
value of MSRs during the period as well as changes in the value of derivatives (economic hedges)
used to hedge the MSRs. Net servicing income in first quarter 2009 included an $875 million net
MSRs valuation gain recorded in earnings (a $2.8 billion reduction in the fair value of the MSRs
offset by a $3.7 billion hedge gain) and in first quarter 2008 included a $94 million net MSRs
valuation gain ($1.8 billion reduction in the fair value of MSRs offset by a $1.9 billion hedge
gain). Our portfolio of loans serviced for others was $1.85 trillion at March 31, 2009, and $1.86
trillion at December 31, 2008, which included $379 billion acquired from Wachovia. At March 31,
2009, the ratio of MSRs to related loans serviced for others was 0.74%.
Insurance revenue was $581 million in first quarter 2009, up from $504 million a year ago,
primarily due to the addition of Wachovia.
Income from trading activities was $787 million in first quarter 2009, up from $103 million a year
ago, with the increase largely from Wachovia. Approximately two-thirds of the income this quarter
was from customer-related business, with much of the remainder from economic hedging. Trading
results included $18 million in first quarter 2009 from the application of FSP FAS 157-4.
Net investment losses (debt and equity) totaled $276 million in first quarter 2009 and included
other-than-temporary impairment write-downs of $516 million. Net losses on debt securities
available for sale were $119 million in first quarter 2009, compared with net gains of $323
million a year ago. Net losses from equity investments were $157 million in first quarter 2009, compared with net gains of $313 million a year ago, which reflected the $334 million gain from our
ownership interest in Visa, which completed its initial public offering in March 2008. For
additional detail, see Balance Sheet Analysis Securities Available for Sale in this Report.
17
NONINTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
ended March 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
|
Salaries |
|
$ |
3,386 |
|
|
$ |
1,984 |
|
Commission and incentive compensation |
|
|
1,824 |
|
|
|
644 |
|
Employee benefits |
|
|
1,284 |
|
|
|
587 |
|
Equipment |
|
|
687 |
|
|
|
348 |
|
Net occupancy |
|
|
796 |
|
|
|
399 |
|
Core deposit and other intangibles |
|
|
647 |
|
|
|
46 |
|
FDIC and other deposit assessments |
|
|
338 |
|
|
|
8 |
|
Outside professional services |
|
|
410 |
|
|
|
171 |
|
Insurance |
|
|
267 |
|
|
|
161 |
|
Postage, stationery and supplies |
|
|
250 |
|
|
|
141 |
|
Outside data processing |
|
|
212 |
|
|
|
109 |
|
Travel and entertainment |
|
|
105 |
|
|
|
105 |
|
Foreclosed assets |
|
|
248 |
|
|
|
107 |
|
Contract services |
|
|
216 |
|
|
|
108 |
|
Operating leases |
|
|
70 |
|
|
|
116 |
|
Advertising and promotion |
|
|
125 |
|
|
|
85 |
|
Telecommunications |
|
|
158 |
|
|
|
78 |
|
Operating losses (reduction in losses) |
|
|
172 |
|
|
|
(73 |
) |
All other |
|
|
623 |
|
|
|
318 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,818 |
|
|
$ |
5,442 |
|
|
|
|
|
|
|
|
|
|
Noninterest expense more than doubled to $11.8 billion in first quarter 2009 from a year ago,
primarily due to the acquisition of Wachovia, which resulted in an expanded geographic platform and
capabilities in businesses such as retail brokerage, asset management and investment banking,
which, like mortgage banking, typically include higher revenue-based incentive expense than the
more traditional banking businesses. FDIC and other deposit assessments increased to $338 million
in first quarter 2009, due to additional assessments related to the FDIC Transaction Account
Guarantee Program, compared with $8 million a year ago. See Liquidity and Funding in this Report
for additional information on this program. Noninterest expense in first quarter 2009 included $122
million of additional insurance reserve at our captive mortgage reinsurance operation and $206
million of merger-related costs.
INCOME TAX EXPENSE
Our effective income tax rate was 33.8% in first quarter 2009, down from 34.9% in first quarter
2008. The decrease is primarily attributable to higher tax-exempt income and tax credits, partially
offset by increased tax expense (with a comparable increase in interest income) associated with the
purchase accounting for leveraged leases. Effective January 1, 2009, we adopted FAS 160, which changes the way noncontrolling interests are
presented in the income statement such that the consolidated income statement includes amounts from
both Wells Fargo interests and the noncontrolling interests. As a result, our effective tax rate is
calculated by dividing income tax expense by income before income tax expense less the net income
from noncontrolling interests.
18
OPERATING SEGMENT RESULTS
Wells Fargo defines its operating segments by product type and customer segment. As a result of the
combination of Wells Fargo and Wachovia, management realigned its business segments into the
following three lines of business: Community Banking; Wholesale Banking; and Wealth, Brokerage and
Retirement Services. Our management accounting process measures the performance of the operating
segments based on our management structure and is not necessarily comparable with other similar
information for other financial services companies. We revised prior period information to reflect
the realignment of our operating segments; however, because the acquisition was completed on
December 31, 2008, Wachovias results are included in segment results beginning in 2009. For a more
complete description of our operating segments, including additional financial information and the
underlying management accounting process, see Note 17 (Operating Segments) to Financial Statements
in this Report.
Community Banking offers a complete line of diversified financial products and services for
consumers and small businesses including investment, insurance and trust services in 39 states and
D.C., and mortgage and home equity loans in all 50 states and D.C. Wachovia added expanded product
capability as well as expanded channels to better serve our customers. In addition, with the
realignment of the operating segments, Community Banking now includes Wells Fargo Financial.
Community Banking net income increased to $1.84 billion in first quarter 2009 from $1.52 billion a
year ago. The growth in net income and average assets for Community Banking was largely due to the
addition of Wachovia businesses, as well as double-digit growth in legacy Wells Fargo businesses
driven by strong balance sheet growth and mortgage banking income. Revenue increased to $13.95
billion from $8.20 billion a year ago. Net interest income increased to $8.50 billion in first
quarter 2009 from $4.72 billion a year ago. Average loans increased to $552.8 billion in first
quarter 2009 from $282.7 billion a year ago. Average core deposits increased to $538.0 billion in
first quarter 2009 from $246.6 billion a year ago due to Wachovia, as well as double-digit growth
in legacy Wells Fargo. Noninterest income increased to $5.46 billion in first quarter 2009 from
$3.48 billion a year ago. Noninterest expense increased to $7.16 billion from $3.91 billion a year
ago. The provision for credit losses increased to $4.00 billion in first quarter 2009 from $1.87
billion a year ago.
Wholesale Banking provides financial solutions to businesses across the United States with annual
sales generally in excess of $10 million and financial institutions globally. Products include
middle market banking, corporate banking, commercial real estate, treasury management, asset-based
lending, insurance brokerage, foreign exchange, correspondent banking, trade services, specialized
lending, equipment finance, corporate trust, investment banking, capital markets, and asset
management. Wachovia added expanded product capabilities across the segment, including investment
banking, mergers and acquisitions, equity trading, equity structured products, fixed-income sales
and trading, and equity and fixed income research.
Wholesale Banking net income increased to $1.18 billion in first quarter 2009 from $483 million a
year ago. The growth in net income and average assets for Wholesale Banking was largely due to the
addition of Wachovia businesses. Revenue increased to a record $4.91 billion in first
quarter 2009 from $2.18 billion a year ago. Net interest income increased to $2.37 billion in first
quarter 2009 from $1.03 billion a year ago. Average loans increased to $271.9 billion in first
19
quarter 2009 from $100.8 billion a year ago. Average core deposits increased to $138.5 billion in
first quarter 2009 from $68.2 billion a year ago. Noninterest income increased to $2.54 billion in
first quarter 2009 from $1.15 billion a year ago, primarily due to Wachovia, as well as strong
growth in service charges on deposits and loan fees. Noninterest expense increased to $2.53 billion
in first quarter 2009 from $1.34 billion a year ago. The provision for credit losses increased to
$545 million in first quarter 2009, from $161 million a year ago.
Wealth, Brokerage and Retirement Services provides a full range of financial advisory services to
clients using a comprehensive planning approach to meet each clients needs. The Wealth Management
Group provides affluent and high net worth clients with a complete range of wealth management
solutions including financial planning, private banking, credit, investment management and trust.
Family Office Services meets the unique needs of the ultra high net worth customers. Retail
brokerages financial advisors serve customers advisory, brokerage and financial needs as part of
one of the largest full-service brokerage firms in the U.S. The Retirement Group provides
retirement services for individual investors and is a national leader in 401(k) and pension record
keeping. The addition of Wachovia in first quarter 2009 added the following businesses to this
operating segment: Wachovia Securities (retail brokerage), Wachovia Wealth Management, including
its family office business and Wachovias retirement services and reinsurance group.
Wealth, Brokerage and Retirement Services net income was $259 million in first quarter 2009 up from
$93 million a year ago. The growth in net income and average assets for the segment is due to the
addition of Wachovia businesses. Revenue increased to $2.64 billion in first quarter 2009 from $637
million a year ago. Net interest income increased to $737 million in first quarter 2009 from $154
million a year ago. Average loans increased to $46.7 billion in first quarter 2009 from $13.7
billion a year ago. The provision for credit losses was $25 million in first quarter 2009.
Noninterest expense increased to $2.22 billion in first quarter 2009 from $485 million a year ago.
First quarter 2009 noninterest expense includes $166 million of intangible amortization expense
related to the Wachovia acquisition.
20
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of both debt and marketable equity securities. We hold debt
securities available for sale primarily for liquidity, interest rate risk management and long-term
yield enhancement. Accordingly, this portfolio consists primarily of very liquid, high-quality
federal agency debt and privately issued mortgage-backed securities. At March 31, 2009, we held
$173.3 billion of debt securities available for sale, with net unrealized losses of $4.1 billion,
compared with $145.4 billion at December 31, 2008, including $63.7 billion acquired from Wachovia,
with net unrealized losses of $9.8 billion. We also held $5.2 billion of marketable equity
securities available for sale at March 31, 2009, with net unrealized losses of $646 million
compared with $6.1 billion at December 31, 2008, including $3.7 billion acquired from Wachovia,
with net unrealized losses of $160 million. Following application of purchase accounting to the
Wachovia portfolio, the net unrealized losses in cumulative other comprehensive income at December
31, 2008, related entirely to the legacy Wells Fargo portfolio.
The decrease in net unrealized losses on debt securities available for sale to $4.1 billion at
March 31, 2009, from $9.8 billion at December 31, 2008, was predominantly due to the early adoption
of FSP FAS 157-4, which clarified the use of trading prices in determining fair value for
securities in illiquid markets, thus moderating the need to use distressed prices in valuing these
securities in illiquid markets as we had done in prior periods. The remainder of the change was due
to declining interest rates and narrower credit spreads.
We analyze securities for other-than-temporary impairment (OTTI) on a quarterly basis, or more
often if a potential loss-triggering event occurs. We recognize OTTI when it is probable that we
will be unable to collect all amounts due according to the contractual terms of the security, and
the fair value of the investment security is less than its amortized cost. The initial indication
of OTTI for both debt and equity securities is a decline in the market value below the amount
recorded for an investment, and the severity and duration of the decline. In determining whether an
impairment is other than temporary, we consider the length of time and the extent to which the
market value has been below cost, recent events specific to the issuer, including investment
downgrades by rating agencies and economic conditions within its industry, and whether it is more
likely than not that we will be required to sell the security before a recovery in value.
For marketable equity securities, in addition to the above factors, we also consider the issuers
financial condition, capital strength and near-term prospects. For debt securities and for certain
perpetual preferred securities, which are treated as debt securities for the purpose of OTTI
analysis, we also consider the cause of the price decline (general level of interest rates and
industry- and issuer-specific factors), the issuers financial condition, near-term prospects and
current ability to make future payments in a timely manner, the issuers ability to service debt,
any change in agency ratings at evaluation date from acquisition date and any likely imminent
action. For asset-backed securities, we consider the credit performance of the underlying
collateral, including delinquency rates, cumulative losses to date, and the remaining credit
enhancement compared to expected credit losses of the security.
21
For debt securities that are considered other-than-temporarily impaired and that we do not intend
to sell and will not be required to sell prior to recovery of our amortized cost basis, we
recognize OTTI in accordance with FSP FAS 115-2 and FAS 124-2, which we early adopted on January 1,
2009. Under this FSP, we separate the amount of the OTTI into the amount that is credit related
(credit loss component) and the amount due to all other factors. The credit loss component is
recognized in earnings and is the difference between a securitys amortized cost basis and the
present value of expected future cash flows discounted at the securitys effective interest rate.
The amount due to all other factors is recognized in other comprehensive income.
Of the first quarter 2009 OTTI write-downs of $516 million, $269 million related to debt securities
and $247 million to equity securities. Under FSP FAS 115-2 and FAS 124-2, which we adopted this
quarter, total OTTI on debt securities amounted to $603 million, which includes $263 million of
credit-related OTTI and $6 million related to securities we intend to sell, both of which were
recorded as part of gross realized losses, and $334 million recorded directly to other
comprehensive income for non-credit related impairment on securities.
At March 31, 2009, we had approximately $6 billion of securities, primarily municipal bonds, that
are guaranteed against loss by bond insurers. These securities are almost exclusively investment
grade and were generally underwritten in accordance with our own investment standards prior to the
determination to purchase, without relying on the bond insurers guarantee. These securities will
continue to be monitored as part of our ongoing impairment analysis of our securities available for
sale, but are expected to perform, even if the rating agencies reduce the credit ratings of the
bond insurers.
The weighted-average expected maturity of debt securities available for sale was 4.9 years at March
31, 2009. Since 77% of this portfolio is mortgage-backed securities, the expected remaining
maturity may differ from contractual maturity because borrowers may have the right to prepay
obligations before the underlying mortgages mature. The estimated effect of a 200 basis point
increase or decrease in interest rates on the fair value and the expected remaining maturity of the
mortgage-backed securities available for sale is shown below.
MORTGAGE-BACKED SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Net unrealized |
|
|
Remaining |
|
(in billions) |
|
value |
|
|
gain (loss) |
|
|
maturity |
|
|
|
|
$ |
132.9 |
|
|
$ |
(2.4 |
) |
|
3.1 yrs. |
|
At March 31, 2009, assuming a 200 basis point: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in interest rates |
|
|
121.5 |
|
|
|
(13.8 |
) |
|
6.7 yrs. |
|
Decrease in interest rates |
|
|
137.9 |
|
|
|
2.6 |
|
|
2.2 yrs. |
|
|
See Note 4 (Securities Available for Sale) to Financial Statements in this Report for securities
available for sale by security type.
22
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 15.
The major
categories of loans outstanding showing those subject to SOP 03-3 are presented in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
All |
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
|
|
SOP 03-3 |
|
|
other |
|
|
|
|
|
|
SOP 03-3 |
|
|
other |
|
|
|
|
(in millions) |
|
loans |
|
|
loans |
|
|
Total |
|
|
loans |
|
|
loans |
|
|
Total |
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
3,088 |
|
|
$ |
188,623 |
|
|
$ |
191,711 |
|
|
$ |
4,580 |
|
|
$ |
197,889 |
|
|
$ |
202,469 |
|
Other real estate mortgage |
|
|
6,597 |
|
|
|
98,337 |
|
|
|
104,934 |
|
|
|
7,762 |
|
|
|
95,346 |
|
|
|
103,108 |
|
Real estate construction |
|
|
4,507 |
|
|
|
29,405 |
|
|
|
33,912 |
|
|
|
4,503 |
|
|
|
30,173 |
|
|
|
34,676 |
|
Lease financing |
|
|
-- |
|
|
|
14,792 |
|
|
|
14,792 |
|
|
|
-- |
|
|
|
15,829 |
|
|
|
15,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
14,192 |
|
|
|
331,157 |
|
|
|
345,349 |
|
|
|
16,845 |
|
|
|
339,237 |
|
|
|
356,082 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
41,520 |
|
|
|
201,427 |
|
|
|
242,947 |
|
|
|
39,214 |
|
|
|
208,680 |
|
|
|
247,894 |
|
Real estate 1-4 family junior lien mortgage |
|
|
615 |
|
|
|
109,133 |
|
|
|
109,748 |
|
|
|
728 |
|
|
|
109,436 |
|
|
|
110,164 |
|
Credit card |
|
|
-- |
|
|
|
22,815 |
|
|
|
22,815 |
|
|
|
-- |
|
|
|
23,555 |
|
|
|
23,555 |
|
Other revolving credit and installment |
|
|
32 |
|
|
|
91,220 |
|
|
|
91,252 |
|
|
|
151 |
|
|
|
93,102 |
|
|
|
93,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
42,167 |
|
|
|
424,595 |
|
|
|
466,762 |
|
|
|
40,093 |
|
|
|
434,773 |
|
|
|
474,866 |
|
Foreign |
|
|
1,849 |
|
|
|
29,619 |
|
|
|
31,468 |
|
|
|
1,859 |
|
|
|
32,023 |
|
|
|
33,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
58,208 |
|
|
$ |
785,371 |
|
|
$ |
843,579 |
|
|
$ |
58,797 |
|
|
$ |
806,033 |
|
|
$ |
864,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In first quarter 2009, we refined certain of our initial purchase accounting, which resulted in
changes to the portfolio of loans subject to SOP 03-3 and updates to the December 31, 2008, fair
value estimates. Based on updates to the initial purchase accounting, $95.8 billion of loans were
determined to be within the scope of SOP 03-3, a net increase of $1.9 billion from initial year-end
estimates, and the fair value of these loans was $59.7 billion at December 31, 2008. These
adjustments are reflected in the March 31, 2009, loan balances, along with first quarter activity,
in the table above.
For further detail on SOP 03-3 loans see Note 1 (Summary of Significant Accounting Policies
Loans) to Financial Statements in the 2008 Form 10-K and Note 5 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report.
23
DEPOSITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31 |
, |
|
Dec. 31 |
, |
|
Mar. 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
Noninterest-bearing |
|
$ |
166,497 |
|
|
$ |
150,837 |
|
|
$ |
90,793 |
|
Interest-bearing checking |
|
|
89,010 |
|
|
|
72,828 |
|
|
|
5,372 |
|
Market rate and other savings |
|
|
315,209 |
|
|
|
306,255 |
|
|
|
163,230 |
|
Savings certificates |
|
|
160,220 |
|
|
|
182,043 |
|
|
|
39,554 |
|
Foreign deposits (1) |
|
|
25,247 |
|
|
|
33,469 |
|
|
|
28,411 |
|
|
|
|
|
|
|
|
|
|
|
Core deposits |
|
|
756,183 |
|
|
|
745,432 |
|
|
|
327,360 |
|
Other time deposits |
|
|
23,329 |
|
|
|
28,498 |
|
|
|
6,033 |
|
Other foreign deposits |
|
|
17,757 |
|
|
|
7,472 |
|
|
|
24,751 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
797,269 |
|
|
$ |
781,402 |
|
|
$ |
358,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects Eurodollar sweep balances included in core deposits. |
Deposits at March 31, 2009, totaled $797.3 billion, compared with $781.4 billion at December 31,
2008. A comparative detail of average deposit balances is provided on page 15. Total core deposits
were $756.2 billion at March 31, 2009, up $10.8 billion from December 31, 2008. High-rate
certificates of deposit (CDs) of $33.6 billion at legacy Wachovia matured in the quarter, including
$13.2 billion from CD-only households. Higher-rate CDs are maturing and we are successfully
retaining many of these deposits at todays lower rates. The combination of noninterest-bearing and
interest-bearing transaction and savings deposits increased 31% (annualized) to $570.7 billion at
March 31, 2009, from $529.9 billion at December 31, 2008. Deposit performance continued to benefit
from deeper market penetration, flight to quality and mortgage escrow activity.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in financial transactions that are not recorded in
the balance sheet, or may be recorded in the balance sheet in amounts that are different from the
full contract or notional amount of the transaction. These transactions are designed to (1) meet
the financial needs of customers, (2) manage our credit, market or liquidity risks, (3) diversify
our funding sources, and/or (4) optimize capital. These are described below as off-balance sheet
transactions with unconsolidated entities, and guarantees and certain contingent arrangements.
OFF-BALANCE SHEET TRANSACTIONS WITH UNCONSOLIDATED ENTITIES
In the normal course of business, we enter into various types of on- and off-balance sheet
transactions with special purpose entities (SPEs), which are corporations, trusts or partnerships
that are established for a limited purpose. The majority of SPEs are formed in connection with
securitization transactions. In a securitization transaction, assets from our balance sheet are
transferred to an SPE, which then issues to investors various forms of interests in those assets
and may also enter into derivative transactions. In a securitization transaction, we typically
receive cash and/or other interests in an SPE as proceeds for the assets we transfer. Also, in
certain transactions, we may retain the right to service the transferred receivables and to
repurchase those receivables from the SPE if the outstanding balance of the receivables falls to a
level where the cost exceeds the benefits of servicing such receivables.
24
In connection with our securitization activities, we have various forms of ongoing involvement with
SPEs, which may include:
|
|
underwriting securities issued by SPEs and subsequently making markets in those securities; |
|
|
providing liquidity to support short-term obligations of SPEs issued to third party
investors; |
|
|
providing credit enhancement to securities issued by SPEs or market value guarantees of
assets held by SPEs through the use of letters of credit, financial guarantees, credit default
swaps and total return swaps; |
|
|
entering into other derivative contracts with SPEs; |
|
|
holding senior or subordinated interests in SPEs; |
|
|
acting as servicer or investment manager for SPEs; and |
|
|
providing administrative or trustee services to SPEs. |
The SPEs we use are primarily either qualifying SPEs (QSPEs), which are not consolidated if the
criteria described below are met, or variable interest entities (VIEs). To qualify as a QSPE, an
entity must be passive and must adhere to significant limitations on the types of assets and
derivative instruments it may own and the extent of activities and decision making in which it may
engage. For example, a QSPEs activities are generally limited to purchasing assets, passing along
the cash flows of those assets to its investors, servicing its assets and, in certain transactions,
issuing liabilities. Among other restrictions on a QSPEs activities, a QSPE may not actively
manage its assets through discretionary sales or modifications.
A VIE is an entity that has either a total equity investment that is insufficient to permit the
entity to finance its activities without additional subordinated financial support or whose equity
investors lack the characteristics of a controlling financial interest. A VIE is consolidated by
its primary beneficiary, which is the entity that, through its variable interests, absorbs the
majority of a VIEs variability. A variable interest is a contractual, ownership or other interest
that changes with fluctuations in the fair value of the VIEs net assets.
25
The following table presents our significant continuing involvement with QSPEs and unconsolidated
VIEs.
QUALIFYING SPECIAL PURPOSE ENTITIES AND UNCONSOLIDATED VARIABLE INTEREST ENTITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Total |
|
|
|
|
|
Maximum |
|
|
Total |
|
|
|
|
|
Maximum |
|
|
|
entity |
|
Carrying |
|
exposure |
|
|
entity |
|
Carrying |
|
exposure |
|
(in millions) |
|
assets |
|
value |
|
to loss |
|
|
assets |
|
value |
|
to loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loan securitizations |
|
$ |
1,229,211 |
|
|
$ |
32,143 |
|
|
$ |
34,525 |
|
|
$ |
1,144,775 |
|
|
$ |
29,939 |
|
|
$ |
31,438 |
|
Commercial mortgage securitizations |
|
|
391,114 |
|
|
|
2,979 |
|
|
|
6,013 |
|
|
|
355,267 |
|
|
|
3,060 |
|
|
|
6,376 |
|
Student loan securitizations |
|
|
2,776 |
|
|
|
220 |
|
|
|
220 |
|
|
|
2,765 |
|
|
|
133 |
|
|
|
133 |
|
Auto loan securitizations |
|
|
3,580 |
|
|
|
115 |
|
|
|
115 |
|
|
|
4,133 |
|
|
|
115 |
|
|
|
115 |
|
Other |
|
|
9,955 |
|
|
|
11 |
|
|
|
181 |
|
|
|
11,877 |
|
|
|
71 |
|
|
|
1,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total QSPEs |
|
$ |
1,636,636 |
|
|
$ |
35,468 |
|
|
$ |
41,054 |
|
|
$ |
1,518,817 |
|
|
$ |
33,318 |
|
|
$ |
39,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
$ |
53,439 |
|
|
$ |
15,603 |
|
|
$ |
20,101 |
|
|
$ |
48,802 |
|
|
$ |
15,133 |
|
|
$ |
20,443 |
|
Wachovia administered ABCP (1) conduit |
|
|
9,894 |
|
|
|
-- |
|
|
|
10,092 |
|
|
|
10,767 |
|
|
|
-- |
|
|
|
15,824 |
|
Asset-based lending structures |
|
|
15,158 |
|
|
|
8,939 |
|
|
|
10,256 |
|
|
|
11,614 |
|
|
|
9,096 |
|
|
|
9,482 |
|
Tax credit structures |
|
|
27,197 |
|
|
|
4,162 |
|
|
|
5,040 |
|
|
|
22,882 |
|
|
|
3,850 |
|
|
|
4,926 |
|
CLOs |
|
|
24,691 |
|
|
|
3,666 |
|
|
|
4,195 |
|
|
|
23,339 |
|
|
|
3,326 |
|
|
|
3,881 |
|
Investment funds |
|
|
96,497 |
|
|
|
1,918 |
|
|
|
2,541 |
|
|
|
105,808 |
|
|
|
3,543 |
|
|
|
3,690 |
|
Credit-linked note structures |
|
|
1,578 |
|
|
|
1,462 |
|
|
|
2,241 |
|
|
|
12,993 |
|
|
|
1,522 |
|
|
|
2,303 |
|
Money market funds |
|
|
33,552 |
|
|
|
(9 |
) |
|
|
51 |
|
|
|
31,843 |
|
|
|
60 |
|
|
|
101 |
|
Other |
|
|
3,989 |
|
|
|
4,242 |
|
|
|
5,031 |
|
|
|
1,832 |
|
|
|
3,806 |
|
|
|
4,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated VIEs |
|
$ |
265,995 |
|
|
$ |
39,983 |
|
|
$ |
59,548 |
|
|
$ |
269,880 |
|
|
$ |
40,336 |
|
|
$ |
65,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Asset-backed commercial paper. |
The table above does not include SPEs and unconsolidated VIEs where our only involvement is in the
form of investments in trading securities, investments in securities available for sale or loans
underwritten by third parties, or administrative or trustee services. Also not included are
investments accounted for in accordance with the AICPA Investment Company Audit Guide, investments
accounted for under the cost method and investments accounted for under the equity method.
In the table above, the column titled Total entity assets represents the total assets of
unconsolidated SPEs. Carrying value is the amount in our consolidated balance sheet related to
our involvement with the unconsolidated SPEs. Maximum exposure to loss from our involvement with
off-balance sheet entities is a required disclosure under generally accepted accounting principles
and represents the estimated loss that would be incurred under an assumed hypothetical
circumstance, despite its extremely remote possibility, where the value of our interests and any
associated collateral declines to zero, without any consideration of recovery or offset from any
economic hedges. Accordingly, this required disclosure is not an indication of expected loss.
For more information on securitizations, including sales proceeds and cash flows from
securitizations, see Note 7 (Securitizations and Variable Interest Entities) to Financial
Statements in this Report.
26
We also have significant involvement with SPEs where the entity holding a majority of the voting
interests consolidates the SPE. Wells Fargo Home Mortgage (Home Mortgage), in the ordinary course
of business, originates a portion of its mortgage loans through unconsolidated joint ventures in
which we own an interest of 50% or less. Loans made by these joint ventures are funded by Wells
Fargo Bank, N.A. through an established line of credit and are subject to specified underwriting
criteria. The total assets of these mortgage origination joint ventures were approximately $111
million and $46 million at March 31, 2009, and
December 31, 2008, respectively. We provide
liquidity to these joint ventures in the form of outstanding lines of credit and, at March 31,
2009, and December 31, 2008, these liquidity commitments totaled $128 million and $135 million,
respectively.
We also hold interests in other unconsolidated joint ventures formed with unrelated third parties
to provide efficiencies from economies of scale. A third party manages our real estate lending
services joint ventures and provides customers with title, escrow, appraisal and other real
estate-related services. Our fraud prevention services partnership facilitates the exchange of
information between financial services organizations to detect and prevent fraud. Total assets of
our real estate lending joint ventures and fraud prevention services partnership were approximately
$150 million and $132 million at March 31, 2009, and
December 31, 2008, respectively.
27
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.
Real Estate 1-4 Family Mortgage Loans
As part of the Wachovia acquisition, we acquired residential first and home equity loans that are
very similar to the Wells Fargo core originated portfolio. We also acquired the Pick-a-Pay option
ARM first mortgage portfolio. The nature of this product creates a potential opportunity for
negative amortization. As part of our purchase accounting activities, the option ARM loans with the
highest probability of default were identified as SOP 03-3. See Pick-a-Pay Portfolio in this
Report for additional detail.
The deterioration in specific segments of the Home Equity portfolios required a targeted approach
to managing these assets. A liquidating portfolio, consisting of home equity loans generated
through third party wholesale channels not behind a Wells Fargo first mortgage, and home equity
loans acquired through correspondents, was identified. While the $9.9 billion of loans in this
liquidating portfolio represented about 1% of total loans outstanding at March 31, 2009, these
loans represented some of the highest risk in the $128.9 billion Home Equity portfolios, with a
loss rate of 9.27% compared with 2.09% for the core portfolio. The loans in the liquidating
portfolio are largely concentrated in geographic markets that have experienced the most abrupt and
steepest declines in housing prices. The core portfolio was $119.1 billion at March 31, 2009, of
which 97% was originated through the retail channel, and approximately 16% of the outstanding
balance was in a first lien position. The table on the following page includes the credit
attributes of these two portfolios.
28
HOME EQUITY PORTFOLIO (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
two payments |
|
|
|
|
|
|
Annualized |
|
|
|
Outstanding balances |
|
|
or more past due |
|
|
loss rate (1) |
|
|
|
Mar. 31 |
, |
|
Dec. 31 |
, |
|
Mar. 31 |
, |
|
Dec. 31 |
, |
|
Mar. 31 |
, |
|
Dec. 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
$ |
31,784 |
|
|
$ |
31,544 |
|
|
|
3.56 |
% |
|
|
2.95 |
% |
|
|
3.97 |
% |
|
|
3.94 |
% |
Florida |
|
|
12,067 |
|
|
|
11,781 |
|
|
|
3.73 |
|
|
|
3.36 |
|
|
|
2.03 |
|
|
|
4.39 |
|
New Jersey |
|
|
8,086 |
|
|
|
7,888 |
|
|
|
1.58 |
|
|
|
1.41 |
|
|
|
0.45 |
|
|
|
0.78 |
|
Virginia |
|
|
5,653 |
|
|
|
5,688 |
|
|
|
1.45 |
|
|
|
1.50 |
|
|
|
0.76 |
|
|
|
1.56 |
|
Pennsylvania |
|
|
5,129 |
|
|
|
5,043 |
|
|
|
1.04 |
|
|
|
1.10 |
|
|
|
0.29 |
|
|
|
0.52 |
|
Other |
|
|
56,342 |
|
|
|
56,415 |
|
|
|
2.06 |
|
|
|
1.97 |
|
|
|
1.59 |
|
|
|
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
119,061 |
|
|
|
118,359 |
|
|
|
2.53 |
|
|
|
2.27 |
|
|
|
2.09 |
|
|
|
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
3,835 |
|
|
|
4,008 |
|
|
|
8.49 |
|
|
|
6.69 |
|
|
|
13.98 |
|
|
|
12.32 |
|
Florida |
|
|
492 |
|
|
|
513 |
|
|
|
10.35 |
|
|
|
8.41 |
|
|
|
13.33 |
|
|
|
13.60 |
|
Arizona |
|
|
233 |
|
|
|
244 |
|
|
|
8.37 |
|
|
|
7.40 |
|
|
|
15.04 |
|
|
|
13.19 |
|
Texas |
|
|
179 |
|
|
|
191 |
|
|
|
1.40 |
|
|
|
1.27 |
|
|
|
2.66 |
|
|
|
1.67 |
|
Minnesota |
|
|
122 |
|
|
|
127 |
|
|
|
3.88 |
|
|
|
3.79 |
|
|
|
6.92 |
|
|
|
5.25 |
|
Other |
|
|
5,001 |
|
|
|
5,226 |
|
|
|
3.96 |
|
|
|
3.28 |
|
|
|
5.29 |
|
|
|
4.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9,862 |
|
|
|
10,309 |
|
|
|
6.10 |
|
|
|
4.93 |
|
|
|
9.27 |
|
|
|
8.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core and liquidating portfolios |
|
$ |
128,923 |
|
|
$ |
128,668 |
|
|
|
2.80 |
|
|
|
2.48 |
|
|
|
2.65 |
|
|
|
2.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of real estate 1-4 family junior lien mortgages and lines of credit secured by real
estate from all groups, excluding SOP 03-3 loans. |
(2) |
|
Loss rates for 2008 for the core portfolio in the table above reflect results for Wachovia
(not included in the Wells Fargo reported results) and Wells Fargo. For fourth quarter 2008,
the Wells Fargo core portfolio on a stand-alone basis, outstanding balances and related
annualized loss rates were $29,399 million (3.81%) for California, $2,677 million (6.87%) for
Florida, $1,925 million (1.29%) for New Jersey, $1,827 million (1.26%) for Virginia, $1,073
million (1.17%) for Pennsylvania, $38,934 million (1.77%) for all other states, and $75,835
million (2.71%) in total. |
(3) |
|
Includes equity lines of credit and closed end second liens associated with the Pick-a-Pay
portfolio totaling $2.1 billion at March 31, 2009, and December 31, 2008. Related credit
losses are reported separately with the Pick-a-Pay portfolio. |
Pick-a-Pay Portfolio
We acquired the Pick-a-Pay loan portfolio from Wachovia. This is a liquidating portfolio as we
stopped originating new Pick-a-Pay loans in 2008. At March 31, 2009, this portfolio, which excludes
equity lines of credit, had an unpaid principal balance of $115.0 billion and a carrying value of
$93.2 billion. The carrying value is net of $22.0 billion of purchase accounting net write-downs to
reflect SOP 03-3 loans at fair value and a $215 million increase to reflect all other loans at a
market rate of interest.
Pick-a-Pay loans are home mortgages on which the customer has the option each month to select from
among four payment options: (1) a minimum payment as described below, (2) an interest-only payment,
(3) a fully amortizing 15-year payment, or (4) a fully amortizing 30-year payment. Approximately
78% of the Pick-a-Pay portfolio has payment options calculated using a monthly adjustable interest
rate; the rest of the portfolio is fixed rate.
The minimum monthly payment for substantially all of our Pick-a-Pay loans is reset annually. The
new minimum monthly payment amount usually cannot increase by more
than 7.5% of the then-existing principal and interest payment amount. The minimum payment may not be sufficient to pay the
monthly interest due and in those situations a loan on which the customer has made a minimum
payment is subject to negative amortization, where unpaid interest is
29
added to
the principal balance of the loan. The amount of interest that has been added to a loan balance is referred to as
deferred interest. Our Pick-a-Pay customers have been fairly constant in their utilization of the
minimum payment option. At March 31, 2009, and December 31, 2008, customers representing 51% of the
loan balances with the payment options feature elected the minimum payment option.
Deferral of interest on a Pick-a-Pay loan may continue as long as the loan balance remains below a
pre-defined principal cap, which is based on the percentage that the current loan balance
represents to the original loan balance. Loans with an original loan-to-value (LTV) ratio equal to
or below 85% have a cap of 125% of the original loan balance, and these loans represent
substantially all the Pick-a-Pay portfolio. Loans with an original LTV ratio above 85% have a cap
of 110% of the original loan balance. Most of the Pick-a-Pay loans on which there is a deferred interest
balance re-amortize (the monthly payment amount is reset or recast) on the earlier of the date
when the loan balance reaches its principal cap, or the 10-year
anniversary of the loan. There exists a small population of
Pick-a-Pay loans for which recast occurs at the five-year anniversary. After a recast, the customers new payment terms are reset to the amount
necessary to repay the balance over the remainder of the original loan term.
Based on assumptions of a flat rate environment, if all eligible customers elect the minimum
payment option 100% of the time and no balances prepay, we would expect the following balance of
loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of
2009, $9 million in 2010, $11 million in 2011 and
$32 million in 2012. In first quarter 2009, the amount of loans recast based on reaching the principal cap was de minimus. In
addition, we would expect the following
balance of ARM loans having a payment change based on the contractual terms of the loan to recast:
$20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and
$128 million in 2012. A payment change recast occurred on $4
million of loans during first quarter 2009.
Included in the Pick-a-Pay portfolio were loans accounted for under SOP 03-3 with a total unpaid
principal balance of $61.6 billion and a carrying value of $39.7 billion at March 31, 2009. Loans
that we acquired from Wachovia with evidence of credit quality deterioration since origination and
for which it was probable at the date of the Wachovia acquisition that we will be unable to collect
all contractually required payments are accounted for under SOP 03-3. SOP 03-3 requires that
acquired credit-impaired loans be recorded at fair value and prohibits carrying over of the related
allowance in the initial accounting.
The table on the following page reflects the geographic distribution of the Pick-a-Pay portfolio
broken out between SOP 03-3 loans and all other loans. In stressed housing markets with declining
home prices and increasing delinquencies, the LTV ratio is a key metric in predicting future loan
performance, including charge-offs. Because SOP 03-3 loans are carried at fair value, the carrying
value LTV ratio for an SOP 03-3 loan will be lower as compared to the LTV based on the unpaid
principal. For informational purposes, we have included the ratio of the carrying value to the
current collateral value for SOP 03-3 loans in the following table.
30
PICK-A-PAY PORTFOLIO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOP 03-3 loans |
|
|
All other loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
carrying |
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Current |
|
|
|
|
|
|
value to |
|
Unpaid |
|
|
Current |
|
|
|
|
|
principal |
|
|
LTV |
|
Carrying |
|
|
current |
|
principal |
|
|
LTV |
|
Carrying |
|
(in millions) |
|
balance |
|
|
ratio |
(1) |
|
value |
(2) |
|
value |
|
balance |
|
|
ratio |
(1) |
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,216 |
|
|
|
152 |
% |
|
$ |
26,907 |
|
|
|
98 |
% |
|
$ |
25,875 |
|
|
|
90 |
% |
|
$ |
25,979 |
|
Florida |
|
|
6,260 |
|
|
|
129 |
|
|
|
3,779 |
|
|
|
79 |
|
|
|
5,412 |
|
|
|
92 |
|
|
|
5,433 |
|
New Jersey |
|
|
1,750 |
|
|
|
101 |
|
|
|
1,271 |
|
|
|
74 |
|
|
|
3,358 |
|
|
|
76 |
|
|
|
3,372 |
|
Texas |
|
|
475 |
|
|
|
76 |
|
|
|
336 |
|
|
|
54 |
|
|
|
2,204 |
|
|
|
60 |
|
|
|
2,213 |
|
Arizona |
|
|
1,642 |
|
|
|
161 |
|
|
|
987 |
|
|
|
99 |
|
|
|
1,239 |
|
|
|
104 |
|
|
|
1,244 |
|
Other states |
|
|
9,306 |
|
|
|
110 |
|
|
|
6,397 |
|
|
|
77 |
|
|
|
15,282 |
|
|
|
79 |
|
|
|
15,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pick-a-Pay loans |
|
$ |
61,649 |
|
|
|
|
|
|
$ |
39,677 |
|
|
|
|
|
|
$ |
53,370 |
|
|
|
|
|
|
$ |
53,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Current LTV ratio is based on collateral values and is updated quarterly by an independent
vendor. LTV ratio includes unpaid principal balance on equity lines of credit (included in the
Home Equity Portfolio table on page 29 in this Report) that share common collateral and are
junior to the above Pick-a-Pay loans. |
(2) |
|
Carrying value, which does not reflect the allowance for loan losses, includes purchase
accounting adjustments, which, for SOP 03-3 loans, are a deduction of $25.9 billion nonaccretable
difference and an addition of $3.9 billion accretable yield at March 31, 2009, and for all
other loans, an adjustment to mark the loans to a market yield at date of merger less any
subsequent charge-offs. |
To maximize return and allow flexibility for customers to avoid foreclosure, we have in place
several loss mitigation strategies for our Pick-a-Pay loan portfolio. We contact customers who are
experiencing difficulty and may in certain cases modify the terms of a loan based on a customers
documented income and other circumstances.
We also have in place proactive steps to work with customers to refinance or restructure their
Pick-a-Pay loans into other loan products. For customers at risk, we will offer combinations of
term extensions of up to 40 years, interest rate reductions, charge no interest on a portion of the
principal for some period of time and, in geographies with substantial property value declines, we
will even offer permanent principal reductions. We expect to continually reassess our loss
mitigation strategies and may adopt additional strategies in the future.
Wells Fargo Financial
Wells Fargo Financial originates real estate secured debt consolidation loans, and both prime and
non-prime auto secured loans, unsecured loans and credit cards.
Wells Fargo Financial had $28.8 billion and $29.1 billion in real estate secured loans at March 31,
2009, and December 31, 2008, respectively. Of this portfolio, $1.8 billion for each period is
considered prime based on secondary market standards. The remaining portfolio is non-prime but has
been originated with standards that effectively mitigate credit risk. It was originated through our
retail channel with documented income, LTV limits based on credit quality and property
characteristics, and risk-based pricing. In addition, the loans were originated without teaser
rates, interest-only or negative amortization features. Credit losses in the portfolio have
increased in the current economic environment compared with historical levels, but performance
remained similar to prime portfolios in the industry with overall credit losses in first quarter
2009 of 2.39% (annualized) on the entire portfolio. Of the portfolio, $9.5 billion at
31
March 31, 2009,
was originated with customer FICO scores below 620, but these loans have further restrictions on
LTV and debt-to-income ratios to limit the credit risk.
Wells Fargo Financial also had $21.6 billion and $23.6 billion in auto secured loans and leases at
March 31, 2009, and December 31, 2008, respectively, of which $5.8 billion and $6.3 billion,
respectively, were originated with customer FICO scores below 620. Net charge-offs in this portfolio
in first quarter 2009 were 5.11% (annualized) for FICO scores of 620 and above, and 6.88%
(annualized) for FICO scores below 620. Of this portfolio, $16.3 billion represented loans and
leases originated through its indirect auto business, which Wells Fargo Financial ceased
originating near the end of 2008.
Wells Fargo Financial had $7.9 billion and $8.4 billion in unsecured loans and credit card
receivables at March 31, 2009, and December 31, 2008, respectively, of which $1.2 billion and $1.3
billion, respectively, was originated with customer FICO scores below 620. Net charge-offs in this
portfolio in first quarter 2009 were 12.97% (annualized) for FICO scores of 620 and above, and
19.58% (annualized) for FICO scores below 620. Wells Fargo Financial has been actively tightening
credit policies and managing credit lines to reduce exposure given current economic conditions.
32
Nonaccrual Loans and Other Nonperforming Assets
The following table shows the comparative data for nonaccrual loans and other nonperforming assets.
We generally place loans on nonaccrual status when:
|
|
the full and timely collection of interest or principal becomes uncertain; |
|
|
they are 90 days (120 days with respect to real estate 1-4 family first and junior lien
mortgages and auto loans) past due for interest or principal (unless both well-secured and in
the process of collection); or |
|
|
part of the principal balance has been charged off. |
Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2008 Form 10-K
describes our accounting policy for nonaccrual loans.
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31 |
, |
Dec. 31 |
, |
Mar. 31 |
, |
(in millions) |
|
2009 |
(1) |
|
2008 |
(1) |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,696 |
|
|
$ |
1,253 |
|
|
$ |
588 |
|
Other real estate mortgage |
|
|
1,324 |
|
|
|
594 |
|
|
|
152 |
|
Real estate construction |
|
|
1,371 |
|
|
|
989 |
|
|
|
438 |
|
Lease financing |
|
|
114 |
|
|
|
92 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
4,505 |
|
|
|
2,928 |
|
|
|
1,235 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage (2) |
|
|
4,218 |
|
|
|
2,648 |
|
|
|
1,398 |
|
Real estate 1-4 family junior lien mortgage |
|
|
1,418 |
|
|
|
894 |
|
|
|
381 |
|
Other revolving credit and installment |
|
|
300 |
|
|
|
273 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
5,936 |
|
|
|
3,815 |
|
|
|
1,975 |
|
Foreign |
|
|
75 |
|
|
|
57 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (3) |
|
|
10,516 |
|
|
|
6,800 |
|
|
|
3,259 |
|
As a percentage of total loans |
|
|
1.25 |
% |
|
|
0.79 |
% |
|
|
0.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans (4) |
|
|
768 |
|
|
|
667 |
|
|
|
578 |
|
Other |
|
|
1,294 |
|
|
|
1,526 |
|
|
|
637 |
|
Real estate and other nonaccrual investments (5) |
|
|
34 |
|
|
|
16 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans and other nonperforming assets |
|
$ |
12,612 |
|
|
$ |
9,009 |
|
|
$ |
4,495 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total loans |
|
|
1.50 |
% |
|
|
1.04 |
% |
|
|
1.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At March 31, 2009, and December 31, 2008, nonaccrual loans exclude loans acquired from
Wachovia that are accounted for under SOP 03-3. |
(2) |
|
Includes nonaccrual mortgages held for sale. |
(3) |
|
Includes impaired loans of $4,126 million, $3,640 million and $859 million at March 31,
2009, December 31, 2008, and March 31, 2008, respectively. See Note 5 to Financial Statements
in this Report and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in
our 2008 Form 10-K for further information on impaired loans. |
(4) |
|
Consistent with regulatory reporting requirements, foreclosed real estate securing
Government National Mortgage Association (GNMA) loans is classified as nonperforming. Both
principal and interest for GNMA loans secured by the foreclosed real estate are collectible
because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed
by the Department of Veterans Affairs. |
(5) |
|
Includes real estate investments (contingent interest loans accounted for as investments)
that would be classified as nonaccrual if these assets were recorded as loans. |
Total nonperforming assets were $12.6 billion (1.50% of total loans) at March 31, 2009, and
included $10.5 billion of nonaccrual loans and $2.1 billion of foreclosed assets and repossessed
real estate and vehicles. Nonaccrual loans increased $3.7 billion, or 46 basis points as a
percentage of total loans, from December 31, 2008, with increases in both the
commercial and retail segments. The increase included $1.5 billion related to Wachovia, which grew
from a relatively low $97 million at year end as virtually all
of the associated nonaccrual loans were no
33
longer considered nonaccrual after applying required purchase accounting. Over 90% of
nonaccrual loans are secured. The increases in nonaccrual loans were concentrated primarily
in portfolios secured by real estate or with borrowers dependent on the housing industry.
The $2.1 billion increase in nonaccrual consumer loans from December 31, 2008, was due primarily to
an increase of $884 million from Wachovia, $405 million in Wells Fargo Financial real estate, $383
million in Home Mortgage and $366 million from the legacy Wells Fargo Home Equity Group. Nonaccrual
real estate 1-4 family loans included approximately $3.5 billion of loans at March 31, 2009, that
have been modified. Our policy requires six consecutive months of payments on modified loans before
they are returned to accrual status. Other foreclosed assets decreased $232 million to $1.3 billion
at March 31, 2009, from $1.5 billion at December 31, 2008, which included $885 million from
Wachovia. Until conditions improve in the residential real estate and liquidity markets, we will
continue to hold more nonperforming assets on our balance sheet as it is currently the most
economic option available. Increases in commercial nonperforming assets were also primarily a
direct result of the conditions in the residential real estate markets and general consumer
economy.
We expect nonperforming asset balances to continue to grow, reflecting an environment where
retaining these assets is the most viable economic option, as well as our efforts to modify more
real estate loans to reduce foreclosures and keep customers in their homes. We remain focused on
proactively identifying problem credits, moving them to nonperforming status and recording the loss
content in a timely manner. We have increased and will continue to increase staffing in our workout
and collection organizations to ensure these troubled borrowers receive the attention and help they
need. See Financial Review Allowance for Credit Losses 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.
34
Loans 90 Days or More Past Due and Still Accruing
Loans included in this category are 90 days or more past due as to interest or principal and still
accruing, because they are (1) well-secured and in the process of collection or (2) real estate 1-4
family first mortgage loans or consumer loans exempt under regulatory rules from being classified
as nonaccrual. Loans acquired from Wachovia that are subject to SOP 03-3 are excluded from the
disclosure of loans 90 days or more past due and still accruing
interest even though certain of them are 90 days or more contractually past due and they are considered to be accruing
because the interest income on these loans relates to the establishment of an accretable yield in
purchase accounting under the SOP and not to contractual interest payments.
The total of loans 90 days or more past due and still accruing was $14,736 million at March 31,
2009, $11,830 million at December 31, 2008, (Wachovia and Wells Fargo combined), and $6,919 million
at March 31, 2008. The total included $9,509 million, $8,184 million and $5,288 million for the
same periods, respectively, in advances pursuant to our servicing agreements to GNMA mortgage pools
and similar loans whose repayments are insured by the FHA or guaranteed by the Department of
Veterans Affairs.
The table below reflects loans 90 days or more past due and still accruing excluding the
insured/guaranteed GNMA advances.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
(EXCLUDING INSURED/GUARANTEED GNMA AND SIMILAR LOANS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31 |
, |
Dec. 31 |
, |
Mar. 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
(2) |
|
2008 |
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
417 |
|
|
$ |
218 |
|
|
$ |
29 |
|
Other real estate mortgage |
|
|
355 |
|
|
|
88 |
|
|
|
24 |
|
Real estate construction |
|
|
624 |
|
|
|
232 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
1,396 |
|
|
|
538 |
|
|
|
68 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage (1) |
|
|
1,361 |
|
|
|
883 |
|
|
|
314 |
|
Real estate 1-4 family junior lien mortgage |
|
|
598 |
|
|
|
457 |
|
|
|
228 |
|
Credit card |
|
|
738 |
|
|
|
687 |
|
|
|
449 |
|
Other revolving credit and installment |
|
|
1,105 |
|
|
|
1,047 |
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
3,802 |
|
|
|
3,074 |
|
|
|
1,523 |
|
Foreign |
|
|
29 |
|
|
|
34 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,227 |
|
|
$ |
3,646 |
|
|
$ |
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage loans held for sale 90 days or more past due and still accruing. |
(2) |
|
The amount of real estate 1-4 family first and junior lien mortgage loan delinquencies as
originally reported at December 31, 2008, included certain SOP 03-3 loans previously
classified as nonaccrual by Wachovia. The December 31, 2008, amounts have been revised to
exclude those loans. |
35
Net Charge-offs
Net charge-offs in first quarter 2009 were $3.3 billion (1.54% of average total loans outstanding,
annualized), including $371 million in the Wachovia portfolio, compared with $2.8 billion (2.69%)
in fourth quarter 2008 and $1.5 billion (1.60%) in first quarter 2008. Commercial and commercial real estate losses remained at relatively
low levels reflecting the historically disciplined underwriting standards applied by Wells Fargo
and the customer-relationship focus in this portfolio. Losses in residential real estate and credit
cards rose modestly in the quarter, in line with expectations, while other credit losses,
principally indirect auto, declined due to seasonality and our risk reduction actions in indirect
auto over the last two years.
Net charge-offs in the 1-4 family first mortgage portfolio totaled $391 million in first quarter
2009. These results included $310 million from legacy Wells Fargo, which increased $117 million
linked quarter. Our relatively high-quality 1-4 family first mortgage portfolio continued to
reflect relatively low loss rates although until housing prices fully stabilize, these credit
results will continue to deteriorate. Credit card charge-offs increased $131 million linked quarter
to $582 million in first quarter 2009, including $48 million relating to the $2.4 billion Wachovia
portfolio. We continued to see increases in delinquency and loss levels in the consumer unsecured
loan portfolios as a result of higher unemployment. Losses in the auto portfolio decreased $47
million linked quarter reflecting improvements from seasonality and portfolio balance reduction
over the past several quarters.
Net charge-offs in the real estate 1-4 family junior lien portfolio of $847 million in first
quarter 2009 included $801 million in the legacy Wells Fargo portfolio, which increased $99 million
linked quarter as residential real estate values continued to be depressed. These results are not
solely driven by declining home values. As more customers seek to modify their first mortgages,
there may be an adverse effect on the credit performance of junior lien holders behind these
modifications. More information about the Home Equity portfolio is available on page 29.
Commercial and commercial real estate net charge-offs of $697 million in first quarter 2009
included $667 million in the legacy Wells Fargo portfolio, down $175 million linked quarter, which
included $294 million related to the customers of the Madoff investment firm. The linked-quarter
trends also reflected a $100 million increase relating to our Business Direct portfolio while other
commercial losses declined and remained at relatively low levels. Wholesale credit results
continued to deteriorate. Commercial lending requests slowed during first quarter 2009 as borrowers
reduced their receivable and inventory levels to conserve cash.
36
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan losses and the reserve
for unfunded credit commitments, is managements estimate of credit losses inherent in the loan
portfolio at the balance sheet date and excludes loans carried at fair value. The process for
determining the adequacy of the allowance for credit losses is critical to our financial results.
It requires difficult, subjective and complex judgments, as a result of the need to make estimates
about the effect of matters that are uncertain. See Financial
Review Critical Accounting
Policies Allowance for Credit Losses in our 2008 Form 10-K for additional information.
We apply a consistent methodology to determine the allowance for credit losses, using both
forecasted and historical loss trends, adjusted for underlying economic and market conditions. For
individually graded (typically commercial) portfolios, we generally use loan-level credit quality
ratings, which require knowledge about the borrower, industry and collateral value, combined with
historically-based grade specific loss factors. For statistically managed portfolios (typically
consumer), we generally leverage models which use credit-related characteristics such as
delinquency rates and trends, vintages, and portfolio concentrations to estimate loss content.
Additionally, individual commercial impaired loans greater than $5 million and troubled debt
restructurings (TDRs) are reserved for individually. The level of the allowance for credit losses
is affected by credit performance, changes in portfolio composition, and managements assessment of
the economic environment and related impact on underlying credit risk. While the allowance is built
using product/business segment estimates, it is available to absorb losses for the entire loan
portfolio.
At March 31, 2009, the allowance for loan losses totaled $22.3 billion (2.64% of total loans),
compared with $21.0 billion (2.43%) at December 31, 2008, and $5.8 billion (Wells Fargo only)
(1.50%) at March 31, 2008. The allowance for credit losses was $22.8 billion (2.71%) at March 31,
2009, $21.7 billion (2.51%) at December 31, 2008, and $6.0 billion (1.56%)(Wells Fargo only) at
March 31, 2008. The allowance for credit losses at March 31, 2009, did not include any amounts
related to credit-impaired loans acquired from Wachovia accounted for under SOP 03-3. The reserve
for unfunded credit commitments was $565 million at March 31, 2009, $698 million at December 31,
2008, and $210 million at March 31, 2008.
Total provision expense in first quarter 2009 was $4.6 billion and included a credit reserve build
of $1.3 billion. The $1.3 billion reserve build was primarily driven by two factors: (1)
deterioration in economic conditions that increased the projected losses in our statistically
managed portfolios, and (2) increases in specific reserves under FAS 114 for both commercial loans
and TDRs. The increase in reserves for TDRs is associated with loan modification programs designed
to keep qualifying borrowers in their homes. We anticipate further increases in TDR volumes as we
continue to utilize government sponsored programs and other methods to minimize foreclosures and
associated credit losses.
The application of SOP 03-3 to loans acquired from Wachovia affects net charge-offs and nonaccrual
loans as described in Loans in this Report and, therefore, the allowance ratios associated with
these measures should not be relied upon as a tool for determining adequacy of
the allowance and should not be used to compare our allowance to peer banks or to compare our
ratios for periods that include the application of SOP 03-3 to those that do not.
37
The ratio of the allowance for credit losses to total nonaccrual loans was 217%, 319% and 185% at
March 31, 2009, December 31, 2008, and March 31, 2008, respectively. The decrease in this ratio
from December 31, 2008, was due to the 55% increase in nonaccrual loans. The increase in this ratio
from a year ago reflects the addition of the Wachovia allowance for loan losses and the reduction
of nonaccrual loans in the Wachovia portfolio resulting from the application of SOP 03-3.
The ratio of the allowance for credit losses to annualized net charge-offs was 173%, 191% and 97%
for March 31, 2009, December 31, 2008, and March 31, 2008, respectively. The increase in this ratio
from a year ago is largely a function of increased loss expectations. The decrease from December
31, 2008, is directly related to the addition of Wachovia charge-offs in first quarter 2009. Loan
losses for the quarter excluded those losses from SOP 03-3 loans as these loans have already been
reduced to their fair value, the result being significantly lower losses on the balance of the
portfolio.
We believe the allowance for credit losses of $22.8 billion was adequate to cover credit losses
inherent in the loan portfolio, including unfunded credit commitments, at March 31, 2009. Due to
the sensitivity of the allowance for credit losses to changes in the economic environment, it is
possible that unanticipated economic deterioration would create incremental credit losses not
anticipated as of the balance sheet date. We may need to significantly adjust the allowance for
credit losses, considering current factors at the time, including economic or market conditions and
ongoing internal and external examination processes. Our process for determining the adequacy of
the allowance for credit losses is discussed in Financial
Review Critical Accounting Policies
Allowance for Credit Losses and Note 6 (Loans and Allowance for Credit Losses) to Financial
Statements in our 2008 Form 10-K.
38
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
Asset/liability management involves the evaluation, monitoring and management of interest rate
risk, market risk, liquidity and funding. The Corporate Asset/Liability Management Committee
(Corporate ALCO) which oversees these risks and reports periodically to the Finance Committee of
the Board of Directors consists of senior financial and business executives. Each of our
principal business groups has individual asset/liability management committees and processes linked
to the Corporate ALCO process.
Interest Rate Risk
Interest rate risk, which potentially can have a significant earnings impact, is an integral part
of being a financial intermediary. We are subject to interest rate risk because:
|
|
assets and liabilities may mature or reprice at different times (for example, if assets
reprice faster than liabilities and interest rates are generally falling, earnings will
initially decline); |
|
|
assets and liabilities may reprice at the same time but by different amounts (for example,
when the general level of interest rates is falling, we may reduce rates paid on checking and
savings deposit accounts by an amount that is less than the general decline in market interest
rates); |
|
|
short-term and long-term market interest rates may change by different amounts (for
example, the shape of the yield curve may affect new loan yields and funding costs
differently); or |
|
|
the remaining maturity of various assets or liabilities may shorten or lengthen as interest
rates change (for example, if long-term mortgage interest rates decline sharply,
mortgage-backed securities held in the securities available-for-sale portfolio may prepay
significantly earlier than anticipated which could reduce portfolio income). |
Interest rates may also have a direct or indirect effect on loan demand, credit losses, mortgage
origination volume, the fair value of MSRs and other financial instruments, the value of the
pension liability and other items affecting earnings.
We assess interest rate risk by comparing our most likely earnings plan with various earnings
simulations using many interest rate scenarios that differ in the direction of interest rate
changes, the degree of change over time, the speed of change and the projected shape of the yield
curve. For example, as of March 31, 2009, our most recent simulation indicated estimated earnings
at risk of approximately 4% of our most likely earnings plan using a scenario in which the federal
funds rate rises to 2.75% and the 10-year Constant Maturity Treasury bond yield rises to 3.45% by
the end of 2009. Simulation estimates depend on, and will change with, the size and mix of our
actual and projected balance sheet at the time of each simulation. Due to timing differences
between the quarterly valuation of MSRs and the eventual impact of interest rates on mortgage
banking volumes, earnings at risk in any particular quarter could be higher than the average
earnings at risk over the 12-month simulation period, depending on the path of interest rates and
on our hedging strategies for MSRs. See Mortgage Banking Interest Rate and Market Risk in this
Report.
39
We use exchange-traded and over-the-counter interest rate derivatives to hedge our interest rate
exposures. The notional or contractual amount and fair values of these derivatives as of March 31,
2009, and December 31, 2008, are presented in Note 12 (Derivatives) to Financial Statements in this
Report. We use derivatives for asset/liability management in three main ways:
|
|
to convert a major portion of our long-term fixed-rate debt, which we issue to finance the
Company, from fixed-rate payments to floating-rate payments by entering into receive-fixed
swaps; |
|
|
to convert the cash flows from selected asset and/or liability instruments/portfolios from
fixed-rate payments to floating-rate payments or vice versa; and |
|
|
to hedge our mortgage origination pipeline, funded mortgage loans and MSRs using interest
rate swaps, swaptions, futures, forwards and options. |
Mortgage Banking Interest Rate and Market Risk
We originate, fund and service mortgage loans, which subjects us to various risks, including
credit, liquidity and interest rate risks. Based on market conditions and other factors, we reduce
credit and liquidity risks by selling or securitizing some or all of the long-term fixed-rate
mortgage loans we originate and most of the ARMs we originate. On the other hand, we may hold
originated ARMs and fixed-rate mortgage loans in our loan portfolio as an investment for our
growing base of core deposits. We determine whether the loans will be held for investment or held
for sale at the time of commitment. We may subsequently change our intent to hold loans for
investment and sell some or all of our ARMs or fixed-rate mortgages as part of our corporate
asset/liability management. We may also acquire and add to our securities available for sale a
portion of the securities issued at the time we securitize mortgages held for sale.
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity
in the nonconforming secondary markets, our mortgage banking revenue growth continued to be
positive, reflecting the complementary origination and servicing strengths of the business. The
secondary market for agency-conforming mortgages functioned well during the quarter. The mortgage
warehouse and pipeline, which predominantly consists of prime mortgage loans, incurred a $39
million liquidity related write-down in first quarter 2009. In addition, we further reduced
mortgage origination gains by $78 million in first quarter 2009, primarily to reflect an increase
to the repurchase reserve for higher projected losses due to the continuing deterioration in the
housing market.
Interest rate and market risk can be substantial in the mortgage business. Changes in interest
rates may potentially impact total origination and servicing fees, the value of our residential
MSRs measured at fair value, the value of mortgages held for sale (MHFS) and the associated income and loss reflected in
mortgage banking noninterest income, the income and expense associated with instruments (economic
hedges) used to hedge changes in the fair value of MSRs and MHFS, and the value of derivative loan
commitments (interest rate locks) extended to mortgage applicants.
Interest rates impact the amount and timing of origination and servicing fees because consumer
demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage
interest rates. Typically, a decline in mortgage interest rates will lead to an increase in
mortgage originations and fees and may also lead to an increase in servicing fee income,
depending on the level of new loans added to the servicing portfolio and prepayments. Given the
time it takes for consumer behavior to fully react to interest rate changes, as well as the time
40
required for processing a new application, providing the commitment, and securitizing and selling
the loan, interest rate changes will impact origination and servicing fees with a lag. The amount
and timing of the impact on origination and servicing fees will depend on the magnitude, speed and
duration of the change in interest rates.
Under FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115, which we adopted January 1, 2007, we elected to measure MHFS
at fair value prospectively for new prime MHFS originations for which an active secondary market
and readily available market prices existed to reliably support fair value pricing models used for
these loans. At December 31, 2008, we elected to measure at fair value similar MHFS acquired from
Wachovia. Loan origination fees on these loans are recorded when earned, and related direct loan
origination costs and fees are recognized when incurred. We also elected to measure at fair value
certain of our other interests held related to residential loan sales and securitizations. We
believe that the election for new prime MHFS and other interests held (which are now hedged with
free-standing derivatives (economic hedges) along with our MSRs) reduces certain timing differences
and better matches changes in the value of these assets with changes in the value of derivatives
used as economic hedges for these assets. During 2008 and in first quarter 2009, in response to
continued secondary market illiquidity, we continued to originate certain prime non-agency loans to
be held for investment for the foreseeable future rather than to be held for sale.
Under FAS
156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No.
140, we elected to use the fair value measurement method to initially measure and carry our
residential MSRs, which represent substantially all of our MSRs. Under this method, the MSRs are
recorded at fair value at the time we sell or securitize the related mortgage loans. The carrying
value of MSRs reflects changes in fair value at the end of each quarter and changes are included in
net servicing income, a component of mortgage banking noninterest income. If the fair value of the
MSRs increases, income is recognized; if the fair value of the MSRs decreases, a loss is
recognized. We use a dynamic and sophisticated model to estimate the fair value of our MSRs and
periodically benchmark our estimates to independent appraisals. The valuation of MSRs can be highly
subjective and involve complex judgments by management about matters that are inherently
unpredictable. Changes in interest rates influence a variety of significant assumptions included in
the periodic valuation of MSRs, including prepayment speeds, expected returns and potential risks
on the servicing asset portfolio, the value of escrow balances and other servicing valuation
elements.
A decline in interest rates generally increases the propensity for refinancing, reduces the
expected duration of the servicing portfolio and therefore reduces the estimated fair value of
MSRs. This reduction in fair value causes a charge to income (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,
extends the expected duration of the servicing portfolio and therefore increases the estimated fair
value of the MSRs. However, an increase in interest rates can also reduce mortgage loan demand and
therefore reduce origination income. In first quarter 2009, a $2.8 billion decrease in the fair
value of our MSRs and $3.7 billion of gains on free-standing derivatives used to hedge the MSRs
resulted in a net gain of $875 million.
41
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 $13.6 billion at March 31,
2009, and $16.2 billion at December 31, 2008. The weighted-average note rate on the owned servicing
portfolio was 5.83% at March 31, 2009, and 5.92% at December 31, 2008. Our total MSRs were 0.74% of
mortgage loans serviced for others at March 31, 2009, compared with 0.87% at December 31, 2008.
As part of our mortgage banking activities, we enter into commitments to fund residential mortgage
loans at specified times in the future. A mortgage loan commitment is an interest rate lock that
binds us to lend funds to a potential borrower at a specified interest rate and within a specified
period of time, generally up to 60 days after inception of the rate lock. These loan commitments
are derivative loan commitments if the loans that will result from the exercise of the commitments
will be held for sale. These derivative loan commitments are recognized at fair value in the
balance sheet with changes in their fair values recorded as part of mortgage banking noninterest
income. We were required by Staff Accounting Bulletin No. 109,
Written Loan Commitments Recorded at Fair Value Through
Earnings, to include at inception and during the life of the loan
commitment, the expected net future cash flows related to the associated servicing of the loan as
part of the fair value measurement of derivative loan commitments. Changes subsequent to inception
are based on changes in fair value of the underlying loan resulting from the exercise of the
commitment and changes in the probability that the loan will not fund within the terms of
the commitment (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.
42
Outstanding derivative loan commitments expose us to the risk that the price of the mortgage loans
underlying the commitments might decline due to increases in mortgage interest rates from inception
of the rate lock to the funding of the loan. To minimize this risk, we utilize forwards
and options, Eurodollar futures and options, and Treasury futures, forwards and option contracts as
economic hedges against the potential decreases in the values of the loans. We expect that these
derivative financial instruments will experience changes in fair value that will either fully or
partially offset the changes in fair value of the derivative loan commitments. However, changes in
investor demand, such as concerns about credit risk, can also cause changes in the spread
relationships between underlying loan value and the derivative financial instruments that cannot be
hedged.
Market
Risk Trading Activities
From a market risk perspective, our net income is exposed to changes in interest rates, credit
spreads, foreign exchange rates, equity and commodity prices and their implied volatilities. The
primary purpose of our trading businesses is to accommodate customers in the management of their
market price risks. Also, we take positions based on market expectations or to benefit from price
differences between financial instruments and markets, subject to risk limits established and
monitored by Corporate ALCO. All securities, foreign exchange transactions, commodity transactions
and derivatives used in our trading businesses are carried at fair value. The Institutional Risk
Committee establishes and monitors counterparty risk limits. The credit risk amount and estimated
net fair value of all customer accommodation derivatives at March 31, 2009, and December 31, 2008,
are included in Note 12 (Derivatives) to Financial Statements in this Report. Open at risk
positions for all trading business are monitored by Corporate ALCO.
The standardized approach for monitoring and reporting market risk for the trading activities
consists of value-at-risk (VAR) metrics complemented with factor analysis and stress testing. VAR
measures the worst expected loss over a given time interval and within a given confidence interval.
We measure and report daily VAR at a 99% confidence interval based on actual changes in rates and
prices over the past 250 trading days. The analysis captures all financial instruments that are
considered trading positions. The average one-day VAR throughout first quarter 2009 was $103
million, with a lower bound of $83 million and an upper bound of $130 million.
Market
Risk Equity Markets
We are directly and indirectly affected by changes in the equity markets. We make and manage direct
equity investments in start-up businesses, emerging growth companies, management buy-outs,
acquisitions and corporate recapitalizations. We also invest in non-affiliated funds that make
similar private equity investments. These private equity investments are made within capital
allocations approved by management and the Board of Directors (the Board). The Boards policy is to
review business developments, key risks and historical returns for the private equity investment
portfolio at least annually. Management reviews the valuations of these
investments at least quarterly and assesses them for possible other-than-temporary impairment. For
nonmarketable investments, the analysis is based on facts and circumstances of each individual
investment and the expectations for that investments cash flows and capital needs, the viability
of its business model and our exit strategy. Nonmarketable investments included private
43
equity
investments of $2.59 billion and $2.71 billion and principal investments of $1.27 billion and $1.28
billion at March 31, 2009, and December 31, 2008, respectively. Private equity investments are
carried at cost subject to other-than-temporary impairment. Principal investments are carried at fair value with net unrealized gains and losses reported in noninterest income.
We also have marketable equity securities in the securities available-for-sale portfolio, including
securities relating to our venture capital activities. We manage these investments within capital
risk limits approved by management and the Board and monitored by Corporate ALCO. Gains and losses
on these securities are recognized in net income when realized and periodically include
other-than-temporary impairment charges. The fair value of
marketable equity securities was $5.18 billion and cost was $5.83 billion at March 31, 2009, and
$6.14 billion and $6.30 billion, respectively, at December 31, 2008.
Changes in equity market prices may also indirectly affect our net income by affecting (1) the
value of third party assets under management and, hence, fee income, (2) particular borrowers whose
ability to repay principal and/or interest may be affected by the stock market, or (3) brokerage
activity, related commission income and other business activities. Each business line monitors and
manages these indirect risks.
44
Liquidity and Funding
The objective of effective liquidity management is to ensure that we can meet customer loan
requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both
normal operating conditions and under unpredictable circumstances of industry or market stress. To
achieve this objective, Corporate ALCO establishes and monitors liquidity guidelines that require
sufficient asset-based liquidity to cover potential funding requirements and to avoid
over-dependence on volatile, less reliable funding markets. We set these guidelines for both the
consolidated balance sheet and for the Parent to ensure that the Parent is a source of strength for
its regulated, deposit-taking banking subsidiaries.
Debt securities in the securities available-for-sale portfolio provide asset liquidity, in addition
to the immediately liquid resources of cash and due from banks and federal funds sold, securities
purchased under resale agreements and other short-term investments. Asset liquidity is further
enhanced by our ability to sell or securitize loans in secondary markets and to pledge loans to
access secured borrowing facilities through the Federal Home Loan Banks, the Federal Reserve Board
or the United States Department of the Treasury (Treasury Department).
Core customer deposits have historically provided a sizeable source of relatively stable and
low-cost funds. Additional funding is provided by long-term debt (including trust preferred
securities), other foreign deposits and short-term borrowings (federal funds purchased, securities
sold under repurchase agreements, commercial paper and other short-term borrowings).
Liquidity is also available through our ability to raise funds in a variety of domestic and
international money and capital markets. We access capital markets for long-term funding through
issuances of registered debt securities, private placements and asset-backed secured funding.
Rating agencies base their ratings on many quantitative and qualitative factors, including capital
adequacy, liquidity, asset quality, business mix, and level and quality of earnings. Material
changes in these factors could result in a different debt rating; however, a change in debt rating
would not cause us to violate any of our debt covenants. Wells Fargo Bank, N.A. is rated Aa2, by
Moodys Investors Service, and AA+, by Standard & Poors Rating Services.
Wells Fargo is participating in the Federal Deposit Insurance Corporations (FDIC) Temporary
Liquidity Guarantee Program (TLGP). The TLGP has two components: the Debt Guarantee Program, which
provides a temporary guarantee of newly issued senior unsecured debt issued by eligible entities;
and the Transaction Account Guarantee Program, which provides a temporary unlimited guarantee of
funds in noninterest-bearing transaction accounts at FDIC insured institutions. Under the Debt
Guarantee Program, we had $88.2 billion of remaining capacity to
issue guaranteed debt as of March 31, 2009. Eligible entities are assessed fees payable to the FDIC
for coverage under the program. This assessment is in addition to risk-based deposit insurance
assessments currently imposed under FDIC rules and regulations.
Federal Home Loan Bank Membership
We are a member of the Federal Home Loan Bank of Atlanta, the Federal Home Loan Bank of Dallas, the
Federal Home Loan Bank of Des Moines and the Federal Home Loan Bank of San Francisco (collectively,
the FHLBs). Each member of each of the FHLBs is required to maintain a
45
minimum investment in
capital stock of the applicable FHLB. The Board of Directors of each FHLB can increase the minimum
investment requirements in the event it has concluded that additional capital is required to allow
it to meet its own regulatory capital requirements. Any increase in the minimum investment
requirements outside of specified ranges requires the approval of the Federal Housing Finance
Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends
entirely upon the occurrence of a future event, potential future payments to the FHLBs are not
determinable.
Parent. Under SEC rules, the Parent is classified as a well-known seasoned issuer, which allows
it to file a registration statement that does not have a limit on issuance capacity. Well-known
seasoned issuers generally include those companies with a public float of common equity of at
least $700 million or those companies that have issued at least $1 billion in aggregate principal
amount of non-convertible securities, other than common equity, in the last three years. In June
2006, the Parents registration statement with the SEC for issuance of senior and subordinated
notes, preferred stock and other securities became effective. 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 $60 billion in
outstanding short-term debt and $170 billion in outstanding long-term debt, subject to a total
outstanding debt limit of $230 billion. At March 31, 2009, the Parent had outstanding debt under
these authorities of $15.7 billion, $133.9 billion and $149.6 billion, respectively. During first
quarter 2009, the Parent issued a total of $3.5 billion in registered senior notes guaranteed by
the FDIC. We used the proceeds from securities issued in first quarter 2009 for general corporate
purposes and expect that the proceeds from securities issued in the future will also be used for
general corporate purposes. The Parent also issues commercial paper from time to time, subject to
its short-term debt limit.
Wells Fargo Bank, N.A. Wells Fargo Bank, N.A. is authorized by its board of directors to issue $100
billion in outstanding short-term debt and $50 billion in outstanding long-term debt. In December
2007, Wells Fargo Bank, N.A. established a $100 billion bank note program under which, subject to
any other debt outstanding under the limits described above, it may issue $50 billion in
outstanding short-term senior notes and $50 billion in long-term senior or subordinated notes.
During first quarter 2009, Wells Fargo Bank, N.A. issued $7.5 billion in short-term notes. At March
31, 2009, Wells Fargo Bank, N.A. had remaining issuance capacity on the bank note program of $45.7
billion in short-term senior notes and $46.4 billion in long-term senior or subordinated
notes, respectively. Securities are issued under this program as private
placements in accordance with Office of the Comptroller of the Currency (OCC) regulations.
Wachovia Bank, N.A. Wachovia Bank, N.A. had $49.0 billion available for issuance under a global
note program at March 31, 2009. Wachovia Bank, N.A. also has a $25 billion Euro medium-term note
program (EMTN) under which it may issue senior and subordinated debt securities. These securities
are not registered with the SEC and may not be offered in the U.S. without applicable exemptions
from registration. Under the EMTN, Wachovia Bank, N.A. had up to $22.4 billion available for
issuance at March 31, 2009. In addition, Wachovia Bank, N.A.
has an A$10 billion Australian medium-term note program (AMTN), under which it may issue senior and
subordinated debt securities. These securities are not registered with the SEC and may not be
offered in the U.S. without applicable exemptions from registration. Up to A$8.5 billion was
available for issuance at March 31, 2009.
46
Wells Fargo Financial. In February 2008, Wells Fargo Financial Canada Corporation (WFFCC), an
indirect wholly-owned Canadian subsidiary of the Parent, qualified with the Canadian provincial
securities commissions CAD$7.0 billion in medium-term notes for distribution from time to time in
Canada. At March 31, 2009, CAD$6.5 billion remained available for future issuance. All medium-term
notes issued by WFFCC are unconditionally guaranteed by the Parent.
CAPITAL MANAGEMENT
We have an active program for managing stockholder capital. We use capital to fund organic growth,
acquire banks and other financial services companies, pay dividends and repurchase our shares. Our
objective is to produce above-market long-term returns by opportunistically using capital when
returns are perceived to be high and issuing/accumulating capital when such costs are perceived to
be low.
From time to time the Board of Directors authorizes the Company to repurchase shares of our common
stock. Although we announce when the Board authorizes share repurchases, we typically do not give
any public notice before we repurchase our shares. Various factors determine the amount and timing
of our share repurchases, including our capital requirements, the number of shares we expect to
issue for acquisitions and employee benefit plans, market conditions (including the trading price
of our stock), and legal considerations. These factors can change at any time, and there can be no
assurance as to the number of shares we will repurchase or when we will repurchase them.
In 2007, the Board authorized the repurchase of up to 200 million additional shares of our
outstanding common stock and, in September 2008, the repurchase of up to 25 million additional
shares. During first quarter 2009, we repurchased approximately 2 million shares of our common
stock. At March 31, 2009, the total remaining common stock repurchase authority was approximately
12 million shares. For additional information regarding share repurchases and repurchase
authorizations, see Part II Item 2 of this Report.
Historically, our policy has been to repurchase shares under the safe harbor conditions of Rule
10b-18 of the Securities Exchange Act including a limitation on the daily volume of repurchases.
Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending
merger or acquisition in which shares of our stock will constitute some or all of the
consideration. Our management may determine that during a pending stock merger or acquisition when
the safe harbor would otherwise be available, it is in our best interest to repurchase shares in
excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in
compliance with the other conditions of the safe harbor, including the standing daily volume
limitation that applies whether or not there is a pending stock merger or acquisition.
Our potential sources of capital include retained earnings and issuances of common and preferred
stock. In first quarter 2009, retained earnings increased $406 million, a major portion from Wells
Fargo net income of $3.05 billion, less common and preferred dividends and accretion of $2.10
billion. In first quarter 2009, we issued approximately 35 million shares, or $543 million, of
common stock (including shares issued for our ESOP plan) under various employee benefit and
director plans and under our dividend reinvestment and direct stock repurchase programs.
47
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 to the Treasury Department 25,000
shares of a new class 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. We pay cumulative dividends on the preferred securities at a rate of 5% per year for
the first five years and thereafter at a rate of 9% per year. Unless permitted under the provisions
of the American Recovery and Reinvestment Act of 2009, we may not redeem the preferred securities
during the first three years except with the proceeds from a qualifying equity offering. After
three years, we may, at our option, redeem the preferred securities at par value plus accrued and
unpaid dividends. The preferred securities are generally non-voting. Prior to October 28, 2011,
unless we have redeemed the preferred securities or the Treasury Department has transferred the
preferred securities to a third party, the consent of the Treasury Department will be required for
us to increase our common stock dividend or repurchase our common stock or other equity or capital
securities, other than in connection with benefit plans consistent with past practice and certain
other circumstances specified in the Securities Purchase Agreements. The terms of the Treasury
Departments purchase of the preferred securities include certain restrictions on certain forms of
executive compensation and limits on the tax deductibility of compensation we pay to executive
management. As part of its purchase of the preferred securities, the Treasury Department also
received warrants to purchase 110,261,688 shares of our common stock at an initial per share
exercise price of $34.01, subject to customary anti-dilution provisions. The warrants expire ten
years from the issuance date. Both the preferred securities and warrants are accounted for as
components of Tier 1 capital.
In March 2009, we reduced our common stock dividend by 85% to $0.05 per share, enhancing our
ability to build capital.
At March 31, 2009, the Company and each of our subsidiary banks were well capitalized under the
applicable regulatory capital adequacy guidelines. For additional information see Note 19
(Regulatory and Agency Capital Requirements) to Financial Statements in this Report.
On May 7, 2009, the Federal Reserve confirmed that under its adverse stress test scenario the
Companys Tier 1 capital exceeded the minimum level needed for well-capitalized institutions. In
conjunction with the stress test, the Company has agreed with the Federal Reserve to increase
common equity by $13.7 billion by November 9, 2009. On May 8, 2009, the Company agreed to issue 341
million shares of its common stock at a price of $22 per share. Also on May 8, 2009, the
underwriters in the offering exercised their option to purchase up to an additional 51.15 million
shares of common stock from the Company at $22 per share to cover over-allotments. The Company
will receive net proceeds of $8.4 billion from the offering including the exercise of the
over-allotment option. The Company expects to satisfy the remainder of the capital requirement
through profits and other internally generated sources. The Company can satisfy any part of the
capital requirement by exchanging up to $13.7 billion of its $25 billion of Capital Purchase
Program (CPP) funds for the Treasurys Capital Assistance Program (CAP) on a dollar-for-dollar
basis.
48
Tangible Common Equity
We strengthened our capital position in first quarter 2009. Tangible common equity (TCE) was $41.1
billion at quarter end, an increase of $4.5 billion. The ratio of TCE to tangible assets was 3.28%,
up from 2.86% at December 31, 2008. TCE was 3.84% of risk-weighted assets. At March 31, 2009, Tier
1 capital was $89.0 billion and the Tier 1 capital ratio was 8.30%, up from 7.84% at December 31,
2008.
|
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Quarter ended |
|
|
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|
|
|
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|
Mar. 31 |
, |
|
|
|
|
|
Dec. 31 |
, |
(in billions) |
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
$ |
107.1 |
|
|
|
|
|
|
$ |
102.3 |
|
Less: Preferred equity |
|
|
|
|
|
|
|
|
(30.9 |
) |
|
|
|
|
|
|
(30.8 |
) |
Goodwill and intangible assets (other than MSRs) |
|
|
|
$ |
(38.5 |
) |
|
|
|
|
|
$ |
(38.1 |
) |
|
|
|
|
Applicable deferred taxes |
|
|
|
|
5.7 |
|
|
|
|
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets, net of deferred taxes |
|
|
|
|
|
|
|
|
(32.8 |
) |
|
|
|
|
|
|
(32.5 |
) |
Noncontrolling interests |
|
|
|
|
|
|
|
|
(2.3 |
) |
|
|
|
|
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity (1) |
|
(A) |
|
|
|
|
|
$ |
41.1 |
|
|
|
|
|
|
$ |
36.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,285.9 |
|
|
|
|
|
|
$ |
1,309.6 |
|
Less: Goodwill and intangible assets, net of deferred taxes |
|
|
|
|
|
|
|
|
(32.8 |
) |
|
|
|
|
|
|
(32.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets |
|
(B) |
|
|
|
|
|
$ |
1,253.1 |
|
|
|
|
|
|
$ |
1,277.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity ratio |
|
(A)/(B) |
|
|
|
|
|
|
3.28 |
% |
|
|
|
|
|
|
2.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-weighted assets (2) |
|
(C) |
|
|
|
|
|
$ |
1,071.5 |
|
|
|
|
|
|
$ |
1,101.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to total risk-weighted assets |
|
(A)/(C) |
|
|
|
|
|
|
3.84 |
% |
|
|
|
|
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Tangible common equity, a non-GAAP financial measure, includes total equity, less preferred
equity, goodwill and intangible assets (excluding MSRs), net of related deferred taxes, and
the portion of noncontrolling interests accounted for under FAS 160 that does not have risk
sharing attributes similar to common equity. Management reviews tangible common equity along
with other measures of capital as part of its financial analyses and has included this
information because of current interest on the part of market participants in tangible common
equity as a measure of capital. The methodology of determining tangible common equity may
differ among companies. |
(2) |
|
Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit
equivalent amounts of derivatives and off-balance sheet items are assigned to one of several
broad risk categories according to the obligor or, if relevant, the guarantor or the nature of
any collateral. The aggregate dollar amount in each risk category is then multiplied by the
risk weight associated with that category. The resulting weighted values from each of the risk
categories are aggregated for determining total risk-weighted assets. |
RISK FACTORS
An investment in the Company involves risk, including the possibility that the value of the
investment could fall substantially and that dividends or other distributions on the investment
could be reduced or eliminated. We discuss in this Report, as well as in other documents we file
with the SEC, risk factors that could adversely affect our financial results and condition and the
value of, and return on, an investment in the Company. We refer you to the Financial Review section
and Financial Statements (and related Notes) in this Report for more information about credit,
interest rate, market and litigation risks, to the Risk Factors and Regulation and Supervision
sections and Note 15 (Guarantees and Legal Actions) to Financial Statements in our 2008 Form 10-K
for a detailed discussion of risk factors, and to the discussion below that supplements the Risk
Factors section of the 2008 Form 10-K. Any factor described in this Report or in our 2008 Form
10-K could by itself, or together with other factors, adversely affect our financial results and
condition. There are factors not discussed below or elsewhere in this Report that could adversely
affect our financial results and condition.
49
In accordance with the Private Securities Litigation Reform Act of 1995, we caution you that one or
more of these same risk factors could cause actual results to differ significantly from projections
or forecasts of our financial results and condition and expectations for our operations and
business that we make in forward-looking statements in this Report and in presentations and other
Company communications. We make forward-looking statements when we use words such as believe,
expect, anticipate, estimate, project, forecast, will, may, can and similar
expressions. Do not unduly rely on forward-looking statements, as actual results could differ
significantly. Forward-looking statements speak only as of the date made, and we do not undertake
to update them to reflect changes or events that occur after that date that may affect whether
those forecasts and expectations continue to reflect managements beliefs or the likelihood that
the forecasts and expectations will be realized.
In this Report we make forward-looking statements that:
|
|
we believe our allowance for credit losses at March 31, 2009, was adequate to cover
expected consumer losses for at least the next 12 months and to provide approximately 24
months of anticipated loss coverage for the commercial and commercial real estate portfolios; |
|
|
we expect to generate $5 billion of annual merger-related expense savings, which will begin
to emerge in the second quarter and are expected to be fully realized upon completion of the
integration; |
|
|
we expect total integration expense to be substantially less than our original estimate of
$7.9 billion and to be spread over the integration period rather than all by year-end 2009; |
|
|
we expect additional efficiency initiatives to lower expenses over the remainder of 2009; |
|
|
we expect to satisfy the remaining capital requirement relating to the recently completed
stress test through profits and other internally generated sources; |
|
|
losses on the combined Wells Fargo and Wachovia loan portfolios will increase as long as
the U.S. economy remains weak; |
|
|
we believe actions described in this Report that we have taken to reduce credit risk better
position us for continued deterioration and economic headwinds; |
|
|
to the extent the market does not recover, the residential mortgage business could continue
to have increased loss severity on repurchases, causing future increases in the repurchase
reserve; |
|
|
we could have significant losses on unsaleable loans until the housing market recovers; |
|
|
we will continue to hold more nonperforming assets on our balance sheet until conditions
improve in the residential real estate and liquidity markets; |
|
|
we expect nonperforming asset balances to continue to grow; |
|
|
charge-offs on Wachovia loans accounted for under SOP 03-3 are not expected to reduce
income in future periods to the extent the original estimates used to determine the purchase
accounting adjustments continue to be accurate; |
|
|
we expect changes in the fair value of derivative financial instruments used to hedge
outstanding derivative loan commitments will fully or partially offset the changes in fair
value of the commitments; |
|
|
we expect that $34 million of deferred net loss on derivatives in other comprehensive
income at March 31, 2009, will be reclassified as earnings during the next twelve months; |
|
|
we do not expect that we will be required to make a minimum contribution in 2009 for the
Cash Balance Plan; and |
50
|
|
we expect actions taken with respect to the Wells Fargo qualified and supplemental Cash
Balance Plans and the Wachovia Pension Plan will reduce pension cost by approximately $330
million in 2009. |
Several factors could cause actual results to differ significantly from expectations including:
|
|
current economic and market conditions; |
|
|
our capital requirements and ability to raise capital on favorable terms; |
|
|
the terms of capital investments or other financial assistance provided by the U.S.
government; |
|
|
legislative proposals to allow mortgage cram-downs in bankruptcy or require other loan
modifications; |
|
|
our ability to successfully integrate the Wachovia merger and realize the expected cost
savings and other benefits; |
|
|
our ability to realize the recently announced efficiency initiatives to lower expenses when
and in the amount expected; |
|
|
the adequacy of our allowance for credit losses; |
|
|
recognition of other-than-temporary impairment on securities held in our available-for-sale
portfolio; |
|
|
the effect of changes in interest rates on our net interest margin and our mortgage
originations, mortgage servicing rights and mortgages held for sale; |
|
|
hedging gains or losses; disruptions in the capital markets and reduced investor demand for
mortgages loans; |
|
|
our ability to sell more products to our customers; |
|
|
the effect of the economic recession on the demand for our products and services; |
|
|
the effect of the fall in stock market prices on fee income from our brokerage, asset and
wealth management businesses; |
|
|
our election to provide support to our mutual funds for structured credit products they may
hold; |
|
|
changes in the value of our venture capital investments; |
|
|
changes in our accounting policies or in accounting standards or in how accounting
standards are to be applied; |
|
|
mergers and acquisitions; |
|
|
federal and state regulations; |
|
|
reputational damage from negative publicity, fines, penalties and other negative
consequences from regulatory violations; |
|
|
the loss of checking and saving account deposits to other investments such as the stock
market; and |
|
|
fiscal and monetary policies of the Federal Reserve Board. |
There is no assurance that our allowance for credit losses will be adequate to cover future credit
losses, especially if credit markets, housing prices and unemployment do not stabilize. Increases
in loan charge-offs or in the allowance for credit losses and related provision expense could
materially adversely affect our financial results and condition.
51
The following risk factors supplement the discussion under Risk Factors contained in our 2008
Form 10-K.
The Companys participation in government programs to modify first and second lien mortgage loans
could adversely affect the amount and timing of the Companys earnings and credit losses relating
to those loans.
The Treasury Department recently announced guidelines for its first and second lien modification
programs under its Making Home Affordable Program. Participation in the programs could result in a
reduction in the principal balances of real estate 1-4 family first and second lien mortgage loans
held by the Company and the acceleration of loss recognition on those loans. In addition to the
principal reduction aspect of the programs, loan modification efforts can impact the interest rate
and term of these loans which would have a correlated impact to total return on those assets and
timing of those returns. Participation in the programs as a servicer could reduce servicing income
to the extent the principal balance of a serviced loan is reduced or because it increases the cost
of servicing a loan.
There may be future sales or other dilution of our equity, which may adversely affect the market
price of our common stock.
As described under Capital Management, in connection with the completion of the Supervisory
Capital Assessment Program, we have agreed with our federal banking regulators to increase our Tier
1 common equity by $13.7 billion by November 9, 2009. In addition to the 392.15 million shares of
our common stock sold on May 8, 2009, we currently expect to increase our Tier 1 common equity
through profits and other internally generated sources. Although not currently contemplated, we
could also achieve any portion of the required increase in our Tier 1 common equity by exchanging
(with the approval of the Department of the Treasury) a number of shares of the Series D Preferred
Stock we issued to the Department of the Treasury under the Capital Purchase Program for shares of
our mandatory convertible preferred stock under the Department of the Treasurys Capital Assistance
Program, or for common stock or another common equivalent security that the Department of the
Treasury otherwise agrees to purchase, directly or indirectly. Such an exchange could also involve
the issuance of warrants to the Department of the Treasury to purchase additional shares of our
common stock as contemplated by the published terms of the Capital Assistance Program. The issuance
of additional shares of common stock or common equivalent securities in future equity offerings, to
the Department of the Treasury under the Capital Assistance Program or otherwise will dilute the
ownership interest of our existing common stockholders. There can be no assurances that we will not
in the future determine that it is advisable, or that we will not encounter circumstances where we
determine it is necessary, to issue additional shares of common stock or common equivalent
securities to fund strategic initiatives or other business needs or to build additional capital.
The market price of our common stock could decline as a result of such offerings, as well as other
sales of a large block of shares of our common stock or similar securities, including warrants, in
the market thereafter, or the perception that such sales could occur.
52
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Companys management evaluated the effectiveness, as of March 31,
2009, 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 March 31, 2009.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the
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.
On December 31, 2008, the Company completed its acquisition of Wachovia. The Company considers the
acquisition reasonably likely to materially affect its internal control over financial reporting.
The Company has extended its internal control oversight and monitoring processes to include
Wachovia. Except as described above for the Wachovia acquisition, no change occurred during first
quarter 2009 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
53
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31 |
, |
(in millions, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
$ |
266 |
|
|
$ |
47 |
|
Securities available for sale |
|
|
2,709 |
|
|
|
1,132 |
|
Mortgages held for sale |
|
|
415 |
|
|
|
394 |
|
Loans held for sale |
|
|
67 |
|
|
|
12 |
|
Loans |
|
|
10,765 |
|
|
|
7,212 |
|
Other interest income |
|
|
91 |
|
|
|
52 |
|
|
|
|
|
|
|
|
Total interest income |
|
|
14,313 |
|
|
|
8,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
999 |
|
|
|
1,594 |
|
Short-term borrowings |
|
|
123 |
|
|
|
425 |
|
Long-term debt |
|
|
1,779 |
|
|
|
1,070 |
|
Other interest expense |
|
|
36 |
|
|
|
-- |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,937 |
|
|
|
3,089 |
|
|
|
|
|
|
|
|
|
|
|
11,376 |
|
|
|
5,760 |
|
Provision for credit losses |
|
|
4,558 |
|
|
|
2,028 |
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
6,818 |
|
|
|
3,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
1,394 |
|
|
|
748 |
|
Trust and investment fees |
|
|
2,215 |
|
|
|
763 |
|
Card fees |
|
|
853 |
|
|
|
558 |
|
Other fees |
|
|
901 |
|
|
|
499 |
|
Mortgage banking |
|
|
2,504 |
|
|
|
631 |
|
Insurance |
|
|
581 |
|
|
|
504 |
|
Net gains (losses) on debt securities available for sale
(includes impairment losses of $269, consisting of $603 of total
other-than-temporary impairment losses, net of $334 recognized in
other comprehensive income, for the quarter ended March 31, 2009) |
|
|
(119 |
) |
|
|
323 |
|
Net gains (losses) from equity investments |
|
|
(157 |
) |
|
|
313 |
|
Other |
|
|
1,469 |
|
|
|
464 |
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
9,641 |
|
|
|
4,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
3,386 |
|
|
|
1,984 |
|
Commission and incentive compensation |
|
|
1,824 |
|
|
|
644 |
|
Employee benefits |
|
|
1,284 |
|
|
|
587 |
|
Equipment |
|
|
687 |
|
|
|
348 |
|
Net occupancy |
|
|
796 |
|
|
|
399 |
|
Core deposit and other intangibles |
|
|
647 |
|
|
|
46 |
|
FDIC and other deposit assessments |
|
|
338 |
|
|
|
8 |
|
Other |
|
|
2,856 |
|
|
|
1,426 |
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
11,818 |
|
|
|
5,442 |
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX EXPENSE |
|
|
4,641 |
|
|
|
3,093 |
|
Income tax expense |
|
|
1,552 |
|
|
|
1,074 |
|
|
|
|
|
|
|
|
NET INCOME BEFORE NONCONTROLLING INTERESTS |
|
|
3,089 |
|
|
|
2,019 |
|
Less: Net income from noncontrolling interests |
|
|
44 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
$ |
3,045 |
|
|
$ |
1,999 |
|
|
|
|
|
|
|
|
WELLS FARGO NET INCOME APPLICABLE TO COMMON STOCK |
|
$ |
2,384 |
|
|
$ |
1,999 |
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
$ |
0.56 |
|
|
$ |
0.61 |
|
DILUTED EARNINGS PER COMMON SHARE |
|
$ |
0.56 |
|
|
$ |
0.60 |
|
DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
0.34 |
|
|
$ |
0.31 |
|
Average common shares outstanding |
|
|
4,247.4 |
|
|
|
3,302.4 |
|
Diluted average common shares outstanding |
|
|
4,249.3 |
|
|
|
3,317.9 |
|
|
|
The accompanying notes are an integral part of these statements.
54
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
, |
|
December 31 |
, |
|
March 31 |
, |
(in millions, except shares) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
22,186 |
|
|
$ |
23,763 |
|
|
$ |
13,146 |
|
Federal funds sold, securities purchased under
resale agreements and other short-term investments |
|
|
18,625 |
|
|
|
49,433 |
|
|
|
4,171 |
|
Trading assets |
|
|
46,497 |
|
|
|
54,884 |
|
|
|
8,893 |
|
Securities available for sale |
|
|
178,468 |
|
|
|
151,569 |
|
|
|
81,787 |
|
Mortgages held for sale (includes $35,205, $18,754 and
$27,927 carried at fair value) |
|
|
36,807 |
|
|
|
20,088 |
|
|
|
29,708 |
|
Loans held for sale (includes $114 and $398 carried at
fair value at March 31, 2009, and December 31, 2008) |
|
|
8,306 |
|
|
|
6,228 |
|
|
|
813 |
|
|
|
|
843,579 |
|
|
|
864,830 |
|
|
|
386,333 |
|
Allowance for loan losses |
|
|
(22,281 |
) |
|
|
(21,013 |
) |
|
|
(5,803 |
) |
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
821,298 |
|
|
|
843,817 |
|
|
|
380,530 |
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights: |
|
|
|
|
|
|
|
|
|
|
|
|
Measured at fair value (residential MSRs) |
|
|
12,391 |
|
|
|
14,714 |
|
|
|
14,956 |
|
Amortized |
|
|
1,257 |
|
|
|
1,446 |
|
|
|
455 |
|
Premises and equipment, net |
|
|
11,215 |
|
|
|
11,269 |
|
|
|
5,056 |
|
Goodwill |
|
|
23,825 |
|
|
|
22,627 |
|
|
|
13,148 |
|
Other assets |
|
|
105,016 |
|
|
|
109,801 |
|
|
|
42,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,285,891 |
|
|
$ |
1,309,639 |
|
|
$ |
595,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
166,497 |
|
|
$ |
150,837 |
|
|
$ |
90,793 |
|
Interest-bearing deposits |
|
|
630,772 |
|
|
|
630,565 |
|
|
|
267,351 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
797,269 |
|
|
|
781,402 |
|
|
|
358,144 |
|
Short-term borrowings |
|
|
72,084 |
|
|
|
108,074 |
|
|
|
53,983 |
|
Accrued expenses and other liabilities |
|
|
58,831 |
|
|
|
50,689 |
|
|
|
31,480 |
|
Long-term debt |
|
|
250,650 |
|
|
|
267,158 |
|
|
|
103,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,178,834 |
|
|
|
1,207,323 |
|
|
|
546,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
31,411 |
|
|
|
31,332 |
|
|
|
837 |
|
Common stock
$1-2/3 par value, authorized
6,000,000,000 shares; issued 4,363,921,429 shares,
4,363,921,429 shares and 3,472,762,050 shares |
|
|
7,273 |
|
|
|
7,273 |
|
|
|
5,788 |
|
Additional paid-in capital |
|
|
32,414 |
|
|
|
36,026 |
|
|
|
8,259 |
|
Retained earnings |
|
|
36,949 |
|
|
|
36,543 |
|
|
|
39,896 |
|
Cumulative other comprehensive income (loss) |
|
|
(3,624 |
) |
|
|
(6,869 |
) |
|
|
120 |
|
Treasury
stock 102,524,177 shares, 135,290,540 shares
and 170,411,704 shares |
|
|
(3,593 |
) |
|
|
(4,666 |
) |
|
|
(5,850 |
) |
Unearned ESOP shares |
|
|
(535 |
) |
|
|
(555 |
) |
|
|
(891 |
) |
|
|
|
|
|
|
|
|
|
|
Total Wells Fargo stockholders equity |
|
|
100,295 |
|
|
|
99,084 |
|
|
|
48,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,762 |
|
|
|
3,232 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,057 |
|
|
|
102,316 |
|
|
|
48,439 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
1,285,891 |
|
|
$ |
1,309,639 |
|
|
$ |
595,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
55
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
Common stock |
|
(in millions, except shares) |
|
Shares |
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
|
BALANCE DECEMBER 31, 2007 |
|
|
449,804 |
|
|
$ |
450 |
|
|
|
3,297,102,208 |
|
|
$ |
5,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of EITF 06-4 and EITF 06-10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS 158 change of measurement date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE JANUARY 1, 2008 |
|
|
449,804 |
|
|
|
450 |
|
|
|
3,297,102,208 |
|
|
|
5,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities available for sale,
net of reclassification of $180 million of net gains
included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on derivatives and hedging activities, net
of reclassification of $30 million of net gains on cash flow
hedges included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized gains under defined benefit plans, net of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued |
|
|
|
|
|
|
|
|
|
|
12,053,786 |
|
|
|
|
|
Common stock repurchased |
|
|
|
|
|
|
|
|
|
|
(11,404,468 |
) |
|
|
|
|
Preferred stock issued to ESOP |
|
|
520,500 |
|
|
|
521 |
|
|
|
|
|
|
|
|
|
Preferred stock released to ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock converted to common shares |
|
|
(133,756 |
) |
|
|
(134 |
) |
|
|
4,598,820 |
|
|
|
|
|
Common stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit upon exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in deferred compensation and related plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
|
386,744 |
|
|
|
387 |
|
|
|
5,248,138 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
836,548 |
|
|
$ |
837 |
|
|
|
3,302,350,346 |
|
|
$ |
5,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2008 |
|
|
10,111,821 |
|
|
$ |
31,332 |
|
|
|
4,228,630,889 |
|
|
$ |
7,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FSP FAS 115-2 and FAS 124-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of adoption of FAS 160, as amended and interpreted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE JANUARY 1, 2009 |
|
|
10,111,821 |
|
|
|
31,332 |
|
|
|
4,228,630,889 |
|
|
|
7,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses related to factors other than credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other net unrealized gains, net of reclassification of
$48 million of net losses included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on derivatives and hedging activities, net
of reclassification of $84 million of net gains on cash flow
hedges included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized gains under defined benefit plans, net of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued |
|
|
|
|
|
|
|
|
|
|
33,346,822 |
|
|
|
|
|
Common stock repurchased |
|
|
|
|
|
|
|
|
|
|
(2,294,746 |
) |
|
|
|
|
Preferred stock discount accretion |
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
Preferred stock released to ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock converted to common shares |
|
|
(18,830 |
) |
|
|
(19 |
) |
|
|
1,714,287 |
|
|
|
|
|
Common stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in deferred compensation and related plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
|
(18,830 |
) |
|
|
79 |
|
|
|
32,766,363 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,092,991 |
|
|
$ |
31,411 |
|
|
|
4,261,397,252 |
|
|
$ |
7,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
56
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
Unearned |
|
Wells Fargo |
|
|
|
|
|
|
|
|
|
paid-in |
|
|
Retained |
|
comprehensive |
|
Treasury |
|
|
ESOP |
|
stockholders |
|
Noncontrolling |
|
|
Total |
|
|
|
capital |
|
|
earnings |
|
|
income |
|
|
stock |
|
|
shares |
|
|
equity |
|
interests |
|
|
equity |
|
|
|
|
|
$ |
8,212 |
|
|
$ |
38,970 |
|
|
$ |
725 |
|
|
$ |
(6,035 |
) |
|
$ |
(482 |
) |
|
$ |
47,628 |
|
|
$ |
286 |
|
|
$ |
47,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,212 |
|
|
|
38,942 |
|
|
|
725 |
|
|
|
(6,035 |
) |
|
|
(482 |
) |
|
|
47,600 |
|
|
|
286 |
|
|
|
47,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,999 |
|
|
|
20 |
|
|
|
2,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
(783 |
) |
|
|
|
|
|
|
|
|
|
|
(783 |
) |
|
|
|
|
|
|
(783 |
) |
|
|
|
|
|
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,394 |
|
|
|
20 |
|
|
|
1,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
(26 |
) |
|
|
(26 |
) |
|
|
|
(58 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
396 |
|
|
|
|
|
|
|
317 |
|
|
|
|
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(351 |
) |
|
|
|
|
|
|
(351 |
) |
|
|
|
|
|
|
(351 |
) |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(551 |
) |
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
134 |
|
|
|
|
|
|
|
134 |
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
(1,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,024 |
) |
|
|
|
|
|
|
(1,024 |
) |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
71 |
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
954 |
|
|
|
(605 |
) |
|
|
185 |
|
|
|
(409 |
) |
|
|
559 |
|
|
|
(6 |
) |
|
|
553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,259 |
|
|
$ |
39,896 |
|
|
$ |
120 |
|
|
$ |
(5,850 |
) |
|
$ |
(891 |
) |
|
$ |
48,159 |
|
|
$ |
280 |
|
|
$ |
48,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,026 |
|
|
$ |
36,543 |
|
|
$ |
(6,869 |
) |
|
$ |
(4,666 |
) |
|
$ |
(555 |
) |
|
$ |
99,084 |
|
|
$ |
3,232 |
|
|
$ |
102,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
(3,716 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
(3,716 |
) |
|
|
3,716 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,310 |
|
|
|
36,596 |
|
|
|
(6,922 |
) |
|
|
(4,666 |
) |
|
|
(555 |
) |
|
|
95,368 |
|
|
|
6,948 |
|
|
|
102,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,045 |
|
|
|
44 |
|
|
|
3,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
(5 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
(210 |
) |
|
|
|
|
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
3,473 |
|
|
|
|
|
|
|
|
|
|
|
3,473 |
|
|
|
12 |
|
|
|
3,485 |
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,343 |
|
|
|
51 |
|
|
|
6,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
(237 |
) |
|
|
(237 |
) |
|
|
|
35 |
|
|
|
(588 |
) |
|
|
|
|
|
|
1,077 |
|
|
|
|
|
|
|
524 |
|
|
|
|
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
98 |
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
(1,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,443 |
) |
|
|
|
|
|
|
(1,443 |
) |
|
|
|
|
|
|
|
(661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(661 |
) |
|
|
|
|
|
|
(661 |
) |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
95 |
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
|
353 |
|
|
|
3,298 |
|
|
|
1,073 |
|
|
|
20 |
|
|
|
4,927 |
|
|
|
(186 |
) |
|
|
4,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,414 |
|
|
$ |
36,949 |
|
|
$ |
(3,624 |
) |
|
$ |
(3,593 |
) |
|
$ |
(535 |
) |
|
$ |
100,295 |
|
|
$ |
6,762 |
|
|
$ |
107,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
WELLS FARGO & COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Wells Fargo net income |
|
$ |
3,045 |
|
|
$ |
1,999 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
4,558 |
|
|
|
2,028 |
|
Changes in fair value of MSRs (residential) and MHFS carried at fair value |
|
|
2,141 |
|
|
|
1,812 |
|
Depreciation and amortization |
|
|
981 |
|
|
|
368 |
|
Other net gains |
|
|
(383 |
) |
|
|
(158 |
) |
Preferred shares released to ESOP |
|
|
19 |
|
|
|
134 |
|
Stock option compensation expense |
|
|
95 |
|
|
|
71 |
|
Excess tax benefits related to stock option payments |
|
|
-- |
|
|
|
(15 |
) |
Originations of MHFS |
|
|
(98,613 |
) |
|
|
(59,146 |
) |
Proceeds from sales of and principal collected on mortgages originated for sale |
|
|
83,262 |
|
|
|
56,737 |
|
Originations of LHFS |
|
|
(1,494 |
) |
|
|
-- |
|
Proceeds from sales of LHFS |
|
|
26,100 |
|
|
|
-- |
|
Purchases of LHFS |
|
|
(26,167 |
) |
|
|
-- |
|
Net change in: |
|
|
|
|
|
|
|
|
Trading assets |
|
|
7,821 |
|
|
|
(1,166 |
) |
Deferred income taxes |
|
|
2,373 |
|
|
|
(200 |
) |
Accrued interest receivable |
|
|
674 |
|
|
|
142 |
|
Accrued interest payable |
|
|
(767 |
) |
|
|
(63 |
) |
Other assets, net |
|
|
6,372 |
|
|
|
(4,356 |
) |
Other accrued expenses and liabilities, net |
|
|
5,818 |
|
|
|
1,423 |
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
15,835 |
|
|
|
(390 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Federal funds sold, securities purchased under resale agreements
and other short-term investments |
|
|
30,808 |
|
|
|
(1,417 |
) |
Securities available for sale: |
|
|
|
|
|
|
|
|
Sales proceeds |
|
|
10,760 |
|
|
|
16,213 |
|
Prepayments and maturities |
|
|
7,343 |
|
|
|
5,466 |
|
Purchases |
|
|
(39,173 |
) |
|
|
(30,947 |
) |
Loans: |
|
|
|
|
|
|
|
|
Decrease (increase) in banking subsidiaries loan originations, net of collections |
|
|
10,908 |
|
|
|
(3,519 |
) |
Proceeds from sales (including participations) of loans originated for
investment by banking subsidiaries |
|
|
419 |
|
|
|
325 |
|
Purchases (including participations) of loans by banking subsidiaries |
|
|
(301 |
) |
|
|
(2,656 |
) |
Principal collected on nonbank entities loans |
|
|
3,175 |
|
|
|
5,015 |
|
Loans originated by nonbank entities |
|
|
(1,995 |
) |
|
|
(5,273 |
) |
Net cash paid for acquisitions |
|
|
(123 |
) |
|
|
(46 |
) |
Proceeds from sales of foreclosed assets |
|
|
1,001 |
|
|
|
438 |
|
Changes in MSRs from purchases and sales |
|
|
(4 |
) |
|
|
37 |
|
Net change in noncontrolling interests |
|
|
(186 |
) |
|
|
6 |
|
Other, net |
|
|
(4,117 |
) |
|
|
(2,062 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
18,515 |
|
|
|
(18,420 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
15,725 |
|
|
|
13,684 |
|
Short-term borrowings |
|
|
(35,990 |
) |
|
|
728 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
Proceeds from issuance |
|
|
3,811 |
|
|
|
8,137 |
|
Repayment |
|
|
(17,877 |
) |
|
|
(7,569 |
) |
Preferred stock: |
|
|
|
|
|
|
|
|
Cash dividends paid and accretion |
|
|
(623 |
) |
|
|
-- |
|
Common stock: |
|
|
|
|
|
|
|
|
Proceeds from issuance |
|
|
524 |
|
|
|
317 |
|
Repurchased |
|
|
(54 |
) |
|
|
(351 |
) |
Cash dividends paid |
|
|
(1,443 |
) |
|
|
(1,024 |
) |
Excess tax benefits related to stock option payments |
|
|
-- |
|
|
|
15 |
|
Other, net |
|
|
-- |
|
|
|
3,262 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(35,927 |
) |
|
|
17,199 |
|
|
|
|
|
|
|
|
Net change in cash and due from banks |
|
|
(1,577 |
) |
|
|
(1,611 |
) |
Cash and due from banks at beginning of quarter |
|
|
23,763 |
|
|
|
14,757 |
|
|
|
|
|
|
|
|
Cash and due from banks at end of quarter |
|
$ |
22,186 |
|
|
$ |
13,146 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the quarter for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,704 |
|
|
$ |
3,152 |
|
Income taxes |
|
|
249 |
|
|
|
259 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Transfers from trading assets to securities available for sale |
|
$ |
786 |
|
|
$ |
-- |
|
Transfers from MHFS to trading assets |
|
|
220 |
|
|
|
-- |
|
Transfers from MHFS to securities available for sale |
|
|
-- |
|
|
|
268 |
|
Transfers from MHFS to loans |
|
|
32 |
|
|
|
55 |
|
Transfers from MHFS to MSRs |
|
|
1,451 |
|
|
|
802 |
|
Transfers from MHFS to foreclosed assets |
|
|
33 |
|
|
|
-- |
|
Net transfers from LHFS to loans |
|
|
-- |
|
|
|
176 |
|
Transfers from loans to foreclosed assets |
|
|
1,479 |
|
|
|
775 |
|
|
|
The accompanying notes are an integral part of these statements.
58
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wells Fargo & Company is a diversified financial services company. We provide banking, insurance,
investments, mortgage banking, investment banking, retail banking, brokerage, and consumer finance
through banking stores, the internet and other distribution channels to consumers, businesses and
institutions in all 50 states, the District of Columbia, and in other countries. When we refer to
Wells Fargo, the Company, we, our or us in this Form 10-Q, we mean Wells Fargo & Company
and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company
and a bank holding company. We also hold a majority interest in a retail brokerage subsidiary and a
real estate investment trust, which has publicly traded preferred stock outstanding.
Our accounting and reporting policies conform with U.S. generally accepted accounting principles
(GAAP) and practices in the financial services industry. To prepare the financial statements in
conformity with GAAP, management must make estimates based on assumptions about future economic and
market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that
affect the reported amounts of assets and liabilities at the date of the financial statements and
income and expenses during the reporting period and the related disclosures. Although our estimates
contemplate current conditions and how we expect them to change in the future, it is reasonably
possible that in 2009 actual conditions could be worse than anticipated in those estimates, which
could materially affect our results of operations and financial condition. Management has made
significant estimates in several areas, including the evaluation of other-than-temporary impairment
on investment securities (Note 4), allowance for credit losses and loans accounted for under
American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, Accounting
for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3) (Note 5), valuing
residential mortgage servicing rights (MSRs) (Notes 7 and 8) and financial instruments (Note 13),
pension accounting (Note 15) and income taxes. Actual results could differ from those estimates.
Among other effects, such changes could result in future impairments of investment securities,
increases to the allowance for loan losses, as well as increased future pension expense.
On December 31, 2008, Wells Fargo acquired Wachovia Corporation (Wachovia). Because the acquisition
was completed at the end of 2008, Wachovias results of operations are included in the income
statement and average balances beginning in 2009. Wachovias assets and
liabilities are included in the consolidated balance sheet beginning on December 31, 2008. The
accounting policies of Wachovia have been conformed to those of Wells Fargo as described herein.
On January 1, 2009, the Company adopted Statement of Financial Accounting Standards (FAS) No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51, on a
retrospective basis for disclosure and, accordingly, prior period information reflects the
adoption. FAS 160 requires that noncontrolling interests be reported as a component of total
equity. In addition, FAS 160 requires that the consolidated income statement disclose amounts
attributable to both Wells Fargo interests and the noncontrolling interests.
59
The information furnished in these unaudited interim statements reflects all adjustments that are,
in the opinion of management, necessary for a fair statement of the results for the periods
presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this
Form 10-Q. The results of operations in the interim statements do not necessarily indicate the
results that may be expected for the full year. The interim financial information should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form
10-K).
Current Accounting Developments
In first quarter 2009, we adopted the following new accounting pronouncements:
|
|
FAS 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of
FASB Statement No. 133; |
|
|
FAS 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of
ARB No. 51; |
|
|
FAS 141R (revised 2007), Business Combinations; |
|
|
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly; |
|
|
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments; and |
|
|
FASB Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities. |
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. We adopted FAS 161 for first quarter
2009 reporting. See Note 12 for complete disclosures under FAS 161. Because FAS 161 amends only the
disclosure requirements for derivative instruments and hedged items, the adoption of FAS 161 does
not affect our consolidated financial results.
FAS 160 requires that noncontrolling interests (previously referred to as minority
interests) be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160,
they were classified outside of equity. This new standard also changes the way a noncontrolling
interest is presented in the income statement such that a parents consolidated income statement
includes amounts attributable to both the parents interest and the noncontrolling interest. FAS
160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The
remaining interest is initially recorded at fair value. Other changes in ownership interest where
the parent continues to have a majority ownership interest in the subsidiary are accounted for as
capital transactions. FAS 160 was effective for us on January 1, 2009. Adoption is applied
prospectively to all noncontrolling interests including those that arose prior to the adoption of
FAS 160, with retrospective adoption required for disclosure of noncontrolling interests held as of
the adoption date.
We hold a controlling interest in a joint venture with Prudential Financial, Inc. (Prudential). In
connection with the adoption of FAS 160 on January 1, 2009, we reclassified Prudentials
noncontrolling interest to equity. Under the terms of the original agreement under which the joint
60
venture was established between Wachovia and Prudential, each party has certain rights such that
changes in our ownership interest can occur. Prudential has stated its intention to exercise its
option to put its noncontrolling interest to us at a date in the future, but has not yet done so.
As a result of the issuance of FAS 160 and related interpretive guidance, along with this stated
intention, on January 1, 2009, we increased the carrying value of Prudentials noncontrolling
interest in the joint venture to the estimated maximum redemption amount, with the offset recorded
to additional paid-in capital.
FAS 141R requires an acquirer in a business combination to recognize the assets acquired
(including loan receivables), the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, at their fair values as of that date, with limited exceptions.
The acquirer is not permitted to recognize a separate valuation allowance as of the acquisition
date for loans and other assets acquired in a business combination. The revised statement requires
acquisition-related costs to be expensed separately from the acquisition. It also requires
restructuring costs that the acquirer expected but was not obligated to incur, to be expensed
separately from the business combination. FAS 141R is applicable prospectively to business
combinations completed on or after January 1, 2009. We will account for business combinations with
acquisition dates on or after January 1, 2009, under FAS 141R.
FSP FAS 157-4 addresses measuring fair value under FAS 157 in situations where markets are
inactive and transactions are not orderly. The FSP acknowledges that in these circumstances quoted
prices may not be determinative of fair value. The FSP emphasizes, however, that even if there has
been a significant decrease in the volume and level of activity for an asset or liability and
regardless of the valuation technique(s) used, the objective of a fair value measurement has not
changed. Prior to issuance of this FSP, FAS 157 had been interpreted by many companies, including
Wells Fargo, to emphasize that fair value must be measured based on the most recently available
quoted market prices, even for markets that have experienced a significant decline in the volume
and level of activity relative to normal conditions and therefore could have increased frequency of
transactions that are not orderly. Under the provisions of the FSP, price quotes for assets or
liabilities in inactive markets may require adjustment due to uncertainty as to whether the
underlying transactions are orderly. For inactive markets, we note there is little information, if
any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate,
based upon all available facts and circumstances, the degree to which orderly transactions are
occurring. The FSP does not prescribe a specific method for adjusting transaction or quoted prices,
however, it does provide guidance for determining how much weight to give transaction or quoted
prices. Price quotes based upon transactions that are not orderly are not considered to be
determinative of fair value and should be given little, if any, weight in measuring fair value.
Price quotes based upon transactions that are orderly shall be considered in determining fair value
and the weight given is based upon the facts and circumstances. If sufficient information is not
available to determine if price quotes are based upon orderly transactions, less weight should be
given to the price quote relative to other transactions that are known to be orderly.
The provisions of FSP FAS 157-4 are effective in second quarter 2009; however, as permitted under
the pronouncement, we early adopted in first quarter 2009. Adoption of this pronouncement resulted
in an increase in the valuation of securities available for sale of $4.5
billion ($2.8 billion after tax), which is included in other comprehensive income, and trading
assets of $18 million, which is reflected in earnings.
61
The following table provides the detail of the first quarter 2009 $4.5 billion (pre tax) increase
in fair value of securities available for sale under FSP FAS 157-4.
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
Residential |
|
$ |
2,311 |
|
Commercial |
|
|
1,329 |
|
Collateralized debt obligations |
|
|
492 |
|
Other (1) |
|
|
394 |
|
|
|
|
|
|
|
$ |
4,526 |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily consists of home equity asset-backed securities and
credit card-backed securities. |
FSP FAS 115-2 and FAS 124-2 states that an other-than-temporary impairment (OTTI)
write-down of debt securities, where fair value is below amortized cost, is triggered in
circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not
that the entity will be required to sell the security before recovery of its amortized cost basis,
or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an
entity intends to sell a security or if it is more likely than not the entity will be required to
sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire
difference between the securitys amortized cost basis and its fair value. If an entity does not
intend to sell the security or it is not more likely than not that it will be required to sell the
security before recovery, the OTTI write-down is separated into an amount representing the credit
loss, which is recognized in earnings, and the amount related to all other factors, which is
recognized in other comprehensive income. The provisions of this FSP are effective in second
quarter 2009; however, as permitted under the pronouncement, we early adopted on January 1, 2009,
and increased the beginning balance of retained earnings by $85 million ($53 million after tax)
with a corresponding adjustment to accumulated other comprehensive income for OTTI recorded in
previous periods on securities in our portfolio at January 1, 2009, that would not have been
required had the FSP been effective for those periods. As a result of
the adoption of the FSP, $334 million of OTTI remained in other
comprehensive income that would have been reported in the income
statement under the prior guidance.
EITF 03-6-1 requires that unvested share-based payment awards that have nonforfeitable
rights to dividends or dividend equivalents be treated as participating securities and, therefore,
included in the computation of earnings per share under the two-class method described in FAS 128,
Earnings per Share. This pronouncement is effective on January 1, 2009, with retrospective adoption
required. The adoption of EITF 03-6-1 did not have a material effect on our consolidated financial
statements.
62
2. BUSINESS COMBINATIONS
We regularly explore opportunities to acquire financial services companies and businesses.
Generally, we do not make a public announcement about an acquisition opportunity until a definitive
agreement has been signed.
In first quarter 2009, we completed the acquisitions of a factoring business with total assets of
$74 million and an insurance brokerage business with total assets of $23 million.
At March 31, 2009, we had no pending business combinations.
On December 31, 2008, we acquired all outstanding shares of Wachovia common stock in a
stock-for-stock transaction. Because the transaction closed on the last day of the annual reporting
period, certain fair value purchase accounting adjustments were based on data as of an interim
period with estimates through year end. Accordingly, we have re-validated and, where necessary,
have refined our purchase accounting adjustments. We will continue to update the fair value of net
assets acquired for a period of up to one year from the date of the acquisition as we further
refine acquisition date fair values. The impact of the first quarter 2009 refinements were recorded
to goodwill and increased goodwill by $1.14 billion in first quarter 2009. The refined allocation
of the purchase price at December 31, 2008, is presented in the following table.
Purchase Price and Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31 |
, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
Dec. 31 |
, |
(in millions) |
|
(refined) |
|
Refinements |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of common shares |
|
$ |
14,621 |
|
|
$ |
-- |
|
|
$ |
14,621 |
|
Value of preferred shares |
|
|
8,409 |
|
|
|
-- |
|
|
|
8,409 |
|
Other (value of share-based awards and direct acquisition costs) |
|
|
62 |
|
|
|
-- |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
23,092 |
|
|
|
-- |
|
|
|
23,092 |
|
Allocation of the purchase price: |
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia tangible stockholders equity, less prior purchase
accounting adjustments and other basis adjustments eliminated
in purchase accounting |
|
|
19,319 |
|
|
|
(75 |
) |
|
|
19,394 |
|
Adjustments to reflect assets acquired and liabilities assumed
at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases, net |
|
|
(17,139 |
) |
|
|
(742 |
) |
|
|
(16,397 |
) |
Premises and equipment, net |
|
|
(656 |
) |
|
|
(200 |
) |
|
|
(456 |
) |
Intangible assets |
|
|
14,590 |
|
|
|
(150 |
) |
|
|
14,740 |
|
Other assets |
|
|
(3,675 |
) |
|
|
(231 |
) |
|
|
(3,444 |
) |
Deposits |
|
|
(4,576 |
) |
|
|
(142 |
) |
|
|
(4,434 |
) |
Accrued expenses and other liabilities (exit, termination and
other liabilities) |
|
|
(2,153 |
) |
|
|
(554 |
) |
|
|
(1,599 |
) |
Long-term debt |
|
|
(199 |
) |
|
|
(9 |
) |
|
|
(190 |
) |
Deferred taxes |
|
|
7,635 |
|
|
|
959 |
|
|
|
6,676 |
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired |
|
|
13,146 |
|
|
|
(1,144 |
) |
|
|
14,290 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill resulting from the merger |
|
$ |
9,946 |
|
|
$ |
1,144 |
|
|
$ |
8,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The increase in goodwill includes the recognition of additional costs associated with involuntary
employee termination, contract terminations and closing duplicate facilities and have been
allocated to the purchase price. These costs will be recorded throughout 2009 as part of the
further integration of Wachovias employees, locations and operations with Wells Fargo as
management finalizes integration plans. The following table summarizes exit reserves associated
with the Wachovia acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Contract |
|
Facilities |
|
|
|
|
(in millions) |
termination |
|
termination |
|
related |
|
Total |
|
|
|
Balance, December 31, 2008 |
|
$ |
57 |
|
|
$ |
13 |
|
|
$ |
129 |
|
|
$ |
199 |
|
Purchase accounting adjustments |
|
|
100 |
|
|
|
200 |
|
|
|
60 |
|
|
|
360 |
|
Cash payments |
|
|
(50 |
) |
|
|
-- |
|
|
|
(8 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
$ |
107 |
|
|
$ |
213 |
|
|
$ |
181 |
|
|
$ |
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. FEDERAL FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND OTHER SHORT-TERM
INVESTMENTS
The following table provides the detail of federal funds sold, securities purchased under resale
agreements and other short-term investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31 |
, |
|
Dec. 31 |
, |
|
Mar. 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
Federal funds sold and securities purchased under
resale agreements |
|
$ |
4,114 |
|
|
$ |
8,439 |
|
|
$ |
2,209 |
|
Interest-earning deposits |
|
|
13,359 |
|
|
|
39,890 |
|
|
|
994 |
|
Other short-term investments |
|
|
1,152 |
|
|
|
1,104 |
|
|
|
968 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,625 |
|
|
$ |
49,433 |
|
|
$ |
4,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
64
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. The net unrealized gains (losses) are reported on an
after-tax basis as a component of cumulative other comprehensive income. There were no securities
classified as held to maturity as of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
unrealized |
|
unrealized |
|
|
Fair |
|
(in millions) |
|
Cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
$ |
983 |
|
|
$ |
33 |
|
|
$ |
-- |
|
|
$ |
1,016 |
|
Securities of U.S. states and political subdivisions |
|
|
7,453 |
|
|
|
109 |
|
|
|
(382 |
) |
|
|
7,180 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
37,468 |
|
|
|
1,145 |
|
|
|
(36 |
) |
|
|
38,577 |
|
Residential |
|
|
15,625 |
|
|
|
55 |
|
|
|
(217 |
) |
|
|
15,463 |
|
Commercial |
|
|
7,755 |
|
|
|
85 |
|
|
|
(718 |
) |
|
|
7,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
60,848 |
|
|
|
1,285 |
|
|
|
(971 |
) |
|
|
61,162 |
|
Corporate debt securities |
|
|
2,045 |
|
|
|
24 |
|
|
|
(162 |
) |
|
|
1,907 |
|
Collateralized debt obligations |
|
|
1,086 |
|
|
|
4 |
|
|
|
(273 |
) |
|
|
817 |
|
Other (1) |
|
|
6,711 |
|
|
|
57 |
|
|
|
(28 |
) |
|
|
6,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
79,126 |
|
|
|
1,512 |
|
|
|
(1,816 |
) |
|
|
78,822 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
2,533 |
|
|
|
3 |
|
|
|
(386 |
) |
|
|
2,150 |
|
Other marketable equity securities |
|
|
726 |
|
|
|
115 |
|
|
|
(26 |
) |
|
|
815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
3,259 |
|
|
|
118 |
|
|
|
(412 |
) |
|
|
2,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,385 |
|
|
$ |
1,630 |
|
|
$ |
(2,228 |
) |
|
$ |
81,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
$ |
3,187 |
|
|
$ |
62 |
|
|
$ |
-- |
|
|
$ |
3,249 |
|
Securities of U.S. states and political subdivisions |
|
|
14,062 |
|
|
|
116 |
|
|
|
(1,520 |
) |
|
|
12,658 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
64,726 |
|
|
|
1,711 |
|
|
|
(3 |
) |
|
|
66,434 |
|
Residential |
|
|
29,536 |
|
|
|
11 |
|
|
|
(4,717 |
) |
|
|
24,830 |
|
Commercial |
|
|
12,305 |
|
|
|
51 |
|
|
|
(3,878 |
) |
|
|
8,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
106,567 |
|
|
|
1,773 |
|
|
|
(8,598 |
) |
|
|
99,742 |
|
Corporate debt securities |
|
|
7,382 |
|
|
|
81 |
|
|
|
(539 |
) |
|
|
6,924 |
|
Collateralized debt obligations |
|
|
2,634 |
|
|
|
21 |
|
|
|
(570 |
) |
|
|
2,085 |
|
Other (1) (2) |
|
|
21,363 |
|
|
|
14 |
|
|
|
(602 |
) |
|
|
20,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
155,195 |
|
|
|
2,067 |
|
|
|
(11,829 |
) |
|
|
145,433 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
5,040 |
|
|
|
13 |
|
|
|
(327 |
) |
|
|
4,726 |
|
Other marketable equity securities |
|
|
1,256 |
|
|
|
181 |
|
|
|
(27 |
) |
|
|
1,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
6,296 |
|
|
|
194 |
|
|
|
(354 |
) |
|
|
6,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
161,491 |
|
|
$ |
2,261 |
|
|
$ |
(12,183 |
) |
|
$ |
151,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
$ |
2,837 |
|
|
$ |
68 |
|
|
$ |
(2 |
) |
|
$ |
2,903 |
|
Securities of U.S. states and political subdivisions |
|
|
12,738 |
|
|
|
281 |
|
|
|
(1,173 |
) |
|
|
11,846 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
87,721 |
|
|
|
2,931 |
|
|
|
(4 |
) |
|
|
90,648 |
|
Residential (2) |
|
|
34,853 |
|
|
|
1,287 |
|
|
|
(3,658 |
) |
|
|
32,482 |
|
Commercial |
|
|
12,762 |
|
|
|
280 |
|
|
|
(3,267 |
) |
|
|
9,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
135,336 |
|
|
|
4,498 |
|
|
|
(6,929 |
) |
|
|
132,905 |
|
Corporate debt securities |
|
|
7,531 |
|
|
|
157 |
|
|
|
(702 |
) |
|
|
6,986 |
|
Collateralized debt obligations |
|
|
2,761 |
|
|
|
221 |
|
|
|
(596 |
) |
|
|
2,386 |
|
Other (1) |
|
|
16,159 |
|
|
|
660 |
|
|
|
(556 |
) |
|
|
16,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
177,362 |
|
|
|
5,885 |
|
|
|
(9,958 |
) |
|
|
173,289 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
4,483 |
|
|
|
41 |
|
|
|
(754 |
) |
|
|
3,770 |
|
Other marketable equity securities |
|
|
1,342 |
|
|
|
190 |
|
|
|
(123 |
) |
|
|
1,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
5,825 |
|
|
|
231 |
|
|
|
(877 |
) |
|
|
5,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
183,187 |
|
|
$ |
6,116 |
|
|
$ |
(10,835 |
) |
|
$ |
178,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Other category includes certain asset-backed securities collateralized by auto leases
with a cost basis and fair value of $8,407 million and $8,309 million, respectively, at March
31, 2009, $8,310 million and $7,852 million at December 31, 2008, and $5,909 million and
$5,941 million at March 31, 2008. |
(2) |
|
Foreign residential mortgage-backed securities with a fair value of $6.0 billion are
included in residential mortgage-backed securities at March 31, 2009. These
instruments were included in other debt securities at December 31, 2008, and had a fair value
of $6.3 billion. |
65
Gross Unrealized Losses and Fair Value
The following table shows the gross unrealized losses and fair value of securities in the
securities available-for-sale portfolio by length of time that individual securities in each
category had been in a continuous loss position. Debt securities on which we have taken only
credit-related OTTI write-downs are categorized as being less
than 12 months or 12 months or more in a continuous loss position based on the point in time
that the fair value declined to below the cost basis and not the period of time since the OTTI
write-down.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
unrealized |
|
|
Fair |
|
unrealized |
|
|
Fair |
|
|
unrealized |
|
|
Fair |
|
(in millions) |
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal
agencies |
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Securities of U.S. states and political
subdivisions |
|
|
(745 |
) |
|
|
3,483 |
|
|
|
(775 |
) |
|
|
1,702 |
|
|
|
(1,520 |
) |
|
|
5,185 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
(3 |
) |
|
|
83 |
|
|
|
-- |
|
|
|
-- |
|
|
|
(3 |
) |
|
|
83 |
|
Residential |
|
|
(4,471 |
) |
|
|
9,960 |
|
|
|
(246 |
) |
|
|
238 |
|
|
|
(4,717 |
) |
|
|
10,198 |
|
Commercial |
|
|
(1,726 |
) |
|
|
4,152 |
|
|
|
(2,152 |
) |
|
|
2,302 |
|
|
|
(3,878 |
) |
|
|
6,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
(6,200 |
) |
|
|
14,195 |
|
|
|
(2,398 |
) |
|
|
2,540 |
|
|
|
(8,598 |
) |
|
|
16,735 |
|
Corporate debt securities |
|
|
(285 |
) |
|
|
1,056 |
|
|
|
(254 |
) |
|
|
469 |
|
|
|
(539 |
) |
|
|
1,525 |
|
Collateralized debt obligations |
|
|
(113 |
) |
|
|
215 |
|
|
|
(457 |
) |
|
|
180 |
|
|
|
(570 |
) |
|
|
395 |
|
Other |
|
|
(554 |
) |
|
|
8,638 |
|
|
|
(48 |
) |
|
|
38 |
|
|
|
(602 |
) |
|
|
8,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
(7,897 |
) |
|
|
27,587 |
|
|
|
(3,932 |
) |
|
|
4,929 |
|
|
|
(11,829 |
) |
|
|
32,516 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
(75 |
) |
|
|
265 |
|
|
|
(252 |
) |
|
|
360 |
|
|
|
(327 |
) |
|
|
625 |
|
Other marketable equity securities |
|
|
(23 |
) |
|
|
72 |
|
|
|
(4 |
) |
|
|
9 |
|
|
|
(27 |
) |
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
(98 |
) |
|
|
337 |
|
|
|
(256 |
) |
|
|
369 |
|
|
|
(354 |
) |
|
|
706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7,995 |
) |
|
$ |
27,924 |
|
|
$ |
(4,188 |
) |
|
$ |
5,298 |
|
|
$ |
(12,183 |
) |
|
$ |
33,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal
agencies |
|
$ |
(2 |
) |
|
$ |
1,300 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
(2 |
) |
|
$ |
1,300 |
|
Securities of U.S. states and political
subdivisions |
|
|
(504 |
) |
|
|
3,821 |
|
|
|
(669 |
) |
|
|
2,222 |
|
|
|
(1,173 |
) |
|
|
6,043 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
(4 |
) |
|
|
279 |
|
|
|
-- |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
299 |
|
Residential |
|
|
(1,723 |
) |
|
|
12,707 |
|
|
|
(1,935 |
) |
|
|
4,823 |
|
|
|
(3,658 |
) |
|
|
17,530 |
|
Commercial |
|
|
(1,077 |
) |
|
|
4,228 |
|
|
|
(2,190 |
) |
|
|
3,037 |
|
|
|
(3,267 |
) |
|
|
7,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
(2,804 |
) |
|
|
17,214 |
|
|
|
(4,125 |
) |
|
|
7,880 |
|
|
|
(6,929 |
) |
|
|
25,094 |
|
Corporate debt securities |
|
|
(442 |
) |
|
|
2,863 |
|
|
|
(260 |
) |
|
|
531 |
|
|
|
(702 |
) |
|
|
3,394 |
|
Collateralized debt obligations |
|
|
(195 |
) |
|
|
853 |
|
|
|
(401 |
) |
|
|
285 |
|
|
|
(596 |
) |
|
|
1,138 |
|
Other |
|
|
(384 |
) |
|
|
6,982 |
|
|
|
(172 |
) |
|
|
1,430 |
|
|
|
(556 |
) |
|
|
8,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
(4,331 |
) |
|
|
33,033 |
|
|
|
(5,627 |
) |
|
|
12,348 |
|
|
|
(9,958 |
) |
|
|
45,381 |
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred securities |
|
|
(405 |
) |
|
|
807 |
|
|
|
(349 |
) |
|
|
366 |
|
|
|
(754 |
) |
|
|
1,173 |
|
Other marketable equity securities |
|
|
(123 |
) |
|
|
387 |
|
|
|
-- |
|
|
|
-- |
|
|
|
(123 |
) |
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable equity securities |
|
|
(528 |
) |
|
|
1,194 |
|
|
|
(349 |
) |
|
|
366 |
|
|
|
(877 |
) |
|
|
1,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,859 |
) |
|
$ |
34,227 |
|
|
$ |
(5,976 |
) |
|
$ |
12,714 |
|
|
$ |
(10,835 |
) |
|
$ |
46,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses associated with securities of U.S. states and political subdivisions are
primarily driven by changes in interest rates and not due to the credit quality of the securities.
These investments are almost exclusively investment grade and were generally underwritten in
accordance with our own investment standards prior to the decision to purchase, without relying on
a bond insurers guarantee in making the investment decision. These securities will continue
to be monitored as part of our ongoing impairment analysis, but are expected to perform, even if
66
the rating agencies reduce the credit rating of the bond insurers. As a result, we concluded that
these securities were not other-than-temporarily impaired at March 31, 2009.
The unrealized losses associated with private collateralized mortgage obligations are primarily
related to securities backed by commercial mortgages and residential mortgages. Approximately 75%
of the securities were AAA-rated by at least one major rating agency. We estimate loss projections
for each security by assessing loans collateralizing the security and determining expected default
rates and loss severities. Based upon our assessment of expected credit losses of the security
given the performance of the underlying collateral compared to our credit enhancement, we concluded
that these securities were not other-than-temporarily impaired at March 31, 2009.
The unrealized losses associated with other securities are primarily related to securities backed
by commercial loans and individual issuer companies. For securities with commercial loans as the
underlying collateral, we have evaluated the expected credit losses in the security and concluded
that we have sufficient credit enhancement when compared with our estimate of credit losses for the
individual security. For individual issuers, we evaluate the financial performance of the issuer on
a quarterly basis to determine if it is probable that the issuer can make all contractual principal
and interest payments.
Our marketable equity securities included $3.8 billion of investments in perpetual
preferred securities at March 31, 2009. These securities provide very attractive tax-equivalent
yields and were current as to periodic distributions in accordance with their respective terms as
of March 31, 2009. We evaluated these hybrid financial instruments with investment-grade ratings
for impairment using an evaluation methodology similar to that used for debt securities. Perpetual
preferred securities were not other-than-temporarily impaired at March 31, 2009, if there was no
evidence of credit deterioration or investment rating downgrades of any issuers to below investment
grade, and it was probable we would continue to receive full contractual payments. We will continue
to evaluate the prospects for these securities for recovery in their market value in accordance
with our policy for estimating OTTI. We have recorded impairment
write-downs on perpetual preferred securities where there was evidence of credit deterioration.
The fair values of our investment securities could decline in the future if the underlying
performance of the collateral for the private collateralized mortgage obligations or other
securities deteriorate and our credit enhancement levels do not provide sufficient protection to
our contractual principal and interest. As a result, there is a risk that significant OTTI may
occur in the future given the current economic environment.
Other-Than-Temporarily Impaired Debt Securities
We recognize OTTI for debt securities classified as available for sale in accordance with FSP FAS
115-2 and FAS 124-2. As required by this FSP, we assess whether we intend to sell or it is more
likely than not that we will be required to sell a security before recovery of its amortized cost
basis less any current-period credit losses. For debt securities that are considered
other-than-temporarily impaired and that we do not intend to sell and will not be required to sell
prior to recovery of our amortized cost basis, we separate the amount of the impairment into the
amount
that is credit related (credit loss component) and the amount due to all other factors. The credit
loss component is recognized in earnings and is the difference between the securitys amortized
cost basis and the present value of its expected future cash flows. The remaining difference
67
between the securitys fair value and the present value of future expected cash flows is due to
factors that are not credit related and is recognized in other comprehensive income.
The following table presents a roll-forward of the credit loss component of the amortized cost of
debt securities that we have written down for OTTI and the credit component of the loss is
recognized in earnings (referred to as credit-impaired debt securities). The credit loss
component of the amortized cost represents the difference between the present value of expected
future cash flows and the amortized cost basis of the security prior to considering credit losses.
The beginning balance represents the credit loss component for debt securities for which OTTI
occurred prior to January 1, 2009. OTTI recognized in earnings in first quarter 2009 for
credit-impaired debt securities is presented as additions in two components based upon whether the
current period is the first time the debt security was credit-impaired (initial credit impairment)
or is not the first time the debt security was credit impaired (subsequent credit impairments). The
credit loss component is reduced if we sell, intend to sell or believe we will be required to sell
previously credit-impaired debt securities. Additionally, the credit loss component is reduced if
we receive cash flows in excess of what we expected to receive over the remaining life of the
credit-impaired debt security, the security matures or is fully written down. Changes in the credit
loss component of credit-impaired debt securities were:
|
|
|
|
|
|
|
|
Quarter ended |
|
(in millions) |
March 31, 2009 |
|
|
|
Balance, beginning of period |
|
$ |
471 |
|
|
|
|
|
|
Initial credit impairments |
|
|
197 |
|
Subsequent credit impairments |
|
|
66 |
|
|
|
|
|
|
For securities sold |
|
|
(7 |
) |
|
|
|
|
|
|
$ |
727 |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $6 million of OTTI on debt securities we intend to sell. |
68
For asset-backed securities (e.g., residential mortgage-backed securities), we estimated expected
future cash flows of the security by estimating the expected future cash flows of the underlying
collateral and applying those collateral cash flows, together with any credit enhancements such as
subordination interests owned by third parties, to the security. The expected future cash flows of
the underlying collateral are determined using the remaining contractual cash flows adjusted for
future expected credit losses (which considers current delinquencies and nonperforming assets,
future expected default rates and collateral value by vintage and geographic region) and
prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. The following table presents a summary of the significant inputs considered in
determining the measurement of the credit loss component recognized in earnings for asset-backed
securities as of March 31, 2009.
|
|
|
|
|
|
|
|
|
Residential MBS |
|
|
|
Expected remaining life of loan losses (1): |
|
|
|
|
Range (2) |
|
|
0.28 to 34.32% |
|
Weighted average (3) |
|
|
11.69% |
|
Current subordination levels (4): |
|
|
|
|
Range (2) |
|
|
0 to 19.68% |
|
Weighted average (3) |
|
|
6.93% |
|
Prepayment speed (annual CPR (5)): |
|
|
|
|
Range (2) |
|
|
7.27 to 24.64% |
|
Weighted average (3) |
|
|
15.76% |
|
|
|
|
|
|
(1) |
|
Represents future expected credit losses on underlying pool of loans expressed as a
percentage of total current outstanding loan balance. |
(2) |
|
Represents the range of inputs/assumptions based upon the individual securities within each
category. |
(3) |
|
Calculated by weighting the relevant input/assumption for each individual security by current
outstanding amortized cost basis of the security. |
(4) |
|
Represents current level of credit protection (subordination) for the securities, expressed
as a percentage of total current underlying loan balance. |
(5) |
|
Constant prepayment rate. |
Realized Gains and Losses
The following table shows the gross realized gains and losses on the sales of securities from the
securities available-for-sale portfolio, including marketable equity securities. Of the first
quarter 2009 OTTI write-downs of $516 million, $269 million related to debt securities and $247
million to equity securities. Under FSP FAS 115-2 and FAS 124-2, which we adopted this quarter,
total OTTI on debt securities amounted to $603 million, which included $263 million of
credit-related OTTI and $6 million related to securities we intend to sell, both of which were
recorded as part of gross realized losses, and $334 million recorded directly to other
comprehensive income for non-credit related impairment on securities. We believe that we will fully
collect the carrying value of securities on which we have recorded a non-credit-related impairment
in other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
|
|
|
$ |
294 |
|
|
$ |
378 |
|
Gross realized losses |
|
|
(370 |
) |
|
|
(88 |
) |
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
(76 |
) |
|
$ |
290 |
|
|
|
|
|
|
|
|
|
|
69
Contractual Maturities
The following table shows the remaining contractual principal maturities and contractual yields of
debt securities available for sale. The remaining contractual principal maturities for
mortgage-backed securities were allocated assuming no prepayments. Remaining expected maturities
will differ from contractual maturities because borrowers may have the right to prepay obligations
before the underlying mortgages mature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining contractual principal maturity |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
After one year |
|
|
After five years |
|
|
|
|
|
|
Total |
|
|
average |
|
|
Within one year |
|
|
through five years |
|
|
through ten years |
|
|
After ten years |
|
(in millions) |
|
Amount |
|
|
yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
$ |
3,249 |
|
|
|
1.54 |
% |
|
$ |
1,719 |
|
|
|
0.02 |
% |
|
$ |
1,127 |
|
|
|
3.15 |
% |
|
$ |
388 |
|
|
|
3.40 |
% |
|
$ |
15 |
|
|
|
4.79 |
% |
Securities of U.S. states and political subdivisions |
|
|
12,658 |
|
|
|
7.54 |
|
|
|
210 |
|
|
|
5.54 |
|
|
|
784 |
|
|
|
7.36 |
|
|
|
1,163 |
|
|
|
7.39 |
|
|
|
10,501 |
|
|
|
7.61 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
66,434 |
|
|
|
5.73 |
|
|
|
42 |
|
|
|
4.23 |
|
|
|
122 |
|
|
|
4.98 |
|
|
|
353 |
|
|
|
6.02 |
|
|
|
65,917 |
|
|
|
5.73 |
|
Residential |
|
|
24,830 |
|
|
|
6.73 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
34 |
|
|
|
8.15 |
|
|
|
24,796 |
|
|
|
6.73 |
|
Commercial |
|
|
8,478 |
|
|
|
7.95 |
|
|
|
-- |
|
|
|
-- |
|
|
|
5 |
|
|
|
1.57 |
|
|
|
135 |
|
|
|
8.64 |
|
|
|
8,338 |
|
|
|
7.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
99,742 |
|
|
|
6.17 |
|
|
|
42 |
|
|
|
4.23 |
|
|
|
127 |
|
|
|
4.87 |
|
|
|
522 |
|
|
|
6.83 |
|
|
|
99,051 |
|
|
|
6.17 |
|
Corporate debt securities |
|
|
6,924 |
|
|
|
5.81 |
|
|
|
432 |
|
|
|
5.49 |
|
|
|
3,697 |
|
|
|
4.76 |
|
|
|
2,212 |
|
|
|
7.48 |
|
|
|
583 |
|
|
|
6.31 |
|
Collateralized debt obligations |
|
|
2,085 |
|
|
|
4.52 |
|
|
|
-- |
|
|
|
-- |
|
|
|
120 |
|
|
|
7.83 |
|
|
|
809 |
|
|
|
3.65 |
|
|
|
1,156 |
|
|
|
4.77 |
|
Other |
|
|
20,775 |
|
|
|
5.17 |
|
|
|
43 |
|
|
|
3.82 |
|
|
|
8,057 |
|
|
|
7.41 |
|
|
|
1,346 |
|
|
|
4.86 |
|
|
|
11,329 |
|
|
|
3.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities at fair value (1) |
|
$ |
145,433 |
|
|
|
6.00 |
% |
|
$ |
2,446 |
|
|
|
1.60 |
% |
|
$ |
13,912 |
|
|
|
6.34 |
% |
|
$ |
6,440 |
|
|
|
6.14 |
% |
|
$ |
122,635 |
|
|
|
6.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. Treasury and federal agencies |
|
$ |
2,903 |
|
|
|
1.72 |
% |
|
$ |
1,380 |
|
|
|
0.11 |
% |
|
$ |
918 |
|
|
|
3.01 |
% |
|
$ |
586 |
|
|
|
3.41 |
% |
|
$ |
19 |
|
|
|
5.36 |
% |
Securities of U.S. states and political subdivisions |
|
|
11,846 |
|
|
|
6.48 |
|
|
|
117 |
|
|
|
6.19 |
|
|
|
621 |
|
|
|
7.43 |
|
|
|
976 |
|
|
|
6.90 |
|
|
|
10,132 |
|
|
|
6.38 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
90,648 |
|
|
|
5.62 |
|
|
|
6 |
|
|
|
4.80 |
|
|
|
97 |
|
|
|
5.50 |
|
|
|
329 |
|
|
|
5.57 |
|
|
|
90,216 |
|
|
|
5.62 |
|
Residential |
|
|
32,482 |
|
|
|
5.41 |
|
|
|
8 |
|
|
|
4.42 |
|
|
|
131 |
|
|
|
0.80 |
|
|
|
91 |
|
|
|
6.31 |
|
|
|
32,252 |
|
|
|
5.43 |
|
Commercial |
|
|
9,775 |
|
|
|
5.20 |
|
|
|
79 |
|
|
|
1.46 |
|
|
|
72 |
|
|
|
5.31 |
|
|
|
158 |
|
|
|
7.67 |
|
|
|
9,466 |
|
|
|
5.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
132,905 |
|
|
|
5.54 |
|
|
|
93 |
|
|
|
1.94 |
|
|
|
300 |
|
|
|
3.40 |
|
|
|
578 |
|
|
|
6.26 |
|
|
|
131,934 |
|
|
|
5.54 |
|
Corporate debt securities |
|
|
6,986 |
|
|
|
5.85 |
|
|
|
715 |
|
|
|
5.48 |
|
|
|
3,092 |
|
|
|
4.95 |
|
|
|
2,643 |
|
|
|
7.03 |
|
|
|
536 |
|
|
|
5.42 |
|
Collateralized debt obligations |
|
|
2,386 |
|
|
|
2.53 |
|
|
|
-- |
|
|
|
-- |
|
|
|
168 |
|
|
|
5.87 |
|
|
|
1,025 |
|
|
|
2.94 |
|
|
|
1,193 |
|
|
|
1.69 |
|
Other |
|
|
16,263 |
|
|
|
4.59 |
|
|
|
35 |
|
|
|
3.47 |
|
|
|
9,414 |
|
|
|
6.65 |
|
|
|
766 |
|
|
|
1.62 |
|
|
|
6,048 |
|
|
|
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities at fair value (1) |
|
$ |
173,289 |
|
|
|
5.42 |
% |
|
$ |
2,340 |
|
|
|
2.18 |
% |
|
$ |
14,513 |
|
|
|
6.01 |
% |
|
$ |
6,574 |
|
|
|
5.35 |
% |
|
$ |
149,862 |
|
|
|
5.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted-average yield is computed using the contractual life amortization method. |
70
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The major categories of loans outstanding showing those subject to SOP 03-3 are presented in the
following table. Certain loans acquired in the Wachovia acquisition are subject to SOP 03-3. These
include loans where it is probable that we will not collect all contractual principal and interest.
Loans within the scope of SOP 03-3 are initially recorded at fair value, and no allowance is
carried over or initially recorded. Outstanding balances of all other loans are presented net of
unearned income, net deferred loan fees, and unamortized discount and premium totaling $21,173
million, $16,891 million and $4,172 million, at March 31, 2009, December 31, 2008, and March 31,
2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
|
|
|
|
|
|
SOP 03-3 |
|
|
other |
|
|
|
|
|
|
SOP 03-3 |
|
|
other |
|
|
|
|
|
|
Mar. 31 |
, |
(in millions) |
|
loans |
|
|
loans |
|
|
Total |
|
|
loans |
|
|
loans |
|
|
Total |
|
|
2008 |
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
3,088 |
|
|
$ |
188,623 |
|
|
$ |
191,711 |
|
|
$ |
4,580 |
|
|
$ |
197,889 |
|
|
$ |
202,469 |
|
|
$ |
92,589 |
|
Other real estate mortgage |
|
|
6,597 |
|
|
|
98,337 |
|
|
|
104,934 |
|
|
|
7,762 |
|
|
|
95,346 |
|
|
|
103,108 |
|
|
|
38,415 |
|
Real estate construction |
|
|
4,507 |
|
|
|
29,405 |
|
|
|
33,912 |
|
|
|
4,503 |
|
|
|
30,173 |
|
|
|
34,676 |
|
|
|
18,885 |
|
Lease financing |
|
|
-- |
|
|
|
14,792 |
|
|
|
14,792 |
|
|
|
-- |
|
|
|
15,829 |
|
|
|
15,829 |
|
|
|
6,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
14,192 |
|
|
|
331,157 |
|
|
|
345,349 |
|
|
|
16,845 |
|
|
|
339,237 |
|
|
|
356,082 |
|
|
|
156,774 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
41,520 |
|
|
|
201,427 |
|
|
|
242,947 |
|
|
|
39,214 |
|
|
|
208,680 |
|
|
|
247,894 |
|
|
|
73,321 |
|
Real estate 1-4 family junior lien mortgage |
|
|
615 |
|
|
|
109,133 |
|
|
|
109,748 |
|
|
|
728 |
|
|
|
109,436 |
|
|
|
110,164 |
|
|
|
74,840 |
|
Credit card |
|
|
-- |
|
|
|
22,815 |
|
|
|
22,815 |
|
|
|
-- |
|
|
|
23,555 |
|
|
|
23,555 |
|
|
|
18,677 |
|
Other revolving credit and installment |
|
|
32 |
|
|
|
91,220 |
|
|
|
91,252 |
|
|
|
151 |
|
|
|
93,102 |
|
|
|
93,253 |
|
|
|
55,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
42,167 |
|
|
|
424,595 |
|
|
|
466,762 |
|
|
|
40,093 |
|
|
|
434,773 |
|
|
|
474,866 |
|
|
|
222,343 |
|
Foreign |
|
|
1,849 |
|
|
|
29,619 |
|
|
|
31,468 |
|
|
|
1,859 |
|
|
|
32,023 |
|
|
|
33,882 |
|
|
|
7,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
58,208 |
|
|
$ |
785,371 |
|
|
$ |
843,579 |
|
|
$ |
58,797 |
|
|
$ |
806,033 |
|
|
$ |
864,830 |
|
|
$ |
386,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We consider a loan to be impaired under FAS 114, Accounting by Creditors for Impairment of a Loan
an amendment of FASB Statement No. 5 and 15, when, based on current information and events, we
determine that we will not be able to collect all amounts due according to the loan contract,
including scheduled interest payments. We assess and account for as impaired certain nonaccrual
commercial and commercial real estate loans that are over $5 million and certain consumer,
commercial and commercial real estate loans whose terms have been modified in a troubled debt
restructuring. The recorded investment in impaired loans and the methodology used to measure
impairment was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31 |
, |
|
Dec. 31 |
, |
Mar. 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
Impairment measurement based on: |
|
|
|
|
|
|
|
|
|
|
|
|
Collateral value method |
|
$ |
345 |
|
|
|
$ 88 |
|
|
|
$ 14 |
|
Discounted cash flow method (1) |
|
|
6,445 |
|
|
|
3,552 |
|
|
|
909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (2) |
|
$ |
6,790 |
|
|
|
$3,640 |
|
|
|
$ 923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The March 31, 2009, balance includes $474 million of Government National Mortgage Association
(GNMA) loans that are insured by the Federal Housing Administration (FHA) or guaranteed by the
Department of Veterans Affairs. Although both principal and interest are insured, the insured
interest rate may be different than the original contractual interest rate prior to
modification, resulting in interest impairment under a discounted cash flow methodology. |
(2) |
|
Includes $6,206 million, $3,468 million and $828 million of impaired loans with a related
allowance of $1,571 million, $816 million and $111 million at March 31, 2009, December 31,
2008, and March 31, 2008, respectively. |
The average recorded investment in impaired loans was $5,795 million in first quarter 2009 and $678
million in first quarter 2008.
71
The allowance for credit losses consists of the allowance for loan losses and the reserve for
unfunded credit commitments. Changes in the allowance for credit losses were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
|
Balance, beginning of period |
|
$ |
21,711 |
|
|
$ |
5,518 |
|
Provision for credit losses |
|
|
4,558 |
|
|
|
2,028 |
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
Commercial |
|
|
(596 |
) |
|
|
(259 |
) |
Other real estate mortgage |
|
|
(31 |
) |
|
|
(4 |
) |
Real estate construction |
|
|
(105 |
) |
|
|
(29 |
) |
Lease financing |
|
|
(20 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
(752 |
) |
|
|
(304 |
) |
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
(424 |
) |
|
|
(81 |
) |
Real estate 1-4 family junior lien mortgage |
|
|
(873 |
) |
|
|
(455 |
) |
Credit card |
|
|
(622 |
) |
|
|
(313 |
) |
Other revolving credit and installment |
|
|
(900 |
) |
|
|
(543 |
) |
|
|
|
|
|
|
|
Total consumer |
|
|
(2,819 |
) |
|
|
(1,392 |
) |
Foreign |
|
|
(54 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
Total loan charge-offs |
|
|
(3,625 |
) |
|
|
(1,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
Commercial |
|
|
40 |
|
|
|
31 |
|
Other real estate mortgage |
|
|
10 |
|
|
|
1 |
|
Real estate construction |
|
|
2 |
|
|
|
1 |
|
Lease financing |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
55 |
|
|
|
36 |
|
Consumer: |
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
33 |
|
|
|
6 |
|
Real estate 1-4 family junior lien mortgage |
|
|
26 |
|
|
|
17 |
|
Credit card |
|
|
40 |
|
|
|
38 |
|
Other revolving credit and installment |
|
|
204 |
|
|
|
125 |
|
|
|
|
|
|
|
|
Total consumer |
|
|
303 |
|
|
|
186 |
|
Foreign |
|
|
9 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Total loan recoveries |
|
|
367 |
|
|
|
236 |
|
|
|
|
|
|
|
|
Net loan charge-offs (1) |
|
|
(3,258 |
) |
|
|
(1,528 |
) |
|
|
|
|
|
|
|
Allowances related to business combinations/other |
|
|
(165 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
$ |
22,846 |
|
|
$ |
6,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
22,281 |
|
|
$ |
5,803 |
|
Reserve for unfunded credit commitments |
|
|
565 |
|
|
|
210 |
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
22,846 |
|
|
$ |
6,013 |
|
|
|
|
|
|
|
|
Net loan charge-offs (annualized) as a percentage of average total loans |
|
|
1.54 |
% |
|
|
1.60 |
% |
Allowance for loan losses as a percentage of total loans (2) |
|
|
2.64 |
% |
|
|
1.50 |
% |
Allowance for credit losses as a percentage of total loans (2) |
|
|
2.71 |
|
|
|
1.56 |
|
|
|
|
|
|
(1) |
|
Loans accounted for under SOP 03-3 were recorded in purchase accounting at fair value and,
accordingly, charge-offs do not include losses on such loans. |
(2) |
|
The allowance for loan losses and the allowance for credit losses do not include any amounts
related to loans acquired from Wachovia that are accounted for under SOP 03-3. Loans acquired
from Wachovia are included in total loans net of related purchase accounting net write-downs. |
72
SOP 03-3
At December 31, 2008, and March 31, 2009, loans within the scope of SOP 03-3 had an unpaid
principal balance of $95.8 billion and $93.0 billion,
respectively, and a carrying value of $59.7 billion and
$58.2 billion, respectively. The following table provides details on the SOP 03-3 loans acquired
from Wachovia.
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
(in millions) |
|
(refined) |
|
|
|
Contractually required payments including interest |
|
|
$114,565 |
|
Nonaccretable difference (1) |
|
|
(44,274 |
) |
|
|
|
|
|
Cash flows expected to be collected (2) |
|
|
70,291 |
|
Accretable yield |
|
|
(10,547 |
) |
|
|
|
|
|
Fair value of loans acquired |
|
|
$ 59,744 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $40.0 billion in principal cash flows (purchase accounting adjustments) not expected
to be collected, $2.0 billion of pre-acquisition charge-offs and $2.3 billion of future
interest not expected to be collected. |
(2) |
|
Represents undiscounted expected principal and interest cash flows. |
The change in the accretable yield related to SOP 03-3 loans is presented in the following table.
|
|
|
|
|
|
|
(in millions) |
|
Quarter ended March 31, 2009 |
|
|
|
Balance, beginning of quarter (refined) |
|
|
$ (10,547 |
) |
Disposals |
|
|
4 |
|
Accretion |
|
|
561 |
|
|
|
|
|
|
Balance, end of quarter |
|
|
$ (9,982 |
) |
|
|
|
|
|
|
|
73
6. OTHER ASSETS
The components of other assets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31 |
, |
|
Dec. 31 |
, |
|
Mar. 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
Nonmarketable equity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost method: |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity investments |
|
$ |
2,588 |
|
|
$ |
2,706 |
|
|
$ |
2,078 |
|
Federal bank stock |
|
|
6,080 |
|
|
|
6,106 |
|
|
|
2,110 |
|
Other |
|
|
2,306 |
|
|
|
2,292 |
|
|
|
1,939 |
|
|
|
|
|
|
|
|
|
|
|
Total cost method |
|
|
10,974 |
|
|
|
11,104 |
|
|
|
6,127 |
|
Equity method |
|
|
4,151 |
|
|
|
4,400 |
|
|
|
1,107 |
|
Principal investments (1) |
|
|
1,270 |
|
|
|
1,278 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
Total nonmarketable equity investments |
|
|
16,395 |
|
|
|
16,782 |
|
|
|
7,234 |
|
|
|
|
2,866 |
|
|
|
2,251 |
|
|
|
1,955 |
|
Accounts receivable |
|
|
16,471 |
|
|
|
22,493 |
|
|
|
14,547 |
|
Interest receivable |
|
|
5,009 |
|
|
|
5,746 |
|
|
|
2,835 |
|
Core deposit intangibles |
|
|
12,026 |
|
|
|
11,999 |
|
|
|
403 |
|
Customer relationship and other intangibles |
|
|
2,700 |
|
|
|
3,516 |
|
|
|
306 |
|
Foreclosed assets: |
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans (2) |
|
|
768 |
|
|
|
667 |
|
|
|
578 |
|
Other |
|
|
1,294 |
|
|
|
1,526 |
|
|
|
637 |
|
Due from customers on acceptances |
|
|
188 |
|
|
|
615 |
|
|
|
66 |
|
Other |
|
|
47,299 |
|
|
|
44,206 |
|
|
|
13,997 |
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
105,016 |
|
|
$ |
109,801 |
|
|
$ |
42,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principal investments are recorded at fair value with realized and unrealized gains (losses)
included in net gains (losses) from equity investments in the income statement. |
(2) |
|
Consistent with regulatory reporting requirements, foreclosed assets include foreclosed real
estate securing GNMA loans. Both principal and interest for GNMA loans secured by the
foreclosed real estate are collectible because the GNMA loans are insured by the Federal
Housing Administration or guaranteed by the Department of Veterans Affairs. |
Income related to nonmarketable equity investments was:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31 |
, |
(in millions) |
|
2009 |
|
|
2008 |
|
|
|
Net gains (losses) from private equity investments (1) |
|
$ |
(220 |
) |
|
$ |
346 |
|
Net losses from principal investments |
|
|
(8 |
) |
|
|
-- |
|
Net losses from all other nonmarketable equity investments |
|
|
(49 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
Net gains (losses) from nonmarketable equity investments |
|
$ |
(277 |
) |
|
$ |
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net gains from first quarter 2008 include $334 million gain from our ownership in Visa, which
completed its initial public offering in March 2008. |
74
7. SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
Involvement with SPEs
We enter into various types of on- and off-balance sheet transactions with special purpose entities
(SPEs) in the normal course of business. SPEs are corporations, trusts or partnerships that are
established for a limited purpose. We use SPEs to create sources of financing, liquidity and
regulatory capital capacity for the Company, as well as sources of financing and liquidity, and
investment products for our clients. Our use of SPEs generally consists of various securitization
activities with SPEs whereby financial assets are transferred to an SPE and repackaged as
securities or similar interests that are sold to investors. In connection with our securitization
activities, we have various forms of ongoing involvement with SPEs, which may include:
|
|
underwriting securities issued by SPEs and subsequently making markets in those securities; |
|
|
providing liquidity facilities to support short-term obligations of SPEs issued to third
party investors; |
|
|
providing credit enhancement on securities issued by SPEs or market value guarantees of
assets held by SPEs through the use of letters of credit, financial guarantees, credit default
swaps and total return swaps; |
|
|
entering into other derivative contracts with SPEs; |
|
|
holding senior or subordinated interests in SPEs; |
|
|
acting as servicer or investment manager for SPEs; and |
|
|
providing administrative or trustee services to SPEs. |
The SPEs we use are primarily either qualifying SPEs (QSPEs), which are not consolidated if the
criteria described below are met, or variable interest entities (VIEs). To qualify as a QSPE, an
entity must be passive and must adhere to significant limitations on the types of assets and
derivative instruments it may own and the extent of activities and decision making in which it may
engage. For example, a QSPEs activities are generally limited to purchasing assets, passing along
the cash flows of those assets to its investors, servicing its assets and, in certain transactions,
issuing liabilities. Among other restrictions on a QSPEs activities, a QSPE may not actively
manage its assets through discretionary sales or modifications.
A VIE is an entity that has either a total equity investment that is insufficient to permit the
entity to finance its activities without additional subordinated financial support or whose equity
investors lack the characteristics of a controlling financial interest. A VIE is consolidated by
its primary beneficiary, which is the entity that, through its variable interests, absorbs the
majority of a VIEs variability. A variable interest is a contractual, ownership or other interest
that changes with changes in the fair value of the VIEs net assets.
75
The classifications of assets and liabilities in our balance sheet associated with our transactions
with QSPEs and VIEs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers that |
|
|
|
|
|
|
|
|
|
VIEs that we |
|
|
|
|
|
we account |
|
|
|
|
|
|
|
|
|
|
do not |
|
VIEs that we |
|
for as secured |
|
|
|
|
(in millions) |
|
QSPEs |
|
consolidate |
|
consolidate |
|
borrowings |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
117 |
|
|
$ |
287 |
|
|
$ |
404 |
|
Trading account assets |
|
|
1,261 |
|
|
|
5,241 |
|
|
|
71 |
|
|
|
141 |
|
|
|
6,714 |
|
Securities (1) |
|
|
18,078 |
|
|
|
15,168 |
|
|
|
922 |
|
|
|
6,094 |
|
|
|
40,262 |
|
Mortgages held for sale |
|
|
56 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
56 |
|
Loans (2) |
|
|
-- |
|
|
|
16,882 |
|
|
|
217 |
|
|
|
4,126 |
|
|
|
21,225 |
|
MSRs |
|
|
14,106 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
14,106 |
|
Other assets |
|
|
345 |
|
|
|
5,022 |
|
|
|
2,416 |
|
|
|
55 |
|
|
|
7,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
33,846 |
|
|
|
42,313 |
|
|
|
3,743 |
|
|
|
10,703 |
|
|
|
90,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
-- |
|
|
|
307 |
|
|
|
1,440 |
|
|
|
1,747 |
|
Accrued expenses and other liabilities |
|
|
528 |
|
|
|
1,976 |
|
|
|
330 |
|
|
|
26 |
|
|
|
2,860 |
|
Long term debt |
|
|
-- |
|
|
|
-- |
|
|
|
1,773 |
|
|
|
7,125 |
|
|
|
8,898 |
|
Noncontrolling interests |
|
|
-- |
|
|
|
-- |
|
|
|
121 |
|
|
|
-- |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and noncontrolling interests |
|
|
528 |
|
|
|
1,976 |
|
|
|
2,531 |
|
|
|
8,591 |
|
|
|
13,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,318 |
|
|
$ |
40,337 |
|
|
$ |
1,212 |
|
|
$ |
2,112 |
|
|
$ |
76,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
166 |
|
|
$ |
288 |
|
|
$ |
454 |
|
Trading account assets |
|
|
2,097 |
|
|
|
5,183 |
|
|
|
55 |
|
|
|
135 |
|
|
|
7,470 |
|
Securities (1) |
|
|
21,766 |
|
|
|
14,633 |
|
|
|
1,627 |
|
|
|
5,849 |
|
|
|
43,875 |
|
Loans (2) |
|
|
-- |
|
|
|
16,852 |
|
|
|
312 |
|
|
|
3,284 |
|
|
|
20,448 |
|
MSRs |
|
|
11,969 |
|
|
|
18 |
|
|
|
-- |
|
|
|
-- |
|
|
|
11,987 |
|
Other assets |
|
|
258 |
|
|
|
5,648 |
|
|
|
2,616 |
|
|
|
167 |
|
|
|
8,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
36,090 |
|
|
|
42,334 |
|
|
|
4,776 |
|
|
|
9,723 |
|
|
|
92,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
-- |
|
|
|
306 |
|
|
|
2,307 |
|
|
|
2,613 |
|
Accrued expenses and other liabilities |
|
|
622 |
|
|
|
2,351 |
|
|
|
517 |
|
|
|
90 |
|
|
|
3,580 |
|
Long term debt |
|
|
-- |
|
|
|
-- |
|
|
|
1,807 |
|
|
|
6,529 |
|
|
|
8,336 |
|
Noncontrolling interests |
|
|
-- |
|
|
|
-- |
|
|
|
138 |
|
|
|
-- |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and noncontrolling interests |
|
|
622 |
|
|
|
2,351 |
|
|
|
2,768 |
|
|
|
8,926 |
|
|
|
14,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,468 |
|
|
$ |
39,983 |
|
|
$ |
2,008 |
|
|
$ |
797 |
|
|
$ |
78,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes certain debt securities related to loans serviced for the Federal National Mortgage
Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Government National
Mortgage Association (GNMA). |
(2) |
|
Excludes related allowance for loan losses. |
The following disclosures regarding our significant continuing involvement with QSPEs and
unconsolidated VIEs exclude entities where our only involvement is in the form of: (1) investments
in trading securities, (2) investments in securities or loans underwritten by third parties, (3)
certain derivatives such as interest rate swaps or cross currency swaps that have customary terms,
and (4) administrative or trustee services. We have also excluded investments accounted for in
accordance with the AICPA Investment Company Audit Guide, investments accounted for under the cost
method, and investments accounted for under the equity method.
Transactions with QSPEs
We use QSPEs to securitize consumer and commercial real estate loans and other types of financial
assets, including student loans, auto loans and municipal bonds. We typically retain the servicing
rights from these sales and may continue to hold other beneficial interests in QSPEs.
We may also provide liquidity to investors in the beneficial interests and credit enhancements in
76
the form of standby letters of credit. Through these securitizations we may be exposed to liability
under limited amounts of recourse as well as standard representations and warranties we make to
purchasers and issuers. The amount recorded for this liability is included in other commitments and
guarantees in the following table.
A summary of our involvements with QSPEs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
Debt and |
|
|
|
|
|
|
|
|
|
commitments |
|
|
|
|
|
|
QSPE |
|
|
equity |
|
Servicing |
|
|
|
|
|
|
and |
|
|
Net |
|
(in millions) |
|
assets (1) |
|
interests (2) |
|
|
assets |
|
Derivatives |
|
guarantees |
|
|
assets |
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
Carrying value asset (liability) |
|
Residential mortgage loan securitizations |
|
$ |
1,144,775 |
|
|
$ |
17,469 |
|
|
$ |
12,951 |
|
|
$ |
30 |
|
|
$ |
(511 |
) |
|
$ |
29,939 |
|
Commercial mortgage securitizations |
|
|
355,267 |
|
|
|
1,452 |
|
|
|
1,098 |
|
|
|
524 |
|
|
|
(14 |
) |
|
|
3,060 |
|
Auto loan securitizations |
|
|
4,133 |
|
|
|
72 |
|
|
|
-- |
|
|
|
43 |
|
|
|
-- |
|
|
|
115 |
|
Student loan securitizations |
|
|
2,765 |
|
|
|
76 |
|
|
|
57 |
|
|
|
-- |
|
|
|
-- |
|
|
|
133 |
|
Other |
|
|
11,877 |
|
|
|
74 |
|
|
|
-- |
|
|
|
(3 |
) |
|
|
-- |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,518,817 |
|
|
$ |
19,143 |
|
|
$ |
14,106 |
|
|
$ |
594 |
|
|
$ |
(525 |
) |
|
$ |
33,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss |
|
Residential mortgage loan securitizations |
|
|
|
|
|
$ |
17,469 |
|
|
$ |
12,951 |
|
|
$ |
300 |
|
|
$ |
718 |
|
|
$ |
31,438 |
|
Commercial mortgage securitizations |
|
|
|
|
|
|
1,452 |
|
|
|
1,098 |
|
|
|
524 |
|
|
|
3,302 |
|
|
|
6,376 |
|
Auto loan securitizations |
|
|
|
|
|
|
72 |
|
|
|
-- |
|
|
|
43 |
|
|
|
-- |
|
|
|
115 |
|
Student loan securitizations |
|
|
|
|
|
|
76 |
|
|
|
57 |
|
|
|
-- |
|
|
|
-- |
|
|
|
133 |
|
Other |
|
|
|
|
|
|
74 |
|
|
|
-- |
|
|
|
1,465 |
|
|
|
37 |
|
|
|
1,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
19,143 |
|
|
$ |
14,106 |
|
|
$ |
2,332 |
|
|
$ |
4,057 |
|
|
$ |
39,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
Carrying value asset (liability) |
|
Residential mortgage loan securitizations |
|
$ |
1,229,211 |
|
|
$ |
21,763 |
|
|
$ |
10,961 |
|
|
$ |
24 |
|
|
$ |
(605 |
) |
|
$ |
32,143 |
|
Commercial mortgage securitizations |
|
|
391,114 |
|
|
|
1,561 |
|
|
|
953 |
|
|
|
482 |
|
|
|
(17 |
) |
|
|
2,979 |
|
Auto loan securitizations |
|
|
3,580 |
|
|
|
76 |
|
|
|
-- |
|
|
|
39 |
|
|
|
-- |
|
|
|
115 |
|
Student loan securitizations |
|
|
2,776 |
|
|
|
165 |
|
|
|
55 |
|
|
|
-- |
|
|
|
-- |
|
|
|
220 |
|
Other |
|
|
9,955 |
|
|
|
11 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,636,636 |
|
|
$ |
23,576 |
|
|
$ |
11,969 |
|
|
$ |
545 |
|
|
$ |
(622 |
) |
|
$ |
35,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss |
|
Residential mortgage loan securitizations |
|
|
|
|
|
$ |
21,763 |
|
|
$ |
10,961 |
|
|
$ |
276 |
|
|
$ |
1,525 |
|
|
$ |
34,525 |
|
Commercial mortgage securitizations |
|
|
|
|
|
|
1,561 |
|
|
|
953 |
|
|
|
482 |
|
|
|
3,017 |
|
|
|
6,013 |
|
Auto loan securitizations |
|
|
|
|
|
|
76 |
|
|
|
-- |
|
|
|
39 |
|
|
|
-- |
|
|
|
115 |
|
Student loan securitizations |
|
|
|
|
|
|
165 |
|
|
|
55 |
|
|
|
-- |
|
|
|
-- |
|
|
|
220 |
|
Other |
|
|
|
|
|
|
11 |
|
|
|
-- |
|
|
|
133 |
|
|
|
37 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
23,576 |
|
|
$ |
11,969 |
|
|
$ |
930 |
|
|
$ |
4,579 |
|
|
$ |
41,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the remaining principal balance of assets held by QSPEs using the most current
information available. |
(2) |
|
Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA. |
Maximum exposure to loss represents the carrying value of our involvement with off-balance sheet
QSPEs plus remaining undrawn liquidity and lending commitments, notional amount of net written
derivative contracts, and notional amount of other commitments and guarantees. Maximum exposure to
loss is a required disclosure under generally accepted accounting principles and represents the
estimated loss that would be incurred under an assumed hypothetical circumstance, despite its
extremely remote possibility, where the value of our interests and any associated collateral
declines to zero, without any consideration of recovery or
offset from any economic hedges. Accordingly, this required disclosure is not an indication of
expected loss.
77
We recognized net losses of $4 million from sales of financial assets in securitizations in first
quarter 2009. Additionally, we had the following cash flows with our securitization trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2009 |
, |
|
|
|
|
|
|
Other |
|
|
|
Mortgage |
|
|
financial |
|
(in millions) |
|
loans |
|
|
assets |
|
|
|
Sales proceeds from securitizations (1) |
|
|
$81,178 |
|
|
|
$ -- |
|
Servicing fees |
|
|
1,000 |
|
|
|
18 |
|
Other interests held |
|
|
495 |
|
|
|
79 |
|
Purchases of delinquent assets |
|
|
13 |
|
|
|
-- |
|
Net servicing advances |
|
|
62 |
|
|
|
-- |
|
|
|
|
|
|
(1) |
|
Represents cash flow data for all loans securitized in first quarter 2009. |
For securitizations completed in first quarter 2009, we used the following assumptions to determine
the fair value of mortgage servicing rights at the date of securitization.
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Mortgage |
|
|
|
servicing rights |
|
|
|
Prepayment speed (annual CPR (1)) |
|
|
12.6 |
% |
Life (in years) |
|
|
5.9 |
|
Discount rate |
|
|
9.1 |
% |
|
|
|
|
|
(1) |
|
Constant prepayment rate. |
78
Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes
in those assumptions at March 31, 2009, for residential and commercial mortgage servicing rights,
and other interests held related to residential mortgage loan securitizations are presented in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Other |
|
|
Other interests held |
|
($ in millions) |
|
servicing rights |
|
|
interests held |
|
|
subordinate bonds |
|
|
Fair value of interests held |
|
$ |
12,932 |
|
|
$ |
265 |
|
|
$ |
176 |
|
Expected weighted-average life (in years) |
|
|
3.6 |
|
|
|
4.2 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment speed assumption (annual CPR) |
|
|
19.6 |
% |
|
|
17.6 |
% |
|
|
14.0 |
% |
Decrease in fair value from: |
|
|
|
|
|
|
|
|
|
|
|
|
10% increase |
|
$ |
650 |
|
|
$ |
17 |
|
|
$ |
--
|
|
25% increase |
|
|
1,482 |
|
|
|
38 |
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate assumption |
|
|
10.0 |
% |
|
|
12.6 |
% |
|
|
13.6 |
% |
MSRs and other interests held |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in fair value from: |
|
|
|
|
|
|
|
|
|
|
|
|
100 basis point increase |
|
$ |
448 |
|
|
$ |
8 |
|
|
|
|
|
200 basis point increase |
|
|
861 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
interests held subordinate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in fair value from: |
|
|
|
|
|
|
|
|
|
|
|
|
50 basis point increase |
|
|
|
|
|
|
|
|
|
$ |
4 |
|
100 basis point increase |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss assumption |
|
|
|
|
|
|
|
|
|
|
3.4 |
% |
Decrease in fair value from: |
|
|
|
|
|
|
|
|
|
|
|
|
10% higher losses |
|
|
|
|
|
|
|
|
|
$ |
16 |
|
25% higher losses |
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
Adverse changes in key economic assumptions used to measure the fair value of retained interests in
securitizations that we acquired in the Wachovia acquisition were analyzed. The price sensitivity
to these adverse changes was not significant and, accordingly, is not included in the table above.
The sensitivities in the table above are hypothetical and caution should be exercised when relying
on this data. Changes in fair value based on a 10% variation in assumptions generally cannot be
extrapolated because the relationship of the change in the assumption to the change in fair value
may not be linear. Also, the effect of a variation in a particular assumption on the fair value of
the other interests held is calculated independently without changing any other assumptions. In
reality, changes in one factor may result in changes in others (for example, changes in prepayment
speed estimates could result in changes in the discount rates), which might magnify or counteract
the sensitivities.
79
We also retained some AAA-rated fixed-rate and adjustable rate mortgage-backed securities. The fair
value of the securities was $5,623 million at March 31, 2009, and $5,147 million at December 31,
2008, and was determined using an independent third party pricing service.
The table below presents information about the principal balances of owned and securitized loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent |
|
|
Net charge-offs |
|
|
|
Total loans (1) |
|
|
loans (2)(3) |
|
|
(recoveries) (3) |
|
|
|
Mar. 31 |
, |
|
Dec. 31 |
, |
|
Mar. 31 |
, |
|
Dec. 31 |
, |
|
Quarter ended |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
193,236 |
|
|
$ |
204,113 |
|
|
$ |
2,113 |
|
|
$ |
1,471 |
|
|
$ |
556 |
|
Other real estate mortgage |
|
|
312,211 |
|
|
|
310,480 |
|
|
|
2,912 |
|
|
|
1,058 |
|
|
|
25 |
|
Real estate construction |
|
|
33,912 |
|
|
|
34,676 |
|
|
|
1,995 |
|
|
|
1,221 |
|
|
|
103 |
|
Lease financing |
|
|
14,792 |
|
|
|
15,829 |
|
|
|
114 |
|
|
|
92 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate |
|
|
554,151 |
|
|
|
565,098 |
|
|
|
7,134 |
|
|
|
3,842 |
|
|
|
701 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate 1-4 family first mortgage |
|
|
1,211,050 |
|
|
|
1,165,456 |
|
|
|
10,213 |
|
|
|
6,849 |
|
|
|
593 |
|
Real estate 1-4 family junior lien mortgage |
|
|
114,845 |
|
|
|
115,308 |
|
|
|
2,096 |
|
|
|
1,421 |
|
|
|
880 |
|
Credit card |
|
|
22,815 |
|
|
|
23,555 |
|
|
|
738 |
|
|
|
687 |
|
|
|
582 |
|
Other revolving credit and installment |
|
|
104,469 |
|
|
|
104,886 |
|
|
|
1,504 |
|
|
|
1,427 |
|
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
1,453,179 |
|
|
|
1,409,205 |
|
|
|
14,551 |
|
|
|
10,384 |
|
|
|
2,792 |
|
Foreign |
|
|
31,468 |
|
|
|
33,882 |
|
|
|
104 |
|
|
|
91 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans owned and securitized |
|
|
2,038,798 |
|
|
|
2,008,185 |
|
|
$ |
21,789 |
|
|
$ |
14,317 |
|
|
$ |
3,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized loans |
|
|
1,150,106 |
|
|
|
1,117,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages held for sale |
|
|
36,807 |
|
|
|
20,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
8,306 |
|
|
|
6,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held |
|
$ |
843,579 |
|
|
$ |
864,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents loans in the balance sheet or that have been securitized and includes residential
mortgages sold to FNMA and FHLMC and securitizations where servicing is our only form of
continuing involvement. |
|
(2) |
|
Delinquent loans are 90 days or more past due and still accruing interest as well as
nonaccrual loans. |
|
(3) |
|
Delinquent loans and net charge-offs exclude loans sold to FNMA and FHLMC. We continue to
service the loans and would only experience a loss if required to repurchase a delinquent loan
due to a breach in original representations and warranties associated with our underwriting
standards. |
Transactions with VIEs
Our transactions with VIEs include securitization, investment and financing activities involving
collateralized debt obligations (CDOs) backed by asset-backed and commercial real estate
securities, collateralized loan obligations (CLOs) backed by corporate loans or bonds, and other
types of structured financing. We have various forms of involvement with VIEs, including holding
senior or subordinated interests, entering into liquidity arrangements, credit default swaps and
other derivative contracts.
80
A summary of our involvements with off-balance sheet (unconsolidated) VIEs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
Debt and |
|
|
|
|
|
|
commitments |
|
|
|
|
|
|
VIE |
|
|
equity |
|
|
|
|
|
|
and |
|
|
Net |
|
(in millions) |
|
assets (1) |
|
|
interests |
|
|
Derivatives |
|
|
guarantees |
|
|
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
Carrying value asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
$ |
48,802 |
|
|
$ |
14,080 |
|
|
$ |
1,053 |
|
|
$ |
--
|
|
|
$ |
15,133 |
|
Wachovia administered ABCP conduit |
|
|
10,767 |
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Asset-based lending structures |
|
|
11,614 |
|
|
|
9,232 |
|
|
|
(136 |
) |
|
|
--
|
|
|
|
9,096 |
|
Tax credit structures |
|
|
22,882 |
|
|
|
4,366 |
|
|
|
--
|
|
|
|
(516 |
) |
|
|
3,850 |
|
CLOs |
|
|
23,339 |
|
|
|
3,217 |
|
|
|
109 |
|
|
|
--
|
|
|
|
3,326 |
|
Investment funds |
|
|
105,808 |
|
|
|
3,543 |
|
|
|
--
|
|
|
|
--
|
|
|
|
3,543 |
|
Credit-linked note structures |
|
|
12,993 |
|
|
|
50 |
|
|
|
1,472 |
|
|
|
--
|
|
|
|
1,522 |
|
Money market funds |
|
|
31,843 |
|
|
|
50 |
|
|
|
10 |
|
|
|
--
|
|
|
|
60 |
|
Other (2) |
|
|
1,832 |
|
|
|
3,983 |
|
|
|
(36 |
) |
|
|
(141 |
) |
|
|
3,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
269,880 |
|
|
$ |
38,521 |
|
|
$ |
2,472 |
|
|
$ |
(657 |
) |
|
$ |
40,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
|
|
|
|
$ |
14,080 |
|
|
$ |
4,849 |
|
|
$ |
1,514 |
|
|
$ |
20,443 |
|
Wachovia administered ABCP conduit |
|
|
|
|
|
|
--
|
|
|
|
15,824 |
|
|
|
--
|
|
|
|
15,824 |
|
Asset-based lending structures |
|
|
|
|
|
|
9,346 |
|
|
|
136 |
|
|
|
--
|
|
|
|
9,482 |
|
Tax credit structures |
|
|
|
|
|
|
4,366 |
|
|
|
--
|
|
|
|
560 |
|
|
|
4,926 |
|
CLOs |
|
|
|
|
|
|
3,217 |
|
|
|
109 |
|
|
|
555 |
|
|
|
3,881 |
|
Investment funds |
|
|
|
|
|
|
3,550 |
|
|
|
--
|
|
|
|
140 |
|
|
|
3,690 |
|
Credit-linked note structures |
|
|
|
|
|
|
50 |
|
|
|
2,253 |
|
|
|
--
|
|
|
|
2,303 |
|
Money market funds |
|
|
|
|
|
|
50 |
|
|
|
51 |
|
|
|
--
|
|
|
|
101 |
|
Other (2) |
|
|
|
|
|
|
3,991 |
|
|
|
130 |
|
|
|
578 |
|
|
|
4,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
38,650 |
|
|
$ |
23,352 |
|
|
$ |
3,347 |
|
|
$ |
65,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
Carrying value asset (liability)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
$ |
53,439 |
|
|
$ |
14,595 |
|
|
$ |
1,008 |
|
|
$ |
--
|
|
|
$ |
15,603 |
|
Wachovia administered ABCP conduit |
|
|
9,894 |
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
-- |
|
Asset-based lending structures |
|
|
15,158 |
|
|
|
9,061 |
|
|
|
(122 |
) |
|
|
--
|
|
|
|
8,939 |
|
Tax credit structures |
|
|
27,197 |
|
|
|
5,025 |
|
|
|
--
|
|
|
|
(863 |
) |
|
|
4,162 |
|
CLOs |
|
|
24,691 |
|
|
|
3,547 |
|
|
|
119 |
|
|
|
--
|
|
|
|
3,666 |
|
Investment funds |
|
|
96,497 |
|
|
|
1,918 |
|
|
|
--
|
|
|
|
--
|
|
|
|
1,918 |
|
Credit-linked note structures |
|
|
1,578 |
|
|
|
52 |
|
|
|
1,410 |
|
|
|
--
|
|
|
|
1,462 |
|
Money market funds |
|
|
33,552 |
|
|
|
--
|
|
|
|
(9 |
) |
|
|
--
|
|
|
|
(9 |
) |
Other (2) |
|
|
3,989 |
|
|
|
4,336 |
|
|
|
(8 |
) |
|
|
(86 |
) |
|
|
4,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
265,995 |
|
|
$ |
38,534 |
|
|
$ |
2,398 |
|
|
$ |
(949 |
) |
|
$ |
39,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure to loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
|
|
|
|
$ |
14,595 |
|
|
$ |
4,414 |
|
|
$ |
1,092 |
|
|
$ |
20,101 |
|
Wachovia administered ABCP conduit |
|
|
|
|
|
|
--
|
|
|
|
10,092 |
|
|
|
--
|
|
|
|
10,092 |
|
Asset-based lending structures |
|
|
|
|
|
|
9,061 |
|
|
|
122 |
|
|
|
1,073 |
|
|
|
10,256 |
|
Tax credit structures |
|
|
|
|
|
|
5,025 |
|
|
|
--
|
|
|
|
15 |
|
|
|
5,040 |
|
CLOs |
|
|
|
|
|
|
3,547 |
|
|
|
119 |
|
|
|