Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94104
1-866-878-5865 wellsfargo.com
Satisfy all our customers’ fi nancial needs and help them
Our Vision:
succeed fi nancially.
Nuestra Vision:
Deseamos satisfacer todas las necesidades fi nancieras
de nuestros clientes y ayudarlos a tener éxito en el
área fi nanciera.
Notre Vision:
Satisfaire tous les besoins fi nanciers de nos clients
et les aider à atteindre le succès fi nancier.
Wells Fargo & Company Annual Report 2010
Standing together.
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To Our Owners
10
Standing Together
24
Standing Together
With Our Communities
31
Board of Directors, Senior Leaders
33
Financial Review
102 Controls and Procedures
104 Financial Statements
221 Report of Independent Registered
Public Accounting Firm
225 Stock Performance
Wells Fargo & Company
(NYSE:WFC)
We’re a diversifi ed fi nancial services company(cid:19)
—(cid:19)community-based and relationship-oriented(cid:19)—(cid:19)
serving people across the nation and around
the world.
Our corporate headquarters is in San Francisco, but
all our stores, regional commercial banking centers,
ATMs, Wells Fargo PhoneBank,SM and internet sites
are headquarters for satisfying all our customers’
fi nancial needs and helping them succeed fi nancially,
through banking, insurance, investments, mortgage,
and commercial and consumer fi nance.
Assets: $1.3 trillion, 4th among peers
Market value of stock: $163 billion,
2nd among peers (12/31/10)
Customers: 70 million,
(one of every three U.S. households)
Team members: 281,000
Stores: 9,000
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© 2011 Wells Fargo & Company. All rights reserved.
Wells Fargo across North America and around the world
Washington
207
Oregon
158
Montana
56
Idaho
104
Wyoming
36
North Dakota
32
South Dakota
62
Nevada
137
Utah
143
Colorado
224
Arizona
321
New Mexico
105
California
1,286
Alaska
56
Hawaii
4
Minnesota
214
Iowa
91
Wisconsin
97
Michigan
70
Nebraska
60
Kansas
35
Oklahoma
23
Texas
824
Illinois
109
Indiana
80
Ohio
88
Pennsylvania
387
Missouri
49
Arkansas
32
Louisiana
26
Kentucky
15
Tennessee
55
W. Virginia
15
Virginia
362
North Carolina
402
South Carolina
179
Mississippi
27 Alabama
Georgia
338
169
Maine
6
Massachusetts
44
Rhode Island
6
Connecticut
97
Vt.
8
N.H.
17
New York
185
New Jersey
388
Delaware
30
Maryland
128
D.C.
34
Countries
Argentina
Australia
Bangladesh
Brazil
Canada
Cayman Islands
Chile
Dominican Republic
China
Colombia
Ecuador
Egypt
England
France
Germany
Hong Kong
India
Indonesia
Ireland
Italy
Japan
Malaysia
Mexico
Philippines
Russia
Singapore
South Africa
South Korea
Spain
Taiwan
Thailand
Turkey
Uruguay
Vietnam
United Arab Emirates
#1
Banking stores (Wells Fargo and Wachovia stores in 39 states & D.C.)
High grade bond secondary trading (FY 2010, Thomson Reuters LPC)
#1 Retail banking deposits(cid:19)1
Total stores (Wells Fargo and Wachovia stores)
Total mortgage producer; Retail mortgage producer
Mortgage lender to low-to-moderate income home buyers
(2009 HMDA data)
Residential mortgage lender
Used car lender (AutoCount 2010)
Small business lender in dollars (2009 Community
Reinvestment Act government data)
#1
SBA 7(a) lender in dollars (2010 Small Business Administration
federal fi scal year-end data)
Underwriter of preferred stock (FY 2010, Bloomberg)
REIT preferred stock (FY 2010, Thomas Financial)
Real estate lead arranger of loan syndications by volume and
number of transactions (FY 2010, Thomson Reuters LPC)
#2
U.S. Deposits
#2 Debit card issuer
Mortgage servicer
Annuity distributor
#1
#1
#1
#1
#1
#1
#1
#1
#1
#2
#2
#2
REIT common stock (FY 2010, Dealogic)
1 FDIC-insured deposits up to $500 million in a single banking store, excludes credit unions.
#2
#2
#3
#3
#4
#5
#5
#5
#7
#7
#7
#8
Arranger of asset-based loans by volume and number of
transactions (FY 2010, Thomson Reuters LPC)
#2
Non-investment grade loan issuer by number of transactions
(FY 2010, Thomson Reuters LPC)
Branded bank ATM owner (12,196 Wells Fargo and Wachovia ATMs)
Full-service retail brokerage provider based on number of
Financial Advisors and client assets
#3
Loan syndication bookrunner by number of transactions
(FY 2010, Thomson Reuters LPC)
#3
High grade corporate loan issuer by number of transactions
(FY 2010, Thomson Reuters LPC)
Wealth management provider
IRA provider
Family wealth provider
Equity capital markets bookrunner by number of transactions
(FY 2010, SDC)
#6
Institutional retirement plan recordkeeper
Issuer of Credit Cards
Merchant processor for Credit and Debit Cards
Top senior manager of municipal competitive bond issues (FY 2010)
High yield bond issuer by number of transactions
(FY 2010, Bloomberg)
Florida
781
Puerto Rico
1
Stores
9,000
(map)
state by state
ATMs
12,196
wellsfargo.com
23 million
active users
Wells Fargo
Customer
Connection
500+ million
calls, e-mails
and letters
As the world continues to weather this global economic downturn,
customers and communities need more from their fi nancial services
providers. They need fi nancial solutions. They want help navigating
storms of fi nancial uncertainty to calmer waters. Our customers, more
than ever, need a safe, trustworthy, capable fi nancial services company
that can help them buy a home. Pay for educating their children. Build
a business. Save for retirement. Customers and communities want
a friend who’s there to help them succeed fi nancially. This is about
relationships. This is about being there with more than just outstanding
service and useful products. We want our customers to be proud that
they chose Wells Fargo and reward that friendship with even more
of their business. This is the story of how our unmatched record of
creating long-term relationships is helping unlock opportunities for
our customers and the communities we serve. Standing together.
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1
To our owners,
In 2010 we stood together with our customers.
Seventy million of them. One of every three
John G. Stumpf
Chairman, President and Chief Executive Offi cer
Wells Fargo & Company
American households, in more communities than any other bank.
One of every four U.S. home mortgage customers. Our customers
worked harder than ever to earn a living or fi nd a job. They paid
down debt. They tightened their budgets. They saved, invested,
paid their bills, and applied for loans. Many started a business or
expanded one. They supported their neighborhoods and communities.
In all of this, we helped them succeed fi nancially.
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The recession may be officially over, but it still casts a dark
shadow, though perhaps not as long a one. Unemployment
stayed stubbornly, and unacceptably, around 9 percent, but
the U.S. economy, ever so slowly, seemed to pick up steam. We
helped generate that momentum. We provided $665 billion in
loans and lines of credit to households and businesses, down
6.5 percent from a year ago, but up in the fourth quarter to the
highest quarterly level since we acquired Wachovia at year-
end 2008. Since the beginning of 2009, we helped more than
3.5 million mortgage customers buy a home or refinance their
mortgage at a lower rate, saving them hundreds of dollars a
month on mortgage payments, money they can save, invest,
or use to pay down other debt.
We had loan growth in the last half of the year in many
portfolios, including asset-backed finance, auto dealer services,
capital finance, private student lending, SBA, commercial
banking, and commercial real estate.
Some of our loan growth came from customers who brought
us their business from other banks not diversified enough by
geography, loan portfolio, or product line, or banks that don’t
offer the convenience or trusted brand that we do. When I first
went to work in financial services in 1976, there were about
14,000 banks in the United States. Today there are about 7,000,
yet there’s more choice than ever before because banking is
just a segment of the much broader, much larger financial
services industry.
As a result of the value we created for our customers,
we achieved our second consecutive year of record earnings,
$12.36 billion ($12.28 billion in 2009). That was despite the
negative effect before taxes of $810 million of new federal
regulations limiting overdraft fees. Our diluted earnings per
common share were $2.21, up 26 percent from a year ago.1
We earned $85.2 billion in revenue, still the single most
important measure of our customers’ willingness to entrust
us with more of their business. This was down from $88.7
billion last year. Profit before taxes and providing for loan loss
reserves — the truest test of the earnings horsepower of the
stagecoach — was $34.8 billion.2 We earned after-tax profit of
$1.01 for every $100 in assets (97 cents last year). We earned
10.33 cents for every shareholder dollar (9.88 cents last year).
Our stock price increased almost 15 percent for the year as the
marketplace signaled its confidence in our company and the
economy (compared with +13 percent for the S&P 500).
Loan losses trending down
As the economy improved, so did the quality of our loan
portfolio. The rate of our credit losses trended down. The loans
we deemed uncollectable, called net charge-offs, declined for
four consecutive quarters. Net loan charge-offs in fourth quarter
2010 were $3.8 billion, down 29 percent from their peak
a year ago.
As a result, we were able to release $2.0 billion from our
reserves. In 2011 we expect our credit quality will improve
again and also expect our reserves to decline again unless
there’s some significant, unexpected downturn in the economy.
1 “Diluted” includes stock option grants and securities that can be converted into stock; EPS for
2009 reduced for dividends and deemed dividend when TARP preferred stock redeemed.
Our loan losses declined for four consecutive quarters, down
or relatively flat in commercial loans, credit cards, and home
equity. The loans we acquired two years ago through the
Wachovia merger, which we wrote down at the acquisition by
about 40 cents on the dollar, have performed as we expected
or better. Nonperforming loans (not accruing interest) rose
moderately from a year ago, but declined sizably in the last
quarter of the year. We expect nonperforming assets to stay
high because the recession, as they say, still has a tail. We had
$0.89 set aside for potential loan losses for every dollar of loans
that were not accruing interest, compared with $1.03 last year.
Growing capital the right way: Earning it
Capital — usually a mix of equity and debt — is what a bank
must hold in reserve to support its businesses. A bank uses
capital to invest and grow consistently over time and to absorb
any unexpected losses along the way. Coming into the credit
crisis two years ago, for example, Wells Fargo was very well
capitalized. This enabled us to acquire Wachovia and double
the size of our company.
The best way to grow capital is the old-fashioned way:
earn it yourself internally rather than relying on unpredictable
markets. We’ve grown our capital internally at a higher, more
consistent rate than any of our large peers because we’ve
earned more per dollar of assets than they did. How do we do
it? Our foundation for this growth is not a financial equation,
but, rather, our very clear, time-tested vision that we’ve made
steady progress toward for almost a quarter century. We want
to satisfy all our customers’ financial needs and help them
succeed financially. Thanks to our vision and diversified
business model, centered on what’s best for our customers and
building lifelong relationships with them, our capital is stronger
today than it’s ever been. Our Tier 1 capital (the ratio of a bank’s
core equity capital to its total risk-weighted assets) rose to
11.2 percent from 9.3 percent a year ago. Our Tier 1 common
ratio (a measure of the best kind of capital) was 8.3 percent of
risk-weighted assets, up from 6.5 percent a year ago. Our Tier 1
common capital ratio was 28 percent higher than a year ago.3
New international standards may require banks globally
to hold top-quality capital eventually totaling seven percent
of their risk-weighted assets (some banks have as little as two
percent now). Those regulations aren’t final yet, but — based
on those new international standards — we expect to be above
the seven percent threshold under the proposed rules, as
we currently understand them, sometime in 2011. By being
above seven percent in 2011, we’ll be above the new standards
well before they start going into effect in 2013. They’re not
scheduled to be fully in effect until 2018.
To retain more capital and further strengthen our ability
to earn more of our customers’ business, our Board reduced
Wells Fargo’s quarterly common stock dividend from 34 cents
to five cents a share in March 2009. We want to increase our
dividend as soon as is practical. To do so, we submitted in
early 2011 a capital plan, as requested, to the Federal Reserve.
2 Total revenue minus non-interest expense; measures our ability to generate capital to cover
3 Please see Note 25 (Regulatory and Agency Capital Requirements) to Financial Statements
credit losses through a credit cycle.
and the “Financial Review – Capital Management” section in this Report for more information.
3
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Our performance
in millions, except per share amounts
2010
2009
% Change
FOR THE YEAR
Wells Fargo net income
Wells Fargo net income applicable to common stock
Diluted earnings per common share
Profitability ratios:
Wells Fargo net income to average total assets (ROA)
Wells Fargo net income applicable to common stock to average
Wells Fargo common stockholders’ equity (ROE)
Efficiency ratio 1
Total revenue
Pre-tax pre-provision profit 2
Dividends declared per common share
Average common shares outstanding
Diluted average common shares outstanding
Average loans
Average assets
Average core deposits 3
Average retail core deposits 4
Net interest margin
AT YEAR-END
Securities available for sale
Loans
Allowance for loan losses
Goodwill
Assets
Core deposits 3
Wells Fargo stockholders’ equity
Total equity
Tier 1 capital 5
Total capital 5
Capital ratios:
Total equity to assets
Risk-based capital: 5
Tier 1 capital
Total capital
Tier 1 leverage 5
Tier 1 common equity 6
Book value per common share
Team members (active, full-time equivalent)
$
12,362
11,632
2.21
$
1.01%
10.33
59.2
85,210
34,754
0.20
5,226.8
5,263.1
$ 770,601
1,226,938
772,021
572,881
12,275
7,990
1.75
0.97
9.88
55.3
88,686
39,666
0.49
4,545.2
4,562.7
822,833
1,262,354
762,461
588,072
4.26%
4.28
$ 172,654
757,267
23,022
24,770
1,258,128
798,192
126,408
127,889
109,353
147,142
10.16%
11.16
15.01
9.19
8.30
$
22.49
272,200
172,710
782,770
24,516
24,812
1,243,646
780,737
111,786
114,359
93,795
134,397
9.20
9.25
13.26
7.87
6.46
20.03
267,300
1%
46
26
4
5
7
(4)
(12)
(59)
15
15
(6)
(3)
1
(3)
—
—
(3)
(6)
—
1
2
13
12
17
9
10
21
13
17
28
12
2
1 The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
2 Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to
assess the Company’s ability to generate capital to cover credit losses through a credit cycle.
3 Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits (Eurodollar sweep balances).
4 Retail core deposits are total core deposits excluding Wholesale Banking core deposits and retail mortgage escrow deposits.
5 See Note 25 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
6 See the “Financial Review – Capital Management” section in this Report for additional information.
4
We await its assessment of that plan. We know the value of
dividends to you, our shareholders. We thank you for your
loyalty and your patience.
Our capital position is among the strongest of any large bank
in the world, but capital isn’t meant to be hoarded, it’s meant to be
used. Strongly capitalized banks such as Wells Fargo should be
allowed to put more of their capital to work for economic growth,
lending to creditworthy customers, investing in communities, and
returning more capital to their shareholders so they can invest it.
At the same time, our #1 financial goal remains unchanged: Have
a conservative financial structure as measured by asset quality,
capital levels, diversity of revenue sources, and dispersing risk
by geography, loan size, and industry.
How’s the merger going? So far, so great
Two years ago — to offer more value and convenience to our
current customers and to our new customers — we began the
largest, most complex banking merger in U.S. history. We’re
now in the final innings of integrating Wachovia. We’re creating
single computer systems for our combined businesses that
serve all 70 million of our customers, so their hometown bank
is always right around the corner and we can serve them across
the country and around the world when, where, and how they
want to be served.
The past two years, we’ve completed almost a hundred
conversions to the One Wells Fargo brand. Amazing! One ATM
system. One credit card system. One mortgage system. One
mutual funds system. One brokerage system. One retirement
services system. One system for trust services. We’re now
creating one operating system for retail banking, the nation’s
most extensive financial services network. We’ve already
integrated our Community Banking operations in Alabama,
Arizona, California, Colorado, Delaware, Georgia, Illinois,
Kansas, Mississippi, Missouri, Nevada, New Jersey,
Tennessee, and Texas.
So far, each of our conversions has gone extremely well.
That might look like a miracle to some observers, but not to us.
Our success so far simply has been the result of an immense
amount of planning, hard work, focus, skill, and sacrifice by tens
of thousands of our dedicated team members who are visible
or invisible to our customers. We can’t thank them and their
families enough.
We’re determined to finish the job with the same focus
that has served us so well the last two years. We still need to
bring 70 percent of Wachovia banking customers fully into the
Wells Fargo retail banking system in 2011. We’ll do that when
we combine operating systems under the Wells Fargo brand
for our banking stores in New York and Connecticut (March),
Pennsylvania (April), and Florida, Maryland, North Carolina,
South Carolina, Virginia, and Washington D.C. later in the year.
In just the past two years, by every measure, this merger has
delivered significant benefit for all our stakeholders, more than
even we first expected. One plus one, indeed, can equal three.
We originally estimated the integration would cost $7.9 billion.
Our latest estimate: about $6 billion. We originally thought we’d
save $5 billion in expenses after the integration and that’s still
true. To date, we’ve used only about half our initial write-down
through purchase accounting of Wachovia’s loan portfolios.
Those portfolios have performed better than we expected at the
time of our merger.
For our team members, the merger has doubled their career
opportunities across a company twice our former size, the
nation’s 12th-largest private employer with more U.S.-based
team members than any other financial services company. For
our customers, it means more products, more convenience,
more opportunities for sound financial advice and price-
value. For our communities, it means more capital: financial,
human, and social, and the presence of a strong, stable, and
growing financial services provider, employer, and taxpayer
(7th-largest U.S. taxpayer in 2010 among all industries). For
our shareholders, it means an even more attractive, long-term
investment.
The merger enables us to earn even more of our customers’
business. In California, where we’re now the state’s most
extensive community bank, we grew checking accounts in 2010
by a net 8.2 percent. In Florida, yet to convert to our brand,
checking accounts rose a net 10 percent, despite the state’s
struggling economy and slower population growth. That’s
virtually all new business, customers who either left other banks
and came to us, or chose to open their first checking account
with us.
When Wells Fargo and Wachovia merged two years ago,
customers of the combined new bank had $745.4 billion of core
deposits with us. At year-end 2010, despite the recent recession,
our core deposits were $798.2 billion, up seven percent. Our
two million Wachovia credit card customers (consumer and
business) have converted to Wells Fargo. They can view and
print up to 24 months of online statements, choose to end paper
delivery, benefit from free online money management tools, and
be protected against liability for fraud that’s promptly reported.
Many huge revenue opportunities of the merger remain
to be seized. For example, there are about three million
Wells Fargo mortgage customers in the 15 states plus the
District of Columbia who became our customers through our
merger with Wachovia. Only about 29 percent of them bank
with us. Only about one of every five of our banking households
nationwide with a mortgage, have a Wells Fargo mortgage.
Huge opportunity!
Community Banking: Cross-sell milestone
If anyone tells you it’s easy to earn more business from current
customers in financial services, don’t believe them. We should
know. We’ve been at it almost a quarter century. We’ve been
called, true or not, the “king of cross-sell.” To succeed at it,
you have to do a thousand things right. It requires long-term
persistence, significant investment in systems and training,
proper team member incentives and recognition, taking the
time to understand your customers’ financial objectives, then
offering them products and solutions to satisfy their needs so
they can succeed financially. You can’t expect much progress
in earning more business from current customers in just one
quarter or even in a year or two. That’s why many banks give up
on it. The bad news is it’s hard to do. The good news is it’s hard
to do, because once you build it, it’s a competitive advantage
that can’t be copied. If it were easy, everyone would be doing it.
5
Thirteen years ago, when I was head of Community
Banking for Norwest Bank in Texas (before Norwest acquired
Wells Fargo), our company set an ambitious goal to have our
average banking household have eight products with us. Many
analysts, focused only on the next quarter, yawned. That year,
we averaged nearly four products per retail banking household.
The next year, at the merger of Norwest and Wells Fargo, it
was 3.2. 1999: 3.4. 2000: 3.7. 2001: 3.8. 2002: 4.2. 2003: 4.3. 2004:
4.6. 2005: 4.8. 2006: 5.2. 2007: 5.5. 2008: 5.7. 2009: our legacy
Wells Fargo households, just under 6.0.
This year, we crossed a major cross-sell threshold. Our
banking households in the western U.S. now have an average
of 6.14 products with us. For our retail households in the east,
it’s 5.11 products and growing. Across all 39 of our Community
Banking states and the District of Columbia, we now average
5.70 products per banking household (5.47 a year ago). One of
every four of our banking households already has eight or more
products with us. Four of every ten have six or more. Even when
we get to eight, we’re only halfway home. The average banking
household has about 16. I’m often asked why we set a cross-sell
goal of eight. The answer is, it rhymed with “great.” Perhaps our
new cheer should be: “Let’s go again, for ten!”
More sales don’t always bring better service, but better
service almost always brings more sales. That’s why our service
quality scores are an early indicator of our sales trends. Our
service scores are rising. Almost eight of every ten of our
Regional Banking customers said they’re “extremely satisfied”
with their recent call or visit with our banking stores or contact
centers. For the second year in a row, we ranked #1 among large
banks, according to the American Customer Satisfaction Index,
an independent measure of how satisfied U.S. customers are
with the quality of consumer goods and services.
We grew market share in several other Community
Banking businesses. Consumer checking accounts rose
a net 7.5 percent. Average checking and savings deposits
across the company were up 10 percent. We have more than
two-and-a-half million business customer relationships.
Business checking accounts rose a net 4.8 percent last year,
while store-based business solutions increased 22 percent in
the West. Sales of Wells Fargo Business Services® Packages
(business checking account and at least three other business
products) rose 42 percent, purchased by two of every three
new business checking account customers in the West.
Our average Business Banking customer in the West now
has 4.04 products with us (3.76 a year ago). We extended
$14.9 billion of new lending (to existing or new borrowers,
and increases to lines of credit) to small businesses in 2010,
up 2.9 percent from last year.
We continue to be the nation’s #1 small business and SBA
lender. Our Auto Dealer Services team grew its share of the
used-vehicle lending market from 4.3 percent in the first quarter
of 2009 to 5.4 percent at year-end 2010, retaining its #1 national
ranking, and solidifying relationships with 11,000 dealers.
In the West, eight of every ten new customers who opened
a checking account also purchased Wells Fargo Packages®
(a checking account and at least three other products) — with
sales rising 21 percent. We ended the year with 18.3 million
active online banking customers, up 10.3 percent from a year
6
“The percent of our mortgage
customers late on their payments or
in the foreclosure process was about a
fourth less than the industry average.”
earlier, and 4.7 million active mobile customers, up 88 percent
from a year earlier. Global Finance ranked us the best
online bank in North America for consumers, corporate,
and institutional customers.
New regulations prohibit banks from automatically covering
ATM withdrawals and everyday debit card transactions that
customers make from accounts short of funds. They now must
choose if they want those transactions denied at the counter
or if they want us to cover those shortages. We want them to
make smart financial choices, use our free online tools, and
have a personal financial plan. We eliminated overdraft fees
for consumer and most business deposit customers when they
overdraw their account by $5 or less.
Our student lending in the private market rose 43 percent
in our Wachovia community banking states and our national
market share rose to 25 percent (16 percent a year ago). A new
law regrettably removed private-sector lenders from the federal
student market, but there’s still an important role for private
lenders. We’re very much in the student loan business, as we’ve
been for 42 years. College costs continue to rise. Government-
guaranteed loans provide only about $7,500 or less for college
costs. Students, families, and schools still need our help to be
financially successful, especially Wachovia customers, because
their company had exited the student loan business right before
it merged with Wells Fargo.
Home Mortgage: Helping keep customers in their homes
We originated $386 billion in mortgages this year, providing
one of every four home loans making us, again, the nation’s
largest home mortgage lender. We provided 1.8 million
mortgages, at historically low rates, for customers
to buy a home or refinance their mortgage. Applications
for mortgages in the pipeline at year-end were $73 billion,
up 28 percent from a year ago. We serviced $1.8 trillion
in mortgages, one of every six U.S. mortgage households,
the nation’s second-largest servicing portfolio.
Americans are resilient. They proved it again this year.
Ninety-two percent of our customers made their home
payments on time. Delinquency rates declined. The percent
of our mortgage customers late on their payments or in the
foreclosure process was about a fourth less than the industry
average. Only three of every 100 of our home equity customers
were two or more payments past due.
We avoided foreclosure for about three-fourths of those
customers 60 days or more past due who chose to work with
us. In 2009 and 2010, we adjusted loan terms, lowered rates or
reduced principal (or a combination of the three) for 620,000
loans to help customers stay in their homes. For 73,000 loans,
we forgave $3.8 billion in principal (by far, the industry leader
in this measure). That was an average reduction of $51,000 per
loan. To do this work, we hired 10,000 home preservation staff
for a total of 16,000. We assign one specialist to work with
a customer from start-to-finish on a modification.
In 2010 however, we didn’t always measure up. For example,
when we became aware we hadn’t managed some aspects of
the foreclosure affidavit process well, our first concern was
to confirm that no customer experienced an unwarranted
foreclosure because of an incorrect affidavit. We then reviewed
certain pending foreclosure affidavits, and enhanced our
policies and processes to help ensure full consistency and
compliance.
We plan to double in 2011 the number of home preservation
events we hosted last year. Through 19 large-scale events since
the beginning of 2009, we’ve worked face-to-face with 19,000
customers struggling to make their mortgage payments. We
met with 31,000 more customers at our 27 home preservation
centers across the country.
Our commitment to our customers and our country in
managing home loan challenges has been unwavering, and it
will continue in 2011.
Wholesale Banking: Ripe with opportunity
Our Wholesale bankers were careful planners and stewards
of their businesses during the economic downturn. As a
result, they’re now earning even more of our customers’
business as the economy revives. For example, they managed
Microsoft’s $4.7 billion senior notes offering. They’re providing
$750 million to finance LEED® certified commercial buildings
and community development projects. They’re providing
insurance to help reduce customers’ business risks. They’re
satisfying the global financial needs of more of our clients
through our international group’s 36 offices in 34 countries.
Investment Banking
Helping our corporate and middle market clients raise capital
to grow their businesses is an art and a science. You have to
focus on what’s best for the customer. You have to provide
extensive research and deep, thoughtful knowledge about the
client’s industry. You have to have a very experienced team that
can provide superior execution. All this has to be supported by
a strong capital position. Because of our strength in all these
areas many large companies are now entrusting billions of
dollars of bond and equity financing with Wells Fargo, including
MetLife, HSBC, Walmart, Hewlett Packard and Hertz. Many
other companies turned to Wells Fargo Securities in 2010
for their mergers and acquisitions, including Penske, Capital
Source, Snyder’s of Hanover, Lance, Inergy, and Atlas Pipeline.
Supporting municipalities, healthcare and education
Many banks are averse to doing business with governments,
education, healthcare and non-profits because of what they
perceive as high risk and low returns. We’re proud to serve
these sectors. We provide a wide range of financial solutions
for our 4,400 government, education, healthcare and non-
profit clients. Our loans to these institutions rose 40 percent
for the year. Their deposits with us rose 35 percent. We also
identified more opportunities to serve them, and this benefits
communities and our shareholders. In 2010, we facilitated
hundreds of transactions to support municipalities, hospitals
and universities, including a $300 million credit facility for
the Los Angeles Department of Water & Power, part of a
comprehensive, long-term relationship with the city.
Helping American business grow
We serve thousands of companies across America that have
annual revenue from $10 million to $750 million. Bankers may
call this the “middle market,” but it’s really The Big Middle.
Companies such as this are at the forefront of the U.S. economic
recovery. They employ tens of millions of Americans. They
make things people use every day. They’re the lifeblood of
the tax base in our communities. Their shop floors are where
America gets things done, makes things better and makes
better things. As CEO of Wells Fargo, I’m privileged to visit
the plants and offices of many of our commercial customers
every year across the country. They appreciate our relationship
approach, consistent underwriting through the business
cycle, local decision-making, and the depth and breadth of our
products, which we believe are the best in our industry.
The CEOs and CFOs of many of our commercial customers,
and many of our large corporate customers, are telling us
they see the economy improving. Many are adding inventory,
expanding operations, using lines of credit and qualifying
for new credit. One example is Aetna Plywood, a wholesale
distributor of wood and composite products based in Maywood,
Illinois. It’s been a loyal customer of Wells Fargo for several
years. Its sales declined during the recession, but its owner
and president, Larry Rassin, says sales picked up in 2010 as its
clients began making delayed improvements in their stores.
“It’s a slow progression of continued growth,” he says, “and we
believe it will continue.”
We want to be the commercial bank of choice for companies
like Aetna Plywood in every one of our markets. We want to
have more lead relationships than any competitor in every
market we serve. We want to satisfy every financial need of
commercial customers, large and small. We made significant
progress toward these ambitious goals in 2010. We’re already
#1 in market share for middle-market companies. Our
Commercial Banking team attracted more new customers in
2010 than in any single year in our company’s history.
Our average Commercial Banking relationship in the West
(legacy Wells Fargo) had eight products with us in 2010. In the
East, where the Wachovia conversion is in the home stretch,
customer relationships are strong and we’re earning more
of their business.
Average core deposits for Wholesale Banking customers
rose 15 percent. Loan balances grew in asset-backed finance
and global financial institutions. New loan commitments rose
in commercial real estate. Our commercial customers have
scanned, sent and deposited from their offices more than
$1 trillion of checks with us the last three years securely via the
internet through our Desktop Deposit service. This saved them,
and our environment, 1.64 million miles driving back and forth
to the bank, and 91,000 gallons of gas.
7
Financial planning and investing: One visit doesn’t do it all
As we stand together with our customers, helping them
manage their investments and plan their financial future,
we’re reminded every day that this isn’t a one-time event any
more than one visit to a doctor’s office ensures good health.
Our relationships with Wealth, Brokerage and Retirement
customers are built on providing thoughtful, objective, and
frequent advice — understanding each customer’s individual
goals, risk tolerance, and needs, monitoring progress, and
helping them make changes when it’s right for them to do so.
When our customers achieve financial success — however
they define it — then we’ll achieve our goal: becoming the nation’s
most respected provider of wealth, brokerage, and retirement
services. The opportunity to earn more business from our own
customers is enormous. Only nine of every 100 of our banking
households have brokerage relationships with us. Only six of
every 100 have their IRA with us. We want all our investment
customers to bank with us. We want all our banking customers
to think of us first for all their investment needs. Our average
banking household that has a Wealth, Brokerage or Retirement
relationship with us has an average of 9.80 products with us
(up from 9.67 in first quarter 2010).
Wealth Our team-based approach gives our customers access
to experts with deep knowledge and extensive experience in
many disciplines. We manage, administer, or have custody of
$198 billion in assets, including $48 billion in deposits, for our
high-net-worth clients. Client deposits rose a strong 13 percent,
a key measure of our ability to earn more of their business.
Investment management and trust revenue was up 11 percent
from 2009 on strong investment results and continued growth
in the trust services provided to clients.
Brokerage We believe every customer should have a financial
plan. Wells Fargo Advisors, the nation’s third-largest retail
brokerage network with 15,200 full-service financial advisors
and 4,400 licensed bankers, is helping make that goal a reality.
Today, more than two-thirds of our affluent customers have a
financial plan. This year, we grew customer assets 6 percent
to $1.2 trillion. Managed-account assets, now at $235 billion,
rose $38 billion, or 20 percent. The number of loans originated
through Wells Fargo Advisors financial advisors rose 71 percent,
totaling $7.2 billion.
Retirement Our 2010 Retirement Survey showed that working
in retirement is becoming the norm for middle-class Americans,
the latest evidence that retirement is changing drastically
and that people need help more than ever. We work with
customers as they plan and prepare for their retirement, and
we also administer 401(k), pension, and other retirement plans
for companies. Customer assets in retirement plans that we
administer rose 6 percent, or $14 billion, to $231 billion for the
year. Our national market share rose to 3.7 percent (3.1 percent
a year ago). We strengthened our rank as one of the nation’s
top-five IRA providers, growing IRA assets 10 percent,
or $24 billion, to $266 billion.
8
Now the hard part: Making rules that work for America
The Dodd-Frank Wall Street Reform and Consumer Protection
Act may change the landscape of financial services more than
any other law in my three-decade career in the industry. It’s
2,319 pages. (The Sarbanes-Oxley Act of 2002 was 66 pages.
Those were the good old days!) Its 240 rules will affect checking
accounts, debit cards, credit cards, home loans, and brokerage
accounts. We support any protection for customers nationally
to ensure all financial services providers, not just banks, are
held to the same high standard of responsibility that we’ve tried
to hold ourselves to for almost 160 years. Our customers expect
nothing less. We’re working with legislators and regulators
to help make sure this happens.
Dodd-Frank and other new regulations, however, would
reduce the prices banks can charge for some products. One
example: a reduction of 80 percent or more, scheduled to take
effect in July 2011, in the fee banks charge retailers when
customers use their debit cards at the cash register. Government
price controls such as this make no sense. They distort our
market-based, free-enterprise economy. What’s next? Will the
government require car dealers to sell a new vehicle for $5,000
or grocers a gallon of milk for 50 cents? Banks should be fairly
compensated for the value that debit cards create for merchants
and their customers by reducing fraud risk and the cost of
carrying cash or handling checks. An 80 percent cut in this
fee wouldn’t even enable us to cover the cost of providing
the service.
The key to growing our economy
There are three priorities for our economy. The first is creating
good jobs. The second is creating good jobs. The third is
creating good jobs. Negative home equity, depressed housing
prices, and mortgage foreclosures are not the cause of our
sluggish economy. They’re the result of homeowners losing their
jobs. I started as a loan collector in banking 34 years ago. Back
then, when a borrower wasn’t making payments, it usually was
because of divorce, a death in the family, medical emergency
or, most often, unemployment. It’s the same today. Americans
want to pay their bills and will if they have the resources to do
so. The U.S. economy did add a million jobs last year, but that’s
cold comfort to the almost one in every 11 Americans looking
for work. We’re telling all our creditworthy business customers
as often as we can: More credit is available. Many of our
small business and commercial customers have the cash and
resources to rehire and expand, but there’s hesitation because
of the legislative and regulatory landscape, customer spending
habits, and government debt. This can paralyze and confuse
business owners, entrepreneurs, investors, and consumers.
Government and private enterprise need to stand together to
alleviate this uncertainty by promoting fiscal discipline and
economic opportunity.
Wells Fargo is hiring. At year-end 2010, we had 6,500
unfilled jobs in our company. We want to create a welcoming
home for talent, a place where team members can build a
varied, challenging, satisfying career that can last a lifetime.
We consider team members an asset to invest in, not an
expense to be managed. We invested 3 percent of our total
payroll dollars for the year in team member training, an
average of 36 hours for every team member. We’ve added
3,000 bankers in our stores the past two years and opened
47 banking stores during the last year, many in Wachovia
Community Banking states.
Regardless of the economic cycle, any successful business
must reduce cost and complexity without impairing customer
service. This means that in a company our size, jobs are being
created, changed, or eliminated every day. In 2010, we closed
our network of 638 Wells Fargo Financial stores because we now
can serve those consumer and commercial finance customers
through our national network, expanded through the Wachovia
merger, of 6,314 Community Banking stores, and through
other Wells Fargo businesses. In addition to our banking
stores, we also have a mortgage presence in 2,200 locations
including standalone mortgage stores and other business-
partner sites. Because “people as a competitive advantage” is
one of our primary values, we identified positions elsewhere
in our company for thousands of team members affected by
this difficult decision. We also moved other businesses and
functions that were part of Wells Fargo Financial to other parts
of our company. We’re proud that by year-end, three of every
four affected team members, or 11,200, had moved into other
positions or departments with our company. That is standing
together with team members.
In appreciation
In April 2011, Dick McCormick retires
from our Board after 28 years of service to
our company. We believe this makes him
the longest-serving Board member in our
company’s history. Dick joined the Board
of our predecessor company, Norwest Corporation, in 1983
when we were an Upper Midwest bank with $20 billion in assets,
more than 900 stores, and 17,700 team members (including me,
a 29-year-old loan administrator who had joined the company
a year earlier). Dick brought to our Board not just decades
of senior leadership in the telecommunications industry, but
year after year, we benefited from his thorough, pragmatic
knowledge of our industry, markets, and businesses, his
institutional memory, and his ability to ask the tough questions
in a respectful and courteous way, with integrity, humility, and
kindness. He embodies for us the best of corporate governance.
We thank Dick and his wife, Mary Pat, for all they’ve done for
our company, and wish them and their family all the best.
We thank all our team members for standing together with
our customers, taking the time to understand and satisfy their
financial needs, helping them create a financial plan, serving
them when, where, and how they want to be served. We thank
them for their outstanding execution to date of the Wells Fargo-
Wachovia merger as we embark on the third and final year
of the integration. Recognizing their outstanding effort, our
Board approved in January 2011 a profit-sharing contribution
of 2 percent of pay for all eligible team members on our U.S.
payroll into their 401(k) plans. We thank our customers for
entrusting us with even more of their business and returning
to us for their next financial services product. Beginning on
the next page, we tell you the stories of how we stand together
with our customers and our communities. And we thank you,
our owners, for your confidence in Wells Fargo as we begin our
160th year.
We’re more optimistic than ever about the future of our
company, our communities, and our country. Every decision
we make is guided by our vision — to satisfy all our customers’
financial needs and help them succeed financially — and
by our values: people, ethics, “what’s right for our customers,”
diversity, and leadership. They remain our compass, our road
map, our gyroscope. That’s the way our ancestors who raised
their families, the pioneers who built our communities, the team
members who built our company, were guided. They didn’t need
GPS, smart phones, and electronic tablets to find their way.
Their values guided them. We do this by choice, not chance.
We don’t wake up every morning having to ask ourselves which
way we’re going. We just stand with our customers, try to do
what’s right for them, and keep riding the stagecoach in the
same direction it’s been headed since 1852.
When we stand together, we can thrive together.
John G. Stumpf
Chairman, President and Chief Executive Officer
9
Standing together.
Standing together is a lot more than just “being there.”
It’s about actively working with our customers and
communities in ways that few other fi nancial services
companies can. Need to fi nance a factory expansion
in Canada? We can do that. Need to fi gure out options
to keep your family in your home? We’re there for you.
Need a company that listens to and follows through on
your ideas? That’s us. Our customers are our friends
and we advocate for their best fi nancial interests. We
strive to build lifelong customer relationships that meet
customers’ needs through all stages of their lives. Here
are a few stories about how Wells Fargo’s 281,000 team
members stand together with our customers.
Phillip Schuman (right) and investment manager Adam Schwalb in Lighthouse Point, Florida. Story on page 21.
10
11
12
“We’re a
relationship-based
business, and now
we’re standing by
CMG in a new way
as it continues
to grow.”
Canada connection
Custom Molders Group had a challenge. The
New Jersey-based company supplies millions
of plastic packaging components for major candy
makers. Four years ago, the business opened
a plant in Canada, but its bank of 30 years —
Wachovia — didn’t off er cross-border fi nancing, so
the business had to turn to a new lending partner.
Then the merger with Wells Fargo happened
and a new option opened. Glenn Loh (center),
CMG’s chief fi nancial offi cer, worked
with his business relationship manager at
Wells Fargo, Robert Maroney (right), as well
as Michael Donoghue (left) to tap a unique
Wells Fargo equipment fi nancing unit based
in Canada represented by Karl Libonati. That
meant Loh’s Custom Molders Group could keep
its fi nances as simple as possible and with its
longtime trusted fi nancial provider. “We’re
a relationship-based business, and now we’re
standing by CMG in a new way as it continues
to grow,” said Maroney.
13
63 years of service
Bruce Holt’s bank has stood by him since 1948. That’s when he opened his fi rst account with Birmingham (Alabama)
Trust after his discharge from the Army. While the names on his bank changed over the years — including from
Wachovia to Wells Fargo in 2010 — he puts a premium on one factor: Does the bank help him when he needs it the most?
“I’ve loved Wells Fargo,” said Holt, a retired railroad engineer who turns 90 this year. “I tell my family, my friends:
‘Go to Wells Fargo; they’re so friendly and know how to treat you right.’ ” Jennie Lee is Holt’s banker at Holt’s neighborhood
banking store in Gardendale, just north of Birmingham. “Mr. Holt usually comes in a couple times a week to talk with
us, to make a deposit, and just share stories. He’s a huge fan of Wells Fargo and we’re all huge fans of Mr. Holt.”
14
Protecting customers
Kimberly Hill helps weddings be as beautiful as they can be. How? She’s a trainer with Wells Fargo’s
Liability and Fraud Claims department, the team that stands behind customers when they call with a
problem they have with a purchase made on their Wells Fargo® Debit Card. “Wilted fl owers for a wedding,
the wrong refrigerator delivered, heading off fraud, we stand by our customers when they need us most,”
said Hill, based in Charlotte, North Carolina. “Earlier this year, we called a customer on vacation in Europe
after we saw an unusual $3,000 purchase cross our computers. Sure enough, it was fraud, and the customer
was so grateful we prevented it.” Hill has trained hundreds of team members on how to make sure
customers are cared for and protected when transactions need help.
15
16
Coast-to-coast service
When Juliet Zhu says, “
?” her
customers know exactly what she’s talking about.
Zhu, based in El Monte, California, is a phone
banker with the Chinese Language Sales team,
serving customers across the nation and around
the world. In December, the seven-year company
veteran started a call with her usual greeting
(“How can I help you today?”), and discovered a
customer-to-be in Norcross, Georgia, who needed
fast help. “He didn’t speak English and needed
to open an account so he could send money to his
family in China,” Zhu said. She started the process,
then — because the request was so urgent —
asked him to go to a Wells Fargo banking store
in Norcross to complete the account opening.
He said he didn’t know how to talk to a banker,
but “I explained what to say, and he wrote it down
and the local banker did the rest. We earned a
new customer because we spoke his language,
had the right products and could meet his urgent
request fast.” The customer opened several
accounts and is sending money to China through
the ExpressSend® service, Wells Fargo’s way for
customers to send money to remittance network
members in other countries.
“We earned a new
customer because
we spoke his
language, had the
right products and
could meet his
urgent request.”
17
Helping homeowners
Edward Ramirez stands together with communities across the nation to help keep people in their homes.
He’s one of hundreds of team members who traveled coast-to-coast to meet, in person, with troubled mortgage
customers at 13 Home Preservation Workshops in 2010. At the workshops, customers met with home-preservation
specialists such as Ramirez in private settings to discuss their options. There were dozens of bilingual team
members on hand, too. “Each of us met with hundreds of customers, each person on the verge of losing a home,”
said Ramirez, who’s based in San Antonio, Texas, and volunteered at a dozen workshops. “We worked to come
up with solutions on the spot and what a great feeling it was when we could help.” More than 20 workshops are
planned for 2011. “These workshops show that Wells Fargo is a caring, responsible member of our community,”
said Bill Sanchez, a counselor for the Tampa Bay Community Development Corporation, which partnered
with Wells Fargo at the Tampa workshop in 2010.
18
19
Listening
Bryan Wilson had a question: Could his software development business — Wind River of Alameda, California — use
credit cards in a new way to better manage outgoing payments? Rather than spark and fade, however, he brought his
question to Wells Fargo. Wilson was one of dozens of customers who took part in 22 Advisory Council forums that
Wells Fargo hosted in 2010. The councils are day-long conferences for business customers to talk shop with other
fi nance pros and help Wells Fargo improve products, sales, and service. “We’re here to listen and better understand how
we can help our business customers succeed fi nancially,” said Wells Fargo’s Millicent Calinog, chair of the Advisory
Councils. “The forums have helped us and our customers tremendously while building deeper relationships.”
20
A team on your side
Phillip Schuman (right) breathes easier these days. A year ago, Schuman was made guardian and trustee for
his father, whose health had worsened. That meant running a bunch of businesses and assets that were new
to him. Enter Adam Schwalb (left) with Wells Fargo Advisors, who had been Schuman’s investment manager
since 2008. Schwalb, based in Lighthouse Point, Florida, connected Schuman to a team of Wells Fargo
experts — among them Jeff Haines and Tad Galin — and together they developed a plan for managing all
the new responsibilities. “It was all enormously complicated, and the day we all agreed on a plan, you could
see Phillip’s shoulders visibly relax as the burdens lifted,” Schwalb said. “He was managing so much on
behalf of his father and his family. By bringing in our experts and taking a team approach, we off ered him
tremendous security and peace of mind.”
21
Standing together
in Las Vegas
Relationships are everything to Las Vegas
restaurateur Jimmy Maddin. A Wachovia customer
since 2007, he’s not only kept his personal and
business accounts with Wells Fargo through
the merger, he’s now turning to Wells Fargo for
help launching a new business venture — Hotel
California Restaurant & Cantina — that could
employ 100 local people. “What’s important to me
is working with a bank that’s there for the good
times and the bad times,” said Maddin. “Everyone
loves you when things are good. A friend is always
there, period. That’s especially true when you’re
trying to grow a business in a region like ours
where the economy has been pretty rough.” That’s
where banker Lisa Patton comes in. She helps
Maddin manage business-service accounts by
connecting him with other Wells Fargo partners
while taking care of his personal fi nancial needs,
too. “We want to make it easy for all our customers
to bring us more of their business,” Patton said.
“We build relationships that last a lifetime, starting
with doing what’s best for our customers.”
“We build
relationships that
last a lifetime,
starting with doing
what’s best for our
customers.”
22
23
24
Standing together with our communities.
What is a partner? Someone who works by your side, cares about
your future, and has your best interests at heart. Wells Fargo
believes in partnerships not only in the way we do business, but in
the way we participate in community life. And never before in our
company’s history has our support for communities been so vital.
Our team members volunteer tens of thousands of hours each year,
sharing their time and talents to help nonprofi ts. We also provide
millions of dollars to support the good work of organizations large
and small. It’s all because our success depends on the success
of the people we serve. Here are a few stories of how we stand
together with communities across the nation.
Wells Fargo volunteers in Augusta, Georgia
(from left): Joe Mitchell, Adile Williams,
Evita Butler, Susan Hunnicutt, Ajay Singh.
Story on page 27.
25
Increasing financial smarts
Ask Junior Achievement’s Gina Blayney about Wells Fargo’s commitment to her organization and get ready to talk
a long time. More than 2,300 team members volunteered with Junior Achievement in 2010 around the nation teaching
financial literacy, entrepreneurship, and workforce readiness to 46,000 students, such as Jacob, Sophia, and Nathan.
Wells Fargo’s David Rader is on Junior Achievement’s board for the region serving Minnesota, North Dakota, and
Western Wisconsin where Wells Fargo has provided the most corporate volunteers for 15 consecutive years. “Wells Fargo
has been an innovative partner, providing so much more than just volunteers,” said Blayney, executive director for Junior
Achievement Upper Midwest. For instance, Wells Fargo donated a portion of a former banking store in Maplewood,
Minnesota, that Junior Achievement converted to a BizTown site (pictured). It’s a replica city where students role play
the economic happenings of a real city. Other team members serve on local advisory boards and help recruit more
team member volunteers. Wells Fargo also contributed to expand Junior Achievement’s online financial-education
curriculum. “We need to do all we can to assure children can make smart financial decisions and Wells Fargo has been
an invaluable supporter to Junior Achievement.”
26
Boosting hope
Things are looking up for a challenged Augusta, Georgia, neighborhood that’s now home to Sharna Roundtree
and her three children and the site of a new Salvation Army Kroc Community Center. Wells Fargo was
instrumental to both. The Wells Fargo Housing Foundation partnered with the city, team members, and a local
nonprofit to renovate a foreclosed home. Twenty-five team member volunteers then spent 181 hours alongside
Roundtree cleaning and rebuilding the house. The company also rallied local support — and donated $250,000
through the Foundation — for the community center, where as many as 20 service organizations will have offices
to direct families to the help they need when completed in 2011. “When a community is hurting, providing
hope can take any number of forms,” said Market President Susan Hunnicutt. “I am proud that our company
continues to help individuals and support the community at large.”
Homeowner Sharna Roundtree (left), with team members (from left): Joe Mitchell, Josh Linton, Ajay Singh, Susan Hunnicutt,
Carol Counts, Adile Williams, Allen Farr, Kim Lewis, Arnitra Lockhart, Lynne Harris, Evita Butler
27
28
Financial lessons
Managing your finances is tough enough without
having to do it all alone. That philosophy is
behind an innovative partnership to improve
the lives of African Americans though financial
literacy training — at church. Wells Fargo and
the Citizenship Education Fund, an affiliate of
the Rev. Jesse L. Jackson Sr.’s Rainbow PUSH
Coalition, are teaming to teach the basics to
African American clergy and parishioners, who
in turn will pass the lessons along. “Education
is the solution to today’s financial challenges,”
said Gigi Dixon, Wells Fargo’s director of
national partnerships, who is based in Charlotte,
North Carolina. “And we’ve found that sometimes
the best way to approach unfamiliar financial
subjects is to reach people where they are
comfortable and then build on that.” In its initial
phases, the partnership involves 1,500 churches
at six sites across the U.S., where participants use
the Wells Fargo Hands on Banking® curriculum.
Dixon said, “It’s all part of our commitment
to the long-term economic development of the
African American community.”
“ Sometimes the best
way to approach
unfamiliar financial
subjects is to reach
people where they
are comfortable and
then build on that.”
29
Wells Fargo contributed
$219 million
to 19,000 non-profits
in 2010, an average of:
$4.2 m
every week
$600,000
every day
$25,000
every hour
Evita Butler, Augusta, Georgia
30
Where we give
• Education
• Community Development
• Human Services
• Arts and Culture
• Civic
• Environmental
• Other
30%
28%
25%
8%
6%
2%
1%
Our community commitment
• Social capital
applying our best thinking as
leaders in making communities
better places to live and work
• Team member volunteerism
encouraging and celebrating the
good work team members do in
their communities
giving with purpose and focus
• Financial contributions
• Compliance
conducting business ethically and
responsibly according to legal
requirements and our own standards
$55 million donated by team members during
annual Community Support and United Way Campaign
1.3 million hours volunteered by team
members — Average value of a volunteer hour: $20.85,
equivalent to $28.1 million in time contributed
$1.24 billion* in Community Development
Lending — Includes aff ordable housing, community
service, and economic development loans
$66 million to educational organizations —
$17 million in matched educational donation from
team members
Environmental progress
· $6 billion in environmental fi nancing
· Set a goal to reduce our U.S.-based greenhouse gas
emissions by 20 percent below 2008 levels by 2018
· New banking stores will use about 20 percent less
energy and 40 percent less water than conventional
buildings of the same type
* preliminary estimate; subject to change pending March 1, 2011, regulatory fi ling
Board of Directors
John D. Baker II 1, 2, 3
Executive Chairman
Patriot Transportation
Holding, Inc.
Jacksonville, Florida
(Transportation, real estate
management)
John S. Chen 6
Chairman, CEO
Sybase, Inc.
Dublin, California
(Computer software)
Lloyd H. Dean 1, 2, 3, 7
President, CEO
Catholic Healthcare West
San Francisco, California
(Healthcare)
Susan E. Engel 3, 4, 6
Chief Executive Officer
Portero, Inc.
New York, New York
(Online luxury retailer)
Enrique Hernandez, Jr. 1, 2, 4, 7
Chairman, CEO
Inter-Con Security
Systems, Inc.
Pasadena, California
(Security services)
Donald M. James 4, 6
Chairman, CEO
Vulcan Materials Company
Birmingham, Alabama
(Construction materials)
Stephen W. Sanger 5, 6, 7
Retired Chairman
General Mills, Inc.
Minneapolis, Minnesota
(Packaged foods)
John G. Stumpf
Chairman, President, CEO
Wells Fargo & Company
Susan G. Swenson 1, 5
President, CEO
Sage Software – North America
Irvine, California
(Business software and
services supply)
Standing Committees
1. Audit and Examination
2. Corporate Responsibility *
3. Credit
4. Finance
5. Governance and Nominating
6. Human Resources
7. Risk *
* Effective January 1, 2011
Richard D. McCormick 4, 6
Chairman Emeritus
US WEST, Inc.
Denver, Colorado
(Communications)
Mackey J. McDonald 5, 6
Retired Chairman, CEO
VF Corporation
Greensboro, North Carolina
(Apparel manufacturer)
Cynthia H. Milligan 1, 2, 3, 5, 7
Dean Emeritus
College of Business
Administration
University of Nebraska –
Lincoln, Nebraska
(Higher education)
Nicholas G. Moore 1, 3, 7
Retired Global Chairman
PricewaterhouseCoopers
New York, New York
(Accounting)
Philip J. Quigley 1, 5, 7
Retired Chairman,
President, CEO
Pacific Telesis Group
San Francisco, California
(Telecommunications)
Judith M. Runstad 2, 3, 4
Of Counsel
Foster Pepper PLLC
Seattle, Washington
(Law firm)
Executive Officers, Corporate Staff
John G. Stumpf, Chairman, President, CEO *
Avid Modjtabai, Technology and Operations *
Mark C. Oman, Home and Consumer Finance *
Paul R. Ackerman, Treasurer
Caryl J. Athanasiu, Chief Operational Risk Officer
Patricia R. Callahan, Chief Administrative Officer * †
Jon R. Campbell, Social Responsibility
David M. Carroll, Wealth, Brokerage and
Retirement Services *
Kevin A. Rhein, Card Services and
Consumer Lending *
Joseph J. Rice, Chief Credit Officer
James H. Rowe, Investor Relations
Eric D. Shand, Chief Loan Examiner
Timothy J. Sloan, Chief Financial Officer * †
Hope A. Hardison, Human Resources
James M. Strother, General Counsel *
Bruce E. Helsel, Corporate Development
Oscar Suris, Corporate Communications
Laurel A. Holschuh, Corporate Secretary
Carrie L. Tolstedt, Community Banking *
David A. Hoyt, Wholesale Banking *
Joseph R. York, Investment Portfolio
Richard D. Levy, Controller *
Michael J. Loughlin, Chief Risk Officer *
Kevin McCabe, Chief Auditor
* “ Executive officers” according to Securities and Exchange
Commission rules
† Effective February 8, 2011
31
Senior Business Leaders
Senior Business Leaders
COMMUNITY BANKING
COMMUNITY BANKING
Group Head
Group Head
Carrie L. Tolstedt
Carrie L. Tolstedt
Regional Banking
Regional Banking
Regional Presidents
Regional Presidents
Paul W. “Chip” Carlisle, Texas, Arkansas,
Paul W. “Chip” Carlisle, Texas, Arkansas,
Border Banking
Border Banking
John T. Gavin, Dallas-Fort Worth
John T. Gavin, Dallas-Fort Worth
Glenn V. Godkin, Houston
Glenn V. Godkin, Houston
Don C. Kendrick, Central Texas
Don C. Kendrick, Central Texas
Suzanne M. Ramos, Border Banking
Suzanne M. Ramos, Border Banking
Kenneth A. Telg, Greater Texas
Kenneth A. Telg, Greater Texas
Thomas W. Honig, Mountain West
Thomas W. Honig, Mountain West
Nathan E. Christian, Colorado
Nathan E. Christian, Colorado
Kirk L. Kellner, Nebraska, Kansas
Kirk L. Kellner, Nebraska, Kansas
Michael J. Matthews, Wyoming
Michael J. Matthews, Wyoming
Joy N. Ott, Montana
Joy N. Ott, Montana
Dana B. Reddington, Idaho
Dana B. Reddington, Idaho
Richard Strutz, Alaska
Richard Strutz, Alaska
Greg A. Winegardner, Utah
Greg A. Winegardner, Utah
Patrick G. Yalung, Washington
Patrick G. Yalung, Washington
Gerrit van Huisstede, Desert Mountain
Gerrit van Huisstede, Desert Mountain
Kirk V. Clausen, Nevada
Kirk V. Clausen, Nevada
Pamela M. Conboy, Arizona
Pamela M. Conboy, Arizona
Donald J. Pearson, Oregon
Donald J. Pearson, Oregon
Lisa J. Riley, New Mexico
Lisa J. Riley, New Mexico
James O. Prunty, Great Lakes
James O. Prunty, Great Lakes
Mary E. Bell, Indiana, Ohio
Mary E. Bell, Indiana, Ohio
Frederick A. Bertoldo, Michigan,
Frederick A. Bertoldo, Michigan,
Wisconsin
Wisconsin
James D. Hanson, Greater Minnesota
James D. Hanson, Greater Minnesota
Scott Johnson, Iowa, Illinois
Scott Johnson, Iowa, Illinois
Daniel P. Murphy, North Dakota,
Daniel P. Murphy, North Dakota,
South Dakota
South Dakota
Laura A. Schulte, Eastern Region
Laura A. Schulte, Eastern Region
Shelley Freeman, Florida
Shelley Freeman, Florida
Scott M. Coble, North Florida
Scott M. Coble, North Florida
Kathryn G. Dinkin, Southeast Florida
Kathryn G. Dinkin, Southeast Florida
Carl A. Miller, Greater Gulf Coast
Carl A. Miller, Greater Gulf Coast
Frank M. Newman III, Gold Coast
Frank M. Newman III, Gold Coast
Larisa F. Perry, Central Florida
Darryl G. Harmon, Southeast
Larisa F. Perry, Central Florida
Jerome J. Byers, Atlanta
Darryl G. Harmon, Southeast
Michael S. Donnelly, MidSouth/
Jerome J. Byers, Atlanta
Tennessee, Alabama, Mississippi
Michael S. Donnelly, MidSouth/
Ebbert E. (Pete) Jones, Jr., Mid-Atlantic
Tennessee, Alabama, Mississippi
Andrew M. Bertamini, Baltimore
Ebbert E. (Pete) Jones, Jr., Mid-Atlantic
Timothy A. Butturini, Greater Virginia
Andrew M. Bertamini, Baltimore
Michael L. Golden,
Timothy A. Butturini, Greater Virginia
Greater Washington, D.C.
Michael L. Golden,
Deborah E. O’Donnell,
Greater Washington, D.C.
Western Virginia
Deborah E. O’Donnell,
Stanhope A. Kelly, Carolinas
Western Virginia
Kendall K. Alley, Charlotte
Stanhope A. Kelly, Carolinas
Jack O. Clayton, Triangle/Eastern
Kendall K. Alley, Charlotte
North Carolina
Jack O. Clayton, Triangle/Eastern
Leslie L. Hayes, Western/Triad
North Carolina
North Carolina
Leslie L. Hayes, Western/Triad
Forrest R. (Rick) Redden,
North Carolina
South Carolina
Forrest R. (Rick) Redden,
Michelle Y. Lee, Northeast
South Carolina
Lucia D. Gibbons, Northern New Jersey
Michelle Y. Lee, Northeast
Joseph F. Kirk, New York, Connecticut
Lucia D. Gibbons, Northern New Jersey
Brenda K. Ross-Dulan, Southern
Joseph F. Kirk, New York, Connecticut
New Jersey
Brenda K. Ross-Dulan, Southern
New Jersey
32
32
Hugh C. Long II, Penn-Del
Hugh C. Long II, Penn-Del
Vincent J. Liuzzi III, Greater
Vincent J. Liuzzi III, Greater
Philadelphia, Delaware
Philadelphia, Delaware
Gregory S. Redden,
Gregory S. Redden,
Greater Pennsylvania
Greater Pennsylvania
Lisa J. Stevens, California
Lisa J. Stevens, California
Michael F. Billeci, San Francisco Bay Area
Michael F. Billeci, San Francisco Bay Area
Felix S. Fernandez, Northern California
Felix S. Fernandez, Northern California
James W. Foley, Greater San Francisco
James W. Foley, Greater San Francisco
Bay Area
Bay Area
David A. Galasso, Central California
David A. Galasso, Central California
Robert W. Myers, Orange County
Robert W. Myers, Orange County
John K. Sotoodeh, Los Angeles Metro
John K. Sotoodeh, Los Angeles Metro
Kim M. Young, Southern California
Kim M. Young, Southern California
Diversified Products Group
Diversified Products Group
Michael R. James
Michael R. James
Marc L. Bernstein, Small Business
Marc L. Bernstein, Small Business
Segment and Business Direct Lending
Segment and Business Direct Lending
Jerry G. Bowen, Auto Dealer
Jerry G. Bowen, Auto Dealer
Commercial Services
Commercial Services
Kevin Moss, Home Equity Lending
Kevin Moss, Home Equity Lending
David J. Rader, SBA Lending
David J. Rader, SBA Lending
Todd A. Reimringer, Business
Todd A. Reimringer, Business
Payroll Services
Payroll Services
Debra B. Rossi, Merchant
Debra B. Rossi, Merchant
Payment Solutions
Payment Solutions
Thomas A. Wolfe, Wells Fargo
Thomas A. Wolfe, Wells Fargo
Dealer Services
Dealer Services
Robert D. Worth, Business Banking
Robert D. Worth, Business Banking
Support Group
Support Group
Kenneth A. Zimmerman, Consumer and
Kenneth A. Zimmerman, Consumer and
Small Business Deposits
Small Business Deposits
Internet Services Group
Internet Services Group
James P. Smith
James P. Smith
Customer Connection
Customer Connection
Diana L. Starcher
Diana L. Starcher
HOME AND CONSUMER FINANCE
HOME AND CONSUMER FINANCE
Group Head
Group Head
Mark C. Oman
Mark C. Oman
Wells Fargo Home Mortgage
Wells Fargo Home Mortgage
Michael J. Heid
Michael J. Heid
John P. Gibbons, Capital Markets
Cara K. Heiden
John P. Gibbons, Capital Markets
Cara K. Heiden
Franklin R. Codel, National Retail Sales/
Fulfillment Services
Franklin R. Codel, National Retail Sales/
Mary C. Coffin, Mortgage Servicing/
Fulfillment Services
Post Closing
Mary C. Coffin, Mortgage Servicing/
Joe F. Jackson, Wells Fargo Ventures
Post Closing
Eric P. Stoddard, Correspondent Lending
Joe F. Jackson, Wells Fargo Ventures
Kathleen L. Vaughan, Wholesale Lending
Eric P. Stoddard, Correspondent Lending
Kathleen L. Vaughan, Wholesale Lending
CARD SERVICES AND
CONSUMER LENDING
CARD SERVICES AND
CONSUMER LENDING
Group Head
Kevin A. Rhein
Group Head
Kevin A. Rhein
Daniel I. Ayala, Global
Remittance Services
Daniel I. Ayala, Global
R. Kirk Bare, Education Financial Services
Remittance Services
Robert A. Hurzeler, Auto Finance
R. Kirk Bare, Education Financial Services
Edward M. Kadletz, Consumer and
Robert A. Hurzeler, Auto Finance
Business Debit Card/Prepaid Products
Edward M. Kadletz, Consumer and
Michael R. McCoy, Consumer Credit Card
Business Debit Card/Prepaid Products
Robert A. Ryan, Wells Fargo Rewards and
Michael R. McCoy, Consumer Credit Card
Enhancement Services
Robert A. Ryan, Wells Fargo Rewards and
R. Brent Vallat, Personal Credit
Enhancement Services
Management
R. Brent Vallat, Personal Credit
WEALTH, BROKERAGE
Management
AND RETIREMENT
Group Head
David M. Carroll
WEALTH, BROKERAGE
AND RETIREMENT
Christine A. Deakin, Business Services
Daniel J. Ludeman, Wells Fargo Advisors
Group Head
Clyde W. Ostler, Family Wealth
David M. Carroll
John M. Papadopulos, Retirement
Christine A. Deakin, Business Services
Jay S. Welker, Wealth Management
Daniel J. Ludeman, Wells Fargo Advisors
Clyde W. Ostler, Family Wealth
John M. Papadopulos, Retirement
WHOLESALE BANKING
Jay S. Welker, Wealth Management
Group Head
David A. Hoyt
WHOLESALE BANKING
Asset Management Group
Group Head
Michael J. Niedermeyer
David A. Hoyt
Robert W. Bissell, Wells Capital
Management, Inc.
Thomas K. Hoops, Affiliated Managers
Asset Management Group
Michael J. Niedermeyer
Karla M. Rabusch, Wells Fargo Funds
Robert W. Bissell, Wells Capital
Management, LLC
Management, Inc.
Thomas K. Hoops, Affiliated Managers
Commercial Banking
Petros G. Pelos
Karla M. Rabusch, Wells Fargo Funds
Management, LLC
Carlos Evans, Eastern
Commercial Banking
Commercial Banking
Commercial Real Estate
Petros G. Pelos
Carlos Evans, Eastern
A. Larry Chapman
Commercial Banking
Charles H. “Chip” Fedalen, Real Estate
Banking Group
Christopher J. Jordan, Hospitality
Commercial Real Estate
Finance Group
A. Larry Chapman
Robin W. Michel, Middle Market
Charles H. “Chip” Fedalen, Real Estate
Real Estate Group
Banking Group
Stephen F. St. Thomas, Real Estate Capital
Christopher J. Jordan, Hospitality
Investments Group
Finance Group
Robin W. Michel, Middle Market
Real Estate Group
Corporate Banking Group
J. Michael Johnson
Stephen F. St. Thomas, Real Estate Capital
J. Nicholas Cole, Wells Fargo
Investments Group
Restaurant Finance
James D. Heinz, U.S. Corporate Banking
Corporate Banking Group
J. Michael Johnson
Kyle G. Hranicky, Energy Group
John R. Hukari, Equity Funds Group
J. Nicholas Cole, Wells Fargo
Jay J. Kornmayer, Gaming Division
Restaurant Finance
David B. Marks, Credit and
James D. Heinz, U.S. Corporate Banking
Risk Management
Kyle G. Hranicky, Energy Group
Brian J. Van Elslander, Financial
John R. Hukari, Equity Funds Group
Sponsors Group
Jay J. Kornmayer, Gaming Division
Daniel P. Weiler, Financial Institutions
David B. Marks, Credit and
Group; Power and Utilities Group
Risk Management
Brian J. Van Elslander, Financial
Insurance Services Group
David J. Zuercher
Sponsors Group
Daniel P. Weiler, Financial Institutions
Neal R. Aton, Wells Fargo Insurance
Group; Power and Utilities Group
Services USA, Inc. and Wells Fargo
Insurance, Inc.
Michael P. Day, Rural Community
Insurance Services Group
Insurance Services, Inc.
David J. Zuercher
Neal R. Aton, Wells Fargo Insurance
Services USA, Inc. and Wells Fargo
International Group
Insurance, Inc.
Richard J.L. Yorke
Michael P. Day, Rural Community
Peter P. Connolly, Global
Insurance Services, Inc.
Transaction Banking
Sanjiv S. Sanghvi, Global Banking Group
Charles H. Silverman, Global
International Group
Richard J.L. Yorke
Financial Institutions
Sanjiv S. Sanghvi, Global Banking Group
Special Situations Group
Mark L. Myers
Charles H. Silverman, Global
Financial Institutions
Specialized Lending, Servicing
Special Situations Group
and Trust
Mark L. Myers
J. Edward Blakey
Brian Bartlett, Corporate Trust Services
Specialized Lending, Servicing
Joseph R. Becquer, Commercial
and Trust
J. Edward Blakey
Julie Caperton, Asset Backed Finance
Mortgage Servicing
Adam Davis, Real Estate Capital Markets
Brian Bartlett, Corporate Trust Services
Lesley A. Eckstein, Community Lending
Joseph R. Becquer, Commercial
and Investment
Mortgage Servicing
John M. McQueen, Wells Fargo
Julie Caperton, Asset Backed Finance
Equipment Finance, Inc.
Adam Davis, Real Estate Capital Markets
Alan Wiener, Multi-family Housing
Lesley A. Eckstein, Community Lending
and Investment
Wells Fargo Capital Finance
John M. McQueen, Wells Fargo
Henry K. Jordan
Equipment Finance, Inc.
Scott R. Diehl, Corporate Finance
Alan Wiener, Multi-family Housing
William J. Mayer, Commercial and
Retail Finance
Wells Fargo Capital Finance
Henry K. Jordan
Wells Fargo Securities
John R. Shrewsberry
Scott R. Diehl, Corporate Finance
William J. Mayer, Commercial and
Christopher Bartlett, Equity Sales
Retail Finance
and Trading
Walter Dolhare and Tim Mullins,
Fixed Income Sales and Trading
Wells Fargo Securities
John R. Shrewsberry
Robert Engel and Jonathan Weiss,
Christopher Bartlett, Equity Sales
Investment Banking and
and Trading
Capital Markets
Walter Dolhare and Tim Mullins,
Benjamin V. Lambert, Eastdil
Fixed Income Sales and Trading
Secured, LLC
Robert Engel and Jonathan Weiss,
Diane Schumaker-Krieg, Research
and Economics
Investment Banking and
Capital Markets
Phil D. Smith, Government and
Benjamin V. Lambert, Eastdil
Institutional Banking
Secured, LLC
George Wick, Principal Investments
Diane Schumaker-Krieg, Research
and Economics
Wholesale Credit and
Risk Management
David J. Weber
Institutional Banking
Phil D. Smith, Government and
George Wick, Principal Investments
Michael P. Sadilek, Workout
Wholesale Credit and
Wholesale Services
Risk Management
Stephen M. Ellis
David J. Weber
Deborah M. Ball, Wholesale
Michael P. Sadilek, Workout
Internet Services
Michael J. Kennedy, Payment Strategies
Wholesale Services
Daniel C. Peltz, Treasury
Management Group
Stephen M. Ellis
Deborah M. Ball, Wholesale
Internet Services
CORPORATE FINANCE
Michael J. Kennedy, Payment Strategies
Group Head
Daniel C. Peltz, Treasury
Management Group
Timothy J. Sloan
Norwest Equity Partners
CORPORATE FINANCE
John E. Lindahl, Managing Partner
Group Head
Timothy J. Sloan
Norwest Venture Partners
Promod Haque, Managing Partner
Norwest Equity Partners
John E. Lindahl, Managing Partner
Corporate Properties
Donald E. Dana
Norwest Venture Partners
Promod Haque, Managing Partner
Peter P. Connolly, Global
Transaction Banking
Corporate Properties
Donald E. Dana
34
38
49
52
54
82
84
90
90
92
Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Critical Accounting Policies
Current Accounting Developments
Forward-Looking Statements
Risk Factors
Controls and Procedures
102 Disclosure Controls and Procedures
102
Internal Control over Financial Reporting
102 Management’s Report on Internal Control over
Financial Reporting
103
Report of Independent Registered Public Accounting Firm
Financial Statements
104 Consolidated Statement of Income
105 Consolidated Balance Sheet
106 Consolidated Statement of Changes in Equity and
Comprehensive Income
110
Consolidated Statement of Cash Flows
Notes to Financial Statements
122
122
123
131
145
146
156
159
161
162
163
166
172
179
194
196
201
3 Cash, Loan and Dividend Restrictions
4
5
6
7
Federal Funds Sold, Securities Purchased under
Resale Agreements and Other Short-Term Investments
Securities Available for Sale
Loans and Allowance for Credit Losses
Premises, Equipment, Lease Commitments and Other Assets
8
Securitizations and Variable Interest Entities
9 Mortgage Banking Activities
10
Intangible Assets
11 Deposits
12 Short-Term Borrowings
13 Long-Term Debt
14 Guarantees and Legal Actions
15 Derivatives
16 Fair Values of Assets and Liabilities
17 Preferred Stock
18 Common Stock and Stock Plans
19 Employee Benefits and Other Expenses
209
20 Income Taxes
211
212
213
215
21 Earnings Per Common Share
22 Other Comprehensive Income
23 Operating Segments
24 Condensed Consolidating Financial Statements
220
25 Regulatory and Agency Capital Requirements
221 Report of Independent Registered
Public Accounting Firm
222 Quarterly Financial Data
111
121
1
2
Summary of Significant Accounting Policies
224 Glossary of Acronyms
Business Combinations
33
This Annual Report, including the Financial Review and the Financial Statements and related Notes, contains 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 may differ
materially from our forward-looking statements 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 “Forward-Looking Statements” and
“Risk Factors” sections in this Report and the “Regulation and Supervision” section of our Annual Report on Form 10-K for the year
ended December 31, 2010 (2010 Form 10-K).
See the Glossary of Acronyms at the end of this Report for terms used throughout this Report.
Financial Review
Overview
Wells Fargo & Company is a $1.3 trillion diversified financial
services company providing banking, insurance, trust and
investments, mortgage banking, investment banking, retail
banking, brokerage and consumer finance through banking
stores, the internet and other distribution channels to
individuals, businesses and institutions in all 50 states, the
District of Columbia (D.C.) and in other countries. We ranked
fourth in assets and second in the market value of our common
stock among our large bank peers at December 31, 2010. 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).
Our vision is to satisfy all our customers’ financial needs,
help them succeed financially, be recognized as the premier
financial services company in our markets and be one of
America’s great companies. Our primary strategy to achieve this
vision is to increase the number of products our customers buy
from us and to offer them all of the financial products that fulfill
their needs. Our cross-sell strategy, diversified business model
and the breadth of our geographic reach facilitate growth in both
strong and weak economic cycles, as we can grow by expanding
the number of products our current customers have with us, gain
new customers in our extended markets, and increase market
share in many businesses. We continued to earn more of our
customers’ business in 2010 in both our retail and commercial
banking businesses and in our equally customer-centric
securities brokerage and investment banking businesses.
Reflecting solid growth in a variety of businesses, Wells Fargo
net income was a record $12.4 billion in 2010. Diluted earnings
per common share were $2.21. Pre-tax pre-provision profit
(PTPP) was $34.8 billion in 2010, which covered almost
2.o times annual net charge-offs. PTPP is total revenue less
noninterest expense. Management believes that PTPP is a useful
financial measure because it enables investors and others to
assess the Company's ability to generate capital to cover credit
losses through a credit cycle.
Our combined company retail bank household cross-sell,
reported for the first time in December 2010, was 5.70 products
per household, up from 5.47 a year ago. Cross-sell for the
combined company, which is lower than legacy Wells Fargo
34
stand-alone cross-sell, indicates the opportunity to earn more
business from our Wachovia customers. The cross-sell for
customers in the West was 6.14 products, compared with 5.11 for
customers in the East. Our goal is eight products per customer,
which is approximately half of our estimate of potential demand
for an average U.S. household. One of every four of our retail
banking households has eight or more products. Business
banking cross-sell offers another potential opportunity for
growth, with cross-sell of 4.04 products in our Western footprint
(including legacy Wells Fargo and converted Wachovia
customers).
Wells Fargo remained one of the largest providers of credit to
the U.S. economy. We continued to lend to creditworthy
customers and, during 2010, made $665 billion in new loan
commitments to consumer, small business and commercial
customers, including $386 billion of residential mortgage
originations. We are an industry leader in loan modifications for
homeowners. As of December 31, 2010, more than
620,000 Wells Fargo mortgage customers were in active trial or
had completed the loan modifications since the beginning of
2009. We also continued to support our communities by making
a $400 million charitable contribution to the Wells Fargo
Foundation in 2010, covering three years of estimated future
funding.
Our core deposits grew 2% from December 31, 2009. Average
core deposits funded 100% of total average loans in 2010, up
from 93% in 2009. We continue to attract high quality core
deposits in the form of checking and savings deposits, which
grew 6% to $720.9 billion at December 31, 2010, from
$679.9 billion a year ago, as we continued to gain new customers
and deepen our relationships with existing customers.
On December 31, 2008, Wells Fargo acquired Wachovia, one
of the nation’s largest diversified financial services companies.
Wachovia’s assets and liabilities were included in the
December 31, 2008, consolidated balance sheet at their
respective fair values on the acquisition date. Because the
acquisition was completed on December 31, 2008, Wachovia’s
results of operations were not included in our 2008 income
statement. Beginning in 2009, our consolidated results and
associated financial information, as well as our consolidated
average balances, include Wachovia.
We are beginning our third year of the Wachovia integration,
which we expect to substantially complete by the end of 2011.
Our progress to date remains on track and on schedule, with
business and revenue synergies exceeding our expectations at
the time the merger was announced. The Wachovia merger has
already proven to be a financial success, with substantially all of
the expected savings already realized and growing revenue
synergies reflecting market share gains in many businesses,
including mortgage, auto dealer services and investment
banking.
We continued to invest in core businesses while maintaining
a strong balance sheet. In 2010, we opened 47 retail banking
stores for a retail network total of 6,314 stores. We converted a
total of 749 Wachovia banking stores in Alabama, Arizona,
California, Georgia, Illinois, Kansas, Mississippi, Nevada,
Tennessee and Texas, as well as the Wachovia credit card
business and ATM network. The conversion of the remaining
Wachovia eastern markets is expected to be substantially
completed by the end of 2011.
We continued taking actions to further strengthen our
balance sheet, including reducing our non-strategic and
liquidating loan portfolios, which have declined $54.6 billion
since the Wachovia acquisition, including $26.3 billion in 2010,
to $115.7 billion at December 31, 2010. We significantly built
capital in 2010, up $12.9 billion, or 12%, from a year ago. Our
capital growth since our merger with Wachovia has been driven
by record retained earnings and other sources of internal capital
generation, as well as three common stock offerings between
October 2008 and December 2009 totaling over $33 billion.
This included the $12.2 billion offering in fourth quarter 2009,
which allowed us to repay in full the U.S. Treasury’s Troubled
Asset Relief Program (TARP) preferred stock investment. We
substantially increased the size of the Company with the
Wachovia merger, and experienced cyclically elevated credit
costs. However, our capital ratios at December 31, 2010, were
higher than they were prior to the Wachovia acquisition. Tier 1
common equity increased to $81.3 billion at December 31, 2010,
or 8.30% of risk-weighted assets. The Tier 1 capital ratio
increased to 11.16% and Tier 1 leverage ratio increased to 9.19%.
See the “Capital Management” section in this Report for more
information regarding Tier 1 common equity.
We experienced continued and significant improvement in
our credit portfolio, with most metrics showing positive
movement by the end of 2010. Net charge-offs declined in 2010
from the peak in fourth quarter 2009, with almost every major
loan category recording lower charge-offs by the end of 2010.
Delinquencies continued to decline from the peak at the end of
2009 and, in the fourth quarter 2010, nonaccrual loans declined
for the first time since the Wachovia merger. The improvement
in credit quality was also evident in the portfolio of purchased
credit-impaired (PCI) loans acquired through the Wachovia
merger, which overall has performed better than originally
expected. Reflecting improved performance in our loan
portfolios, the provision for credit losses was $2.0 billion less
than net charge-offs for 2010. Absent significant deterioration in
the economy, we expect future reductions in the allowance for
credit losses. The improvement in losses, a more favorable
economic outlook and improved credit statistics in several
portfolios further increase our confidence that our credit cycle is
turning, provided economic conditions do not deteriorate.
We believe it is important to maintain a well controlled
operating environment as we complete the integration of the
Wachovia businesses and grow the combined company. We
manage our credit risk by establishing 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 established ranges, while ensuring
adequate liquidity and funding. We maintain strong capital
levels to facilitate future growth.
As a result of PCI accounting for loans acquired in the merger
with Wachovia, ratios of the Company, including the growth rate
in nonperforming assets (NPAs) since December 31, 2008, may
not be directly comparable with periods prior to the merger or
with credit-related ratios of other financial institutions. In
particular:
• Wachovia’s high risk loans were written down pursuant to
PCI accounting at the time of merger. Therefore, the
allowance for credit losses is lower than otherwise would
have been required without PCI loan accounting; and
• Because we virtually eliminated Wachovia’s nonaccrual
loans at December 31, 2008, quarterly growth in our
nonaccrual loans during 2010 and 2009 was higher than it
would have been without PCI loan accounting. Similarly,
our net charge-offs rate was lower than it otherwise would
have been.
35
Overview (continued)
Table 1: Six-Year Summary of Selected Financial Data
(in millions, except per share amounts)
2010
2009
2008
2007
2006
2005
2009
rate
%
Five-year
Change
2010/
compound
growth
Income statement
Net interest income
Noninterest income
Revenue
Provision for credit losses
Noninterest expense
Net income before
noncontrolling interests
Less: Net income from
noncontrolling interests
$
44,757
40,453
46,324
42,362
25,143
16,734
20,974
18,546
19,951
15,817
18,504
14,591
85,210
88,686
41,877
39,520
35,768
33,095
15,753
50,456
21,668
49,020
15,979
22,598
4,939
22,746
2,204
20,767
2,383
18,943
(3) %
(5)
(4)
(27)
3
19
23
21
46
22
12,663
12,667
2,698
8,265
8,567
7,892
-
10
6
10
-
-
(28)
33
19
43
18
21
26
15
25
44
26
301
392
43
208
147
221
(23)
Wells Fargo net income
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
12,362
2.23
12,275
1.76
2.21
0.20
1.75
0.49
2,655
0.70
0.70
1.30
8,057
2.41
2.38
1.18
8,420
2.50
2.47
1.08
7,671
2.27
2.25
1.00
Balance sheet (at year end)
Securities available for sale
Loans
Allowance for loan losses
Goodwill
Assets
Core deposits (1)
Long-term debt
Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
$
172,654
757,267
172,710
782,770
151,569
864,830
72,951
382,195
42,629
319,116
41,834
310,837
23,022
24,770
24,516
24,812
21,013
22,627
5,307
13,106
3,764
11,275
3,871
10,787
1,258,128 1,243,646 1,309,639
745,432
798,192
780,737
575,442
311,731
481,996
288,068
481,741
253,341
156,983
126,408
1,481
127,889
203,861
111,786
2,573
114,359
267,158
99,084
3,232
102,316
99,393
47,628
286
47,914
87,145
45,814
254
46,068
79,668
40,660
239
40,899
1
27
26
(59)
- %
(3)
(6)
-
1
2
(23)
13
(42)
12
(1) Core deposits are noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits
(Eurodollar sweep balances).
36
Table 2: Ratios and Per Common Share Data
Profitability ratios
Wells Fargo net income to average assets (ROA)
Wells Fargo net income applicable to common stock to average
Wells Fargo common stockholders' equity (ROE)
Efficiency ratio (1)
Capital ratios
At year end:
Wells Fargo common stockholders' equity to assets
Total equity to assets
Risk-based capital (2)
Tier 1 capital
Total capital
Tier 1 leverage (2)(3)
Tier 1 common equity (4)
Average balances:
Average Wells Fargo common stockholders' equity to average assets
Average total equity to average assets
Per common share data
Dividend payout (5)
Book value
Market price (6)
High
Low
Year end
Year ended December 31,
2010
2009
2008
1.01 %
0.97
0.44
10.33
59.2
9.88
55.3
4.79
54.0
9.41
10.16
8.34
9.20
5.21
7.81
11.16
9.25
15.01
13.26
9.19
8.30
9.17
9.96
7.87
6.46
6.41
9.34
7.84
11.83
14.52
3.13
8.18
8.89
9.0
22.49
27.9
20.03
185.4
16.15
$
34.25
23.02
30.99
31.53
7.80
26.99
44.68
19.89
29.48
(1) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2) See Note 25 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(3) Due to the Wachovia transaction that closed on December 31, 2008, the Tier 1 leverage ratio, which considers period-end Tier 1 capital and quarterly averages in the
computation of the ratio, does not reflect average assets of Wachovia for the full period ended December 31, 2008.
(4) See the "Capital Management" section in this Report for additional information.
(5) Dividends declared per common share as a percentage of earnings per common share.
(6) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
37
Earnings Performance
Net income for 2010 was $12.4 billion ($2.21 diluted per share)
with $11.6 billion applicable to common stock, compared with
net income of $12.3 billion ($1.75 diluted per share) with
$8.0 billion applicable to common stock for 2009. Preferred
stock dividends and accretion of preferred stock discount
included $3.5 billion in 2009 for Series D preferred stock issued
to the U.S. Treasury Department in 2008, which reduced 2009
diluted earnings by $0.76 per share. These preferred shares were
redeemed December 23, 2009, when we repaid the U.S.
Treasury Department’s TARP preferred stock investment.
Our 2010 earnings were influenced by a slow recovery from
the recession that dominated 2009 and most of 2008 and by a
continuation of a low rate environment. These economic
conditions caused declining loan demand, solid deposit
generation and continued elevated credit losses. Earnings for
2009 were influenced by the worsening of the recession that
began in 2008, and low market rates. Both 2010 and 2009 were
affected by merger integration costs.
Revenue, the sum of net interest income and noninterest
income, was $85.2 billion in 2010 compared with $88.7 billion
in 2009 and $41.9 billion in 2008. In 2010, net interest income
of $44.8 billion represented 53% of revenue, compared with
$46.3 billion (52%) in 2009 and $25.1 billion (60%) in 2008.
Noninterest income was relatively stable in 2010 at
$40.5 billion, representing 47% of revenue, compared with
$42.4 billion (48%) in 2009 and $16.7 billion (40%) in 2008.
The increase in 2009 to 48% from 40% in 2008 was primarily
due to a higher percentage of trust and investment fees (11% in
2009, up from 7% in 2008) and very strong mortgage banking
results (14% in 2009, up from 6% in 2008, predominantly from
legacy Wells Fargo).
Noninterest expense was $50.5 billion in 2010, compared
with $49.0 billion in 2009 and $22.6 billion in 2008.
Noninterest expense as a percentage of revenue was 59% in
2010, 55% in 2009 and 54% in 2008. Noninterest expense for
2010 included $1.9 billion of Wachovia merger-related
integration expense compared with $895 million in 2009.
Table 3 presents the components of revenue and noninterest
expense as a percentage of revenue for year-over-year results.
38
Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
% of
2010 revenue
% of
2009 revenue
2008
% of
revenue
Year ended December 31,
Net interest income (on a taxable-equivalent basis)
45,386
(in millions)
Interest income
Trading assets
Securities available for sale
Mortgages held for sale (MHFS)
Loans held for sale (LHFS)
Loans
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
Taxable-equivalent adjustment
Net interest income
Noninterest income
Service charges on deposit accounts
Trust and investment fees (1)
Card fees
Other fees (1)
Mortgage banking (1)
Insurance
Net gains from trading activities
Net gains (losses) on debt securities available for sale
Net gains (losses) from equity investments
Operating leases
Other
Total noninterest income
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other (2)
Total noninterest expense
$
1,121
10,236
1,736
101
39,808
437
53,439
2,832
106
4,888
227
8,053
(629)
44,757
4,916
10,934
3,652
3,990
9,737
2,126
1,648
(324)
779
815
2,180
1 %
$
12
2
-
47
1
63
3
-
6
-
9
53
(1)
53
6
13
4
5
11
2
2
-
1
1
3
944
11,941
1,930
183
41,659
336
1 %
$
13
2
-
47
-
56,993
64
3,774
231
5,786
172
4
-
7
-
9,963
11
47,030
53
(706)
(1)
46,324
52
5,741
9,735
3,683
3,804
12,028
2,126
2,674
(127)
185
685
1,828
6
11
4
4
14
2
3
-
-
1
2
189
5,577
1,573
48
27,651
181
35,219
4,521
1,478
3,789
-
9,788
25,431
(288)
25,143
3,190
2,924
2,336
2,097
2,525
1,830
275
1,037
(757)
427
850
40,453
47
42,362
48
16,734
13,869
8,692
4,651
2,636
3,030
2,199
1,197
14,182
50,456
16
10
5
3
4
3
1
17
59
13,757
8,021
4,689
2,506
3,127
2,577
1,849
12,494
16
9
5
3
4
3
2
14
8,260
2,676
2,004
1,357
1,619
186
120
6,376
49,020
55
22,598
Revenue
$
85,210
$
88,686
$
41,877
(1) See Table 7 – Noninterest Income in this Report for additional detail.
(2) See Table 8 – Noninterest Expense in this Report for additional detail.
- %
13
4
-
66
-
84
11
4
9
-
23
61
(1)
60
8
7
6
5
6
4
1
2
(2)
1
2
40
20
6
5
3
4
-
-
15
54
39
Average interest-bearing deposits increased to 59% of
average earning assets for 2010, from 58% for 2009 and 51% for
2008. Average short-term borrowings decreased to 4% of
average earning assets from 5% for 2009 and 13% for 2008.
Average interest-bearing deposits increased as a percentage of
funding for earning assets in 2010, yet the cost of deposits
declined significantly as the mix shifted from higher cost
certificates of deposit to checking and savings products, which
were at lower yields in 2010 due to the prolonged low interest
rate environment. 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, certain market rate and other savings, and certain
foreign deposits (Eurodollar sweep balances). Average core
deposits rose to $772.0 billion in 2010 from $762.5 billion in
2009 and funded 100% and 93% of average loans, respectively.
In 2008, core deposits of legacy Wells Fargo funded 82% of
average loans. About 90% of our core deposits are now in
checking and savings deposits, one of the highest percentages in
the industry.
Table 5 presents the individual components of net interest
income and the net interest margin. The effect on interest
income and costs of earning asset and funding mix changes
described above, combined with rate changes during 2010, are
analyzed in Table 6.
Earnings Performance (continued)
Net Interest Income
Net interest income is the interest earned on debt securities,
loans (including yield-related loan fees) and other interest-
earning assets minus the interest paid for deposits, short-term
borrowings and long-term 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 in Table 5 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
$45.4 billion in 2010, compared with $47.0 billion in 2009, and
$25.4 billion in 2008. The net interest margin was 4.26% in
2010, down 2 basis points from 4.28% in 2009 and 2009 was
down 55 basis points from 4.83% in 2008. During 2010, net
interest income was affected by prepayments of higher yielding
mortgage-backed securities, relatively soft commercial loan
demand, and planned runoff of liquidating loan portfolios. The
impact of these factors was mitigated by disciplined deposit
pricing and reduced market funding costs. For 2009, changes in
net interest income from 2008 were primarily due to the impact
of acquiring Wachovia. Although the addition of Wachovia
increased earning assets and net interest income, it decreased
the net interest margin because Wachovia’s net interest margin
was lower than that of legacy Wells Fargo.
Table 4 presents the components of earning assets and
funding sources as a percentage of earning assets to provide a
more meaningful analysis of year-over-year changes that
influenced net interest income.
The mix of earning assets and their yields are important
drivers of net interest income. During 2010, there were slight
shifts in our earning asset mix from loans and investments to
more liquid assets. Although total loans increased during fourth
quarter 2010, the soft loan demand earlier in 2010 and in 2009,
as well as the impact of liquidating certain loan portfolios,
reduced average loans in 2010 to 72% of average earning assets
from 75% for 2009 and from 76% in 2008. Also, average
mortgage-backed securities (MBS) dropped to 10% in 2010 from
12% in 2009 and 13% in 2008. Average short-term investments
and trading account assets increased to 9% in 2010 from 4% in
2009 and 2% in 2008.
40
Table 4: Average Earning Assets and Funding Sources as a Percentage of Average Earning Assets
(in millions)
Earning assets
Federal funds sold, securities purchased under
resale agreements and other short-term investments
Trading assets
Debt securities available for sale:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt securities (1)
Total debt securities available for sale (1)
Mortgages held for sale (2)
Loans held for sale (2)
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loans (2)
Other
Year ended December 31,
$
Average
balance
62,961
29,920
1,926
16,392
75,875
33,191
109,066
34,752
162,136
36,716
3,773
149,576
98,497
31,286
13,451
29,726
322,536
235,568
101,537
22,375
88,585
448,065
770,601
5,849
2010
% of
earning
assets
$
6 %
3
-
2
7
3
10
3
15
3
-
14
9
3
1
3
30
22
10
2
8
42
72
1
Average
balance
26,869
21,092
2,480
12,702
87,197
41,618
128,815
32,011
176,008
37,416
6,293
180,924
96,273
40,885
14,751
30,661
363,494
238,359
106,957
23,357
90,666
459,339
822,833
6,113
2009
% of
earning
assets
2 %
2
-
1
8
4
12
3
16
3
1
16
9
4
1
3
33
22
10
2
8
42
75
1
Total earning assets
$
1,071,956
100 %
$
1,096,624
100 %
Funding sources
Deposits:
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
Total funding sources
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to fund earning assets
Net noninterest-bearing funding sources
Total assets
(1) Includes certain preferred securities.
(2) Nonaccrual loans are included in their respective loan categories.
$
60,941
416,877
87,133
14,654
55,097
634,702
46,824
185,426
6,863
873,815
198,141
$
6 %
39
8
1
5
59
4
18
1
82
18
70,179
351,892
140,197
20,459
53,166
635,893
51,972
231,801
4,904
924,570
172,054
6 %
32
13
2
5
58
5
21
-
84
16
$
1,071,956
100 %
$
1,096,624
100 %
$
$
$
$
$
17,618
24,824
112,540
154,982
183,008
47,877
122,238
(198,141)
154,982
1,226,938
19,218
23,997
122,515
165,730
171,712
48,193
117,879
(172,054)
165,730
1,262,354
41
2009
Interest
income/
expense
150
944
69
840
4,591
4,150
8,741
2,291
11,941
1,930
183
7,643
3,365
1,190
1,375
1,212
14,785
12,992
5,089
2,841
5,952
26,874
41,659
186
56,993
100
1,375
1,738
415
146
3,774
231
5,786
172
9,963
-
9,963
Earnings Performance (continued)
Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)(3)
2010
(in millions)
Earning assets
Federal funds sold, securities purchased under
Average
balance
Yields/
rates
Interest
income/
expense
Average
balance
Yields/
rates
resale agreements and other short-term investments
$
Trading assets
Debt securities available for sale (4):
62,961
29,920
0.36 % $
3.75
230
1,121
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
1,926
16,392
3.24
6.09
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt securities (5)
Total debt securities available for sale (5)
Mortgages held for sale (6)
Loans held for sale (6)
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loans (6)
Other
75,875
33,191
109,066
34,752
162,136
36,716
3,773
149,576
98,497
31,286
13,451
29,726
5.14
10.67
6.84
6.45
6.63
4.73
2.67
4.80
3.89
3.36
9.21
3.49
61
980
3,697
3,396
7,093
2,102
10,236
1,736
101
7,186
3,836
1,051
1,239
1,037
322,536
4.45
14,349
235,568
101,537
22,375
88,585
5.18
4.45
13.35
6.49
448,065
5.68
770,601
5,849
5.17
3.56
12,206
4,519
2,987
5,747
25,459
39,808
207
26,869
21,092
2,480
12,702
87,197
41,618
128,815
32,011
176,008
37,416
6,293
180,924
96,273
40,885
14,751
30,661
363,494
238,359
106,957
23,357
90,666
459,339
822,833
6,113
0.56 % $
4.48
2.83
6.42
5.45
9.09
6.73
7.16
6.73
5.16
2.90
4.22
3.50
2.91
9.32
3.95
4.07
5.45
4.76
12.16
6.56
5.85
5.06
3.05
Total earning assets
$
1,071,956
5.02 % $
53,439
1,096,624
5.19 % $
Funding sources
Deposits:
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
$
60,941
416,877
87,133
14,654
55,097
634,702
46,824
185,426
6,863
873,815
198,141
0.12 % $
0.26
1.43
2.07
0.22
0.45
0.22
2.64
3.31
0.92
-
Total funding sources
$
1,071,956
0.76
72
1,088
1,247
302
123
2,832
106
4,888
227
8,053
-
8,053
70,179
351,892
140,197
20,459
53,166
635,893
51,972
231,801
4,904
924,570
172,054
1,096,624
0.14 % $
0.39
1.24
2.03
0.27
0.59
0.44
2.50
3.50
1.08
-
0.91
Net interest margin and net interest income
on a taxable-equivalent basis (7)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other (8)
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to
fund earning assets
Net noninterest-bearing funding sources
Total assets
$
$
$
$
$
17,618
24,824
112,540
154,982
183,008
47,877
122,238
(198,141)
154,982
1,226,938
4.26 % $
45,386
4.28 % $
47,030
19,218
23,997
122,515
165,730
171,712
48,193
117,879
(172,054)
165,730
1,262,354
(1) Because the Wachovia acquisition was completed at the end of 2008, Wachovia's assets and liabilities are included in average balances, and Wachovia's results are reflected
in interest income/expense beginning in 2009.
(2) Our average prime rate was 3.25%, 3.25%, 5.09%, 8.05%, and 7.96% for 2010, 2009, 2008, 2007, and 2006, respectively. The average three-month London Interbank
Offered Rate (LIBOR) was 0.34%, 0.69%, 2.93%, 5.30%, and 5.20% for the same years, respectively.
(3) Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(4) Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance
amounts include the effects of any unrealized gain or loss marks but those marks carried in other comprehensive income are not included in yield determination of affected
earning assets. Thus yields are based on amortized cost balances computed on a settlement date basis.
42
2006
Interest
income/
expense
265
245
39
245
2,206
430
2,636
439
3,359
2,746
47
5,340
2,148
1,175
311
786
9,760
4,182
5,126
1,670
4,889
15,867
25,627
68
32,357
123
3,225
1,266
1,607
953
7,174
992
4,124
-
12,290
-
12,290
$
Average
balance
Yields/
rates
5,293
4,971
1,083
6,918
44,777
20,749
65,526
12,818
86,345
25,656
837
98,620
41,659
19,453
7,141
7,127
1.71 % $
3.80
3.84
6.83
5.97
6.04
5.99
7.17
6.22
6.13
5.69
6.12
5.80
5.08
5.62
10.50
2008
Interest
income/
expense
90
189
41
501
2,623
1,412
4,035
1,000
5,577
1,573
48
6,034
2,416
988
401
748
Average
balance
Yields/
rates
4,468
4,291
848
4,740
38,592
6,548
45,140
6,295
57,023
33,066
896
77,965
32,722
16,934
5,921
7,321
4.99 % $
4.37
4.26
7.37
6.10
6.12
6.10
7.52
6.34
6.50
7.76
8.17
7.38
7.80
5.84
11.68
2007
Interest
income/
expense
223
188
36
342
2,328
399
2,727
477
3,582
2,150
70
6,367
2,414
1,321
346
855
Average
balance
Yields/
rates
5,515
4,958
875
3,192
36,691
6,640
43,331
6,204
53,602
42,855
630
65,720
29,344
14,810
5,437
6,343
4.80 % $
4.95
4.36
7.98
6.04
6.57
6.12
7.10
6.31
6.41
7.40
8.13
7.32
7.94
5.72
12.39
174,000
6.08
10,587
140,863
8.02
11,303
121,654
8.02
75,116
75,375
19,601
54,368
224,460
398,460
1,920
6.67
6.55
12.13
8.72
7.60
6.94
4.73
5,008
4,934
2,378
4,744
17,064
27,651
91
61,527
72,075
15,874
54,436
203,912
344,775
1,402
7.25
8.12
13.58
9.71
8.71
8.43
5.07
4,463
5,851
2,155
5,285
17,754
29,057
71
57,509
64,255
12,571
50,922
185,257
306,911
1,357
7.27
7.98
13.29
9.60
8.57
8.35
4.97
$
523,482
6.69 % $
35,219
445,921
7.93 % $
35,341
415,828
7.79 % $
$
5,650
166,691
39,481
6,656
47,578
266,056
65,826
102,283
-
434,165
89,317
$
523,482
$
11,175
13,353
56,386
$
80,914
$
$
$
87,820
28,658
53,753
(89,317)
80,914
604,396
1.12 % $
1.32
3.08
2.83
1.81
1.70
2.25
3.70
-
2.25
-
1.86
64
2,195
1,215
187
860
4,521
1,478
3,789
-
9,788
-
9,788
5,057
147,939
40,484
8,937
36,761
239,178
25,854
93,193
-
358,225
87,696
445,921
3.16 % $
2.78
4.38
4.87
4.57
3.41
4.81
5.18
-
3.97
-
3.19
160
4,105
1,773
435
1,679
8,152
1,245
4,824
-
14,221
-
14,221
4,302
134,248
32,355
32,168
20,724
223,797
21,471
84,035
-
329,303
86,525
415,828
2.86 % $
2.40
3.91
4.99
4.60
3.21
4.62
4.91
-
3.73
-
2.96
4.83 % $
25,431
4.74 % $
21,120
4.83 % $
20,067
11,806
11,957
51,068
74,831
88,907
26,287
47,333
(87,696)
74,831
520,752
12,466
11,114
46,615
70,195
89,117
24,221
43,382
(86,525)
70,195
486,023
(5) Includes certain preferred securities.
(6) Nonaccrual loans and related income are included in their respective loan categories.
(7) Includes taxable-equivalent adjustments of $629 million, $706 million, $288 million, $146 million and $116 million for 2010, 2009, 2008, 2007 and 2006, respectively,
primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.
(8) See Note 7 (Premises, Equipment, Lease Commitments and Other Assets) to Financial Statements in this Report for detail of balances of other noninterest-earning assets at
December 31, 2010 and 2009.
43
Earnings Performance (continued)
Table 6 allocates the changes in net interest income on a
taxable-equivalent basis to changes in either average balances or
average rates for both interest-earning assets and
interest-bearing liabilities. Because of the numerous
simultaneous volume and rate changes during any period, it is
Table 6: Analysis of Changes in Net Interest Income
not possible to precisely allocate such changes between volume
and rate. For this table, changes that are not solely due to either
volume or rate are allocated to these categories in proportion to
the percentage changes in average volume and average rate.
(in millions)
Volume
Rate
Total
Volume
Rate
Total
2010 over 2009
2009 over 2008
Year ended December 31,
Increase (decrease) in interest income:
Federal funds sold, securities purchased under resale
agreements and other short-term investments
Trading assets
Debt securities available for sale:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt securities
$
148
349
(17)
190
(68)
(172)
9
(50)
80
177
(8)
140
156
715
41
369
(96)
40
(13)
(30)
60
755
28
339
(622)
(1,113)
(1,735)
123
(272)
359
(894)
(754)
87
(312)
(1,648)
(189)
2,229
1,823
4,052
1,292
(261)
915
654
(1)
1,968
2,738
4,706
1,291
Total debt securities available for sale
(1,439)
(266)
(1,705)
5,754
610
6,364
Mortgages held for sale
Loans held for sale
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loans
Other
(35)
(69)
(159)
(13)
(194)
(82)
635
169
(278)
(34)
357
135
(1,425)
81
(306)
(120)
968
390
167
(16)
(36)
(139)
(457)
471
(139)
(136)
(175)
3,904
3,278
1,140
602
1,176
(2,295)
(2,329)
1,609
949
(938)
372
(712)
202
974
464
(1,806)
1,370
(436)
10,100
(5,902)
4,198
(150)
(249)
(123)
(140)
(636)
(321)
269
(65)
(786)
(570)
146
(205)
9,055
1,727
457
2,594
(1,071)
(1,572)
6
(1,386)
7,984
155
463
1,208
(662)
(753)
(1,415)
13,833
(4,023)
9,810
(2,468)
617
(1,851)
23,933
(9,925)
14,008
(8)
29
21
137
(42)
95
Total increase (decrease) in interest income
(3,522)
(32)
(3,554)
31,499
(9,725)
21,774
Increase (decrease) in interest expense:
Deposits:
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
(13)
224
(729)
(121)
5
(634)
(21)
(1,209)
65
(15)
(511)
238
8
(28)
(308)
(104)
311
(10)
(28)
(287)
(491)
(113)
(23)
(942)
(125)
(898)
55
136
1,396
1,601
294
(100)
(2,216)
(1,078)
(66)
36
(820)
523
228
91
(805)
(714)
3,518
(259)
3,544
172
(4,265)
(988)
(1,547)
-
(747)
(1,247)
1,997
172
Total increase (decrease) in interest expense
(1,799)
(111)
(1,910)
6,975
(6,800)
175
Increase (decrease) in net interest income
on a taxable-equivalent basis
$
(1,723)
79
(1,644)
24,524
(2,925)
21,599
44
Noninterest Income
Table 7: Noninterest Income
(in millions)
Service charges on
deposit accounts
Year ended December 31,
2010
2009
2008
$
4,916
5,741
3,190
Trust and investment fees:
Trust, investment and IRA fees
4,038
3,588
2,161
Commissions and all other fees
6,896
6,147
763
Total trust and
investment fees
10,934
9,735
2,924
Card fees
Other fees:
3,652
3,683
2,336
Cash network fees
Charges and fees on loans
All other fees
260
1,690
231
1,801
188
1,037
2,040
1,772
872
Total other fees
3,990
3,804
2,097
Mortgage banking:
Servicing income, net
Net gains on mortgage loan
3,340
5,791
1,233
origination/sales activities
6,397
6,237
1,292
Total mortgage banking
9,737
12,028
2,525
Insurance
Net gains from trading activities
Net gains (losses) on debt
2,126
2,126
1,830
1,648
2,674
275
securities available for sale
(324)
(127)
1,037
Net gains (losses) from
equity investments
Operating leases
All other
779
815
185
685
2,180
1,828
(757)
427
850
Total
$
40,453
42,362
16,734
Noninterest income of $40.5 billion represented 47% of revenue
for 2010 compared with $42.4 billion or, 48%, for 2009. The
decrease from 2009 was primarily the net result of an increase in
trust and investment fees to 13% of 2010 revenues from 11% for
2009, offset by the decrease in mortgage banking to 11% of 2010
revenues from 14% for 2009.
Our service charges on deposit accounts decreased in 2010 by
$825 million from 2009, although the deposit account portfolio
increased for the year. This decrease was related to regulatory
changes to debit card and ATM overdraft practices announced
by the Federal Reserve Board (FRB) in fourth quarter 2009. In
third quarter 2009, we also announced policy changes to help
customers limit overdraft and returned item fees. The
combination of these changes reduced our 2010 fee revenue by
approximately $810 million.
We earn trust, investment and IRA (Individual Retirement
Account) fees from managing and administering assets,
including mutual funds, corporate trust, personal trust,
employee benefit trust and agency assets. At December 31, 2010,
these assets totaled $2.1 trillion, up 11% from $1.9 trillion at
December 31, 2009. Trust, investment and IRA fees are largely
based on a tiered scale relative to the market value of the assets
under management or administration. The fees increased to
$4.0 billion in 2010 from $3.6 billion a year ago.
We receive commissions and other fees for providing services
to full-service and discount brokerage customers. These fees
increased to $6.9 billion in 2010 from $6.1 billion a year ago.
These fees include transactional commissions, which are based
on the number of transactions executed at the customer’s
direction, and asset-based fees, which are based on the market
value of the customer’s assets. Brokerage client assets totaled
$1.2 trillion at December 31, 2010, up 6% from a year ago.
Commissions and other fees also include fees from investment
banking activities including equity and bond underwriting.
Card fees were $3.7 billion in 2010, essentially flat from
2009. Legislative and regulatory changes enacted in 2010 caused
a reduction in card fee income, which was offset by growth in
purchase volume driven by improvements in the economy. The
effect of the Credit Card Accountability Responsibility and
Disclosure Act of 2009 (the Card Act) on card fees is fully
reflected in our 2010 results.
Mortgage banking noninterest income is generated by
servicing activities and loan origination/sales activities. This
income was $9.7 billion in 2010, compared with $12.0 billion for
2009. The reduction in mortgage banking noninterest income
was primarily driven by a $2.5 billion decline in net servicing
income, partially offset by a $160 million increase in net gains on
mortgage origination/sales.
Net servicing income includes both changes in the fair value
of mortgage servicing rights (MSRs) during the period as well as
changes in the value of derivatives (economic hedges) used to
hedge the MSRs. Net servicing income for 2010 included a
$1.5 billion net MSR valuation gain that was recorded to
earnings ($3.0 billion decrease in the fair value of the MSRs
offset by a $4.5 billion hedge gain) and for 2009 included a
$5.3 billion net MSR valuation gain ($1.5 billion decrease in the
fair value of MSRs offset by a $6.8 billion hedge gain). The
$3.8 billion decline in the net MSR valuation gain results for
2010 compared with 2009 was primarily due to a decline in
hedge carry income. See the “Risk Management – Mortgage
Banking Interest Rate and Market Risk” section of this Report
for a detailed discussion of our MSRs risks and hedging
approach. Our portfolio of loans serviced for others was
$1.84 trillion at December 31, 2010, and $1.88 trillion at
December 31, 2009. At December 31, 2010, the ratio of MSRs to
related loans serviced for others was 0.86%, compared with
0.91% at December 31, 2009.
Income from loan origination/sale activities was $6.4 billion
in 2010 compared with $6.2 billion for 2009. The slight increase
in 2010 was driven by higher margins on loan originations, offset
by lower loan origination volume and higher provision for loan
repurchase losses. Residential real estate originations were
$386 billion in 2010 compared with $420 billion a year ago and
mortgage applications were $620 billion in 2010 compared with
$651 billion in 2009. The 1-4 family first mortgage unclosed
pipeline was $73 billion at December 31, 2010, and $57 billion at
December 31, 2009. For additional detail, see the “Risk
Management – Mortgage Banking Interest Rate and Market
Risk” section and Note 1 (Summary of Significant Accounting
Policies), Note 9 (Mortgage Banking Activities) and Note 16 (Fair
Values of Assets and Liabilities) to Financial Statements in this
Report.
45
Earnings Performance (continued)
Net gains on mortgage loan origination/sales activities
include the cost of any additions to the mortgage repurchase
liability. Mortgage loans are repurchased from third parties
based on standard representations and warranties and early
payment default clauses in mortgage sale contracts. Additions to
the mortgage repurchase liability that were charged against net
gains on mortgage loan origination/sales activities during 2010
totaled $1.6 billion ($927 million for 2009), of which $144
million ($302 million for 2009) was related to our estimate of
loss content associated with loan sales during the year and $1.5
billion ($625 million for 2009) was for subsequent increases in
estimated losses on prior year’s loan sales because of the current
economic environment. For additional information about
mortgage loan repurchases, see the “Risk Management – Credit
Risk Management – Liability for Mortgage Loan Repurchase
Losses” section in this Report.
Income from trading activities was $1.6 billion in 2010, down
from $2.7 billion a year ago. This decrease reflects a return to a
more normal trading environment from a year ago as well as a
continued reduction in risk levels while we continue to prioritize
support for our customer-related activities.
Net gains on debt and equity securities totaled $455 million
for 2010 and $58 million for 2009, after other-than-temporary
impairment (OTTI) write-downs of $940 million for 2010 and
$1.7 billion for 2009.
Noninterest income of $42.4 billion in 2009 represented
48% of revenue, up from $16.7 billion (40%) in 2008. The
increase in noninterest income as a percentage of revenue was
due to a higher percentage of trust and investment fees (11% in
2009, up from 7% in 2008) with the addition of Wells Fargo
Advisors (formerly Wachovia Securities) retail brokerage
business, Wachovia wealth management and retirement, and
reinsurance businesses, and also due to strong mortgage banking
results, primarily from legacy Wells Fargo (14% in 2009, up
from 6% in 2008).
46
Noninterest Expense
Table 8: Noninterest Expense
(in millions)
2010
2009
2008
Year ended December 31,
Salaries
Commission and incentive
compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit
assessments
Outside professional services
Contract services
Foreclosed assets
Operating losses
Outside data processing
Postage, stationery and supplies
Travel and entertainment
Advertising and promotion
Telecommunications
Insurance
Operating leases
All other
Total
$
13,869
13,757
8,260
8,692
4,651
2,636
3,030
8,021
4,689
2,506
3,127
2,676
2,004
1,357
1,619
2,199
2,577
186
1,197
2,370
1,642
1,537
1,258
1,046
944
783
630
596
464
109
1,849
1,982
1,088
1,071
875
1,027
933
575
572
610
845
227
120
847
407
414
142
480
556
447
378
321
725
389
2,803
2,689
1,270
$
50,456
49,020
22,598
Noninterest expense increased $1.4 billion (3%) in 2010 over
2009, primarily due to merger integration costs, Wells Fargo
Financial restructuring costs and a charitable donation to the
Wells Fargo Foundation. The increase in 2009 over 2008 was
predominantly due to the acquisition of Wachovia, increased
staffing and other costs related to problem loan modifications
and workouts, special deposit assessments and operating losses.
Merger integration costs totaled $1.9 billion in 2010 and
$1.1 billion in 2009, and primarily contributed to the increases
in outside professional and contract services for both years. The
acquisition of Wachovia resulted in an expanded geographic
platform in our banking businesses and added capabilities in
businesses such as retail brokerage, asset management and
investment banking. As part of our integration investment to
enhance both the short- and long-term benefits to our
customers, we added platform team members in the Eastern
market to align Wachovia’s banking stores with Wells Fargo’s
sales and service model. We completed the second year of our
merger integration, converting 749 Wachovia stores in Alabama,
Arizona, California, Georgia, Illinois, Kansas, Mississippi,
Nevada, Tennessee and Texas. We migrated major processing
systems for credit card, mortgage, trust, and mutual funds. We
expect to substantially complete our integration of Wachovia by
the end of 2011.
In July 2010, we announced the restructuring of our Wells
Fargo Financial consumer finance division, including the closing
of 638 Wells Fargo Financial stores, realigning this business into
other Wells Fargo business units and transitioning employees
into other parts of our organization. The restructuring costs
totaled $161 million, predominantly for severance and store
closures.
Commission and incentive compensation expense increased
proportionately more than salaries in both 2010 and 2009, due
to higher revenues generated by businesses with revenue-based
compensation, including the retail securities, brokerage and
mortgage businesses.
Federal Deposit Insurance Corporation (FDIC) and other
deposit assessments decreased in 2010 from 2009,
predominantly due to a midyear 2009 FDIC special assessment
of $565 million.
Problem loans and foreclosures increased workout-related
salaries and foreclosure costs in both 2010 and 2009. Workout-
related costs were influenced in both years by the higher volume
of mortgage loan modifications driven by both federal and our
own proprietary loan modification programs designed to help
customers stay in their homes. Foreclosure costs have been
affected by the high volume of foreclosed properties and the
length of time the properties remained in inventory. During
2010, we began to see a decline in nonperforming loans and
other indications of improvement in credit quality.
Operating losses increased in 2010 predominantly due to
additional litigation accruals.
We continued to support our communities by making a
$400 million charitable contribution to the Wells Fargo
Foundation in 2010, covering three years of estimated future
funding.
Income Tax Expense
The 2010 annual effective tax rate was 33.9% compared with
30.3% in 2009 and 18.5% in 2008. The increase in 2010 was
primarily due to the new health care legislation and fewer
favorable settlements with tax authorities. The increase in 2009
was primarily due to higher pre-tax earnings and increased tax
expense (with a comparable increase in interest income)
associated with purchase accounting for leveraged leases,
partially offset by higher levels of tax exempt income, tax credits
and the impact of changes in our liability for uncertain tax
positions. We recognized a net tax benefit of approximately
$150 million and $200 million during the fourth quarter and
year-ended December 31, 2009, respectively, primarily related to
changes in our uncertain tax positions, due to federal and state
income tax settlements.
Effective January 1, 2009, we adopted new accounting
guidance that changed 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.
47
Earnings Performance (continued)
Operating Segment Results
We define our operating segments by product and customer. In
first quarter 2010, we conformed certain funding and allocation
methodologies of Wachovia to those of Wells Fargo; in addition
integration expense related to mergers other than the Wachovia
merger is now included in the segment results. In fourth quarter
2010, we aligned certain lending businesses into Wholesale
Banking from Community Banking to reflect our previously
Table 9: Operating Segment Results – Highlights
announced restructuring of Wells Fargo Financial. Prior periods
have been revised to reflect these changes. Table 9 and the
following discussion present our results by operating segment.
For a more complete description of our operating segments,
including additional financial information and the underlying
management accounting process, see Note 23 (Operating
Segments) to Financial Statements in this Report.
(in billions)
Revenue
Net income
Average loans
Average core deposits
Year ended December 31,
Wealth, Brokerage
Community Banking
Wholesale Banking
and Retirement
2010
2009
2010
2009
2010
2009
$
54.7
60.5
7.1
8.9
22.2
5.8
20.6
3.9
11.7
1.0
10.8
0.5
530.1
552.7
230.5
260.2
43.0
45.7
536.4
552.8
170.0
147.3
121.2
114.2
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. through its Regional Banking and Wells Fargo
Home Mortgage business units.
Community Banking reported net income of $7.1 billion and
revenue of $54.7 billion in 2010. Revenue declined from 2009
driven primarily by a decrease in mortgage banking income
compared with a record year in 2009 (originations of
$420 billion in 2009 compared with $384 billion in 2010), as
well as lower deposit service charges due to changes to
Regulation E and the planned reduction in certain liquidating
loan portfolios. Core deposits declined due to planned
certificates of deposit (CD) run-off; however, we continued to
grow low cost deposits. We saw strong growth in the number of
consumer and business checking accounts (up 7.5% and 4.8%,
respectively, from December 31, 2009). Noninterest expense was
flat from 2009, with Wells Fargo Financial restructuring costs
and higher charitable contributions offset by continued expense
management and realization of merger synergies. To benefit our
customers we continued to add platform team members in
regional banking’s Eastern markets as we aligned Wachovia
banking stores with the Wells Fargo sales and service model.
The provision for credit losses decreased $4.1 billion from 2009
and credit quality indicators in most of our consumer and
commercial loan portfolios were either stable or continued to
improve. Net credit losses declined in almost all portfolios and
we released $1.4 billion in reserves in 2010 compared with a
$2.2 billion reserve build in 2009.
Wholesale Banking provides financial solutions across the
U.S. and globally to middle market and large corporate
customers with annual revenue generally in excess of
$20 million. Products and businesses include commercial
banking, investment banking and capital markets, securities
investment, government and institutional banking, corporate
banking, commercial real estate, treasury management, capital
48
finance, international, insurance, real estate capital markets,
commercial mortgage servicing, corporate trust, equipment
finance, asset backed finance, and asset management.
On the strength of increasing credit demands from middle
market and international businesses, solid investment banking
and capital markets performance, and a modest rebound in
commercial mortgages, Wholesale Banking generated earnings
of $5.8 billion, up 49% from 2009, with revenue of $22.2 billion,
up 8% from 2009. Growth in core deposits, up 15% from 2009,
and the related increase in fees and commissions, helped offset
the impact of lower loan balances in 2010. Total noninterest
expense increased 5% as continued focus on expense
management helped keep the rate of expense growth below the
rate of revenue growth, resulting in an overall operating
efficiency ratio of 51% versus 52% in 2009. Loan loss rates also
improved from 2009 levels, which allowed for a $561 million
release of the allowance for loan losses in 2010.
Our financial results in 2010 were driven by the performance
of our many diverse businesses, including the real estate capital
markets group, which re-entered the commercial MBS
securitization market with its first deal in three years;
investment banking, which helped drive more than $172 million
of growth in trust and investment fees; commercial mortgage
servicing, which capitalized on its strong competitive position to
win the servicing rights on more than 70% of new commercial
MBS deals; and commercial real estate, where re-pricing efforts
lifted loan portfolio yields 49 basis points to add $180 million in
revenue growth.
Wholesale Banking’s performance was also supported by
additional efficiencies created by the merger with Wachovia. Key
achievements included funds management group
consolidations, leasing and equipment finance system
migrations, Commercial Electronic Office®
) access for
Wachovia Global Connect customers, and building of treasury
product solutions to prepare for full customer migrations in
2011.
(CEO
®
Wealth, Brokerage and Retirement provides a full range of
financial advisory services to clients using a planning approach
to meet each client’s needs. Wealth Management 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 Wealth meets the unique needs of the ultra high net
worth customers. Brokerage serves customers’ advisory,
brokerage and financial needs as part of one of the largest full-
service brokerage firms in the United States. Retirement is a
national leader in providing institutional retirement and trust
services (including 401(k) and pension plan record keeping) for
businesses, retail retirement solutions for individuals, and
reinsurance services for the life insurance industry.
Wealth, Brokerage and Retirement earned net income of
$1.0 billion in 2010. Revenue of $11.7 billion included a mix of
Balance Sheet Analysis
brokerage commissions, asset-based fees and net interest
income. Net interest income growth was dampened by the
continued low short-term interest rate environment. Equity
market gains helped drive growth in fee income. During 2010
client assets grew 6% from a year ago, including managed
account asset growth of 20%. Deposit balances grew 10% during
2010. Expenses increased slightly from the prior year due to
growth in broker commissions partially offset by the realization
of merger synergies during the year and the loss reserve for the
auction rate securities (ARS) legal settlement in 2009. The
wealth, brokerage and retirement businesses have strengthened
partnerships across the Company, working with Community
Banking and Wholesale Banking to provide financial solutions
for clients.
During 2010, our total assets grew 1%, funded by core deposit
growth of 2% and internal capital generation, partially offset by a
reduction in our long-term borrowings. As a result of continued
soft loan demand, our loans decreased 3% and most of our asset
growth was therefore in more liquid earning assets. However,
the strength of our business model continued to produce high
rates of internal capital generation as reflected in our improved
capital ratios. Tier 1 capital increased to 11.16% as a percentage
of total risk-weighted assets, total capital to 15.01%, Tier 1
leverage to 9.19% and Tier 1 common equity to 8.30% at
December 31, 2010, up from 9.25%, 13.26%, 7.87% and 6.46%,
respectively, at December 31, 2009. At December 31, 2010, core
deposits funded 105% of the loan portfolio, and we have
significant capacity to add loans and higher yielding long-term
MBS to generate future revenue and earnings growth.
The following discussion provides additional information
about the major components of our balance sheet. Information
about changes in our asset mix and about our capital is included
in the “Earnings Performance – Net Interest Income” and
“Capital Management” sections of this Report.
Securities Available for Sale
Table 10: Securities Available for Sale – Summary
(in millions)
Debt securities available for sale
Marketable equity securities
Net
unrealized
Cost
gain
2010
Fair
value
December 31,
Net
unrealized
Cost
gain
2009
Fair
value
$
160,071
7,394
167,465
162,314
4,804 167,118
4,258
931
5,189
4,749
843
5,592
Total securities available for sale
$
164,329
8,325
172,654
167,063
5,647 172,710
Table 10 presents a summary of our securities available-for-
sale portfolio. 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 MBS. The total net
unrealized gains on securities available for sale were $8.3 billion
at December 31, 2010, up from net unrealized gains of
$5.6 billion at December 31, 2009, due to a general decline in
long-term yields and narrowing of credit spreads.
We analyze securities for OTTI quarterly, or more often if a
potential loss-triggering event occurs. Of the $692 million OTTI
write-downs in 2010, $672 million related to debt securities and
$20 million to equity securities. For a discussion of our OTTI
accounting policies and underlying considerations and analysis
see Note 1 (Summary of Significant Accounting Policies –
Securities) and Note 5 (Securities Available for Sale) to Financial
Statements in this Report.
At December 31, 2010, debt securities available for sale
included $19 billion of municipal bonds, of which 84% were
rated “A-” or better, based on external, and in some cases
internal, ratings. Additionally, some of these bonds are
guaranteed against loss by bond insurers. These bonds are
predominantly investment grade and were generally
underwritten in accordance with our own investment standards
prior to the determination to purchase, without relying on the
bond insurer’s guarantee in making the investment decision.
These municipal bonds will continue to be monitored as part of
49
Balance Sheet Analysis (continued)
our on-going impairment analysis of our securities available for
sale.
The weighted-average expected maturity of debt securities
available for sale was 6.1 years at December 31, 2010. Because
69% of this portfolio is MBS, the expected remaining maturity
may differ from contractual maturity because borrowers
generally 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 MBS available for
sale are shown in Table 11.
Table 11: Mortgage-Backed Securities
(in billions)
Expected
remaining
Net
Fair
value
unrealized maturity
(in years)
gain (loss)
At December 31, 2010
$
115.8
5.9
4.5
At December 31, 2010,
assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
105.8
124.3
(4.1)
14.4
5.7
3.3
See Note 5 (Securities Available for Sale) to Financial
Statements in this Report for securities available for sale by
security type.
Loan Portfolio
Table 12: Loan Portfolios
(in millions)
Commercial
Consumer
Total loans
Balances decreased during 2010 for nearly all types of loans as
demand remained soft in response to economic conditions. Non-
strategic and liquidating loan portfolios decreased by
$26.3 billion from 2009. Table 12 provides a breakdown by loan
portfolio.
A discussion of average loan balances and a comparative
detail of average loan balances is included in Table 5 under
“Earnings Performance – Net Interest Income” earlier in this
Report. Year-end balances and other loan related information
are in Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report.
December 31,
2010
2009
2008
2007
2006
$
322,058
336,465
389,964
160,282
128,731
435,209
446,305
474,866
221,913
190,385
$
757,267
782,770
864,830
382,195
319,116
Effective June 30, 2010, real estate construction outstanding
balances and all other related data include certain commercial
real estate (CRE) secured loans acquired from Wachovia
previously classified as real estate mortgage. Balances for 2009
and 2008 have been revised to conform with the current
presentation.
Table 13 shows contractual loan maturities for selected loan
categories and sensitivities of those loans to changes in interest
rates.
50
Table 13: Maturities for Selected Loan Categories
(in millions)
Selected loan maturities:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Foreign
Within
one
year
39,576
27,544
15,009
25,087
After
one year
through
five years
After
five
years
2010
Total
December 31,
2009
Within
After
one year
one
year
through
five years
After
five
years
Total
90,497
21,211
151,284
44,919
91,951
21,482
158,352
44,627
9,189
27,264
1,135
99,435
25,333
5,508
2,317
32,912
25,339
23,362
21,266
42,179
12,188
30,009
1,428
97,527
36,978
5,715
2,417
29,398
Total selected loans
$
107,216
149,821
51,927
308,964
114,886
152,033
55,336
322,255
Distribution of loans due
after one year to
changes in interest rates:
Loans at fixed
interest rates
Loans at floating/variable
interest rates
$
29,886
14,543
26,373
18,921
Total selected loans
$
149,821
51,927
119,935
37,384
125,660
36,415
152,033
55,336
Deposits
Deposits totaled $847.9 billion at December 31, 2010,
compared with $824.0 billion at December 31, 2009. Table 14
provides additional detail regarding deposits. Comparative
detail of average deposit balances is provided in Table 5 under
“Earnings Performance – Net Interest Income” earlier in this
Table 14: Deposits
Report. Total core deposits were $798.2 billion at
December 31, 2010, up $17.5 billion from $780.7 billion at
December 31, 2009. We continued to gain new deposit
customers and deepen our relationships with existing
customers.
December 31,
(in millions)
Noninterest-bearing
Interest-bearing checking
Market rate and other savings
Savings certificates
Foreign deposits (1)
Core deposits
Other time and savings deposits
Other foreign deposits
Total deposits
(1) Reflects Eurodollar sweep balances included in core deposits.
% of
total
deposits
%
Change
% of
total
2010
deposits
2009
$
191,231
23 %
$
181,356
63,440
431,883
77,292
34,346
798,192
19,412
30,338
7
51
9
4
94
2
4
63,225
402,448
100,857
32,851
780,737
16,142
27,139
22 %
8
49
12
4
95
2
3
$
847,942
100 %
$
824,018
100 %
5
-
7
(23)
5
2
20
12
3
51
In accordance with the transition provisions of the new
consolidation accounting guidance, we initially recorded newly
consolidated VIE assets and liabilities on a basis consistent
with our accounting for respective assets at their amortized
cost basis, except for those VIEs for which the fair value option
was elected. The carrying amount for loans approximates the
outstanding unpaid principal balance, adjusted for allowance
for loan losses. Short-term borrowings and long-term debt
approximate the outstanding principal amount due to
creditors.
Upon adoption of new consolidation accounting guidance
on January 1, 2010, we elected fair value option accounting for
certain nonconforming residential mortgage loan securitization
VIEs. This election requires us to recognize the VIE’s eligible
assets and liabilities on the balance sheet at fair value with
changes in fair value recognized in earnings.
Such eligible assets and liabilities consisted primarily of
loans and long-term debt, respectively. The fair value option
was elected for those newly consolidated VIEs for which our
interests, prior to January 1, 2010, were predominantly carried
at fair value with changes in fair value recorded to earnings.
Accordingly, the fair value option was elected to effectively
continue fair value accounting through earnings for those
interests. Conversely, fair value option was not elected for
those newly consolidated VIEs that did not share these
characteristics. At January 1, 2010, the fair value for both loans
and long-term debt for which the fair value option was elected
was $1.0 billion each. The incremental impact of electing fair
value option (compared to not electing) on the cumulative
effect adjustment to retained earnings was an increase of
$15 million.
Guarantees and Certain Contingent Arrangements
Guarantees are contracts that contingently require us to make
payments to a guaranteed party based on an event or a change
in an underlying asset, liability, rate or index. Guarantees are
generally in the form of standby letters of credit, securities
lending and other indemnifications, liquidity agreements,
written put options, recourse obligations, residual value
guarantees and contingent consideration.
For more information on guarantees and certain contingent
arrangements, see Note 14 (Guarantees and Legal Actions) to
Financial Statements in this Report.
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.
Off-Balance Sheet Transactions with Unconsolidated
Entities
We routinely 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. Historically, the majority of SPEs were
formed in connection with securitization transactions. For
more information on securitizations, including sales proceeds
and cash flows from securitizations, see Note 8 (Securitizations
and Variable Interest Entities) to Financial Statements in this
Report.
Newly Consolidated VIE Assets and Liabilities
Effective January 1, 2010, we adopted new consolidation
accounting guidance and, accordingly, consolidated certain
variable interest entities (VIEs) that were not included in our
consolidated financial statements at December 31, 2009. On
January 1, 2010, we recorded the assets and liabilities of the
newly consolidated VIEs and derecognized our existing
interests in those VIEs. We also recorded a $183 million
increase to beginning retained earnings as a cumulative effect
adjustment and recorded a $173 million increase to other
comprehensive income (OCI).
Table 15 presents the net incremental assets recorded on
our balance sheet by structure type upon adoption of new
consolidation accounting guidance.
Table 15: Net Incremental Assets Upon Adoption of New
Consolidation Accounting Guidance
(in millions)
Structure type:
Residential mortgage loans – nonconforming (1)
Commercial paper conduit
Other
Total
Incremental
assets as of
Jan. 1, 2010
$
11,479
5,088
2,002
$
18,569
(1) Represents certain of our residential mortgage loans that are not guaranteed
by government-sponsored entities (GSEs) ("nonconforming").
52
Contractual Obligations
In addition to the contractual commitments and arrangements
previously described, which, depending on the nature of the
obligation, may or may not require use of our resources, we
enter into other contractual obligations in the ordinary course
of business, including debt issuances for the funding of
operations and leases for premises and equipment.
Table 16 summarizes these contractual obligations as of
December 31, 2010, excluding obligations for short-term
borrowing arrangements and pension and postretirement
benefit plans. More information on those obligations is in
Note 12 (Short-Term Borrowings) and Note 19 (Employee
Benefits and Other Expenses) to Financial Statements in this
Report.
Table 16: Contractual Obligations
(in millions)
Contractual payments by period:
Deposits
Long-term debt (2)
Operating leases
Unrecognized tax obligations
Commitments to purchase debt securities
Purchase obligations (3)
Note(s) to
Financial
Statements
Less than
1 year
1-3
years
3-5
years
than Indeterminate
maturity
5 years
More
11
7, 13
7
20
$
108,232
36,223
1,134
22
1,153
383
33,601
35,529
2,334
-
650
278
10,855
19,585
1,732
-
-
40
2,500
65,646
3,405
-
-
1
692,754 (1)
-
-
2,630
-
-
Total
847,942
156,983
8,605
2,652
1,803
702
Total contractual obligations
$
147,147
72,392
32,212
71,552
695,384
1,018,687
(1) Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(2) Includes obligations under capital leases of $26 million.
(3) Represents agreements to purchase goods or services.
We are subject to the income tax laws of the U.S., its states
and municipalities, and those of the foreign jurisdictions in
which we operate. We have various unrecognized tax
obligations related to these operations that may require future
cash tax payments to various taxing authorities. Because of
their uncertain nature, the expected timing and amounts of
these payments generally are not reasonably estimable or
determinable. We attempt to estimate the amount payable in
the next 12 months based on the status of our tax examinations
and settlement discussions. See Note 20 (Income Taxes) to
Financial Statements in this Report for more information.
We enter into derivatives, which create contractual
obligations, as part of our interest rate risk management
process for our customers or for other trading activities. See
the “Risk Management – Asset/Liability” section and Note 15
(Derivatives) to Financial Statements in this Report for more
information.
Transactions with Related Parties
The Related Party Disclosures topic of the Codification requires
disclosure of material related party transactions, other than
compensation arrangements, expense allowances and other
similar items in the ordinary course of business. We had no
related party transactions required to be reported for the years
ended December 31, 2010, 2009 and 2008.
53
was considered prime based on secondary market standards.
The remainder is non-prime but was originated with standards
to reduce credit risk. These loans were originated through our
retail channel with documented income, LTV limits based on
credit quality and property characteristics, and risk-based
pricing. In addition, the loans were originated without teaser
rates, interest-only or negative amortization features. Credit
losses in the portfolio have increased in the current economic
environment compared with historical levels, but performance
has remained similar to prime portfolios in the industry with
overall loss rates of 4.15% in 2010 on the entire portfolio.
Analysis of the Pick-a-Pay and the commercial and industrial
and CRE domestic PCI portfolios is presented later in this
section.
Table 17: Non-Strategic and Liquidating Loan Portfolios
Outstanding balance
December 31,
(in billions)
2010
2009
2008
Commercial and industrial, CRE
and foreign PCI loans (1)(2)
$
Pick-a-Pay mortgage (1)
Liquidating home equity
Legacy Wells Fargo Financial
7.9
74.8
6.9
13.0
18.7
85.2
8.4
95.3
10.3
indirect auto
6.0
11.3
18.2
Legacy Wells Fargo Financial
debt consolidation (2)(3)
Other PCI loans (1)(2)
Total non-strategic and
19.0
22.4
25.3
1.1
1.7
2.5
liquidating loan portfolios
$
115.7
142.0 170.3
(1) Net of purchase accounting adjustments related to PCI loans.
(2) These portfolios were designated as non-strategic and liquidating in 2010.
Prior periods have been adjusted to reflect this change.
(3) In July 2010, we announced the restructuring of our Wells Fargo Financial
division and the exiting of the origination of non-prime portfolio mortgage
loans.
Measuring and monitoring our credit risk is an ongoing
process that tracks delinquencies, collateral values, FICO
scores, economic trends by geographic areas, loan-level risk
grading for certain portfolios (typically commercial) and other
indications of credit risk. Our credit risk monitoring process is
designed to enable early identification of developing risk and to
support our determination of an adequate allowance for credit
losses. The following analysis reviews the relevant
concentrations and certain credit metrics of our significant
portfolios. See Note 6 (Loans and Allowance for Credit Losses)
to Financial Statements in this Report for more analysis and
credit metric information.
Risk Management
All financial institutions must manage and control a variety of
business risks that can significantly affect their financial
performance. Key among those are credit, asset/liability and
market risk.
Credit Risk Management
Our credit risk management process is governed centrally, but
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, banking regulatory
examiners review and perform detailed tests of our credit
underwriting, loan administration and allowance processes.
A key to our credit risk management is adhering to a well
controlled underwriting process, which we believe is
appropriate for the needs of our customers as well as investors
who purchase the loans or securities collateralized by the loans.
We approve applications and make loans only if we believe the
customer has the ability to repay the loan or line of credit
according to all its terms. Our underwriting of loans
collateralized by residential real property includes appraisals or
automated valuation models (AVMs) to support property
values. AVMs are computer-based tools used to estimate the
market value of homes. AVMs are a lower-cost alternative to
appraisals and support valuations of large numbers of
properties in a short period of time. AVMs estimate property
values based on processing large volumes of market data
including market comparables and price trends for local
market areas. The primary risk associated with the use of
AVMs is that the value of an individual property may vary
significantly from the average for the market area. We have
processes to periodically validate AVMs and specific risk
management guidelines addressing the circumstances when
AVMs may be used. Generally AVMs are used in underwriting
to support property values on loan originations only where the
loan amount is under $250,000. For underwriting residential
property loans of $250,000 or more, we require property
visitation appraisals by qualified independent appraisers.
We continually evaluate and modify our credit policies to
address appropriate levels of risk. Accordingly, from time to
time, we designate certain portfolios and loan products as non-
strategic or high risk to limit or cease their continued
origination as we actively work to limit losses and reduce our
exposures.
Table 17 identifies our non-strategic and liquidating loan
portfolios as of December 31, 2010, 2009 and 2008. These
portfolios have decreased 32% since the merger with Wachovia
at December 31, 2008, and decreased 19% from the end of
2009. The portfolios consist primarily of the Pick-a-Pay
mortgages portfolio and PCI loans acquired in our acquisition
of Wachovia as well as some portfolios from legacy Wells Fargo
home equity and Wells Fargo Financial. The legacy Wells Fargo
Financial debt consolidation portfolio included $1.2 billion and
$1.6 billion at December 31, 2010 and 2009, respectively, that
54
Table 18 summarizes CRE loans by state and property type
with the related nonaccrual totals. At December 31, 2010, the
highest concentration of total loans by state was $28.2 billion
in California, more than double the next largest state
concentration, and the related nonaccrual loans totaled about
$1.5 billion, or 5% of CRE loans in California. Office buildings,
at $28.7 billion, were the largest property type concentration,
more than double the next largest, and the related nonaccrual
loans totaled $1.4 billion, or 5% of total CRE loans for office
buildings. In aggregate, nonaccrual loans totaled 7% of the
non-PCI outstanding balance at December 31, 2010.
COMMERCIAL REAL ESTATE (CRE) The CRE portfolio consists
of both CRE mortgages and CRE construction loans. The
combined CRE loans outstanding totaled $124.8 billion at
December 31, 2010, or 16% of total loans. Of the $124.8 billion,
approximately $5.8 billion represents the net balance of PCI
CRE loans. CRE construction loans totaled $25.3 billion at
December 31, 2010, or 3% of total loans. CRE mortgage loans
totaled $99.4 billion at December 31, 2010, or 13% of total
loans, of which over 40% is to owner-occupants, who
historically have a low level of default. The portfolio is
diversified both geographically and by property type. The
largest geographic concentrations are found in California and
Florida, which represented 23% and 11% of the total CRE
portfolio, respectively. By property type, the largest
concentrations are office buildings at 23% and
industrial/warehouse at 11% of the portfolio.
The underwriting of CRE loans primarily focuses on cash
flows and creditworthiness, in addition to collateral valuations.
To identify and manage newly emerging problem CRE loans,
we employ a high level of surveillance and regular customer
interaction to understand and manage the risks associated with
these assets, including regular loan reviews and appraisal
updates. As issues are identified, management is engaged and
dedicated workout groups are put in place to manage problem
assets. At December 31, 2010, the recorded investment in PCI
CRE loans totaled $5.8 billion, down from $12.3 billion since
the Wachovia acquisition at December 31, 2008, reflecting the
reduction resulting from loan resolutions and write-downs.
55
Risk Management – Credit Risk Management (continued)
Table 18: CRE Loans by State and Property Type
(in millions)
By state:
PCI loans:
Florida
California
Georgia
North Carolina
New York
Other
Total PCI loans
All other loans:
California
Florida
Texas
North Carolina
New York
Virginia
Georgia
Arizona
Colorado
New Jersey
Other
Total all other loans
Total
By property:
PCI loans:
Office buildings
Apartments
1-4 family land
Retail (excluding shopping center)
1-4 family structure
Other
Total PCI loans
All other loans:
Office buildings
Industrial/warehouse
Real estate - other
Apartments
Retail (excluding shopping center)
Shopping center
Land (excluding 1-4 family)
Hotel/motel
Institutional
1-4 family land
Other
Total all other loans
Total
Real estate mortgage Real estate construction
Total
Nonaccrual Outstanding Nonaccrual Outstanding
loans balance (1)
loans balance (1)
Nonaccrual Outstanding
loans balance (1)
% of
total
loans
December 31, 2010
$
$
$
$
$
$
$
-
-
-
-
-
-
-
459
588
301
180
226
1,101
2,855
1,172
912
23,780
10,023
376
346
56
49
374
259
106
109
6,523
4,663
4,440
3,574
3,726
3,445
2,868
2,641
-
-
-
-
-
-
-
375
412
165
254
17
147
181
140
76
40
578
193
250
353
225
1,350
2,949
3,648
2,286
2,186
1,477
1,111
1,512
885
726
698
513
-
-
-
-
-
-
-
1,037
* %
781
551
533
451
2,451 (2)
*
*
*
*
*
5,804
* %
1,547
1,324
27,428
12,309
541
600
73
196
555
399
182
149
8,709
6,140
5,551
5,086
4,611
4,171
3,566
3,154
4 %
2
1
*
*
*
*
*
*
*
1,468
30,897
869
7,342
2,337
38,239 (3)
5
5,227
96,580
2,676
22,384
7,903
118,964
5,227
99,435
2,676
25,333
7,903
124,768
-
-
-
-
-
-
-
953
565
249
341
29
718
2,855
-
-
-
-
-
-
-
317
704
559
90
353
926
2,949
-
-
-
-
-
-
-
1,270
1,269
808
431
382
1,644
5,804
16 %
16 %
* %
*
*
*
*
*
* %
$
1,214
24,841
233
2,598
1,447
27,439
4 %
730
576
368
591
363
41
469
112
157
606
13,058
11,853
8,309
9,628
6,578
524
5,916
2,646
328
12,899
76
61
305
126
270
671
74
9
514
337
931
691
3,451
868
1,622
7,013
999
179
2,255
1,777
806
637
673
717
633
712
543
121
671
943
13,989
12,544
11,760
10,496
8,200
7,537
6,915
2,825
2,583
14,676
$
$
5,227
96,580
2,676
22,384
7,903
118,964
5,227
99,435 (4)
2,676
25,333
7,903
124,768
2
2
2
1
1
1
*
*
*
2
16 %
16 %
Less than 1%.
*
(1) For PCI loans, amounts represent carrying value.
(2) Includes 35 states; no state had loans in excess of $436 million.
(3) Includes 40 states; no state had loans in excess of $3.1 billion.
(4) Includes $40.0 billion of loans to owner-occupants where 51% or more of the property is used in the conduct of their business.
56
COMMERCIAL AND INDUSTRIAL LOANS AND LEASE
FINANCING For purposes of portfolio risk management, we
aggregate commercial and industrial loans and lease financing
according to market segmentation and standard industry
codes. Table 19 summarizes commercial and industrial loans and
lease financing by industry with the related nonaccrual totals.
While this portfolio has experienced deterioration in the current
credit cycle, we believe this portfolio has experienced less credit
deterioration than our CRE portfolios. For the year ended
December 31, 2010, the commercial and industrial loans and
lease financing portfolios had (1) a lower percentage of loans 90
days or more past due and still accruing (0.19% at year end;
0.24% for CRE), (2) a lower percentage of nonperforming loans
to total loans outstanding (2.02% at year end; 6.33% for CRE),
and (3) a lower loss rate to average total loans (1.50% for the
year; 1.67% for CRE). We believe this portfolio is well
underwritten and is diverse in its risk with relatively even
concentrations across several industries. A majority of our
commercial and industrial loans and lease financing portfolio is
secured by short-term liquid assets, such as accounts receivable,
inventory and securities, as well as long-lived assets, such as
equipment and other business assets. Our credit risk
management process for this portfolio primarily focuses on a
customer’s ability to repay the loan through their cash flow.
Generally, the collateral securing this portfolio represents a
secondary source of repayment.
Table 19: Commercial and Industrial Loans and Lease
Financing by Industry
December 31, 2010
(in millions)
PCI loans:
Investors
Media
Insurance
Technology
Healthcare
Residential construction
Other
Total PCI loans
All other loans:
Financial institutions
Cyclical retailers
Food and beverage
Oil and gas
Healthcare
Transportation
Industrial equipment
Real estate – other
Business services
Technology
Investors
Utilities
Other
Nonaccrual Outstanding
loans balance (1)
$
$
$
-
-
-
-
-
-
-
-
111
107
91
65
47
41
256 (2)
718
167
67
32
156
87
34
113
90
66
28
114
107
2,260
10,468
8,804
8,392
8,140
7,885
6,427
6,284
5,713
5,632
5,609
5,326
4,793
80,187 (3)
Total all other loans
Total
$
$
3,321
163,660
3,321
164,378
% of
total
loans
* %
*
*
*
*
*
*
* %
1 %
1
1
1
1
*
*
*
*
*
*
*
11
22 %
22 %
Less than 1%.
*
(1) For PCI loans, amounts represent carrying value.
(2) No other single category had loans in excess of $35 million.
(3) No other single category had loans in excess of $4.6 billion. The next largest
categories included public administration, hotel/restaurant, media, non-
residential construction and securities firms.
57
Risk Management – Credit Risk Management (continued)
REAL ESTATE 1-4 FAMILY FIRST MORTGAGE LOANS The
concentrations of real estate 1-4 family mortgage loans by state
are presented in Table 20. Our real estate 1-4 family mortgage
loans to borrowers in California represented approximately 14%
of total loans (3% of this amount were PCI loans from Wachovia)
at both December 31, 2010 and 2009, mostly within the larger
metropolitan areas, with no single area consisting of more than
3% of total loans. Changes in real estate values and underlying
economic or market conditions for these areas are monitored
continuously within our credit risk management process.
Some of our real estate 1-4 family mortgage loans
(representing first mortgage and home equity products) include
an interest-only feature as part of the loan terms. At
December 31, 2010, these loans were approximately 25% of total
loans, compared with 26% at the end of 2009. Substantially all
of these loans are considered to be prime or near prime. We
believe we have manageable adjustable-rate mortgage (ARM)
reset risk across our Wells Fargo originated and owned mortgage
loan portfolios.
Table 20: Real Estate 1-4 Family Mortgage Loans by State
Real estate Real estate
Total real
December 31, 2010
1-4 family 1-4 family estate 1-4 % of
total
junior lien
family
first
(in millions)
mortgage mortgage mortgage
loans
PCI loans:
California
Florida
New Jersey
Other (1)
$
21,630
3,076
1,293
7,246
49
56
36
109
21,679
3,132
1,329
7,355
3 %
*
*
*
Total PCI loans
$
33,245
250
33,495
4 %
All other loans:
California
Florida
New Jersey
New York
Virginia
Pennsylvania
North Carolina
Texas
Georgia
Other (2)
Total all
$
55,794
17,296
26,612
7,782
8,908
8,169
6,145
6,233
5,860
6,645
6,403
3,709
4,622
4,066
3,552
1,519
82,406
25,078
15,311
11,878
10,767
10,299
9,412
8,164
11 %
3
2
2
1
1
1
1
4,886
77,054
3,472
34,162
8,358
111,216
1
15
other loans
Total
$
$
196,990
95,899
292,889
39 %
230,235
96,149
326,384
43 %
Less than 1%.
*
(1) Consists of 45 states; no state had loans in excess of $759 million.
(2) Consists of 41 states; no state had loans in excess of $7.2 billion. Includes
$15.5 billion in Government National Mortgage Association (GNMA) pool
buyouts.
During the recent credit cycle, we have experienced an
increase in requests for extensions of commercial and industrial
and CRE loans, which have repayment guarantees. All
extensions granted are based on a re-underwriting of the loan
and our assessment of the borrower’s ability to perform under
the agreed-upon terms. At the time of extension, borrowers are
generally performing in accordance with the contractual loan
terms. Extension terms generally range from six to thirty-six
months and may require that the borrower provide additional
economic support in the form of partial repayment, amortization
or additional collateral or guarantees. In cases where the value of
collateral or financial condition of the borrower is insufficient to
repay our loan, we may rely upon the support of an outside
repayment guarantee in providing the extension. In considering
the impairment status of the loan, we evaluate the collateral and
future cash flows as well as the anticipated support of any
repayment guarantor. When performance under a loan is not
reasonably assured, including the performance of the guarantor,
we place the loan on nonaccrual status and we charge-off all or a
portion of a loan based on the fair value of the collateral securing
the loan.
Our ability to seek performance under the guarantee is
directly related to the guarantor’s creditworthiness, capacity and
willingness to perform, which is evaluated on an annual basis, or
more frequently as warranted. Our evaluation is based on the
most current financial information available and is focused on
various key financial metrics, including net worth, leverage, and
current and future liquidity. We consider the guarantor’s
reputation, creditworthiness, and willingness to work with us
based on our analysis as well as other lenders’ experience with
the guarantor. Our assessment of the guarantor’s credit strength
is reflected in our loan risk ratings for such loans. The loan risk
rating is an important factor in our allowance methodology for
commercial and industrial and CRE loans.
58
PURCHASED CREDIT-IMPAIRED (PCI) LOANS As of
December 31, 2008, certain of the loans acquired from Wachovia
had evidence of credit deterioration since their origination, and
it was probable that we would not collect all contractually
required principal and interest payments. Such loans identified
at the time of the acquisition were accounted for using the
measurement provisions for PCI loans. PCI loans were recorded
at fair value at the date of acquisition, and the historical
allowance for credit losses related to these loans was not carried
over.
PCI loans were 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).
A nonaccretable difference was established in purchase
accounting for PCI loans to absorb losses expected at that time
on those loans. Amounts absorbed by the nonaccretable
difference do not affect the income statement or the allowance
for credit losses.
Substantially all commercial and industrial, CRE and foreign
PCI loans are accounted for as individual loans. Conversely,
Pick-a-Pay and other consumer PCI loans have been aggregated
into several pools based on common risk characteristics. Each
pool is accounted for as a single asset with a single composite
interest rate and an aggregate expectation of cash flows.
Resolutions of loans may include sales of loans to third
parties, receipt of payments in settlement with the borrower, or
Table 21: Changes in Nonaccretable Difference for PCI Loans
foreclosure of the collateral. Our policy is to remove an
individual loan from a pool based on comparing the amount
received from its resolution with its contractual amount. Any
difference between these amounts is absorbed by the
nonaccretable difference. This removal method assumes that the
amount received from resolution approximates pool
performance expectations. The remaining accretable yield
balance is unaffected and any material change in remaining
effective yield caused by this removal method is addressed by
our quarterly cash flow evaluation process for each pool. For
loans that are resolved by payment in full, there is no release of
the nonaccretable difference for the pool because there is no
difference between the amount received at resolution and the
contractual amount of the loan. Modified PCI loans are not
removed from a pool even if those loans would otherwise be
deemed troubled debt restructurings (TDRs). Modified PCI
loans that are accounted for individually are considered TDRs,
and removed from PCI accounting, if there has been a
concession granted in excess of the original nonaccretable
difference.
During 2010, we recognized in income $989 million of
nonaccretable difference related to commercial PCI loans due to
payoffs and dispositions of these loans. We also transferred
$3.4 billion from the nonaccretable difference to the accretable
yield, of which $2.4 billion was due to sustained positive
performance in the Pick-a-Pay portfolio evidenced through an
increase in expected cash flows. Table 21 provides an analysis of
changes in the nonaccretable difference related to principal that
is not expected to be collected.
(in millions)
Balance at December 31, 2008
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Reclassification to accretable yield for loans with improving cash flows (3)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)
Balance at December 31, 2009
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Reclassification to accretable yield for loans with improving cash flows (3)
Use of nonaccretable difference due to:
Commercial Pick-a-Pay
Other
consumer
Total
$
10,410
26,485
4,069
40,964
(330)
(86)
(138)
-
-
(27)
-
(85)
(276)
(330)
(171)
(441)
(4,853)
(10,218)
(2,086)
(17,157)
5,003
16,240
1,622
22,865
(817)
(172)
-
-
-
-
(817)
(172)
(726)
(2,356)
(317)
(3,399)
Losses from loan resolutions and write-downs (4)
(1,698)
(2,959)
(391)
(5,048)
Balance at December 31, 2010
$
1,590
10,925
914
13,429
(1) Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay
and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approximates
the pool performance expectations.
(2) Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
(3) Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield
adjustment over the remaining life of the loan or pool of loans.
(4) Write-downs to net realizable value of PCI loans are absorbed by the nonaccretable difference when severe delinquency (normally 180 days) or other indications of severe
borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
59
Risk Management – Credit Risk Management (continued)
Since the Wachovia acquisition, we have released $5.3 billion
in nonaccretable difference for certain PCI loans and pools of
loans, including $3.8 billion transferred from the nonaccretable
difference to the accretable yield and $1.5 billion released
through loan resolutions. We have provided $1.6 billion in the
allowance for credit losses for certain PCI loans or pools of loans
that have had loss-related decreases to cash flows expected to be
collected. The net result is a $3.7 billion improvement in our
initial projected losses on all PCI loans.
Table 22: Actual and Projected Loss Results on PCI Loans
At December 31, 2010, the allowance for credit losses in
excess of nonaccretable difference on certain PCI loans was
$298 million. The allowance is necessary to absorb decreases in
cash flows expected to be collected since acquisition and
primarily relates to individual PCI loans. Table 22 analyzes the
actual and projected loss results on PCI loans since the
acquisition of Wachovia on December 31, 2008, through
December 31, 2010.
(in millions)
Release of unneeded nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Reclassification to accretable yield for loans with improving cash flows (3)
Total releases of nonaccretable difference due to better than expected losses
Provision for worse than originally expected losses (4)
Commercial Pick-a-Pay
consumer
Total
Other
$
1,147
258
864
2,269
(1,562)
-
-
2,383
2,383
-
-
85
593
678
(62)
1,147
343
3,840
5,330
(1,624)
Actual and projected losses on PCI loans better than originally expected
$
707
2,383
616
3,706
(1) Release of the nonaccretable difference for settlement with borrower, on individually accounted PCI loans, increases interest income in the period of settlement. Pick-a-Pay
and Other consumer PCI loans do not reflect nonaccretable difference releases due to pool accounting for those loans, which assumes that the amount received approximates
the pool performance expectations.
(2) Release of the nonaccretable difference as a result of sales to third parties increases noninterest income in the period of the sale.
(3) Reclassification of nonaccretable difference to accretable yield for loans with increased cash flow estimates will result in increased interest income as a prospective yield
adjustment over the remaining life of the loan or pool of loans.
(4) Provision for additional losses recorded as a charge to income, when it is estimated that the cash flows expected to be collected for a PCI loan or pool of loans have
decreased subsequent to the acquisition.
For further detail on PCI loans, see Note 1 (Summary of
Significant Accounting Policies – Loans) and Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
60
PICK-A-PAY PORTFOLIO The Pick-a-Pay portfolio was one of
the consumer residential first mortgage portfolios we acquired
from Wachovia. We considered a majority of the Pick-a-Pay
loans to be PCI loans.
The Pick-a-Pay portfolio had an outstanding balance of
$84.2 billion and a carrying value of $74.8 billion at
December 31, 2010. It is a liquidating portfolio, as Wachovia
ceased originating new Pick-a-Pay loans in 2008.
Real estate 1-4 family junior lien mortgages and lines of
credit associated with Pick-a-Pay loans are reported in the Home
Equity core portfolio. The Pick-a-Pay portfolio includes loans
Table 23: Pick-a-Pay Portfolio - Balances Over Time
that offer payment options (Pick-a-Pay option payment loans),
loans that were originated without the option payment feature,
loans that no longer offer the option feature as a result of our
modification efforts since the acquisition, and loans where the
customer voluntarily converted to a fixed-rate product. The Pick-
a-Pay portfolio is included in the consumer real estate 1-4 family
first mortgage class of loans in Note 6 (Loans and Allowance for
Credit Losses) to Financial Statements in this Report. Table 23
provides balances over time related to the types of loans
included in the portfolio.
2010
2009
2008
December 31,
Unpaid
principal
Unpaid
principal
Unpaid
principal
(in millions)
balance % of total
balance % of total
balance % of total
Option payment loans (1)
$
49,958
59 %
$
67,170
69 %
$
99,937
86 %
Non-option payment adjustable-rate
and fixed-rate loans (1)
Full-term loan modifications (1)
Total unpaid principal balance (1)
Total carrying value
$
$
11,070
23,132
13
28
13,926
16,378
14
17
15,763
-
14
-
84,160
100 %
$
97,474
100 %
74,815
$
85,238
$
$
115,700
100 %
95,315
(1) Unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist
that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
PCI loans in the Pick-a-Pay portfolio had an outstanding
balance of $41.9 billion and a carrying value of $32.4 billion at
December 31, 2010. The carrying value of the PCI loans is net of
remaining purchase accounting write-downs, which reflected
their fair value at acquisition. Upon acquisition, we recorded a
$22.4 billion write-down in purchase accounting on Pick-a-Pay
loans that were impaired.
Due to the sustained positive performance observed on the
Pick-a-Pay portfolio compared to the original acquisition
estimates, we have reclassified $2.4 billion from the
nonaccretable difference to the accretable yield since the
Wachovia merger. This improvement in the lifetime credit
outlook for this portfolio is primarily attributable to the
significant modification efforts as well as the portfolio’s
delinquency stabilization. This improvement in the credit
outlook is expected to be realized over the remaining life of the
portfolio, which is estimated to have a weighted-average life of
approximately nine years. The accretable yield percentage at the
end of 2010 was 4.54% compared with 5.34% at the end of 2009.
Fluctuations in the accretable yield are driven by changes in
interest rate indices for variable rate PCI loans, prepayment
assumptions, and expected principal and interest payments over
the estimated life of the portfolio. Changes in the projected
timing of cash flow events, including loan liquidations,
modifications and short sales, can also affect the accretable yield
percentage and the estimated weighted-average life of the
portfolio.
Pick-a-Pay option payment loans may be adjustable or fixed
rate. They 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.
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 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.” Total
deferred interest of $2.7 billion at December 31, 2010, was down
from $3.7 billion at December 31, 2009, due to loan modification
efforts as well as falling interest rates resulting in the minimum
payment option covering the interest and some principal on
many loans. At December 31, 2010, approximately 75% of
customers choosing the minimum payment option did not defer
interest.
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
61
Risk Management – Credit Risk Management (continued)
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. For a small population of Pick-a-Pay
loans, the recast occurs at the five-year anniversary. After a
recast, the customers’ new payment terms are reset to the
amount necessary to repay the balance over the remainder of the
original loan term.
Due to the terms of the Pick-a-Pay portfolio, there is little
recast risk over the next three years. Based on assumptions of a
flat rate environment, if all eligible customers elect the minimum
payment option 100% of the time and no balances prepay, we
would expect the following balances of loans to recast based on
reaching the principal cap: $3 million in 2011, $4 million in 2012
and $32 million in 2013. In 2010, the amount of loans recast
based on reaching the principal cap was $1 million. In addition,
we would expect the following balances of loans to start fully
Table 24: Pick-a-Pay Portfolio (1)
amortizing due to reaching their recast anniversary date and also
having a payment change at the recast date greater than the
annual 7.5% reset: $34 million in 2011, $69 million in 2012 and
$275 million in 2013. In 2010, the amount of loans reaching
their recast anniversary date and also having a payment change
over the annual 7.5% reset was $39 million.
Table 24 reflects the geographic distribution of the Pick-a-
Pay portfolio broken out between PCI loans and all other loans.
In stressed housing markets with declining home prices and
increasing delinquencies, the LTV ratio is a useful metric in
predicting future real estate 1-4 family first mortgage loan
performance, including potential charge-offs. Because PCI loans
were initially recorded at fair value, including write-downs for
expected credit losses, the ratio of the carrying value to the
current collateral value will be lower compared with the LTV
based on the unpaid principal balance. For informational
purposes, we have included both ratios in the following table.
December 31, 2010
All other loans
PCI loans
Ratio of
carrying
value to
current
(in millions)
California
Florida
New Jersey
Texas
Washington
Other states
Unpaid
principal
Current
LTV
balance (2)
ratio (3)
Carrying
value (4)
$
28,451
3,925
1,432
371
525
7,189
117 % $
122
21,623
2,960
91
78
96
106
1,242
337
488
5,726
Unpaid
principal
Current
LTV
value
balance (2)
ratio (3)
88 % $
88
78
72
89
83
20,782
4,317
2,568
1,725
1,288
11,587
81 % $
100
77
64
80
84
Carrying
value (4)
20,866
4,335
2,578
1,732
1,293
11,635
Total Pick-a-Pay loans
$
41,893
$
32,376
$
42,267
$
42,439
(1) The individual states shown in this table represent the top five states based on the total net carrying value of the Pick-a-Pay loans at the beginning of 2010.
(2) Unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist
that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
(3) The current LTV ratio is calculated as the unpaid principal balance divided by the collateral value. Collateral values are generally determined using automated valuation
models (AVM) and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market data
including market comparables and price trends for local market areas.
(4) Carrying value, which does not reflect the allowance for loan losses, includes remaining purchase accounting adjustments, which, for PCI loans may include the
nonaccretable difference and the accretable yield and, for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent
charge-offs.
To maximize return and allow flexibility for customers to
avoid foreclosure, we have in place several loss mitigation
strategies for our Pick-a-Pay loan portfolio. We contact
customers who are experiencing difficulty and may in certain
cases modify the terms of a loan based on a customer’s
documented income and other circumstances.
We also have taken steps to work with customers to refinance
or restructure their Pick-a-Pay loans into other loan products.
For customers at risk, we offer combinations of term extensions
of up to 40 years (from 30 years), interest rate reductions,
forbearance of principal, and, in geographies with substantial
property value declines, we may offer permanent principal
reductions.
In 2009, we rolled out the U.S. Treasury Department’s
Home Affordability Modification Program (HAMP) to the
customers in this portfolio. As of December 31, 2010, more than
11,000 HAMP applications were being reviewed by our loan
servicing department and more than 7,000 loans have been
approved for the HAMP trial modification. We believe a key
factor to successful loss mitigation is tailoring the revised loan
payment to the customer’s sustainable income. We continually
reassess our loss mitigation strategies and may adopt additional
or different strategies in the future.
In 2010, we completed more than 27,700 proprietary and
HAMP loan modifications and have completed more than
80,400 modifications since the Wachovia acquisition, resulting
in $3.7 billion of principal forgiveness to our customers. The
majority of the loan modifications were concentrated in our PCI
Pick-a-Pay loan portfolio. Approximately 49,000 modification
offers were proactively sent to customers in 2010. As part of the
modification process, the loans are re-underwritten, income is
documented and the negative amortization feature is eliminated.
62
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
$110.6 billion at December 31, 2010, of which 98% was
originated through the retail channel and approximately 19% of
the outstanding balance was in a first lien position. Table 25
includes the credit attributes of the Home Equity portfolios.
California loans represent the largest state concentration in each
of these portfolios and have experienced among the highest
early-term delinquency and loss rates.
Most of the modifications result in material payment reduction
to the customer. Because of the write-down of the PCI loans in
purchase accounting, our post-merger modifications to PCI Pick-
a-Pay loans have not resulted in any modification-related
provision for credit losses. To the extent we modify loans not in
the PCI Pick-a-Pay portfolio, we may establish an allowance for
consumer loans modified in a TDR.
HOME EQUITY PORTFOLIOS The deterioration in specific
segments of the legacy Wells Fargo Home Equity portfolios,
which began in 2007, required a targeted approach to managing
these assets. In fourth quarter 2007, a liquidating portfolio was
identified, consisting of home equity loans generated through
the wholesale channel not behind a Wells Fargo first mortgage,
and home equity loans acquired through correspondents. The
liquidating portfolio was $6.9 billion at December 31, 2010,
compared with $8.4 billion at December 31, 2009. The loans in
this liquidating portfolio represent less than 1% of our total loans
outstanding at December 31, 2010, and contain some of the
highest risk in our $117.5 billion Home Equity portfolio, with a
loss rate of 10.90% compared with 3.62% for the core portfolio.
Table 25: Home Equity Portfolios (1)
(in millions)
Core portfolio (2)
California
Florida
New Jersey
Virginia
Pennsylvania
Other
Total
Liquidating portfolio
California
Florida
Arizona
Texas
Minnesota
Other
Total
% of loans
two payments
Outstanding balance
or more past due
Loss rate
December 31,
December 31,
December 31,
2010
2009
2010
2009
2010
2009
$
27,850
30,264
12,036
8,629
5,667
5,432
12,038
8,379
5,855
5,051
50,976
53,811
3.30 %
5.46
3.44
2.33
2.48
2.83
4.12
5.48
2.50
1.91
2.03
2.85
4.92
6.13
1.95
1.86
1.24
3.04
5.42
4.73
1.30
1.06
1.49
2.44
110,590
115,398
3.24
3.35
3.62
3.28
2,555
330
149
125
91
3,654
3,205
408
193
154
108
4,361
6.66
8.85
6.91
2.02
5.39
4.53
8.78
9.45
10.46
1.94
4.15
5.06
15.19
13.72
20.89
2.81
9.57
7.48
16.74
16.90
18.57
2.56
7.58
6.46
6,904
8,429
5.54
6.74
10.90
11.17
Total core and liquidating portfolios
$
117,494
123,827
3.37
3.58
4.08
3.88
(1) Consists predominantly of real estate 1-4 family junior lien mortgages and first and junior lines of credit secured by real estate, excluding PCI loans.
(2) Includes $1.7 billion and $1.8 billion at December 31, 2010 and 2009, respectively, associated with the Pick-a-Pay portfolio.
CREDIT CARDS Our credit card portfolio totaled $22.3 billion at
December 31, 2010, which represented 3% of our total
outstanding loans and was smaller than the credit card portfolios
of each of our large bank peers. Delinquencies of 30 days or
more were 4.4% of credit card outstandings at
December 31, 2010, down from 5.5% a year ago. Net charge-offs
were 9.7% for 2010, down from 10.8% in 2009, reflecting
previous risk mitigation efforts and overall economic
improvements.
63
Risk Management – Credit Risk Management (continued)
NONACCRUAL LOANS AND OTHER NONPERFORMING ASSETS
Table 26 shows the five-year trend for nonaccrual loans and
other NPAs. 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) 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 and no
restructuring has occurred.
•
•
Table 26: Nonaccrual Loans and Other Nonperforming Assets
(in millions)
Nonaccrual loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial (1)
Consumer:
Real estate 1-4 family first mortgage (2)
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
Note 1 (Summary of Significant Accounting Policies – Loans)
to Financial Statements in this Report describes our accounting
policy for nonaccrual and impaired loans.
Wachovia nonaccrual loans were virtually eliminated at
December 31, 2008 (acquisition date), due to the purchase
accounting adjustments. As a result, the rate of growth for
nonaccrual loans since acquisition has been higher than it would
have been without the PCI loan accounting. The impact of
purchase accounting on our credit data will diminish over time.
Table 27 summarizes NPAs for each of the four quarters of 2010
and shows a decline in the total balance in fourth quarter 2010
for the first quarter since the acquisition of Wachovia.
2010
2009
2008
2007
2006
December 31,
$
3,213
5,227
2,676
108
127
4,397
3,696
3,313
171
146
1,253
594
989
92
57
11,351
11,723
2,985
432
128
293
45
45
943
12,289
2,302
10,100
2,263
300
332
2,648
894
273
1,272
280
184
331
105
78
29
43
586
688
212
180
Total consumer
14,891
12,695
3,815
1,736
1,080
Total nonaccrual loans (3)(4)
As a percentage of total loans
Foreclosed assets:
GNMA (5)
Other
Real estate and other nonaccrual investments (6)
26,242
24,418
6,800
2,679
1,666
3.47 %
3.12
0.79
0.70
0.52
$
1,479
4,530
120
960
2,199
62
667
1,526
16
535
649
5
322
423
5
Total nonaccrual loans and other nonperforming assets
$
32,371
27,639
9,009
3,868
2,416
As a percentage of total loans
4.27 %
3.53
1.04
1.01
0.76
(1) Includes LHFS of $3 million and $27 million at December 31, 2010 and 2009, respectively.
(2) Includes MHFS of $426 million, $339 million, $193 million, $222 million, and $82 million at December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
(3) Excludes loans acquired from Wachovia that are accounted for as PCI loans because they continue to earn interest income from accretable yield, independent of performance
in accordance with their contractual terms.
(4) See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
(5) Consistent with regulatory reporting requirements, foreclosed real estate securing GNMA loans is classified as nonperforming. Both principal and interest for GNMA loans
secured by the foreclosed real estate are collectible because the GNMA loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of
Veterans Affairs (VA).
(6) Includes real estate investments (loans with non-traditional interest terms accounted for as investments) that would be classified as nonaccrual if these assets were recorded
as loans, and nonaccrual debt securities.
64
Table 27: Nonaccrual Loans and Other Nonperforming Assets During 2010
December 31, 2010
September 30, 2010
June 30, 2010
March 31, 2010
($ in millions)
Balances
loans
Balances
loans
Balances
loans
Balances
% of
total
% of
total
% of
total
% of
total
loans
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family
$
3,213
5,227
2,676
108
127
2.12 % $
5.26
10.56
0.82
0.39
4,103
5,079
3,198
138
126
2.79 % $
5.14
11.46
1.06
0.42
3,843
4,689
3,429
163
115
2.63 % $
4,273
2.84 %
4.71
11.10
1.21
0.38
4,345
3,327
185
135
4.44
9.64
1.33
0.48
11,351
3.52
12,644
3.99
12,239
3.82
12,265
3.77
first mortgage
12,289
5.34
12,969
5.69
12,865
5.50
12,347
5.13
Real estate 1-4 family
junior lien mortgage
2,302
2.39
2,380
2.40
2,391
2.36
2,355
2.27
Other revolving credit
and installment
300
0.35
312
0.35
316
0.36
334
0.37
Total consumer
14,891
3.42
15,661
3.58
15,572
3.49
15,036
3.30
Total nonaccrual loans
26,242
3.47
28,305
3.76
27,811
3.63
27,301
3.49
Foreclosed assets:
GNMA
All other
Total foreclosed assets
Real estate and other
nonaccrual investments
Total nonaccrual
loans and other
1,479
4,530
6,009
1,492
4,635
6,127
1,344
3,650
4,994
1,111
2,970
4,081
120
141
131
118
nonperforming assets $
32,371
4.27 % $
34,573
4.59 % $
32,936
4.30 % $
31,500
4.03 %
Change from prior quarter
$
(2,202)
1,637
1,436
3,861
65
Risk Management – Credit Risk Management (continued)
Total NPAs were $32.4 billion (4.27% of total loans) at
December 31, 2010, and included $26.2 billion of nonaccrual
loans and $6.0 billion of foreclosed assets. The growth rate in
nonaccrual loans slowed in 2010, peaking in third quarter.
Growth occurred in the real estate portfolios (commercial and
Table 28: Analysis of Changes in Nonaccrual Loans
residential) which consist of secured loans. Nonaccruals in all
other loan portfolios were essentially flat or down year over year.
New inflows to nonaccrual loans continued to decline. Table 28
provides an analysis of the changes in nonaccrual loans.
(in millions)
Commercial nonaccrual loans
Balance, beginning of quarter
Inflows
Outflows
Balance, end of quarter
Consumer nonaccrual loans
Balance, beginning of quarter
Inflows
Outflows
Balance, end of quarter
Total nonaccrual loans
Typically, changes to nonaccrual loans period-over-period
represent inflows for loans that reach a specified past due
status, offset by reductions for loans that are charged off, sold,
transferred to foreclosed properties, or are no longer classified
as nonaccrual because they return to accrual status. We have
increased our loan modification activity to assist homeowners
and other borrowers in the current difficult economic cycle.
Loans are re-underwritten at the time of the modification in
accordance with underwriting guidelines established for
governmental and proprietary loan modification programs. For
an accruing loan that has been modified, if the borrower has
demonstrated performance under the previous terms and
shows the capacity to continue to perform under the
restructured terms, the loan will remain in accruing status.
Otherwise, the loan will be placed in a nonaccrual status
generally until the borrower has made six consecutive months
of payments, or equivalent, inclusive of consecutive payments
made prior to modification.
Loss expectations for nonaccrual loans are driven by
delinquency rates, default probabilities and severities. While
nonaccrual loans are not free of loss content, we believe the
estimated loss exposure remaining in these balances is
significantly mitigated by four factors. First, 99% of consumer
nonaccrual loans and 95% of commercial nonaccrual loans are
secured. Second, losses have already been recognized on 52%
of the remaining balance of consumer nonaccruals and
commercial nonaccruals have been written down by
$2.6 billion. Residential nonaccrual loans are written down to
net realizable value at 180 days past due, except for loans that
go into trial modification prior to becoming 180 days past due,
and which are not written down in the trial period (three
months) as long as trial payments are being made on time.
Third, as of December 31, 2010, 57% of commercial nonaccrual
loans were current on interest. Fourth, the inherent risk of loss
66
Dec. 31, Sept. 30,
June 30, Mar. 31, Dec. 31,
2010
2010
2010
2010
2009
Quarter ended
$
12,644
2,329
12,239
2,807
12,265
2,560
11,723
2,763
10,408
3,856
(3,622)
(2,402)
(2,586)
(2,221)
(2,541)
11,351
12,644
12,239
12,265
11,723
15,661
4,357
15,572
4,866
15,036
4,733
12,695
6,169
10,461
5,626
(5,127)
(4,777)
(4,197)
(3,828)
(3,392)
14,891
15,661
15,572
15,036
12,695
26,242
28,305
27,811
27,301
24,418
in all nonaccruals is adequately covered by the allowance for
loan losses.
Commercial nonaccrual loans, net of write-downs,
amounted to $11.4 billion at December 31, 2010, compared
with $11.7 billion a year ago. Consumer nonaccrual loans
amounted to $14.9 billion at December 31, 2010, compared
with $12.7 billion a year ago. The $2.2 billion increase in
nonaccrual consumer loans from a year ago was due to an
increase in 1-4 family first mortgage loans. Residential
mortgage nonaccrual loans increased largely due to slower
disposition and assets brought on the balance sheet upon
consolidation of VIEs. Federal government programs, such as
HAMP, and Wells Fargo proprietary programs, such as the
Company’s Pick-a-Pay Mortgage Assistance program, require
customers to provide updated documentation, and to
demonstrate sustained performance by completing trial
payment periods, before the loan can be removed from
nonaccrual status. In addition, for loans in foreclosure, many
states, including California and Florida, have enacted
legislation that significantly increases the time frames to
complete the foreclosure process, meaning that loans will
remain in nonaccrual status for longer periods. At the
conclusion of the foreclosure process, we continue to sell real
estate owned in a timely fashion.
When a consumer real estate loan is 120 days past due, we
move it to nonaccrual status. When the loan reaches 180 days
past due it is our policy to write these loans down to net
realizable value, except for modifications in their trial period.
Thereafter, we revalue each loan regularly and recognize
additional charges if needed. Of the $14.9 billion of consumer
nonaccrual loans at December 31, 2010, 98% are secured by
real estate and 33% have a combined LTV (CLTV) ratio of 80%
or below.
Table 29 provides a summary of foreclosed assets.
Table 29: Foreclosed Assets
(in millions)
GNMA
PCI loans:
Commercial
Consumer
Total PCI loans
All other loans:
Commercial
Consumer
Total all other loans
Total foreclosed assets
NPAs at December 31, 2010, included $1.5 billion of
foreclosed real estate that is FHA insured or VA guaranteed
and expected to have little to no loss content, and $4.5 billion
of foreclosed assets, which have been written down to the value
of the underlying collateral. Foreclosed assets increased
$2.9 billion, or 90%, in 2010 from the prior year. Of this
increase, $1.3 billion were foreclosed loans from the PCI
portfolio that are now recorded as foreclosed assets. At
December 31, 2010, substantially all of our foreclosed assets of
$6.0 billion have been in the portfolio one year or less.
Given our real estate-secured loan concentrations and
current economic conditions, we anticipate continuing to hold
a high level of NPAs on our balance sheet. The loss content in
the nonaccrual loans has been recognized through charge-offs
or provided for in the allowance for credit losses at
December 31, 2010. The performance of any one loan can be
affected by external factors, such as economic or market
conditions, or factors affecting a particular borrower. We
increased staffing in our workout and collection organizations
to ensure troubled borrowers receive the attention and help
they need. See the “Risk Management – Allowance for Credit
Losses” section in this Report for additional information.
Dec. 31, Sept. 30,
2010
2010
June 30, Mar. 31, Dec. 31,
2009
2010
2010
$
1,479
1,492
1,344
1,111
960
967
1,068
1,043
1,109
940
722
697
490
405
336
2,035
2,152
1,662
1,187
741
1,412
1,083
1,343
1,140
1,087
901
820
963
655
803
2,495
2,483
1,988
1,783
1,458
$
6,009
6,127
4,994
4,081
3,159
We process foreclosures on a regular basis for the loans we
service for others as well as those we hold in our loan portfolio.
However, we utilize foreclosure only as a last resort for dealing
with borrowers who are experiencing financial hardships. We
employ extensive contact and restructuring procedures to
attempt to find other solutions for our borrowers, and on
average we attempt to contact borrowers over 75 times by
phone and nearly 50 times by letter during the period from
first delinquency to foreclosure sale.
We employ the same foreclosure procedures for loans we
service for others as we use for loans that we hold in our
portfolio. We transmit customer and loan data directly from
our system of record to outside foreclosure counsel to help
ensure the quality of the customer and loan data included in
our foreclosure affidavits. We continuously test this process to
confirm the proper transmission of the data. Completed
foreclosure affidavits that are submitted to the courts are
reviewed, signed, and notarized as one of the last steps in a
multi-step process intended to comply with applicable law and
help ensure the quality of customer and loan data. As
previously disclosed, in the course of completing a thorough
review of our foreclosure affidavit preparation and execution
procedures, we did identify practices where final steps relating
to the execution of foreclosure affidavits, as well as some
aspects of the notarization process were not adhered to.
However, we do not believe that any of these practices led to
unwarranted foreclosures. In addition, we have enhanced those
procedures to help ensure that foreclosure affidavits are
properly prepared, reviewed, and signed.
67
Risk Management – Credit Risk Management (continued)
TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 30: Troubled Debt Restructurings (TDRs)
Dec. 31, Sept. 30,
June 30, Mar. 31, Dec. 31,
2010
2010
2010
2010
2009
$
11,603
1,626
10,951
1,566
778
674
9,525
1,469
502
7,972
1,563
310
6,685
1,566
17
14,007
13,191
11,496
9,845
8,268
1,751
1,350
656
386
265
15,758
14,541
12,152
10,231
8,533
5,185
10,573
5,177
9,364
3,877
8,275
2,738
2,289
7,493
6,244
$
$
$
15,758
14,541
12,152
10,231
8,533
We do not forgive principal for a majority of our TDRs, but in
those situations where principal is forgiven, the entire amount of
such principal forgiveness is immediately charged off. When a
TDR performs in accordance with its modified terms, the loan
either continues to accrue interest (for performing loans), or will
return to accrual status after the borrower demonstrates a
sustained period of performance.
If interest due on all nonaccrual loans (including loans that
were, but are no longer on nonaccrual at year end) had been
accrued under the original terms, approximately $1.3 billion of
interest would have been recorded as income in 2010, compared
with $362 million recorded as interest income.
(in millions)
Consumer TDRs:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
Total consumer TDRs
Commercial TDRs
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status
Total TDRs
Table 30 provides information regarding the recorded
investment of loans modified in TDRs. We establish an
allowance for loan losses when a loan is modified in a TDR,
which was $3.9 billion and $1.8 billion at December 31, 2010
and 2009, respectively. Total charge-offs related to loans
modified in a TDR were $812 million in 2010 and $479 million
in 2009.
Our nonaccrual policies are generally the same for all loan
types when a restructuring is involved. We underwrite loans at
the time of restructuring to determine whether there is sufficient
evidence of sustained repayment capacity based on the
borrower’s documented income, debt to income ratios, and other
factors. Any loans lacking sufficient evidence of sustained
repayment capacity at the time of modification are charged down
to the fair value of the collateral, if applicable. If the borrower
has demonstrated performance under the previous terms and
the underwriting process shows the capacity to continue to
perform under the restructured terms, the loan will remain in
accruing status. Otherwise, the loan will be placed in nonaccrual
status generally until the borrower demonstrates a sustained
period of performance, generally six consecutive months of
payments, or equivalent, inclusive of consecutive payments
made prior to modification. Loans will also be placed on
nonaccrual, and a corresponding charge-off is recorded to the
loan balance, if we believe that principal and interest
contractually due under the modified agreement will not be
collectible.
68
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 mortgage loans or consumer loans exempt under
regulatory rules from being classified as nonaccrual until later
delinquency, usually 120 days past due. PCI loans of $11.6 billion
at December 31, 2010, and $16.1 billion at December 31, 2009,
are excluded from this disclosure even though they are 90 days
or more contractually past due. These PCI loans are considered
to be accruing due to the existence of the accretable yield and not
based on consideration given to contractual interest payments.
Non-PCI loans 90 days or more past due and still accruing
were $18.5 billion at December 31, 2010, and $22.2 billion at
December 31, 2009. Those balances include $14.7 billion and
$15.3 billion, respectively, in loans whose repayments are
insured by the FHA or guaranteed by the VA.
Excluding these insured/guaranteed loans, loans 90 days or
more past due and still accruing at December 31, 2010, were
down $3.1 billion, or 45%, from December 31, 2009. The decline
was due to loss mitigation activities including modifications and
increased collection capacity/process improvements, charge-
offs, lower early stage delinquency levels and credit stabilization.
Table 31 reflects loans 90 days or more past due and still
accruing excluding the insured/guaranteed loans.
Table 31: Loans 90 Days or More Past Due and Still Accruing (Excluding Insured/Guaranteed Loans)
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage (1)
Real estate 1-4 family junior lien mortgage (1)
Credit card
Other revolving credit and installment
Total consumer
Total
(1) Includes MHFS 90 days or more past due and still accruing.
2010
2009
2008
2007
2006
December 31,
$
308
104
193
22
590
1,014
909
73
218
70
250
34
32
10
24
52
627
2,586
572
118
941
366
516
1,305
1,623
515
795
1,333
883
457
687
1,047
286
201
402
552
15
3
3
44
65
154
63
262
616
3,128
4,266
3,074
1,441
1,095
$
3,755
6,852
3,646
1,559
1,160
69
Risk Management – Credit Risk Management (continued)
NET CHARGE-OFFS
Table 32: Net Charge-offs
Year ended
Quarter ended
December 31,
December 31,
September 30,
June 30,
March 31,
Net loan % of
avg.
charge-
Net loan
charge-
% of Net loan
charge-
avg.
% of Net loan
charge-
avg.
% of Net loan
charge-
avg.
% of
avg.
($ in millions)
offs
loans
offs loans (1)
offs loans (1)
offs loans (1)
offs loans (1)
2010
Commercial:
Commercial and
industrial
Real estate mortgage
$
2,348 1.57 % $
1,083 1.10
Real estate construction
Lease financing
1,079 3.45
100 0.74
500
234
171
21
1.34 % $
0.94
2.51
0.61
509
218
276
23
1.38 % $
0.87
3.72
0.71
689
360
238
27
1.87 % $
1.47
2.90
0.78
650
271
394
29
1.68 %
1.12
4.45
0.85
Foreign
145 0.49
28
0.36
39
0.52
42
0.57
36
0.52
Total commercial
4,755 1.47
954
1.19
1,065
1.33
1,356
1.69
1,380
1.68
Consumer:
Real estate 1-4 family
first mortgage
4,378 1.86
1,024
1.77
1,034
1.78
1,009
1.70
1,311
2.17
Real estate 1-4 family
junior lien mortgage
4,723 4.65
1,005
4.08
1,085
4.30
1,184
4.62
1,449
5.56
Credit card
Other revolving credit
2,178 9.74
452
8.21
504
9.06
579
10.45
643
11.17
and installment
1,719 1.94
404
1.84
407
1.83
361
1.64
547
2.45
Total consumer
12,998 2.90
2,885
2.63
3,030
2.72
3,133
2.79
3,950
3.45
Total
$ 17,753 2.30 % $ 3,839
2.02 % $ 4,095
2.14 % $ 4,489
2.33 % $ 5,330
2.71 %
2009
Commercial:
Commercial and industrial $
Real estate mortgage
3,111
637
1.72 % $
0.66
Real estate construction
Lease financing
Foreign
1,047
209
2.56
1.42
197
0.64
927
315
409
49
46
2.24 % $
1.29
4.23
1.37
0.62
924
184
274
82
60
2.09 % $
0.77
2.67
2.26
0.79
704
119
259
61
46
1.51 % $
0.49
2.48
1.68
0.61
556
19
105
17
45
1.15 %
0.08
0.99
0.43
0.56
Total commercial
5,201
1.43
1,746
2.02
1,524
1.70
1,189
1.29
742
0.78
Consumer:
Real estate 1-4 family
first mortgage
3,133
1.31
1,018
1.74
966
1.63
758
1.26
391
0.65
Real estate 1-4 family
junior lien mortgage
4,638
4.34
1,329
5.09
1,291
4.85
1,171
4.33
Credit card
Other revolving credit
2,528 10.82
634
10.61
648
10.96
664
11.59
847
582
3.12
10.13
and installment
2,668
2.94
686
3.06
682
3.00
604
2.66
696
3.05
Total consumer
12,967
2.82
3,667
3.24
3,587
3.13
3,197
2.77
2,516
2.16
Total
$
18,168
2.21 % $
5,413
2.71 % $ 5,111
2.50 % $ 4,386
2.11 % $ 3,258
1.54 %
(1) Quarterly net charge-offs as a percentage of average loans are annualized.
70
Table 32 presents net charge-offs for the four quarters and
full year of 2010 and 2009. Net charge-offs in 2010 were
$17.8 billion (2.30% of average total loans outstanding)
compared with $18.2 billion (2.21%) in 2009. Total net charge-
offs decreased in 2010 in part due to lower average loan balances
and as a result of modestly improving economic conditions,
aggressive loss mitigation activities aimed at working with our
customers through their financial challenges, and a depletion of
the pool of the most challenged vintages/relationships in the
portfolio. Total net charge-offs decreased each quarter
throughout the year from the peak loss level in fourth quarter of
2009. While loss levels remained elevated, the broad-based
improvement across the portfolio was an encouraging trend.
Net charge-offs in the 1-4 family first mortgage portfolio
totaled $4.4 billion in 2010. 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 losses will continue to remain elevated.
Net charge-offs in the real estate 1-4 family junior lien
portfolio were $4.7 billion in 2010. Loss levels increased
throughout 2009 and peaked in the first quarter of 2010. Loss
levels will remain elevated, however, until conditions in the real
estate markets improve. More information about the Home
Equity portfolio, which includes substantially all of our real
estate 1-4 family junior lien mortgage loans, is available in
Table 25 in this Report and the related discussion.
Credit card charge-offs decreased $350 million to
$2.2 billion in 2010. Delinquency and loss levels improved in
2010 as the economy showed signs of stabilization.
Commercial and CRE net charge-offs were $4.8 billion in
2010 compared with $5.2 billion a year ago. Wholesale credit
results improved from 2009 as market liquidity and improving
market conditions helped stabilize performance results.
Increased lending activity in fourth quarter 2010 in the majority
of our commercial business lines further supported our belief of
a turn in the demand for credit.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit
losses, which consists of the allowance for loan losses and the
allowance for unfunded credit commitments, is management’s
estimate of credit losses inherent in the loan portfolio and
unfunded credit commitments at the balance sheet date,
excluding loans carried at fair value. The detail of the changes in
the allowance for credit losses by portfolio segment (including
charge-offs and recoveries by loan class) is in Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
We employ a disciplined process and methodology to
establish our allowance for credit losses each quarter. This
process takes into consideration many factors, including
historical and forecasted loss trends, loan-level credit quality
ratings and loan grade-specific loss factors. The process involves
subjective as well as complex judgments. In addition, we review
a variety of credit metrics and trends. However, these trends do
not solely determine the adequacy of the allowance as we use
several analytical tools in determining its adequacy. For
additional information on our allowance for credit losses, see the
“Critical Accounting Policies – Allowance for Credit Losses”
section and Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report.
At December 31, 2010, the allowance for loan losses totaled
$23.0 billion (3.04% of total loans), compared with $24.5 billion
(3.13%), at December 31, 2009. The allowance for credit losses
was $23.5 billion (3.10% of total loans) at December 31, 2010,
and $25.0 billion (3.20%) at December 31, 2009. The allowance
for credit losses included $298 million and $333 million at
December 31, 2010 and 2009, respectively, related to PCI loans
acquired from Wachovia. The allowance for unfunded credit
commitments was $441 million and $515 million at
December 31, 2010 and 2009, respectively. In addition to the
allowance for credit losses there was $13.4 billion and
$22.9 billion of nonaccretable difference at December 31, 2010
and 2009, respectively, to absorb losses for PCI loans. For
additional information on PCI loans, see the “Risk Management
– Credit Risk Management – Purchased Credit-Impaired Loans”
section and Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report.
The ratio of the allowance for credit losses to total
nonaccrual loans was 89% and 103% at December 31, 2010 and
2009, respectively. This ratio may fluctuate significantly
from period to period due to such factors as the mix of loan
types in the portfolio, borrower credit strength and the value and
marketability of collateral. Over half of nonaccrual loans were
home mortgages, auto and other consumer loans at
December 31, 2010.
The ratio of the allowance for loan losses to annual net
charge-offs was 130% and 135% at December 31, 2010 and 2009,
respectively. The $1.5 billion decline in the allowance for loan
losses in 2010 reflected lower loan balances and lower levels of
inherent credit loss in the portfolio compared with previous
year-end levels. When anticipated charge-offs are projected to
decline from current levels, this ratio will decrease. As more of
the portfolio experiences charge-offs, charge-off levels continue
to increase and the remaining portfolio is anticipated to consist
of higher quality vintage loans subjected to tightened
underwriting standards administered during the downturn in
the credit cycle. As charge-off levels peak, we anticipate coverage
levels will decrease until charge-off levels return to more
normalized levels. This ratio may fluctuate significantly from
period to period due to many factors, including general
economic conditions, customer credit strength and the
marketability of collateral.
71
Risk Management – Credit Risk Management (continued)
LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES We
sell residential mortgage loans to various parties, including (1)
Freddie Mac and Fannie Mae (GSEs) who include the mortgage
loans in GSE-guaranteed mortgage securitizations, (2) SPEs that
issue private label MBS, and (3) other financial institutions that
purchase mortgage loans for investment or private label
securitization. In addition, we pool FHA-insured and VA-
guaranteed mortgage loans that back securities guaranteed by
GNMA. We may be required to repurchase these mortgage
loans, indemnify the securitization trust, investor or insurer, or
reimburse the securitization trust, investor or insurer for credit
losses incurred on loans (collectively “repurchase”) in the event
of a breach of such contractual representations or warranties
that is not remedied within a period (usually 90 days or less)
after we receive notice of the breach.
We establish mortgage repurchase liabilities related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
have repurchase obligation, whether or not we currently service
those loans, based on a combination of factors. Currently,
repurchase demands primarily relate to 2006 through 2008
vintages and to GSE-guaranteed MBS.
During 2010, we continued to experience elevated levels of
repurchase activity measured by number of loans, investor
repurchase demands and our level of repurchases. We
repurchased or reimbursed investors for incurred losses on
mortgage loans with balances of $2.6 billion. Additionally, in
2010, we negotiated global settlements on pools of mortgage
loans of $675 million, which effectively eliminates the risk of
repurchase on these loans from our outstanding servicing
portfolio. We incurred net losses on repurchased loans, investor
reimbursements and loan pool global settlements totaling
$1.4 billion in 2010.
Adjustments made to our mortgage repurchase liability in
recent periods have incorporated the increase in repurchase
demands, mortgage insurance rescissions, and higher than
anticipated losses on repurchased loans that we have
experienced. Table 33 provides the number of unresolved
repurchase demands and mortgage insurance rescissions. We
generally do not have unresolved repurchase demands from the
FHA and VA for loans in GNMA-guaranteed securities because
those demands are relatively few and we quickly resolve them.
Total provision for credit losses was $15.8 billion in 2010,
$21.7 billion in 2009 and $16.0 billion in 2008. The 2010
provision was $2.0 billion less than credit losses, compared with
a provision that was $3.5 billion in excess of credit losses in
2009. Absent significant deterioration in the economy, we
expect future reductions in the allowance for credit losses.
Primary drivers of the 2010 provision reduction were
continued improvement in the consumer portfolios and related
loss estimates and improvement in management’s view of
economic conditions. These drivers were partially offset by an
increase in impaired loans and related allowance primarily
associated with increased consumer loan modification efforts
and a $693 million adjustment due to adoption of consolidation
accounting guidance on January 1, 2010.
In 2009, the provision of $21.7 billion included a provision in
excess of credit losses of $3.5 billion, which was primarily driven
by three factors: (1) deterioration in economic conditions that
increased the projected losses in our commercial portfolios,
(2) additional allowance associated with loan modification
programs designed to keep qualifying borrowers in their homes,
and (3) the establishment of additional allowance for PCI loans.
In 2008, the provision of $16.0 billion included a provision
in excess of credit losses of $8.1 billion, which included
$3.9 billion to conform loss emergence coverage periods to the
most conservative of legacy Wells Fargo and Wachovia within
Federal Financial Institutions Examination Council guidelines.
The remainder of the allowance build was attributable to higher
projected loss rates across the majority of the consumer credit
businesses, and some credit deterioration and growth in the
wholesale portfolios.
In determining the appropriate allowance attributable to our
residential real estate portfolios, the loss rates used in our
analysis include the impact of our established loan modification
programs. When modifications occur or are probable to occur,
our allowance considers the impact of these modifications,
taking into consideration the associated credit cost, including re-
defaults of modified loans and projected loss severity. The loss
content associated with existing and probable loan modifications
has been considered in our allowance reserving methodology.
Changes in the allowance reflect changes in statistically
derived loss estimates, historical loss experience, current trends
in borrower risk and/or general economic activity on portfolio
performance, and management’s estimate for imprecision and
uncertainty.
We believe the allowance for credit losses of $23.5 billion
was adequate to cover credit losses inherent in the loan
portfolio, including unfunded credit commitments, at December
31, 2010. The allowance for credit losses is subject to change and
considers existing factors at the time, including economic or
market conditions and ongoing internal and external
examination processes. Due to the sensitivity of the allowance
for credit losses to changes in the economic environment, it is
possible that unanticipated economic deterioration would create
incremental credit losses not anticipated as of the balance sheet
date. Our process for determining the allowance for credit losses
is discussed in the “Critical Accounting Policies – Allowance for
Credit Losses” section and Note 6 (Loans and Allowance for
Credit Losses) to Financial Statements in this Report.
72
Table 33: Unresolved Repurchase Demands and Mortgage Insurance Recissions
Government
sponsored entities (1)
Private
recissions with no demand (2)
Total
Mortgage insurance
($ in millions)
loans
balance (3)
loans
balance (3)
loans
balance (3)
loans
balance (3)
Number of Original loan
Number of Original loan
Number of Original loan
Number of Original loan
2010
December 31
September 30
June 30
March 31
6,501 $
9,887
12,536
10,804
1,467
2,212
2,840
2,499
2,899 $
3,605
3,160
2,320
680
882
707
519
3,248 $
3,035
2,979
2,843
801
748
760
737
12,648 $
16,527
18,675
15,967
2,948
3,842
4,307
3,755
December 31, 2009
8,354
1,911
2,929
886
2,965
859
14,248
3,656
(1) Includes repurchase demands on 1,495 loans totaling $291 million and 1,536 loans totaling $322 million at December 31, 2010, and December 31, 2009, respectively,
received from investors on mortgage servicing rights acquired from other originators. We have the right of recourse against the seller for these repurchase demands and
would incur a loss only for counterparty risk associated with the seller.
(2) As part of our representations and warranties in our loan sales contracts, we represent that certain loans have mortgage insurance. To the extent the mortgage insurance is
rescinded by the mortgage insurer, the lack of insurance may result in a repurchase demand from an investor.
(3) While original loan balance related to these demands is presented above, the establishment of the repurchase reserve is based on a combination of factors, such as our
appeals success rates, reimbursement by correspondent and other third party originators, and projected loss severity, which is driven by the difference between the current
loan balance and the estimated collateral value less costs to sell the property.
The level of repurchase demands outstanding at
December 31, 2010, was down from a year ago in both number of
outstanding loans and in total dollar balances as we continued to
work through the demands. Customary with industry practice,
we have the right of recourse against correspondent lenders with
respect to representations and warranties. Of the repurchase
demands presented in Table 33, approximately 20% relate to
loans purchased from correspondent lenders. Due primarily to
the financial difficulties of some correspondent lenders, we
typically recover on average approximately 50% of losses from
these lenders. Historical recovery rates as well as projected
lender performance are incorporated in the establishment of our
mortgage repurchase liability.
Our liability for repurchases, included in “Accrued expenses
and other liabilities” in our consolidated financial statements,
was $1.3 billion and $1.0 billion at December 31, 2010 and 2009,
respectively. In 2010, $1.6 billion of additions to the liability
were recorded, which reduced net gains on mortgage loan
origination/sales activities. Our additions to the repurchase
liability in 2010 reflect updated assumptions about the losses we
expect on repurchases and future demands, particularly on the
2006-2008 vintages.
We believe we have a high quality residential mortgage loan
servicing portfolio. Of the $1.8 trillion in the residential
mortgage loan servicing portfolio at December 31, 2010, 92%
was current, less than 2% was subprime at origination, and
approximately 1% was home equity securitizations. Our
combined delinquency and foreclosure rate on this portfolio was
8.02% at December 31, 2010, compared with 8.96% at
December 31, 2009. In this portfolio 7% are private
securitizations where we originated the loan and therefore have
some repurchase risk; 58% of these loans are from 2005 vintages
or earlier (weighted average age of 63 months); 81% were prime
at origination; and approximately 70% are jumbo loans. The
weighted-average LTV as of December 31, 2010, was 72%. In
addition, the highest risk segment of these private securitizations
are the subprime loans originated in 2006 and 2007. These
subprime loans have seller representations and warranties and
currently have LTVs close to or exceeding 100%, and represent
8% of the 7% private securitization portion of the residential
mortgage servicing portfolio. We had only $114 million of
repurchases related to private securitizations in 2010. Of the
servicing portfolio, 4% is non-agency acquired servicing and 3%
is private whole loan sales. We did not underwrite and securitize
the non-agency acquired servicing and therefore we have no
obligation on that portion of our servicing portfolio to the
investor for any repurchase demands arising from origination
practices.
Table 34 summarizes the changes in our mortgage
repurchase reserve.
73
Risk Management – Credit Risk Management (continued)
Table 34: Changes in Mortgage Repurchase Liability
Quarter ended
(in millions)
Balance, beginning of period
Provision for repurchase losses:
Loan sales
Change in estimate - primarily due to credit deterioration
Total additions
Losses
Balance, end of period
(1) Reflects purchase accounting refinements.
Dec. 31, Sept. 30, June 30, Mar. 31,
2010
2010
2010
2010
Year ended December 31,
2009
2010
$
1,331
1,375
1,263
1,033
1,033
620 (1)
35
429
29
341
36
346
44
358
144
1,474
464
(506)
370
(414)
382
(270)
402
(172)
1,618
(1,362)
302
625
927
(514)
$
1,289
1,331
1,375
1,263
1,289
1,033
The mortgage repurchase liability of $1.3 billion at
December 31, 2010, represents our best estimate of the probable
loss that we may incur for various representations and
warranties in the contractual provisions of our sales of mortgage
loans. There may be a range of reasonably possible losses in
excess of the estimated liability that cannot be estimated with
confidence. Because the level of mortgage loan repurchase losses
depends upon economic factors, investor demand strategies and
other external conditions that may change over the life of the
underlying loans, the level of the liability for mortgage loan
repurchase losses is difficult to estimate and requires
considerable management judgment. We maintain regular
contact with the GSEs and other significant investors to monitor
and address their repurchase demand practices and concerns.
For additional information on our repurchase liability, see the
“Critical Accounting Policies – Liability for Mortgage Loan
Repurchase Losses” section and Note 9 (Mortgage Banking
Activities) to Financial Statements in this Report.
The repurchase liability is only applicable to loans we
originated and sold with representations and warranties. Most of
these loans are included in our servicing portfolio. Our
repurchase liability estimate involves consideration of many
factors that influence the key assumptions of what our
repurchase volume may be and what loss on average we may
incur. Those key assumptions and the sensitivity of the liability
to immediate adverse changes in them at December 31, 2010, are
presented in Table 35.
Table 35: Mortgage Repurchase Liability –
Sensitivity/Assumptions
(in millions)
Balance at December 31, 2010
Loss on repurchases (1)
Increase in liability from:
10% higher losses
25% higher losses
Repurchase rate assumption
Increase in liability from:
10% higher repurchase rates
25% higher repurchase rates
Mortgage
repurchase
liability
1,289
36.0 %
145
362
0.3 %
108
269
$
$
$
(1) Represents total estimated average loss rate on repurchased loans, net of
recovery from third party originators, based on historical experience and current
economic conditions. The average loss rate includes the impact of repurchased
loans for which no loss is expected to be realized.
To the extent that economic conditions and the housing
market do not recover or future investor repurchase demands
and appeals success rates differ from past experience, we could
continue to have increased demands and increased loss severity
on repurchases, causing future additions to the repurchase
liability. However, some of the underwriting standards that were
permitted by the GSEs for conforming loans in the 2006 through
2008 vintages, which significantly contributed to recent levels of
repurchase demands, were tightened starting in mid to late
2008. Accordingly, we do not expect a similar rate of repurchase
requests from the 2009 and prospective vintages, absent
deterioration in economic conditions or changes in investor
behavior.
74
RISKS RELATING TO SERVICING ACTIVITIES In addition to
servicing loans in our portfolio, we act as servicer and/or master
servicer of residential mortgage loans included in GSE-
guaranteed mortgage securitizations, GNMA-guaranteed
mortgage securitizations and private label mortgage
securitizations, as well as for unsecuritized loans owned by
institutional investors. The loans we service were originated by
us or by other mortgage loan originators. As servicer, our
primary duties are typically to (1) collect payment due from
borrowers, (2) advance certain delinquent payments of principal
and interest, (3) maintain and administer any hazard, title or
primary mortgage insurance policies relating to the mortgage
loans, (4) maintain any required escrow accounts for payment of
taxes and insurance and administer escrow payments, and (5)
foreclose on defaulted mortgage loans or, to the extent
consistent with the documents governing a securitization,
consider alternatives to foreclosure, such as loan modifications
or short sales. As master servicer, our primary duties are
typically to (1) supervise, monitor and oversee the servicing of
the mortgage loans by the servicer, (2) consult with each servicer
and use reasonable efforts to cause the servicer to observe its
servicing obligations, (3) prepare monthly distribution
statements to security holders and, if required by the
securitization documents, certain periodic reports required to be
filed with the Securities and Exchange Commission (SEC), (4) if
required by the securitization documents, calculate distributions
and loss allocations on the mortgage-backed securities, (5)
prepare tax and information returns of the securitization trust,
and (6) advance amounts required by non-affiliated servicers
who fail to perform their advancing obligations.
Each agreement under which we act as servicer or master
servicer generally specifies a standard of responsibility for
actions we take in such capacity and provides protection against
expenses and liabilities we incur when acting in compliance with
the specified standard. For example, most private label
securitization agreements under which we act as servicer or
master servicer typically provide that the servicer and the master
servicer are entitled to indemnification by the securitization
trust for taking action or refraining from taking action in good
faith or for errors in judgment. However, we are not
indemnified, but rather are required to indemnify the
securitization trustee, against any failure by us, as servicer or
master servicer, to perform our servicing obligations or any of
our acts or omissions that involve willful misfeasance, bad faith
or gross negligence in the performance of, or reckless disregard
of, our duties. In addition, if we commit a material breach of our
obligations as servicer or master servicer, we may be subject to
termination if the breach is not cured within a specified period
following notice, which can generally be given by the
securitization trustee or a specified percentage of security
holders. Whole loan sale contracts under which we act as
servicer generally include similar provisions with respect to our
actions as servicer. The standards governing servicing in GSE-
guaranteed securitizations, and the possible remedies for
violations of such standards, vary, and those standards and
remedies are determined by servicing guides maintained by the
GSEs, contracts between the GSEs and individual servicers and
topical guides published by the GSEs from time to time. Such
remedies could include indemnification or repurchase of an
affected mortgage loan.
During fourth quarter 2010, we completed our review of our
foreclosure procedures related to affidavit preparation and
execution. We identified practices where final steps relating to
the execution of foreclosure affidavits, as well as some aspects of
the notarization process were not adhered to. However, we do
not believe that any of these practices led to unwarranted
foreclosures. In addition, we have enhanced those procedures to
help ensure that foreclosure affidavits are properly prepared,
reviewed, and signed.
Any re-execution or redelivery of any documents in
connection with foreclosures will involve costs that may not be
legally or otherwise reimbursable to us to the extent they relate
to securitized mortgage loans. Further, if the validity of any
foreclosure action is challenged by a borrower, whether
successfully or not, we may incur significant litigation costs,
which may not be reimbursable to us to the extent they relate to
securitized mortgage loans. In addition, if a court were to
overturn a foreclosure due to errors or deficiencies in the
foreclosure process, we may have liability to the borrower if the
required process was not followed and such failure resulted in
damages to the borrower. We could also have liability to a title
insurer that insured the title to the property sold in foreclosure.
Any such liabilities may not be reimbursable to us to the extent
they relate to a securitized mortgage loan.
Other concerns cited within recent press reports are that
securitization loan files may be lacking mortgage notes,
assignments or other critical documents required to be produced
on behalf of the trust. Although we believe that we delivered all
documents in accordance with the requirements of each
securitization involving our mortgage loans, if any required
document with respect to a securitized mortgage loan sold by us
is missing or defective, we would be obligated to cure the defect
or to repurchase the loan.
Some commentators also have suggested that the common
industry practice of recording a mortgage in the name of
Mortgage Electronic Registration Systems, Inc. (MERS) creates
issues regarding whether a securitization trust has good title to
the mortgage loan. MERS is a company that acts as mortgagee of
record and as agent for the owner of the related mortgage note.
When mortgage notes are assigned, such as between an
originator and a securitization trust, the change of ownership is
recorded electronically on a register maintained by MERS, which
then acts as agent for the new owner. The purpose of MERS is to
save borrowers and lenders from having to record assignments
of mortgages in county land offices each time ownership of the
mortgage note is assigned. Although MERS has been in existence
and used for many years, it has recently been suggested by some
commentators that having a mortgagee of record that is different
from the owner of the mortgage note “breaks the chain of title”
and clouds the ownership of the loan. We do not believe that to
be the case, and believe that the operative legal principle is that
the ownership of a mortgage follows the ownership of the
mortgage note, and that a securitization trust should have good
title to a mortgage loan if the note is endorsed and delivered to
it, regardless of whether MERS is the mortgagee of record or
whether an assignment of mortgage is recorded to the trust.
75
Risk Management –Asset/Liability Management (continued)
However, in order to foreclose on the mortgage loan, it may be
necessary for an assignment of the mortgage to be completed by
MERS to the trust, in order to comply with state law
requirements governing foreclosure. A delay by a servicer in
processing any related assignment of mortgage to the trust could
delay foreclosure, with adverse effects to security holders and
potential for servicer liability. Our practice is to obtain
assignments of mortgages from MERS during the foreclosure
process.
The FRB and OCC have completed a joint interagency
horizontal examination of foreclosure processing at large
mortgage servicers, including Wells Fargo, to evaluate the
adequacy of their controls and governance over bank foreclosure
processes, including compliance with applicable federal and
state law. The OCC and other federal banking regulators are
finalizing actions that will incorporate remedial requirements
and sanctions with respect to servicers within their relevant
jurisdictions for identified deficiencies.
Asset/Liability 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
(Board), consists of senior financial and business executives.
Each of our principal business groups has its own asset/liability
management committee and process 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, MBS 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.
76
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
December 31, 2010, our most recent simulation indicated
estimated earnings at risk of approximately 5% of our most likely
earnings plan over the next 12 months using a scenario in which
the federal funds rate rises to 4.25% and the 10-year Constant
Maturity Treasury bond yield rises to 5.10%. Simulation
estimates depend on, and will change with, the size and mix of
our actual and projected balance sheet at the time of each
simulation. Due to timing differences between the quarterly
valuation of MSRs and the eventual impact of interest rates on
mortgage banking volumes, earnings at risk in any particular
quarter could be higher than the average earnings at risk over
the 12-month simulation period, depending on the path of
interest rates and on our hedging strategies for MSRs. See the
“Risk Management – Mortgage Banking Interest Rate and
Market Risk” section in this Report for more information.
We use exchange-traded and over-the-counter (OTC) interest
rate derivatives to hedge our interest rate exposures. The
notional or contractual amount, credit risk amount and
estimated net fair value of these derivatives as of
December 31, 2010 and 2009, are presented in Note 15
(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 MHFS.
Notwithstanding the continued downturn in the housing
sector, and the continued lack of liquidity in the nonconforming
secondary markets, our mortgage banking revenue remained
strong, reflecting the complementary origination and servicing
strengths of the business. The secondary market for agency-
conforming mortgages functioned well during the year.
Interest rate and market risk can be substantial in the
mortgage business. Changes in interest rates may potentially
reduce total origination and servicing fees, the value of our
residential MSRs measured at fair value, the value of 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 affect the amount and timing of origination and
servicing fees because consumer demand for new mortgages and
the level of refinancing activity are sensitive to changes in
mortgage interest rates. Typically, a decline in mortgage interest
rates will lead to an increase in mortgage originations and fees
and may also lead to an increase in servicing fee income,
depending on the level of new loans added to the servicing
portfolio and prepayments. Given the time it takes for consumer
behavior to fully react to interest rate changes, as well as the
time required for processing a new application, providing the
commitment, and securitizing and selling the loan, interest rate
changes will affect 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.
We measure MHFS at fair value for prime MHFS
originations for which an active secondary market and readily
available market prices exist to reliably support fair value pricing
models used for these loans. At December 31, 2008, we
measured at fair value similar MHFS acquired from Wachovia.
Loan origination fees on these loans are recorded when earned,
and related direct loan origination costs are recognized when
incurred. We also measure at fair value certain of our other
interests held related to residential loan sales and
securitizations. We believe fair value measurement for prime
MHFS and other interests held, which we hedge with free-
standing derivatives (economic hedges) along with our MSRs
measured at fair value, 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 2009 and 2010, 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. In addition, in
2010, we have originated certain prime agency-eligible loans to
be held for investment as part of our asset/liability management
strategy.
We initially measure all of our MSRs at fair value and carry
substantially all of them at fair value depending on our strategy
for managing interest rate risk. 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 carried at
fair value 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. See “Critical Accounting Policies –
Valuation of Residential Mortgage Servicing Rights” section of
this Report for additional information. 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 for MSRs
carried at fair value, net of any gains on free-standing derivatives
(economic hedges) used to hedge MSRs. We may choose not to
fully hedge all 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.
The price risk associated with our MSRs is economically
hedged with a combination of highly liquid interest rate forward
instruments including mortgage forward contracts, interest rate
swaps and interest rate options. All of the instruments included
in the hedge are marked to market daily. Because the hedging
instruments are traded in highly liquid markets, their prices are
readily observable and are fully reflected in each quarter’s mark
to market. Quarterly MSR hedging results include a combination
of directional gain or loss due to market changes as well as any
carry income generated. If the economic hedge is effective, its
overall directional hedge gain or loss will offset the change in the
valuation of the underlying MSR asset. Consistent with our
longstanding approach to hedging interest rate risk in the
mortgage business, the size of the hedge and the particular
combination of forward hedging instruments at any point in
time is designed to reduce the volatility of the mortgage
business’s earnings over various time frames within a range of
mortgage interest rates. Because market factors, the composition
of the mortgage servicing portfolio and the relationship between
the origination and servicing sides of our mortgage business
change continually, the types of instruments used in our hedging
are reviewed daily and rebalanced based on our evaluation of
current market factors and the interest rate risk inherent in our
MSRs portfolio. Throughout 2010, our economic hedging
strategy generally used forward mortgage purchase contracts
that were effective at offsetting the impact of interest rates on
the value of the MSR asset.
Mortgage forward contracts are designed to pass the full
economics of the underlying reference mortgage securities to the
holder of the contract, including both the directional gain or loss
77
Risk Management –Asset/Liability Management (continued)
from the forward delivery of the reference securities and the
corresponding carry income. Carry income represents the
contract’s price accretion from the forward delivery price to the
current spot price including both the yield earned on the
reference securities and the market implied cost of financing
during the period. The actual amount of carry income earned on
the hedge each quarter will depend on the amount of the
underlying asset that is hedged and the particular instruments
included in the hedge. The level of carry income is driven by the
slope of the yield curve and other market driven supply and
demand factors affecting the specific reference securities. A steep
yield curve generally produces higher carry income while a flat
or inverted yield curve can result in lower or potentially negative
carry income. The level of carry income is also affected by the
type of instrument used. In general, mortgage forward contracts
tend to produce higher carry income than interest rate swap
contracts. Carry income is recognized over the life of the
mortgage forward as a component of the contract’s mark to
market gain or loss.
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:
• Valuation changes for MSRs 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
valuation changes for MSRs 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 affected by many
factors. Such factors include the mix of new business
between ARMs and fixed-rate mortgages, the relationship
between short-term and long-term interest rates, the degree
of volatility in interest rates, the relationship between
mortgage interest rates and other interest rate markets, and
other interest rate factors. Many of these factors are hard to
predict and we may not be able to directly or perfectly hedge
their effect.
• While our hedging activities are designed to balance our
mortgage banking interest rate risks, the financial
instruments we use may not perfectly correlate with the
values and income being hedged. For example, the change
in the value of ARMs production held for sale from changes
in mortgage interest rates may or may not be fully offset by
Treasury and LIBOR index-based financial instruments
used as economic hedges for such ARMs. Additionally, the
hedge-carry income we earn on our economic hedges for the
MSRs may not continue if the spread between short-term
78
and long-term rates decreases, we shift composition of the
hedge to more interest rate swaps, or there are other
changes in the market for mortgage forwards that affect the
implied carry.
The total carrying value of our residential and commercial
MSRs was $15.9 billion and $17.1 billion at December 31, 2010
and 2009, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 5.39% and 5.66% at
December 31, 2010 and 2009, respectively. Our total MSRs were
0.86% of mortgage loans serviced for others at
December 31, 2010, compared with 0.91% at
December 31, 2009.
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. The
fair value of these commitments 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.
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 employ forwards and options,
Eurodollar futures and options, and Treasury futures, forwards
and options contracts as economic hedges against the potential
decreases in the values of the loans. We expect that these
derivative financial instruments will experience changes in fair
value that will either fully or partially offset the changes in fair
value of the derivative loan commitments. However, changes in
investor demand, such as concerns about credit risk, can also
cause changes in the spread relationships between underlying
loan value and the derivative financial instruments that cannot
be hedged.
MARKET RISK – TRADING ACTIVITIES From a market risk
perspective, our net income is exposed to changes in interest
rates, credit spreads, foreign exchange rates, equity and
commodity prices and their implied volatilities. The primary
purpose of our trading businesses is to accommodate customers
in the management of their market price risks. Also, we take
positions based on market expectations or to benefit from price
differences between financial instruments and markets, subject
to risk limits established and monitored by Corporate ALCO. All
securities, foreign exchange transactions, commodity
transactions and derivatives used in our trading businesses are
carried at fair value. The Institutional Risk Committee
establishes and monitors counterparty risk limits. The credit risk
amount and estimated net fair value of all customer
accommodation derivatives at December 31, 2010 and 2009 are
included in Note 15 (Derivatives) to Financial Statements in this
Report. Open, “at risk” positions for all trading businesses 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 2010
was $32 million, with a lower bound of $22 million and an upper
bound of $52 million. The average VaR for fourth quarter 2010
was $30 million, with a lower bound of $22 million and an upper
bound of $38 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. The
Board’s policy is to review business developments, key risks and
historical returns for the private equity investment portfolio at
least annually. Management reviews the valuations of these
investments at least quarterly and assesses them for possible
OTTI. For nonmarketable investments, the analysis is based on
facts and circumstances of each individual investment and the
expectations for that investment’s cash flows and capital needs,
the viability of its business model and our exit strategy.
Nonmarketable investments include private equity investments
accounted for under the cost method and equity method. Private
equity investments are subject to OTTI. Principal investments
are carried at fair value with net unrealized gains and losses
reported in noninterest income.
As part of our business to support our customers, we trade
public equities, listed/OTC equity derivatives and convertible
bonds. We have risk mandates that govern these activities. 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 OTTI charges.
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.
Table 36 provides information regarding our marketable and
nonmarketable equity investments.
Table 36: Marketable and Nonmarketable Equity Investments
(in millions)
Nonmarketable equity investments:
Private equity investments:
Cost method
Equity method
Federal bank stock
Principal investments
Total nonmarketable
December 31,
2010
2009
$
3,240
7,624
5,254
305
3,808
5,138
5,985
1,423
equity investments (1)
$
16,423
16,354
Marketable equity securities:
Cost
Net unrealized gains
Total marketable
$
4,258
931
4,749
843
equity securities (2)
5,592
(1) Included in other assets on the balance sheet. See Note 7 (Premises, Equipment,
Lease Commitments and Other Assets) to Financial Statements in this Report for
additional information.
5,189
$
(2) Included in securities available for sale. See Note 5 (Securities Available for Sale)
to Financial Statements in this Report for additional information.
79
Risk Management –Asset/Liability Management (continued)
credit rating would not cause us to violate any of our debt
covenants. See the “Risk Factors” section of this Report for
additional information regarding recent legislative developments
and our credit ratings.
We continue to evaluate the potential impact on liquidity
management of regulatory proposals, including Basel III and
those required under the Dodd-Frank Act, as they move closer to
the final rule-making process.
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 2009, the
Parent filed a registration statement with the SEC for the
issuance of senior and subordinated notes, preferred stock and
other securities. The Parent’s ability to issue debt and other
securities under this registration statement is limited by the debt
issuance authority granted by the Board. The Parent is currently
authorized by the Board to issue $60 billion in outstanding
short-term debt and $170 billion in outstanding long-term debt.
During 2010, the Parent issued $1.3 billion in non-guaranteed
registered senior notes. In February 2011, the Parent remarketed
$2.5 billion of junior subordinated notes in connection with
Wachovia’s 2006 issuance of 5.80% Fixed-to-floating rate
Wachovia Income Trust hybrid securities. The junior
subordinated notes were exchanged with Wells Fargo for newly
issued senior notes.
The proceeds from securities issued in 2010 were used for
general corporate purposes, and we expect that the proceeds
from securities issued in the future will also be used for the same
purposes. The Parent also issues commercial paper from time to
time, subject to its short-term debt limit.
Table 37 provides information regarding the Parent’s
medium-term note (MTN) programs. The Parent may issue
senior and subordinated debt securities under Series I & J, and
the European and Australian programmes. Under Series K, the
Parent may issue senior debt securities linked to one or more
indices.
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, the 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.
Unencumbered debt and equity 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. The weighted-
average expected remaining maturity of the debt securities
within this portfolio was 6.1 years at December 31, 2010. Of the
$160.1 billion (cost basis) of debt securities in this portfolio at
December 31, 2010, $32.6 billion (20%) is expected to mature or
be prepaid in 2011 and an additional $20.4 billion (13%) in 2012.
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 (FHLB) and the FRB. In 2010, we sold mortgage
loans of $363 billion. The amount of mortgage loans and other
consumer loans available to be sold, securitized or pledged was
approximately $236 billion at December 31, 2010.
Core customer deposits have historically provided a sizeable
source of relatively stable and low-cost funds. Average core
deposits funded 62.9% and 60.4% of average total assets in 2010
and 2009, respectively.
Additional funding is provided by long-term debt (including
trust preferred securities), other foreign deposits, and short-
term borrowings. Long-term debt averaged $185.4 billion in
2010 and $231.8 billion in 2009. Short-term borrowings
averaged $46.8 billion in 2010 and $52.0 billion in 2009.
We anticipate making capital expenditures of approximately
$1.5 billion in 2011 for our stores, relocation and remodeling of
our facilities, and routine replacement of furniture, equipment
and servers. We fund expenditures from various sources,
including retained earnings and borrowings.
Liquidity is also available through our ability to raise funds in
a variety of domestic and international money and capital
markets. We access capital markets for long-term funding
through issuances of registered debt securities, private
placements and asset-backed secured funding. Investors in the
long-term capital markets generally will consider, among other
factors, a company’s debt rating in making investment decisions.
Rating agencies base their ratings on many quantitative and
qualitative factors, including capital adequacy, liquidity, asset
quality, business mix, the level and quality of earnings, and
rating agency assumptions regarding the probability and extent
of Federal financial assistance or support for certain large
financial institutions. Adverse changes in these factors could
result in a reduction of our credit rating; however, a reduction in
80
Table 37: Medium-Term Note (MTN) Programs
December 31, 2010
Debt Available
for
issuance
Date
(in billions)
established
authority issuance
MTN program:
Series I & J (1)
Series K (1)
European (2)
Australian (2)(3)
August 2009
$
April 2010
December 2009
June 2005
25.0
25.0
25.0
10.0
21.8
24.7
25.0
6.8
(1) SEC registered.
(2) Not registered with the SEC. May not be offered in the United States without
applicable exemptions from registration. The Australian MTN amounts are
presented in Australian dollars.
(3) As amended in October 2005 and March 2010.
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 $125 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. At
December 31, 2010, Wells Fargo Bank, N.A. had remaining
issuance capacity on the bank note program of $50 billion in
short-term senior notes and $50 billion in long-term senior or
subordinated notes. Securities are issued under this program as
private placements in accordance with Office of the Comptroller
of the Currency (OCC) regulations.
Wells Fargo Financial Canada Corporation In January
2010, 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 December 31, 2010, CAD$7.0 billion
remained available for future issuance. All medium-term notes
issued by WFFCC are unconditionally guaranteed by the Parent.
FEDERAL HOME LOAN BANK MEMBERSHIP We are a member
of the Federal Home Loan Banks based in Dallas, Des Moines
and San Francisco (collectively, the FHLBs). Each member of
each of the FHLBs is required to maintain a minimum
investment in capital stock of the applicable FHLB. The board of
directors of each FHLB can increase the minimum investment
requirements in the event it has concluded that additional
capital is required to allow it to meet its own regulatory capital
requirements. Any increase in the minimum investment
requirements outside of specified ranges requires the approval of
the Federal Housing Finance Board. Because the extent of any
obligation to increase our investment in any of the FHLBs
depends entirely upon the occurrence of a future event, potential
future payments to the FHLBs are not determinable.
81
Capital Management
We have an active program for managing stockholders’ equity
and regulatory capital and we maintain a comprehensive process
for assessing the Company’s overall capital adequacy. We
generate capital internally primarily through the retention of
earnings net of dividends. Our objective is to maintain capital
levels at the Company and its bank subsidiaries above the
regulatory “well-capitalized” thresholds by an amount
commensurate with our risk profile. Our potential sources of
stockholders’ equity include retained earnings and issuances of
common and preferred stock. Retained earnings increased
$10.4 billion from December 31, 2009, predominantly from
Wells Fargo net income of $12.4 billion, less common and
preferred dividends of $1.8 billion. During 2010, we issued
approximately 87 million shares of common stock, with net
proceeds of $1.4 billion, including 28 million shares during the
period under various employee benefit (including our employee
stock option plan) and director plans, as well as under our
dividend reinvestment and direct stock purchase programs.
On April 29, 2010, following stockholder approval, the
Company amended its certificate of incorporation to provide for
an increase in the number of shares of the Company’s common
stock authorized for issuance from 6 billion to 9 billion.
From time to time the Board 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 regulatory and legal considerations. The FRB
published clarifying supervisory guidance in first quarter 2009
and amended in December 2009, SR 09-4 Applying
Supervisory Guidance and Regulations on the Payment of
Dividends, Stock Redemptions, and Stock Repurchases at Bank
Holding Companies, pertaining to the FRB’s criteria,
assessment and approval process for reductions in capital. As
with all 19 participants in the FRB’s Supervisory Capital
Assessment Program (SCAP), under this supervisory letter,
before repurchasing our common shares, we must consult with
the FRB staff and demonstrate that the proposed actions are
consistent with the existing supervisory guidance, including
demonstrating that our internal capital assessment process is
consistent with the complexity of our activities and risk profile.
In 2008, the Board authorized the repurchase of up to 25 million
additional shares of our outstanding common stock. During
2010, we repurchased 3 million shares of our common stock, all
from our employee benefit plans. At December 31, 2010, the
total remaining common stock repurchase authority from the
2008 authorization was approximately 3 million shares.
Historically, our policy has been to repurchase shares under
the “safe harbor” conditions of Rule 10b-18 of the Securities
Exchange Act of 1934 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
82
all of the consideration. Our management may determine that
during a pending stock merger or acquisition when the safe
harbor would otherwise be available, it is in our best interest to
repurchase shares in excess of this additional daily volume
limitation. In such cases, we intend to repurchase shares in
compliance with the other conditions of the safe harbor,
including the standing daily volume limitation that applies
whether or not there is a pending stock merger or acquisition.
In connection with our participation in the TARP Capital
Purchase Program (CPP), we issued to the U.S. Treasury
Department warrants to purchase 110,261,688 shares of our
common stock with an exercise price of $34.01 per share
expiring on October 28, 2018. On May 26, 2010, in an auction by
the U.S. Treasury, we purchased 70,165,963 of the warrants at a
price of $7.70 per warrant. In addition, we purchased
651,244 warrants from the open market throughout the year. At
December 31, 2010, 39,444,481 warrants were outstanding and
exercisable. In June 2010, the Board authorized the purchase of
up to $1 billion of the warrants, including the warrants
purchased in the auction. As of December 31, 2010, $455 million
of that authority remained. Depending on market conditions, we
may purchase from time to time additional warrants and/or our
outstanding debt securities in privately negotiated or open
market transactions, by tender offer or otherwise.
The Company and each of our subsidiary banks are subject to
various regulatory capital adequacy requirements administered
by the FRB and the OCC. Risk-based capital (RBC) guidelines
establish a risk-adjusted ratio relating capital to different
categories of assets and off-balance sheet exposures. At
December 31, 2010, the Company and each of our subsidiary
banks were “well capitalized” under applicable regulatory capital
adequacy guidelines. See Note 25 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report for
additional information.
Current regulatory RBC rules are based primarily on broad
credit-risk considerations and limited market-related risks, but
do not take into account other types of risk a financial company
may be exposed to. Our capital adequacy assessment process
contemplates a wide range of risks that the Company is exposed
to and also takes into consideration our performance under a
variety of economic conditions, as well as regulatory
expectations and guidance, rating agency viewpoints and the
view of capital market participants.
Wells Fargo was a participant in the FRB’s Capital Plan
Review in December 2010. We submitted a Capital Plan Review
including proposed future dividends and share repurchase
programs to the FRB on January 7, 2011. We cannot guarantee
whether or when the FRB will approve our Capital Plan Review
or what other conditions the FRB may impose on us in order to
increase our common stock dividend or repurchase shares.
In July 2009, the Basel Committee on Bank Supervision
published an additional set of international guidelines for review
known as Basel III and finalized these guidelines in December
2010. The additional guidelines were developed in response to
the financial crisis of 2009 and 2010 and address many of the
weaknesses identified in the banking sector as contributing to
the crisis including excessive leverage, inadequate and low
quality capital and insufficient liquidity buffers. The U.S.
regulatory bodies are reviewing the final international standards
and final U.S. rulemaking is expected to be completed in 2011.
Although uncertainty exists regarding the final rules, we are
evaluating the impact of Basel III on our capital ratios based on
our interpretation of the proposed capital requirements and
expect to be above a 7% Tier 1 common equity ratio under
Basel III within the next few quarters.
We are well underway toward Basel II and Basel III
implementation and are currently on schedule to enter the
parallel run phase of Basel II in 2012 with regulatory approval.
Our delayed entry into the parallel run phase was approved by
the FRB in 2010 as a result of the acquisition of Wachovia.
At December 31, 2010, stockholders’ equity and Tier 1
common equity levels were higher than the quarter ending prior
to the Wachovia acquisition. During 2009, as regulators and the
market focused on the composition of regulatory capital, the Tier
1 common equity ratio gained significant prominence as a metric
of capital strength. There is no mandated minimum or “well
capitalized” standard for Tier 1 common equity; instead the RBC
rules state voting common stockholders’ equity should be the
dominant element within Tier 1 common equity. Tier 1 common
equity was $81.3 billion at December 31, 2010, or 8.30% of risk-
weighted assets, an increase of $15.8 billion from
December 31, 2009. Table 38 provides the details of the Tier 1
common equity calculation.
Table 38: Tier 1 Common Equity (1)
(in billions)
Total equity
Noncontrolling interests
Total Wells Fargo stockholders' equity
Adjustments:
Preferred equity
Goodwill and intangible assets (other than MSRs)
Applicable deferred taxes
Deferred tax asset limitation
MSRs over specified limitations
Cumulative other comprehensive income
Other
Tier 1 common equity
Total risk-weighted assets (2)
Tier 1 common equity to total risk-weighted assets
December 31,
2010
2009
$
127.9
(1.5)
114.4
(2.6)
126.4
111.8
(8.1)
(35.5)
4.3
-
(0.9)
(4.6)
(0.3)
(8.1)
(37.7)
5.3
(1.0)
(1.6)
(3.0)
(0.2)
(A)
(B)
$
$
81.3
65.5
980.0
1,013.6
(A)/(B)
8.30 %
6.46
(1) Tier 1 common equity is a non-generally accepted accounting principle (GAAP) financial measure that is used by investors, analysts and bank regulatory agencies to assess
the capital position of financial services companies. Tier 1 common equity includes total Wells Fargo stockholders' equity, less preferred equity, goodwill and intangible assets
(excluding MSRs), net of related deferred taxes, adjusted for specified Tier 1 regulatory capital limitations covering deferred taxes, MSRs, and cumulative other
comprehensive income. Management reviews Tier 1 common equity along with other measures of capital as part of its financial analyses and has included this non-GAAP
financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.
(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.
83
Critical Accounting Policies
Our significant accounting policies (see Note 1 (Summary of
Significant Accounting Policies) to Financial Statements in this
Report) are fundamental to understanding our results of
operations and financial condition because they require that we
use estimates and assumptions that may affect the value of our
assets or liabilities and financial results. 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;
purchased credit-impaired (PCI) loans;
the valuation of residential mortgage servicing rights
(MSRs);
liability for mortgage loan repurchase losses;
the fair valuation of financial instruments; and
income taxes.
•
•
•
Management has reviewed and approved these critical
accounting policies and has discussed these policies with the
Board’s Audit and Examination Committee.
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance
for loan losses and the allowance for unfunded credit
commitments, is management’s estimate of credit losses
inherent in the loan portfolio at the balance sheet date, excluding
loans carried at fair value. We develop and document our
allowance methodology at the portfolio segment level. Our loan
portfolio consists of a commercial loan portfolio segment and a
consumer loan portfolio segment.
We employ a disciplined process and methodology to
establish our allowance for credit losses. The total allowance for
credit losses considers both impaired and unimpaired loans.
While our methodology attributes portions of the allowance to
specific portfolio segments, the entire allowance for credit losses
is available to absorb credit losses inherent in the total loan
portfolio. No single statistic or measurement determines the
adequacy of the allowance for credit losses.
COMMERCIAL PORTFOLIO SEGMENT The allowance for credit
losses for unimpaired commercial loans is estimated through the
application of loss factors to loans based on credit risk rating for
each loan. In addition, the allowance for credit losses for
unfunded commitments, including letters of credit, is estimated
by applying these loss factors to loan equivalent exposures. The
loss factors reflect the estimated default probability and quality
of the underlying collateral. The loss factors used are statistically
derived through the observation of historical losses incurred for
loans within each credit risk rating over a relevant specified
period of time. As appropriate, we adjust or supplement these
loss factors and estimates to reflect other risks that may be
identified from current conditions and developments in selected
portfolios.
84
The allowance also includes an amount for estimated credit
losses on impaired loans such as nonaccrual loans and loans that
have been modified in a TDR, whether on accrual or nonaccrual
status.
CONSUMER PORTFOLIO SEGMENT Loans are pooled generally
by product type with similar risk characteristics. Losses are
estimated using forecasted losses to represent our best estimate
of inherent loss based on historical experience, quantitative and
other mathematical techniques over the loss emergence period.
Each business group exercises significant judgment in the
determination of the credit loss estimation model that fits the
credit risk characteristics of its portfolio. We use both internally
developed and vendor supplied models in this process. We often
use roll rate or net flow models for near-term loss projections,
and vintage-based models, behavior score models, and time
series or statistical trend models for longer-term projections.
Management must use judgment in establishing additional input
metrics for the modeling processes, considering further
stratification into sub-product, origination channel, vintage, loss
type, geographic location and other predictive characteristics. In
addition, we establish an allowance for consumer loans modified
in a TDR, whether on accrual or nonaccrual status.
The models used to determine the allowance are validated by
an independent internal model validation group operating in
accordance with Company policies.
OTHER ACL MATTERS An allowance for impaired consumer and
commercial loans that have been modified in a TDR is measured
based on an estimate of cash flows, both principal and interest,
expected to be collected or an assessment of the fair value of
collateral underlying the impaired loan, if applicable.
Management exercises significant judgment to develop these
estimates.
Commercial and consumer PCI loans may require an
allowance subsequent to their acquisition. This allowance
requirement is due to probable decreases in expected principal
and interest cash flows (other than due to decreases in interest
rate indices and changes in prepayment assumptions).
The allowance for credit losses for both portfolio segments
includes an amount for imprecision or uncertainty that may
change from period to period. This amount represents
management’s judgment of risks inherent in the processes and
assumptions used in establishing the allowance. This imprecision
considers economic environmental factors, modeling
assumptions and performance, process risk, and other subjective
factors, including industry trends.
SENSITIVITY TO CHANGES Changes in the allowance for credit
losses and, therefore, in the related provision expense can
materially affect net income. The establishment of the allowance
for credit losses relies on a consistent quarterly process that
requires significant management review and judgment.
Management considers changes in economic conditions,
customer behavior, and collateral value, among other influences.
From time to time, economic factors or business decisions, such
as the addition or liquidation of a loan product or business unit,
may affect the loan portfolio, causing management to provide or
release amounts from the allowance for credit losses.
The allowance for credit losses for commercial loans,
including unfunded credit commitments (individually risk
weighted) is sensitive to credit risk ratings assigned to each
credit exposure. Commercial loan risk ratings are evaluated
based on each situation by experienced senior credit officers and
are subject to periodic review by an independent internal team of
credit specialists.
The allowance for credit losses for consumer loans
(statistically modeled) is sensitive to economic assumptions and
delinquency trends. Forecasted losses are modeled using a range
of economic scenarios.
Assuming a one risk rating downgrade throughout our
commercial portfolio segment, a stressed economic scenario for
modeled losses on our consumer portfolio segment and
incremental deterioration in our PCI portfolio could imply an
additional allowance requirement of approximately $10.7 billion.
Assuming a one risk rating upgrade throughout our
commercial portfolio segment and a strong recovery economic
scenario for modeled losses on our consumer portfolio segment
could imply a reduced allowance requirement of approximately
$4.5 billion.
The sensitivity analyses provided are hypothetical scenarios
and are not considered probable. They do not represent
management’s view of inherent losses in the portfolio as of the
balance sheet date. Because significant judgment is used, it is
possible that others performing similar analyses could reach
different conclusions.
See the “Risk Management – Credit Risk Management”
section and Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report for further discussion of our
allowance.
Purchased Credit-Impaired (PCI) Loans
Loans purchased with evidence of credit deterioration since
origination and for which it is probable that all contractually
required payments will not be collected are considered to be
credit impaired. Our PCI loans represent loans acquired in the
Wachovia merger that were deemed to be credit-impaired. PCI
loans are initially measured at fair value, which includes
estimated future credit losses expected to be incurred over the
life of the loan. Accordingly, the historical allowance for credit
losses related to these loans was not carried over.
Management evaluated whether there was evidence of credit
quality deterioration as of the purchase date using indicators
such as past due and nonaccrual status, commercial risk ratings,
recent borrower credit scores and recent loan-to-value
percentages.
The fair value at acquisition was based on an estimate of cash
flows, both principal and interest, expected to be collected,
discounted at the prevailing market rate of interest. We
estimated the cash flows expected to be collected at acquisition
using our internal credit risk, interest rate risk and prepayment
risk models, which incorporate our best estimate of current key
assumptions, such as property values, default rates, loss severity
and prepayment speeds.
Substantially all commercial and industrial, CRE and foreign
PCI loans are accounted for as individual loans. Conversely, Pick-
a-Pay and other consumer PCI loans have been aggregated into
several pools based on common risk characteristics. Each pool is
accounted for as a single asset with a single composite interest
rate and an aggregate expectation of cash flows.
The excess of cash flows expected to be collected over the
carrying value (estimated fair value at acquisition date) is
referred to as the accretable yield and is recognized in interest
income using an effective yield method over the remaining life of
the loan, or pool of loans, in situations where there is a
reasonable expectation about the timing and amount of cash
flows expected to be collected. The difference between the
contractually required payments and the cash flows expected to
be collected at acquisition, considering the impact of
prepayments, is referred to as the nonaccretable difference.
Subsequent to acquisition, we regularly evaluate our estimates
of cash flows expected to be collected. These evaluations,
performed quarterly, require the continued usage of key
assumptions and estimates, similar to our initial estimate of fair
value. We must apply judgment to develop our estimates of cash
flows for PCI loans given the impact of home price and property
value changes, changing loss severities, modification activity, and
prepayment speeds.
If we have probable decreases in cash flows expected to be
collected (other than due to decreases in interest rate indices and
changes in prepayment assumptions), we charge the provision
for credit losses, resulting in an increase to the allowance for loan
losses. If we have probable and significant increases in cash flows
expected to be collected, we first reverse any previously
established allowance for loan losses and then increase interest
income as a prospective yield adjustment over the remaining life
of the loan, or pool of loans. Estimates of cash flows are impacted
by changes in interest rate indices for variable rate loans and
prepayment assumptions, both of which are treated as
prospective yield adjustments included in interest income.
Resolutions of loans may include sales of loans to third
parties, receipt of payments in settlement with the borrower, or
foreclosure of the collateral. Our policy is to remove an
individual loan from a pool based on comparing the amount
received from its resolution with its contractual amount. Any
difference between these amounts is absorbed by the
nonaccretable difference for the entire pool. This removal
method assumes that the amount received from resolution
approximates pool performance expectations. The remaining
accretable yield balance is unaffected and any material change in
remaining effective yield caused by this removal method is
addressed by our quarterly cash flow evaluation process for each
pool. For loans that are resolved by payment in full, there is no
release of the nonaccretable difference for the pool because there
is no difference between the amount received at resolution and
the contractual amount of the loan. Modified PCI loans are not
removed from a pool even if those loans would otherwise be
deemed TDRs. Modified PCI loans that are accounted for
individually are considered TDRs, and removed from PCI
accounting if there has been a concession granted in excess of the
original nonaccretable difference.
85
Critical Accounting Policies (continued)
The amount of cash flows expected to be collected and,
accordingly, the adequacy of the allowance for loan loss due to
certain decreases in cash flows expected to be collected, is
particularly sensitive to changes in loan credit quality. The
sensitivity of the overall allowance for credit losses, including
PCI loans, is presented in the preceding section, “Critical
Accounting Policies – Allowance for Credit Losses.”
PCI loans that were classified as nonperforming loans by
Wachovia are no longer classified as nonperforming because, at
acquisition, we believe we will fully collect the new carrying value
of these loans and due to the existence of the accretable yield. It
is important to note that judgment is required to classify PCI
loans as performing and is dependent on having a reasonable
expectation about the timing and amount of cash flows expected
to be collected, even if the loan is contractually past due.
See the “Risk Management – Credit Risk Management”
section and Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report for further discussion of PCI
loans.
Valuation of Residential Mortgage Servicing Rights
Mortgage servicing rights (MSRs) are assets that represent the
rights to service mortgage loans for others. We recognize MSRs
when we purchase servicing rights from third parties, or retain
servicing rights in connection with the sale or securitization of
loans we originate (asset transfers). We also have MSRs acquired
in the past under co-issuer agreements that provide for us to
service loans that were originated and securitized by third-party
correspondents. We initially measure and carry substantially all
of our MSRs related to residential mortgage loans at fair value.
At the end of each quarter, we determine the fair value of
MSRs using a valuation model that calculates the present value
of estimated future net servicing income. The model incorporates
assumptions that market participants use in estimating future
net servicing income, including estimates of prepayment speeds
(including housing price volatility), discount rate, default rates,
cost to service (including delinquency and foreclosure costs),
escrow account earnings, contractual servicing fee income,
ancillary income and late fees.
To reduce the sensitivity of earnings to interest rate and
market value fluctuations, we may use securities available for
sale and free-standing derivatives (economic hedges) to hedge
the risk of changes in the fair value of MSRs, with the resulting
gains or losses reflected in income. Changes in the fair value of
the MSRs from changing mortgage interest rates are generally
offset by gains or losses in the fair value of the derivatives and
the particular instruments used to hedge the MSRs. In addition,
we also consider origination volume in our risk management
strategy as it tends to act as a “natural hedge.” For example, as
interest rates decline, servicing values generally decrease and
fees from origination volume tend to increase. Conversely, as
interest rates increase, the fair value of the MSRs generally
increases, while fees from origination volume tend to decline. See
the “Risk Management – Mortgage Banking Interest Rate and
Market Risk” section in this Report for discussion of the timing
of the effect of changes in mortgage interest rates.
Net servicing income, a component of mortgage banking
noninterest income, includes the changes from period to period
86
in fair value of both our residential MSRs and the free-standing
derivatives (economic hedges) used to hedge our residential
MSRs. Changes in the fair value of residential MSRs from period
to period result from (1) changes in the valuation model inputs or
assumptions (principally reflecting changes in discount rates and
prepayment speed assumptions, mostly due to changes in
interest rates and costs to service, including delinquency and
foreclosure costs), and (2) other changes, representing changes
due to collection/realization of expected cash flows.
We use a dynamic and sophisticated model to estimate the
value of our MSRs. The model is validated by an independent
internal model validation group operating in accordance with
Company policies. Senior management reviews all significant
assumptions quarterly. Mortgage loan prepayment speed – a key
assumption in the model – is the annual rate at which borrowers
are forecasted to repay their mortgage loan principal. The
discount rate used to determine the present value of estimated
future net servicing income – another key assumption in the
model – is the required rate of return investors in the market
would expect for an asset with similar risk. To determine the
discount rate, we consider the risk premium for uncertainties
from servicing operations (e.g., possible changes in future
servicing costs, ancillary income and earnings on escrow
accounts). Both assumptions can, and generally will, change
quarterly as market conditions and interest rates change. For
example, an increase in either the prepayment speed or discount
rate assumption results in a decrease in the fair value of the
MSRs, while a decrease in either assumption would result in an
increase in the fair value of the MSRs. In recent years, there have
been significant market-driven fluctuations in loan prepayment
speeds and the discount rate. These fluctuations can be rapid and
may be significant in the future. Therefore, estimating
prepayment speeds within a range that market participants
would use in determining the fair value of MSRs requires
significant management judgment.
The valuation and sensitivity of MSRs is discussed further in
Note 1 (Summary of Significant Accounting Policies), Note 8
(Securitizations and Variable Interest Entities), Note 9
(Mortgage Banking Activities) and Note 16 (Fair Values of Assets
and Liabilities) to Financial Statements in this Report.
Liability for Mortgage Loan Repurchase Losses
We sell residential mortgage loans to various parties, including
(1) Freddie Mac and Fannie Mae (GSEs), which include the
mortgage loans in GSE-guaranteed mortgage securitizations, (2)
special purpose entities that issue private label MBS, and (3)
other financial institutions that purchase mortgage loans for
investment or private label securitization. In addition, we pool
FHA-insured and VA-guaranteed mortgage loans, which back
securities guaranteed by GNMA. The agreements under which
we sell mortgage loans and the insurance or guaranty
agreements with FHA and VA contain provisions that include
various representations and warranties regarding the origination
and characteristics of the mortgage loans. Although the specific
representations and warranties vary among different sales,
insurance or guarantee agreements, they typically cover
ownership of the loan, compliance with loan criteria set forth in
the applicable agreement, validity of the lien securing the loan,
absence of delinquent taxes or liens against the property securing
the loan, compliance with applicable origination laws, and other
matters. For more information about these loan sales and the
related risks that may result in liability see the “Risk
Management – Credit Risk Management – Liability for Mortgage
Loan Repurchase Losses” section in this Report.
We may be required to repurchase mortgage loans, indemnify
the securitization trust, investor or insurer, or reimburse the
securitization trust, investor or insurer for credit losses incurred
on loans (collectively “repurchase”) in the event of a breach of
contractual representations or warranties that is not remedied
within a period (usually 90 days or less) after we receive notice of
the breach. Typically, we would only be required to repurchase
securitized loans if any such breach is deemed to have material
and adverse effect on the value of the mortgage loan or to the
interests of the security holders in the mortgage loan. The time
periods specified in our mortgage loan sales contracts to respond
to repurchase requests vary, but are generally 90 days or less.
While many contracts do not include specific remedies if the
applicable time period for a response is not met, contracts for
mortgage loan sales to the GSEs include various types of specific
remedies and penalties that could be applied to inadequate
responses to repurchase requests. Similarly, the agreements
under which we sell mortgage loans require us to deliver various
documents to the securitization trust or investor, and we may be
obligated to repurchase any mortgage loan for which the
required documents are not delivered or are defective. Upon
receipt of a repurchase request, we work with securitization
trusts, investors or insurers to arrive at a mutually agreeable
resolution. Repurchase demands are typically reviewed on an
individual loan by loan basis to validate the claims made by the
securitization trust, investor or insurer, and to determine
whether a contractually required repurchase event occurred.
Occasionally, in lieu of conducting the loan level evaluation, we
may negotiate global settlements in order to resolve a pipeline of
demands in lieu of repurchasing the loans. We manage the risk
associated with potential repurchases or other forms of
settlement through our underwriting and quality assurance
practices and by servicing mortgage loans to meet investor and
secondary market standards.
We establish mortgage repurchase liabilities related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
have repurchase obligation, whether or not we currently service
those loans, based on a combination of factors. Such factors
incorporate estimated levels of defects based on internal quality
assurance sampling, default expectations, historical investor
repurchase demand and appeals success rates (where the
investor rescinds the demand based on a cure of the defect or
acknowledges that the loan satisfies the investor’s applicable
representations and warranties), reimbursement by
correspondent and other third party originators, and projected
loss severity. We establish a liability at the time loans are sold
and continually update our liability estimate during their life.
Although investors may demand repurchase at any time, the
majority of repurchase demands occur in the first 24 to 36
months following origination of the mortgage loan and can vary
by investor. Most repurchases under our representation and
warranty provisions are attributable to borrower
misrepresentations and appraisals obtained at origination that
investors believe do not fully comply with applicable industry
standards.
Although, to date, repurchase demands with respect to private
label mortgage-backed securities have been more limited than
with respect to GSE-guaranteed securities, it is possible that
requests to repurchase mortgage loans in private label
securitizations may increase in frequency as investors explore
every possible avenue to recover losses on their securities. In
addition, the Federal Housing Finance Agency, as conservator of
Freddie Mac and Fannie Mae, recently used its subpoena power
to request loan applications, property appraisals and other
documents from large mortgage securitization industry
participants, including us, relating to private label MBS in order
to determine whether breaches of representations and
warranties exist in those securities owned by the GSEs. We
believe the risk of repurchase in our private label securitizations
is substantially reduced, relative to other private label
securitizations, because approximately half of the private label
securitizations that include our mortgage loans do not contain
representations and warranties regarding borrower or other
third party misrepresentations related to the mortgage loan,
general compliance with underwriting guidelines, or property
valuation, which are commonly asserted bases for repurchase.
We evaluate the validity and materiality of any claim of breach of
representations and warranties in private label MBS that is
brought to our attention and work with securitization trustees to
resolve any repurchase requests. Nevertheless, we may be subject
to legal and other expenses if private label securitization trustees
or investors choose to commence legal proceedings in the event
of disagreements.
The mortgage loan repurchase liability at December 31, 2010,
represents our best estimate of the probable loss that we may
incur for various representations and warranties in the
contractual provisions of our sales of mortgage loans. Because
the level of mortgage loan repurchase losses are dependent on
economic factors, investor demand strategies and other external
conditions that may change over the life of the underlying loans,
the level of the liability for mortgage loan repurchase losses is
difficult to estimate and requires considerable management
judgment. We maintain regular contact with the GSEs and other
significant investors to monitor and address their repurchase
demand practices and concerns. For additional information on
our repurchase liability, including an adverse impact analysis,
see the “Risk Management – Credit Risk Management – Liability
for Mortgage Loan Repurchase Losses” section in this Report.
Fair Valuation of Financial Instruments
We use fair value measurements to record fair value adjustments
to certain financial instruments and to determine fair value
disclosures. Trading assets, securities available for sale,
derivatives, prime residential MHFS, certain commercial LHFS,
principal investments and securities sold but not yet purchased
(short sale liabilities) are recorded at fair value on a recurring
basis. Additionally, from time to time, we may be required to
record at fair value other assets on a nonrecurring basis, such as
certain MHFS and LHFS, loans held for investment and certain
87
Critical Accounting Policies (continued)
other assets. These nonrecurring fair value adjustments typically
involve application of lower-of-cost-or-market accounting or
write-downs of individual assets. Additionally, for financial
instruments not recorded at fair value we disclose the estimate of
their fair value.
Fair value represents the price that would be received to sell
the financial asset or paid to transfer the financial liability in an
orderly transaction between market participants at the
measurement date.
The accounting provisions for fair value measurements
include a three-level hierarchy for disclosure of assets and
liabilities recorded at fair value. The classification of assets and
liabilities within the hierarchy is based on whether the inputs to
the valuation methodology used for measurement are observable
or unobservable. Observable inputs reflect market-derived or
market-based information obtained from independent sources,
while unobservable inputs reflect our estimates about market
data.
•
Level 1 – Valuation is based upon quoted prices for identical
instruments traded in active markets. Level 1 instruments
include securities traded on active exchange markets, such
as the New York Stock Exchange, as well as U.S. Treasury
and other U.S. government securities that are traded by
dealers or brokers in active OTC markets.
Level 2 – Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and
model-based valuation techniques, such as matrix pricing,
for which all significant assumptions are observable in the
market. Level 2 instruments include securities traded in
functioning dealer or broker markets, plain-vanilla interest
rate derivatives and MHFS that are valued based on prices
for other mortgage whole loans with similar characteristics.
Level 3 – Valuation is generated primarily from model-
based techniques that use significant assumptions not
observable in the market. These unobservable assumptions
reflect our own estimates of assumptions market
participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models,
discounted cash flow models and similar techniques.
•
•
When developing fair value measurements, we maximize the
use of observable inputs and minimize the use of unobservable
inputs. When available, we use quoted prices in active markets to
measure fair value. If quoted prices in active markets are not
available, fair value measurement is based upon models that use
primarily market-based or independently sourced market
parameters, including interest rate yield curves, prepayment
speeds, option volatilities and currency rates. However, in
certain cases, when market observable inputs for model-based
valuation techniques are not readily available, we are required to
make judgments about assumptions market participants would
use to estimate the fair value.
The degree of management judgment involved in determining
the fair value of a financial instrument is dependent upon the
availability of quoted prices in active markets or observable
market parameters. For financial instruments with quoted
market prices or observable market parameters in active
88
markets, there is minimal subjectivity involved in measuring fair
value. When quoted prices and observable data in active markets
are not fully available, management judgment is necessary to
estimate fair value. Changes in the market conditions, such as
reduced liquidity in the capital markets or changes in secondary
market activities, may reduce the availability and reliability of
quoted prices or observable data used to determine fair value.
When significant adjustments are required to price quotes or
inputs, it may be appropriate to utilize an estimate based
primarily on unobservable inputs. When an active market for a
financial instrument does not exist, the use of management
estimates that incorporate current market participant
expectations of future cash flows, adjusted for an appropriate
risk premium, is acceptable.
When markets for our financial assets and liabilities become
inactive because the level and volume of activity has declined
significantly relative to normal conditions, it may be appropriate
to adjust quoted prices. The methodology we use to adjust the
quoted prices generally involves weighting the quoted prices 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 to arrive at the fair value. The more active
and orderly markets for particular security classes are
determined to be, the more weighting we assign to quoted prices.
The less active and orderly markets are determined to be, the less
weighting we assign to quoted prices.
We may use independent pricing services and brokers to
obtain fair values based on quoted prices. We determine the
most appropriate and relevant pricing service for each security
class and generally obtain one quoted price for each security. For
certain securities, we may use internal traders to obtain quoted
prices. Quoted prices are subject to our internal price verification
procedures. We validate prices received using a variety of
methods, including, but not limited to, comparison to pricing
services, corroboration of pricing by reference to other
independent market data such as secondary broker quotes and
relevant benchmark indices, and review of pricing by Company
personnel familiar with market liquidity and other market-
related conditions.
Significant judgment is also required to determine whether
certain assets measured at fair value are included in Level 2 or
Level 3. When making this judgment, we consider all available
information, including observable market data, indications of
market liquidity and orderliness, and our understanding of the
valuation techniques and significant inputs used. For securities
in inactive markets, we use a predetermined percentage to
evaluate the impact of fair value adjustments derived from
weighting both external and internal indications of value to
determine if the instrument is classified as Level 2 or Level 3.
Otherwise, the classification of Level 2 or Level 3 is based upon
the specific facts and circumstances of each instrument or
instrument category and judgments are made regarding the
significance of the Level 3 inputs to the instruments’ fair value
measurement in its entirety. If Level 3 inputs are considered
significant, the instrument is classified as Level 3.
Our financial assets valued using Level 3 measurements
consisted of certain asset-backed securities, including those
collateralized by auto leases or loans and cash reserves, private
collateralized mortgage obligations (CMOs), collateralized debt
obligations (CDOs), collateralized loan obligations (CLOs),
auction-rate securities, certain derivative contracts such as credit
default swaps related to CMO, CDO and CLO exposures and
certain MHFS and MSRs.
Table 39 presents the summary of the fair value of financial
instruments recorded at fair value on a recurring basis, and the
amounts measured using significant Level 3 inputs (before
derivative netting adjustments). The fair value of the remaining
assets and liabilities were measured using valuation
methodologies involving market-based or market-derived
information, collectively Level 1 and 2 measurements.
Table 39: Fair Value Level 3 Summary
December 31,
2010
2009
($ in billions)
balance Level 3 (1)
balance Level 3 (1)
Total
Total
Assets carried
at fair value
As a percentage
$
293.1
47.9
277.4
52.0
of total assets
23 %
4
22
4
Liabilities carried
at fair value
As a percentage of
$
21.2
6.4
21.7
6.9
total liabilities
2 %
1
2
1
(1) Before derivative netting adjustments.
See Note 16 (Fair Values of Assets and Liabilities) to Financial
Statements in this Report for a complete discussion on our use of
fair valuation of financial instruments, our related measurement
techniques and its impact to our financial statements.
Income Taxes
We are subject to the income tax laws of the U.S., its states and
municipalities and those of the foreign jurisdictions in which we
operate. Our income tax expense consists of two components:
current and deferred. Current income tax expense approximates
taxes to be paid or refunded for the current period and includes
income tax expense related to our uncertain tax positions. We
determine deferred income taxes using the balance sheet
method. Under this method, the net deferred tax asset or liability
is based on the tax effects of the differences between the book
and tax bases of assets and liabilities, and recognized enacted
changes in tax rates and laws in the period in which they
occur. Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. Deferred tax
assets are recognized subject to management’s judgment that
realization is “more likely than not.” Uncertain tax positions that
meet the more likely than not recognition threshold are
measured to determine the amount of benefit to recognize. An
uncertain tax position is measured at the largest amount of
benefit that management believes has a greater than 50%
likelihood of realization upon settlement. Foreign taxes paid are
generally applied as credits to reduce federal income taxes
payable. We account for interest and penalties as a component of
income tax expense.
The income tax laws of the jurisdictions in which
we operate are complex and subject to different interpretations
by the taxpayer and the relevant government taxing authorities.
In establishing a provision for income tax expense, we must
make judgments and interpretations about the application of
these inherently complex tax laws. We must also make estimates
about when in the future certain items will affect taxable income
in the various tax jurisdictions by the government taxing
authorities, both domestic and foreign. Our interpretations may
be subjected to review during examination by taxing authorities
and disputes may arise over the respective tax positions. We
attempt to resolve these disputes during the tax examination and
audit process and ultimately through the court systems when
applicable.
We monitor relevant tax authorities and revise our estimate of
accrued income taxes due to changes in income tax laws and
their interpretation by the courts and regulatory authorities on a
quarterly basis. Revisions of our estimate of accrued income
taxes also may result from our own income tax planning and
from the resolution of income tax controversies. Such revisions
in our estimates may be material to our operating results for any
given quarter.
See Note 20 (Income Taxes) to Financial Statements in this
Report for a further description of our provision for income taxes
and related income tax assets and liabilities.
89
Current Accounting Developments
The following accounting pronouncement has been issued by the
Financial Accounting Standards Board (FASB):
• Accounting Standards Update (ASU) 2011-01, Deferral of
the Effective Date of Disclosures about Troubled Debt
Restructurings in Update No. 2010-20.
ASU 2011-01 defers the effective date for disclosures on TDRs.
The deferral is intended to provide the FASB with additional
Forward-Looking Statements
This Report contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by words such as
“anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,”
“expects,” “projects,” “outlook,” “forecast,” “will,” “may,” “could,”
“should,” “can” and similar references to future periods.
Examples of forward-looking statements in this Report include,
but are not limited to, statements we make about: (i) future
results of the Company; (ii) future credit quality and
expectations regarding future loan losses in our loan portfolios
and life-of-loan estimates, including our belief that quarterly
total credit losses have peaked and that our credit cycle is
turning; the level and loss content of NPAs and nonaccrual loans
as well as the level of inflows and outflows into NPAs; the
adequacy of the allowance for credit losses, including our current
expectation of future reductions in the allowance for credit
losses; and the reduction or mitigation of risk in our loan
portfolios and the effects of loan modification programs; (iii) the
merger integration of the Company and Wachovia, including
expense savings, merger costs and revenue synergies; (iv) our
mortgage repurchase exposure and exposure relating to our
foreclosure practices; (v) future capital levels and our
expectations that we will be above a 7% Tier 1 common equity
ratio under proposed Basel III capital standards within the next
few quarters; (vi) the expected outcome and impact of legal,
regulatory and legislative developments; and (vii) the Company’s
plans, objectives and strategies.
Forward-looking statements are based on our current
expectations and assumptions regarding our business, the
economy and other future conditions. Because forward-looking
statements relate to the future, they are subject to inherent
uncertainties, risks and changes in circumstances that are
difficult to predict. Our actual results may differ materially from
those contemplated by the forward-looking statements. We
caution you, therefore, against relying on any of these forward-
looking statements. They are neither statements of historical fact
nor guarantees or assurances of future performance. While there
is no assurance that any list of risks and uncertainties or risk
factors is complete, important factors that could cause actual
results to differ materially from those in the forward-looking
statements include the following, without limitation:
90
time to complete a separate TDRs project, with new disclosures
expected to be effective for second quarter 2011. For more
information on the disclosure requirements for TDRs, see the
discussion on ASU 2010-20, Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit
Losses, in Note 1 (Summary of Significant Accounting Policies) to
Financial Statements in this Report.
•
•
•
•
•
•
•
•
•
•
•
•
current and future economic and market conditions,
including the effects of further declines in housing prices
and high unemployment rates;
our capital and liquidity requirements (including under
regulatory capital standards, such as the proposed Basel III
capital standards, as determined and interpreted by
applicable regulatory authorities) and our ability to generate
capital internally or raise capital on favorable terms;
financial services reform and other current, pending or
future legislation or regulation that could have a negative
effect on our revenue and businesses, including the Dodd-
Frank Act and legislation and regulation relating to
overdraft fees (and changes to our overdraft practices as a
result thereof), debit card interchange fees, credit cards, and
other bank services;
legislative proposals to allow mortgage cram-downs in
bankruptcy or require other loan modifications;
the extent of our success in our loan modification efforts, as
well as the effects of regulatory requirements or guidance
regarding loan modifications or changes in such
requirements or guidance;
the amount of mortgage loan repurchase demands that we
receive and our ability to satisfy any such demands without
having to repurchase loans related thereto or otherwise
indemnify or reimburse third parties, and the credit quality
of or losses on such repurchased mortgage loans;
negative effects relating to mortgage foreclosures, including
changes in our procedures or practices and/or industry
standards or practices, regulatory or judicial requirements,
penalties or fines, increased costs, or delays or moratoriums
on foreclosures;
our ability to successfully integrate the Wachovia merger
and realize the expected cost savings and other benefits and
the effects of any delays or disruptions in systems
conversions relating to the Wachovia integration;
our ability to realize the efficiency initiatives to lower
expenses when and in the amount expected;
recognition of OTTI on securities held in our available-for-
sale portfolio;
the effect of changes in interest rates on our net interest
margin and our mortgage originations, MSRs and MHFS;
hedging gains or losses;
•
•
•
•
•
•
•
disruptions in the capital markets and reduced investor
demand for mortgage loans;
our ability to sell more products to our customers;
the effect of the economic recession on the demand for our
products and services;
the effect of the fall in stock market prices on our investment
banking business and our fee income from our brokerage,
asset and wealth management businesses;
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
or interpreted;
In addition to the above factors, we also caution that 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 continue to stabilize or
improve. Increases in loan charge-offs or in the allowance for
credit losses and related provision expense could materially
adversely affect our financial results and condition.
Any forward-looking statement made by us in this Report
speaks only as of the date on which it is made. Factors or events
that could cause our actual results to differ may emerge from
time to time, and it is not possible for us to predict all of them.
We undertake no obligation to publicly update any forward-
looking statement, whether as a result of new information, future
developments or otherwise, except as may be required by law.
• mergers, acquisitions and divestitures;
•
changes in the Company’s credit ratings and changes in the
credit quality of the Company’s customers or counterparties;
reputational damage from negative publicity, fines, penalties
and other negative consequences from regulatory violations
and legal actions;
the loss of checking and savings account deposits to other
investments such as the stock market, and the resulting
increase in our funding costs and impact on our net interest
margin;
fiscal and monetary policies of the FRB; and
the other risk factors and uncertainties described under
“Risk Factors” in this Report.
•
•
•
•
91
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 below
and elsewhere in this Report, as well as in other documents we
file with the SEC, risk factors that could adversely affect our
financial results and condition and the value of, and return on,
an investment in the Company. We refer you to the Financial
Review and “Forward-Looking Statements” sections and
Financial Statements (and related Notes) in this Report for more
information about credit, interest rate, market, litigation and
other risks and to the “Regulation and Supervision” section of
our 2010 Form 10-K for more information about legislative and
regulatory risks. Any factor described below or elsewhere in this
Report or in our 2010 Form 10-K could by itself, or together with
other factors, adversely affect our financial results and condition.
Refer to our quarterly reports on Form 10-Q filed with the SEC in
2011 for material changes to the discussion of risk factors. There
are factors not discussed below or elsewhere in this Report that
could adversely affect our financial results and condition.
RISKS RELATING TO CURRENT ECONOMIC AND MARKET
CONDITIONS
Our financial results and condition may be adversely
affected by difficult business and economic conditions,
particularly if home prices continue to fall or
unemployment does not improve or continues to
increase. Our financial performance is affected by general
business and economic conditions in the U.S. and abroad, and a
worsening of current business and economic conditions could
adversely affect our business, results of operations, and financial
condition. For example, significant declines in home prices over
the last several years and continued high unemployment have
resulted in elevated credit costs and have adversely affected our
credit performance, financial results, and capital levels. If home
prices continue to fall or unemployment does not improve or
rises we would expect to incur higher than normal charge-offs
and provision expense from increases in our allowance for credit
losses. These conditions may adversely affect not only consumer
loan performance but also commercial and CRE loans, especially
those business borrowers that rely on the health of industries or
properties that may experience deteriorating economic
conditions. A deterioration in business and economic conditions,
which may erode consumer and investor confidence levels, also
could adversely affect financial results for our fee-based
businesses, including our mortgage, investment advisory,
securities brokerage, wealth management, and investment
banking businesses.
Financial and credit markets may experience a
disruption or become volatile, making it more difficult
to access capital markets on favorable terms. Financial
and credit markets have experienced unprecedented disruption
and volatility during the past several years. While market
conditions have stabilized and, in many cases, improved, a
92
disruption in, or worsening of, financial and credit market
conditions, or increased volatility in financial and credit markets,
may adversely affect our ability to access capital markets on
favorable terms and could negatively affect our liquidity. We may
raise additional capital through the issuance of common stock,
which could dilute existing stockholders, or further reduce or
even eliminate our common stock dividend to preserve capital or
in order to raise additional capital.
Enacted legislation and regulation, including the Dodd-
Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), as well as future legislation and/or
regulation, could require us to change certain of our
business practices, reduce our revenue, impose
additional costs on us or otherwise adversely affect our
business operations and/or competitive position.
Economic, financial, market and political conditions during the
past few years have led to new legislation and regulation in the
United States and in other jurisdictions outside of the United
States where we conduct business. These laws and regulations
may affect the manner in which we do business and the products
and services that we provide, affect or restrict our ability to
compete in our current businesses or our ability to enter into or
acquire new businesses, reduce or limit our revenue in
businesses or impose additional fees, assessments or taxes on us,
intensify the regulatory supervision of us and the financial
services industry, and adversely affect our business operations or
have other negative consequences.
For example, in 2009 several legislative and regulatory
initiatives were adopted that will have an impact on our
businesses and financial results, including FRB amendments to
Regulation E, which, among other things, affect the way we may
charge overdraft fees beginning on July 1, 2010, and the
enactment of the Credit Card Accountability Responsibility and
Disclosure Act of 2009 (the Card Act), which, among other
things, affects our ability to change interest rates and assess
certain fees on card accounts. The impact of the Regulation E
amendments and the Card Act could vary materially due to a
variety of factors, including changes in customer behavior,
economic conditions and other potential offsetting factors.
On July 21, 2010, the Dodd-Frank Act became law. The
Dodd-Frank Act, among other things, (i) establishes a new
Financial Stability Oversight Council to monitor systemic risk
posed by financial firms and imposes additional and enhanced
FRB regulations on certain large, interconnected bank holding
companies and systemically significant nonbanking firms
intended to promote financial stability; (ii) creates a liquidation
framework for the resolution of covered financial companies, the
costs of which would be paid through assessments on surviving
covered financial companies; (iii) makes significant changes to
the structure of bank and bank holding company regulation and
activities in a variety of areas, including prohibiting proprietary
trading and private fund investment activities, subject to certain
exceptions; (iv) creates a new framework for the regulation of
over-the-counter derivatives and new regulations for the
securitization market and strengthens the regulatory oversight of
securities and capital markets by the SEC; (v) establishes the
Bureau of Consumer Financial Protection within the FRB, which
will have sweeping powers to administer and enforce a new
federal regulatory framework of consumer financial regulation;
(vi) may limit the existing pre-emption of state laws with respect
to the application of such laws to national banks, makes federal
pre-emption no longer applicable to operating subsidiaries of
national banks, and gives state authorities, under certain
circumstances, the ability to enforce state laws and federal
consumer regulations against national banks; (vii) provides for
increased regulation of residential mortgage activities; (viii)
revises the FDIC's assessment base for deposit insurance by
changing from an assessment base defined by deposit liabilities
to a risk-based system based on total assets; (ix) authorizes the
FRB to issue regulations regarding the amount of any
interchange transaction fee that an issuer may receive to ensure
that it is reasonable and proportional to the cost incurred; and
(x) includes several corporate governance and executive
compensation provisions and requirements, including
mandating an advisory stockholder vote on executive
compensation.
Although the Dodd-Frank Act became generally effective in
July 2010, many of its provisions have extended implementation
periods and delayed effective dates and will require extensive
rulemaking by regulatory authorities as well as require more
than 60 studies to be conducted over the next one to two years.
Accordingly, in many respects the ultimate impact of the Dodd-
Frank Act and its effects on the U.S. financial system and the
Company will not be known for an extended period of time.
Nevertheless, the Dodd-Frank Act, including future rules
implementing its provisions and the interpretation of those rules,
could result in a loss of revenue, require us to change certain of
our business practices, limit our ability to pursue certain
business opportunities, increase our capital requirements and
impose additional assessments and costs on us, and otherwise
adversely affect our business operations and have other negative
consequences, including to our credit ratings to the extent the
legislation reduces the probability of future Federal financial
assistance or support currently assumed by the rating agencies in
their credit ratings. A reduction in one or more of our credit
ratings could adversely affect our ability to borrow funds and
raise the costs of our borrowings substantially and could cause
creditors and business counterparties to raise collateral
requirements or take other actions, which could adversely affect
our ability to raise capital.
Recently, the Obama Administration delivered a report to
Congress regarding proposals to reform the housing finance
market in the United States. The report, among other things,
outlined various potential proposals to wind down the GSEs and
reduce or eliminate over time the role of the GSEs in
guaranteeing mortgages and providing funding for mortgage
loans, as well as proposals to implement reforms relating to
borrowers, lenders, and investors in the mortgage market,
including reducing the maximum size of a loan that the GSEs can
guarantee, phasing in a minimum down payment requirement
for borrowers, improving underwriting standards, and increasing
accountability and transparency in the securitization process.
The extent and timing of any regulatory reform regarding the
GSEs and the home mortgage market, as well as any effect on the
Company’s business and financial results, are uncertain.
Any other future legislation and/or regulation, if adopted,
also could have a material adverse effect on our business
operations, income, and/or competitive position and may have
other negative consequences.
For more information, refer to the “Regulation and
Supervision” section in our 2010 Form 10-K.
Bank regulators and other regulations, including
proposed Basel capital standards and FRB guidelines,
may require higher capital levels, limiting our ability to
pay common stock dividends or repurchase our
common stock. Federal banking regulators continually
monitor the capital position of banks and bank holding
companies. In July 2009, the Basel Committee on Bank
Supervision published a set of international guidelines for
determining regulatory capital known as Basel III. These
guidelines, which were finalized in December 2010, followed
earlier guidelines by the Basel Committee and are designed to
address many of the weaknesses identified in the banking sector
as contributing to the financial crisis of 2008 - 2010 by, among
other things, increasing minimum capital requirements,
increasing the quality of capital, increasing the risk coverage of
the capital framework, and increasing standards for the
supervisory review process and public disclosure.
In 2010, the FRB issued guidelines for evaluating proposals
by large bank holding companies, including the Company, to
undertake capital actions in 2011, such as increasing dividend
payments or repurchasing or redeeming stock. Pursuant to those
FRB guidelines, the Company submitted a proposed Capital Plan
Review to the FRB. The FRB is expected to undertake these
capital plan reviews on a regular basis in the future. There can be
no assurance that the FRB will respond favorably to the
Company’s current Capital Plan Review, or future capital plan
reviews, and the FRB, the Basel standards or other regulatory
capital requirements may limit or otherwise restrict how we
utilize our capital, including common stock dividends and stock
repurchases. Although not currently anticipated, our regulators
may require us to raise additional capital in the future. Issuing
additional common stock may dilute existing stockholders.
Bankruptcy laws may be changed to allow mortgage
“cram-downs,” or court-ordered modifications to our
mortgage loans including the reduction of principal
balances. Under current bankruptcy laws, courts cannot force
a modification of mortgage and home equity loans secured by
primary residences. In response to the current financial crisis,
legislation has been proposed to allow mortgage loan “cram-
downs,” which would empower courts to modify the terms of
mortgage and home equity loans including a reduction in the
principal amount to reflect lower underlying property values.
This could result in writing down the balance of our mortgage
and home equity loans to reflect their lower loan values. There is
also risk that home equity loans in a second lien position (i.e.,
behind a mortgage) could experience significantly higher losses
to the extent they become unsecured as a result of a cram-down.
The availability of principal reductions or other modifications to
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Risk Factors (continued)
mortgage loan terms could make bankruptcy a more attractive
option for troubled borrowers, leading to increased bankruptcy
filings and accelerated defaults.
RISKS RELATING TO THE WACHOVIA MERGER
Our financial results and condition could be adversely
affected if we fail to realize all of the expected benefits
of the Wachovia merger or it takes longer than expected
to realize those benefits. The merger with Wachovia requires
the integration of the businesses of Wachovia and Wells Fargo.
The integration process may result in the loss of key employees,
the disruption of ongoing businesses and the loss of customers
and their business and deposits. It may also divert management
attention and resources from other operations and limit the
Company’s ability to pursue other acquisitions. There is no
assurance that we will realize all of the cost savings and other
financial benefits of the merger when and in the amounts
expected.
We may incur losses on loans, securities and other
acquired assets of Wachovia that are materially greater
than reflected in our preliminary fair value
adjustments. We accounted for the Wachovia merger under
the purchase method of accounting, recording the acquired
assets and liabilities of Wachovia at fair value based on
preliminary purchase accounting adjustments. Under purchase
accounting, we had until one year after the merger date to
finalize the fair value adjustments, meaning we could adjust the
preliminary fair value estimates of Wachovia’s assets and
liabilities based on new or updated information that provided a
better estimate of the fair value at merger date.
We recorded at fair value all PCI loans acquired in the merger
based on the present value of their expected cash flows. We
estimated cash flows using internal credit, interest rate and
prepayment risk models using assumptions about matters that
are inherently uncertain. We may not realize the estimated cash
flows or fair value of these loans. In addition, although the
difference between the pre-merger carrying value of the credit-
impaired loans and their expected cash flows – the
“nonaccretable difference” – is available to absorb future charge-
offs, we may be required to increase our allowance for credit
losses and related provision expense because of subsequent
additional credit deterioration in these loans.
For more information, refer to the “Overview” and “Critical
Accounting Policies – Purchased Credit-Impaired Loans”
sections in this Report.
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GENERAL RISKS RELATING TO OUR BUSINESS
Higher charge-offs and worsening credit conditions
could require us to increase our allowance for credit
losses through a charge to earnings. When we loan money
or commit to loan money we incur credit risk, or the risk of
losses if our borrowers do not repay their loans. We reserve for
credit losses by establishing an allowance through a charge to
earnings. The amount of this allowance is based on our
assessment of credit losses inherent in our loan portfolio
(including unfunded credit commitments). The process for
determining the amount of the allowance is critical to our
financial results and condition. It requires difficult, subjective
and complex judgments about the future, including forecasts of
economic or market conditions that might impair the ability of
our borrowers to repay their loans.
We might underestimate the credit losses inherent in our loan
portfolio and have credit losses in excess of the amount reserved.
We might increase the allowance because of changing economic
conditions, including falling home prices and higher
unemployment, or other factors such as changes in borrower
behavior. As an example, borrowers may be less likely to
continue making payments on their real estate-secured loans if
the value of the real estate is less than what they owe, even if they
are still financially able to make the payments.
While we believe that our allowance for credit losses was
adequate at December 31, 2010, there is no assurance that it will
be sufficient to cover future credit losses, especially if housing
and employment conditions worsen. We may be required to
build reserves in 2011, thus reducing earnings.
For more information, refer to the “Risk Management –
Credit Risk Management” and “Critical Accounting Policies –
Allowance for Credit Losses” sections in this Report.
We may have more credit risk and higher credit losses
to the extent our loans are concentrated by loan type,
industry segment, borrower type, or location of the
borrower or collateral. Our credit risk and credit losses can
increase if our loans are concentrated to borrowers engaged in
the same or similar activities or to borrowers who as a group may
be uniquely or disproportionately affected by economic or
market conditions. We experienced the effect of concentration
risk in 2009 and 2010 when we incurred greater than expected
losses in our Home Equity loan portfolio due to a housing
slowdown and greater than expected deterioration in residential
real estate values in many markets, including the Central Valley
California market and several Southern California metropolitan
statistical areas. As California is our largest banking state in
terms of loans and deposits, continued deterioration in real
estate values and underlying economic conditions in those
markets or elsewhere in California could result in materially
higher credit losses. As a result of the Wachovia merger, we have
increased our exposure to California, as well as to Arizona and
Florida, two states that have also suffered significant declines in
home values. Continued deterioration in housing conditions and
real estate values in these states and generally across the country
could result in materially higher credit losses.
For more information, refer to the “Risk Management –
Credit Risk Management” section and Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report.
Loss of customer deposits and market illiquidity could
increase our funding costs. We rely on bank deposits to be a
low cost and stable source of funding for the loans we make. We
compete with banks and other financial services companies for
deposits. If our competitors raise the rates they pay on deposits
our funding costs may increase, either because we raise our rates
to avoid losing deposits or because we lose deposits and must
rely on more expensive sources of funding. Higher funding costs
reduce our net interest margin and net interest income. As
discussed above, the integration of Wells Fargo and Wachovia
may result in the loss of customer deposits.
We sell most of the mortgage loans we originate in order to
reduce our credit risk and provide funding for additional loans.
We rely on GSEs to purchase loans that meet their conforming
loan requirements and on other capital markets investors to
purchase loans that do not meet those requirements – referred to
as “nonconforming” loans. Since 2007, investor demand for
nonconforming loans has fallen sharply, increasing credit
spreads and reducing the liquidity for those loans. In response to
the reduced liquidity in the capital markets, we may retain more
nonconforming loans. When we retain a loan not only do we
keep the credit risk of the loan but we also do not receive any sale
proceeds that could be used to generate new loans. Continued
lack of liquidity could limit our ability to fund – and thus
originate – new mortgage loans, reducing the fees we earn from
originating and servicing loans. In addition, we cannot assure
that GSEs will not materially limit their purchases of conforming
loans due to capital constraints or change their criteria for
conforming loans (e.g., maximum loan amount or borrower
eligibility). As previously noted, the Obama Administration
recently outlined proposals to reform the housing finance market
in the United States, including the role of the GSEs in the
housing finance market. The extent and timing of any such
regulatory reform regarding the housing finance market and the
GSEs, as well as any effect on the Company’s business and
financial results, are uncertain.
Changes in interest rates could reduce our net interest
income and earnings. Our net interest income is the interest
we earn on loans, debt securities and other assets we hold less
the interest we pay on our deposits, long-term and short-term
debt, and other liabilities. Net interest income is a measure of
both our net interest margin – the difference between the yield
we earn on our assets and the interest rate we pay for deposits
and our other sources of funding – and the amount of earning
assets we hold. Changes in either our net interest margin or the
amount of earning assets we hold could affect our net interest
income and our earnings. Changes in interest rates can affect our
net interest margin. Although the yield we earn on our assets and
our funding costs tend to move in the same direction in response
to changes in interest rates, one can rise or fall faster than the
other, causing our net interest margin to expand or contract. Our
liabilities tend to be shorter in duration than our assets, so they
may adjust faster in response to changes in interest rates. When
interest rates rise, our funding costs may rise faster than the
yield we earn on our assets, causing our net interest margin to
contract until the yield catches up.
The amount and type of earning assets we hold can affect our
yield and net interest margin. We hold earning assets in the form
of loans and investment securities, among other assets. If current
economic conditions persist, we may continue to see lower
demand for loans by credit worthy customers, reducing our yield.
In addition, we may invest in lower yielding investment
securities for a variety of reasons, including in anticipation that
interest rates are likely to increase.
Changes in the slope of the “yield curve” – or the spread
between short-term and long-term interest rates – could also
reduce our net interest margin. Normally, the yield curve is
upward sloping, meaning short-term rates are lower than long-
term rates. Because our liabilities tend to be shorter in duration
than our assets, when the yield curve flattens or even inverts, our
net interest margin could decrease as our cost of funds increases
relative to the yield we can earn on our assets.
The interest we earn on our loans may be tied to U.S.-
denominated interest rates such as the federal funds rate while
the interest we pay on our debt may be based on international
rates such as LIBOR. If the federal funds rate were to fall without
a corresponding decrease in LIBOR, we might earn less on our
loans without any offsetting decrease in our funding costs. This
could lower our net interest margin and our net interest income.
We assess our interest rate risk by estimating the effect on our
earnings under various scenarios that differ based on
assumptions about the direction, magnitude and speed of
interest rate changes and the slope of the yield curve. We hedge
some of that interest rate risk with interest rate derivatives. We
also rely on the “natural hedge” that our mortgage loan
originations and servicing rights can provide.
We do not hedge all of our interest rate risk. There is always
the risk that changes in interest rates could reduce our net
interest income and our earnings in material amounts, especially
if actual conditions turn out to be materially different than what
we assumed. For example, if interest rates rise or fall faster than
we assumed or the slope of the yield curve changes, we may incur
significant losses on debt securities we hold as investments. To
reduce our interest rate risk, we may rebalance our investment
and loan portfolios, refinance our debt and take other strategic
actions. We may incur losses when we take such actions.
For more information, refer to the “Risk Management –
Asset/Liability Management – Interest Rate Risk” section in this
Report.
Changes in interest rates could also reduce the value of
our MSRs and MHFS, reducing our earnings. We have a
sizeable portfolio of MSRs. An MSR is the right to service a
mortgage loan – collect principal, interest and escrow amounts –
for a fee. We acquire MSRs when we keep the servicing rights
after we sell or securitize the loans we have originated or when
we purchase the servicing rights to mortgage loans originated by
other lenders. We initially measure all and carry substantially all
our residential MSRs using the fair value measurement method.
Fair value is the present value of estimated future net servicing
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Risk Factors (continued)
income, calculated based on a number of variables, including
assumptions about the likelihood of prepayment by borrowers.
Changes in interest rates can affect prepayment assumptions
and thus fair value. When interest rates fall, borrowers are
usually more likely to prepay their mortgage loans by refinancing
them at a lower rate. As the likelihood of prepayment increases,
the fair value of our MSRs can decrease. Each quarter we
evaluate the fair value of our MSRs, and any decrease in fair
value reduces earnings in the period in which the decrease
occurs.
We measure at fair value prime MHFS for which an active
secondary market and readily available market prices exist. We
also measure at fair value certain other interests we hold related
to residential loan sales and securitizations. Similar to other
interest-bearing securities, the value of these MHFS and other
interests may be negatively affected by changes in interest rates.
For example, if market interest rates increase relative to the yield
on these MHFS and other interests, their fair value may fall. We
may not hedge this risk, and even if we do hedge the risk with
derivatives and other instruments we may still incur significant
losses from changes in the value of these MHFS and other
interests or from changes in the value of the hedging
instruments.
For more information, refer to the “Risk Management –
Asset/Liability Management – Mortgage Banking Interest Rate
and Market Risk” and “Critical Accounting Policies” sections in
this Report.
Our mortgage banking revenue can be volatile from
quarter to quarter. We earn revenue from fees we receive for
originating mortgage loans and for servicing mortgage loans.
When rates rise, the demand for mortgage loans usually tends to
fall, reducing the revenue we receive from loan originations.
Under the same conditions, revenue from our MSRs can increase
through increases in fair value. When rates fall, mortgage
originations usually tend to increase and the value of our MSRs
usually tends to decline, also with some offsetting revenue effect.
Even though they can act as a “natural hedge,” the hedge is not
perfect, either in amount or timing. For example, the negative
effect on revenue from a decrease in the fair value of residential
MSRs is generally immediate, but any offsetting revenue benefit
from more originations and the MSRs relating to the new loans
would generally accrue over time. It is also possible that, because
of economic conditions and/or a deteriorating housing market,
even if interest rates were to fall, mortgage originations may also
fall or any increase in mortgage originations may not be enough
to offset the decrease in the MSRs value caused by the lower
rates.
We typically use derivatives and other instruments to hedge
our mortgage banking interest rate risk. We generally do not
hedge all of our risk, and we may not be successful in hedging
any of the risk. Hedging is a complex process, requiring
sophisticated models and constant monitoring, and is not a
perfect science. We may use hedging instruments tied to U.S.
Treasury rates, LIBOR or Eurodollars that may not perfectly
correlate with the value or income being hedged. We could incur
significant losses from our hedging activities. There may be
96
periods where we elect not to use derivatives and other
instruments to hedge mortgage banking interest rate risk.
For more information, refer to the “Risk Management –
Asset/Liability Management – Mortgage Banking Interest Rate
and Market Risk” section in this Report.
We may be required to repurchase mortgage loans or
reimburse investors and others as a result of breaches
in contractual representations and warranties. We sell
residential mortgage loans to various parties, including GSEs,
SPEs that issue private label MBS, and other financial
institutions that purchase mortgage loans for investment or
private label securitization. We may also pool FHA-insured and
VA-guaranteed mortgage loans which back securities guaranteed
by GNMA. The agreements under which we sell mortgage loans
and the insurance or guaranty agreements with the FHA and VA
contain various representations and warranties regarding the
origination and characteristics of the mortgage loans, including
ownership of the loan, compliance with loan criteria set forth in
the applicable agreement, validity of the lien securing the loan,
absence of delinquent taxes or liens against the property securing
the loan, and compliance with applicable origination laws. We
may be required to repurchase mortgage loans, indemnify the
securitization trust, investor or insurer, or reimburse the
securitization trust, investor or insurer for credit losses incurred
on loans in the event of a breach of contractual representations
or warranties that is not remedied within a period (usually 90
days or less) after we receive notice of the breach. Contracts for
mortgage loan sales to the GSEs include various types of specific
remedies and penalties that could be applied to inadequate
responses to repurchase requests. Similarly, the agreements
under which we sell mortgage loans require us to deliver various
documents to the securitization trust or investor, and we may be
obligated to repurchase any mortgage loan as to which the
required documents are not delivered or are defective. We may
negotiate global settlements in order to resolve a pipeline of
demands in lieu of repurchasing the loans. If economic
conditions and the housing market do not recover or future
investor repurchase demand and our success at appealing
repurchase requests differ from past experience, we could
continue to have increased repurchase obligations and increased
loss severity on repurchases, requiring material additions to the
repurchase reserve.
For more information, refer to the “Risk Management –
Liability for Mortgage Loan Repurchase Losses” section in this
Report.
We may be terminated as a servicer or master servicer,
be required to repurchase a mortgage loan or
reimburse investors for credit losses on a mortgage
loan, or incur costs and other liabilities if we fail to
satisfy our servicing obligations, including our
obligations with respect to mortgage loan foreclosure
actions. We act as servicer and/or master servicer for mortgage
loans included in securitizations and for unsecuritized mortgage
loans owned by investors. As a servicer or master servicer for
those loans we have certain contractual obligations to the
securitization trusts, investors or other third parties, including,
in our capacity as a servicer, foreclosing on defaulted mortgage
loans or, to the extent consistent with the applicable
securitization or other investor agreement, considering
alternatives to foreclosure such as loan modifications or short
sales and, in our capacity as a master servicer, overseeing the
servicing of mortgage loans by the servicer. If we commit a
material breach of our obligations as servicer or master servicer,
we may be subject to termination if the breach is not cured
within a specified period of time following notice, which can
generally be given by the securitization trustee or a specified
percentage of security holders, causing us to lose servicing
income. In addition, we may be required to indemnify the
securitization trustee against losses from any failure by us, as a
servicer or master servicer, to perform our servicing obligations
or any act or omission on our part that involves willful
misfeasance, bad faith or gross negligence. For certain investors
and/or certain transactions, we may be contractually obligated to
repurchase a mortgage loan or reimburse the investor for credit
losses incurred on the loan as a remedy for servicing errors with
respect to the loan. If we have increased repurchase obligations
because of claims that we did not satisfy our obligations as a
servicer or master servicer, or increased loss severity on such
repurchases, we may have to materially increase our repurchase
reserve.
We may incur costs if we are required to, or if we elect to re-
execute or re-file documents or take other action in our capacity
as a servicer in connection with pending or completed
foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court were to
overturn a foreclosure because of errors or deficiencies in the
foreclosure process, we may have liability to the borrower and/or
to any title insurer of the property sold in foreclosure if the
required process was not followed. These costs and liabilities
may not be legally or otherwise reimbursable to us, particularly
to the extent they relate to securitized mortgage loans. In
addition, if certain documents required for a foreclosure action
are missing or defective, we could be obligated to cure the defect
or repurchase the loan. We may incur liability to securitization
investors relating to delays or deficiencies in our processing of
mortgage assignments or other documents necessary to comply
with state law governing foreclosures. The fair value of our MSRs
may be negatively affected to the extent our servicing costs
increase because of higher foreclosure costs. We may be subject
to fines and other sanctions, including a foreclosure moratorium
or suspension, imposed by Federal or state regulators as a result
of actual or perceived deficiencies in our foreclosure practices or
in the foreclosure practices of other mortgage loan servicers. Any
of these actions may harm our reputation or negatively affect our
residential mortgage origination or servicing business.
For more information, refer to the “Earnings Performance –
Noninterest Income,” “Risk Management – Liability for
Mortgage Loan Repurchase Losses” and “– Risks Relating to
Servicing Activities,” and “Critical Accounting Policies –
Valuation of Residential Mortgage Servicing Rights” sections in
this Report.
We could recognize OTTI on securities held in our
available-for-sale portfolio if economic and market
conditions do not improve. Our securities available-for-sale
portfolio had gross unrealized losses of $2.7 billion at December
31, 2010. We analyze securities held in our available-for-sale
portfolio for OTTI on a quarterly basis. The process for
determining whether impairment is other than temporary
usually requires difficult, subjective judgments about the future
financial performance of the issuer and any collateral underlying
the security in order to assess the probability of receiving
contractual principal and interest payments on the security.
Because of changing economic and market conditions affecting
issuers and the performance of the underlying collateral, we may
be required to recognize OTTI in future periods, thus reducing
earnings.
For more information, refer to the “Balance Sheet Analysis –
Securities Available for Sale” and “Current Accounting
Developments” sections and Note 5 (Securities Available for
Sale) to Financial Statements in this Report.
We rely on our systems and certain counterparties, and
certain failures could materially adversely affect our
operations. Our businesses are dependent on our ability to
process, record and monitor a large number of complex
transactions. If any of our financial, accounting, or other data
processing systems fail or have other significant shortcomings,
we could be materially adversely affected. Third parties with
which we do business could also be sources of operational risk to
us, including relating to breakdowns or failures of such parties’
own systems. Any of these occurrences could diminish our ability
to operate one or more of our businesses, or result in potential
liability to clients, reputational damage and regulatory
intervention, any of which could materially adversely affect us.
If personal, confidential or proprietary information of
customers or clients in our possession were to be mishandled or
misused, we could suffer significant regulatory consequences,
reputational damage and financial loss. Such mishandling or
misuse could include, for example, if such information were
erroneously provided to parties who are not permitted to have
the information, either by fault of our systems, employees, or
counterparties, or where such information is intercepted or
otherwise inappropriately taken by third parties.
We may be subject to disruptions of our operating systems
arising from events that are wholly or partially beyond our
control, which may include, for example, computer viruses or
electrical or telecommunications outages, natural disasters,
disease pandemics or other damage to property or physical
assets, or events arising from local or larger scale politics,
including terrorist acts. Such disruptions may give rise to losses
in service to customers and loss or liability to us.
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Risk Factors (continued)
Our framework for managing risks may not be effective
in mitigating risk and loss to us. Our risk management
framework seeks to mitigate risk and loss to us. We have
established processes and procedures intended to identify,
measure, monitor, report and analyze the types of risk to which
we are subject, including liquidity risk, credit risk, market risk,
interest rate risk, operational risk, legal and compliance risk, and
reputational risk, among others. However, as with any risk
management framework, there are inherent limitations to our
risk management strategies as there may exist, or develop in the
future, risks that we have not appropriately anticipated or
identified. If our risk management framework proves ineffective,
we could suffer unexpected losses and could be materially
adversely affected.
Financial difficulties or credit downgrades of mortgage
and bond insurers may negatively affect our servicing
and investment portfolios. Our servicing portfolio includes
certain mortgage loans that carry some level of insurance from
one or more mortgage insurance companies. To the extent that
any of these companies experience financial difficulties or credit
downgrades, we may be required, as servicer of the insured loan
on behalf of the investor, to obtain replacement coverage with
another provider, possibly at a higher cost than the coverage we
would replace. We may be responsible for some or all of the
incremental cost of the new coverage for certain loans depending
on the terms of our servicing agreement with the investor and
other circumstances. Similarly, some of the mortgage loans we
hold for investment or for sale carry mortgage insurance. If a
mortgage insurer is unable to meet its credit obligations with
respect to an insured loan, we might incur higher credit losses if
replacement coverage is not obtained. We also have investments
in municipal bonds that are guaranteed against loss by bond
insurers. The value of these bonds and the payment of principal
and interest on them may be negatively affected by financial
difficulties or credit downgrades experienced by the bond
insurers.
For more information, refer to the “Earnings Performance –
Balance Sheet Analysis – Securities Available for Sale” and “Risk
Management – Credit Risk Management” sections in this Report.
Our ability to grow revenue and earnings will suffer if
we are unable to sell more products to customers.
Selling more products to our customers – “cross-selling” – is
very important to our business model and key to our ability to
grow revenue and earnings. Many of our competitors also focus
on cross-selling, especially in retail banking and mortgage
lending. This can limit our ability to sell more products to our
customers or influence us to sell our products at lower prices,
reducing our net interest income and revenue from our fee-based
products. It could also affect our ability to keep existing
customers. New technologies could require us to spend more to
modify or adapt our products to attract and retain customers.
Increasing our cross-sell ratio – or the average number of
products sold to existing customers – may become more
challenging and we might not attain our goal of selling an
average of eight products to each customer.
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A worsening of economic conditions could reduce
demand for our products and services and lead to lower
revenue and lower earnings. We earn revenue from the
interest and fees we charge on the loans and other products and
services we sell. If the economy worsens and consumer and
business spending decreases and unemployment rises, the
demand for those products and services may fall, reducing our
interest and fee income and our earnings. These same conditions
may also hurt the ability of our borrowers to repay their loans,
causing us to incur higher credit losses.
Changes in stock market prices could reduce fee income
from our brokerage and asset management businesses.
We earn fee income from managing assets for others and
providing brokerage services. Because investment management
fees are often based on the value of assets under management, a
fall in the market prices of those assets could reduce our fee
income. Changes in stock market prices could affect the trading
activity of investors, reducing commissions and other fees we
earn from our brokerage business. As a result of the Wachovia
merger, a greater percentage of our revenue depends on our
brokerage services business.
For more information, refer to the “Risk Management –
Asset/Liability Management – Market Risk – Equity Markets”
section in this Report.
We may elect to provide capital support to our mutual
funds relating to investments in structured credit
products. The money market mutual funds we advise are
allowed to hold investments in structured investment vehicles
(SIVs) in accordance with approved investment parameters for
the respective funds and, therefore, we may have indirect
exposure to CDOs. Although we generally are not responsible for
investment losses incurred by our mutual funds, we may from
time to time elect to provide support to a fund even though we
are not contractually obligated to do so. For example, in
February 2008, to maintain an investment rating of AAA for
certain money market mutual funds, we elected to enter into a
capital support agreement for up to $130 million related to one
SIV held by those funds. If we provide capital support to a
mutual fund we advise, and the fund’s investment losses require
the capital to be utilized, we may incur losses, thus reducing
earnings.
For more information, refer to Note 8 (Securitizations and
Variable Interest Entities) to Financial Statements in this Report.
Our bank customers could take their money out of the
bank and put it in alternative investments, causing us to
lose a lower cost source of funding. Checking and savings
account balances and other forms of customer deposits may
decrease when customers perceive alternative investments, such
as the stock market, as providing a better risk/return tradeoff.
When customers move money out of bank deposits and into
other investments, we may lose a relatively low cost source of
funds, increasing our funding costs and reducing our net interest
income.
Our venture capital business can also be volatile from
quarter to quarter. Certain of our venture capital businesses
are carried under the cost or equity method, and others (e.g.,
principal investments) are carried at fair value with unrealized
gains and losses reflected in earnings. Our venture capital
investments tend to be in technology and other volatile
industries so the value of our public and private equity portfolios
may fluctuate widely. Earnings from our venture capital
investments may be volatile and hard to predict and may have a
significant effect on our earnings from period to period. When,
and if, we recognize gains may depend on a number of factors,
including general economic conditions, the prospects of the
companies in which we invest, when these companies go public,
the size of our position relative to the public float, and whether
we are subject to any resale restrictions.
Our venture capital investments could result in significant
losses, either OTTI losses for those investments carried under
the cost or equity method or mark-to-market losses for principal
investments. Our assessment for OTTI is based on a number of
factors, including the then current market value of each
investment compared with its carrying value. If we determine
there is OTTI for an investment, we write-down the carrying
value of the investment, resulting in a charge to earnings. The
amount of this charge could be significant. Further, our principal
investing portfolio could incur significant mark-to-market losses
especially if these investments have been written up because of
higher market prices.
For more information, refer to the “Risk Management –
Asset/Liability Management – Market Risk – Equity Markets”
section in this Report.
We rely on dividends from our subsidiaries for
revenue, and federal and state law can limit those
dividends. Wells Fargo & Company, the parent holding
company, is a separate and distinct legal entity from its
subsidiaries. It receives a significant portion of its revenue from
dividends from its subsidiaries. We generally use these
dividends, among other things, to pay dividends on our common
and preferred stock and interest and principal on our debt.
Federal and state laws limit the amount of dividends that our
bank and some of our nonbank subsidiaries may pay to us. Also,
our right to participate in a distribution of assets upon a
subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors.
For more information, refer to the “Regulation and
Supervision – Dividend Restrictions” and “–Holding Company
Structure” sections in our 2010 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 25 (Regulatory and
Agency Capital Requirements) to Financial Statements in this
Report.
the value of our assets or liabilities and financial results. Several
of our accounting 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. For a description of these policies, refer to the
“Critical Accounting Policies” section in this Report.
From time to time the FASB and the SEC change the financial
accounting and reporting standards that govern the preparation
of our external financial statements. In addition, accounting
standard setters and those who interpret the accounting
standards (such as the FASB, SEC, banking regulators and our
outside auditors) may change or even reverse their previous
interpretations or positions on how these standards should be
applied. Changes in financial accounting and reporting standards
and changes in current interpretations may be beyond our
control, can be hard to predict and could materially affect how
we report our financial results and condition. We may be
required to apply a new or revised standard retroactively or apply
an existing standard differently, also retroactively, in each case
resulting in our potentially restating prior period financial
statements in material amounts.
Our financial statements are based in part on
assumptions and estimates which, if wrong, could cause
unexpected losses in the future. Pursuant to U.S. GAAP, we
are required to use certain assumptions and estimates in
preparing our financial statements, including in determining
credit loss reserves, reserves related to litigation and the fair
value of certain assets and liabilities, among other items. If
assumptions or estimates underlying our financial statements
are incorrect, we may experience material losses.
Certain of our financial instruments, including trading assets
and liabilities, available-for-sale securities, certain loans, MSRs,
private equity investments, structured notes and certain
repurchase and resale agreements, among other items, require a
determination of their fair value in order to prepare our financial
statements. Where quoted market prices are not available, we
may make fair value determinations based on internally
developed models or other means which ultimately rely to some
degree on management judgment. Some of these and other
assets and liabilities may have no direct observable price levels,
making their valuation particularly subjective, being based on
significant estimation and judgment. In addition, sudden
illiquidity in markets or declines in prices of certain loans and
securities may make it more difficult to value certain balance
sheet items, which may lead to the possibility that such
valuations will be subject to further change or adjustment and
could lead to declines in our earnings.
Changes in accounting policies or accounting
standards, and changes in how accounting standards
are interpreted or applied, could materially affect how
we report our financial results and condition. Our
accounting policies are fundamental to determining and
understanding our financial results and condition. Some of these
policies require use of estimates and assumptions that may affect
Acquisitions could reduce our stock price upon
announcement and reduce our earnings if we overpay
or have difficulty integrating them. We regularly explore
opportunities to acquire companies in the financial services
industry. We cannot predict the frequency, size or timing of our
acquisitions, and we typically do not comment publicly on a
possible acquisition until we have signed a definitive agreement.
99
Risk Factors (continued)
When we do announce an acquisition, our stock price may fall
depending on the size of the acquisition, the purchase price and
the potential dilution to existing stockholders. It is also possible
that an acquisition could dilute earnings per share.
control. We cannot assure that we will not find one or more
material weaknesses as of the end of any given year, nor can we
predict the effect on our stock price of disclosure of a material
weakness.
We generally must receive federal regulatory approvals before
From time to time Congress considers legislation that could
significantly change our regulatory environment, potentially
increasing our cost of doing business, limiting the activities we
may pursue or affecting the competitive balance among banks,
savings associations, credit unions, and other financial
institutions.
For more information, refer to the “Regulation and
Supervision” section in our 2010 Form 10-K and to “Report of
Independent Registered Public Accounting Firm” in this Report.
We may incur fines, penalties and other negative
consequences from regulatory violations, possibly even
inadvertent or unintentional violations. We maintain
systems and procedures designed to ensure that we comply with
applicable laws and regulations. However, some legal/regulatory
frameworks provide for the imposition of fines or penalties for
noncompliance even though the noncompliance was inadvertent
or unintentional and even though there was in place at the time
systems and procedures designed to ensure compliance. For
example, we are subject to regulations issued by the Office of
Foreign Assets Control (OFAC) that prohibit financial
institutions from participating in the transfer of property
belonging to the governments of certain foreign countries and
designated nationals of those countries. OFAC may impose
penalties for inadvertent or unintentional violations even if
reasonable processes are in place to prevent the violations. There
may be other negative consequences resulting from a finding of
noncompliance, including restrictions on certain activities. Such
a finding may also damage our reputation (see below) and could
restrict the ability of institutional investment managers to invest
in our securities.
Negative publicity could damage our reputation.
Reputation risk, or the risk to our earnings and capital from
negative public opinion, is inherent in our business. Negative
public opinion could adversely affect our ability to keep and
attract customers and expose us to adverse legal and regulatory
consequences. Negative public opinion could result from our
actual or alleged conduct in any number of activities, including
lending practices, corporate governance, regulatory compliance,
mergers and acquisitions, and disclosure, sharing or inadequate
protection of customer information, and from actions taken by
government regulators and community organizations in
response to that conduct. Because we conduct most of our
businesses under the “Wells Fargo” brand, negative public
opinion about one business could affect our other businesses.
we can acquire a bank or bank holding company. In deciding
whether to approve a proposed acquisition, federal bank
regulators will consider, among other factors, the effect of the
acquisition on competition, financial condition, and future
prospects including current and projected capital ratios and
levels, the competence, experience, and integrity of management
and record of compliance with laws and regulations, the
convenience and needs of the communities to be served,
including our record of compliance under the Community
Reinvestment Act, and our effectiveness in combating money
laundering. Also, we cannot be certain when or if, or on what
terms and conditions, any required regulatory approvals will be
granted. We might be required to sell banks, branches and/or
business units as a condition to receiving regulatory approval.
Difficulty in integrating an acquired company may cause us
not to realize expected revenue increases, cost savings, increases
in geographic or product presence, and other projected benefits
from the acquisition. The integration could result in higher than
expected deposit attrition (run-off), loss of key employees,
disruption of our business or the business of the acquired
company, or otherwise harm our ability to retain customers and
employees or achieve the anticipated benefits of the acquisition.
Time and resources spent on integration may also impair our
ability to grow our existing businesses. Also, the negative effect
of any divestitures required by regulatory authorities in
acquisitions or business combinations may be greater than
expected.
Federal and state regulations can restrict our business,
and non-compliance could result in penalties, litigation
and damage to our reputation. Our parent company, our
subsidiary banks and many of our nonbank subsidiaries are
heavily regulated at the federal and/or state levels. This
regulation is to protect depositors, federal deposit insurance
funds, consumers and the banking system as a whole, not
necessarily our stockholders. Federal and state regulations can
significantly restrict our businesses, and we could be fined or
otherwise penalized if we are found to be out of compliance.
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) limits the
types of non-audit services our outside auditors may provide to
us in order to preserve their independence from us. If our
auditors were found not to be “independent” of us under SEC
rules, we could be required to engage new auditors and file new
financial statements and audit reports with the SEC. We could be
out of compliance with SEC rules until new financial statements
and audit reports were filed, limiting our ability to raise capital
and resulting in other adverse consequences.
Sarbanes-Oxley also requires our management to evaluate the
Company’s disclosure controls and procedures and its internal
control over financial reporting and requires our auditors to
issue a report on our internal control over financial reporting.
We are required to disclose, in our annual report on Form 10-K,
the existence of any “material weaknesses” in our internal
100
Risks Affecting Our Stock Price Our stock price can
fluctuate widely in response to a variety of factors, in addition to
those described above, including:
•
•
•
general business and economic conditions;
recommendations by securities analysts;
new technology used, or services offered, by our
competitors;
operating and stock price performance of other companies
that investors deem comparable to us;
news reports relating to trends, concerns and other issues in
the financial services industry;
changes in government regulations;
natural disasters; and
geopolitical conditions such as acts or threats of terrorism or
military conflicts.
•
•
•
•
•
Federal Reserve Board policies can significantly affect
business and economic conditions and our financial
results and condition. The FRB regulates the supply of
money and credit in the United States. Its policies determine in
large part our cost of funds for lending and investing and the
return we earn on those loans and investments, both of which
affect our net interest margin. They also can materially affect the
value of financial instruments we hold, such as debt securities
and MSRs. Its policies also can affect our borrowers, potentially
increasing the risk that they may fail to repay their loans.
Changes in FRB policies are beyond our control and can be hard
to predict.
Risks Relating to Legal Proceedings Wells Fargo and some
of its subsidiaries are involved in judicial, regulatory and
arbitration proceedings concerning matters arising from our
business activities. Although we believe we have a meritorious
defense in all material significant litigation pending against us,
there can be no assurance as to the ultimate outcome. We
establish reserves for legal claims when payments associated
with the claims become probable and the costs can be reasonably
estimated. We may still incur legal costs for a matter even if we
have not established a reserve. In addition, the actual cost of
resolving a legal claim may be substantially higher than any
amounts reserved for that matter. The ultimate resolution of a
pending legal proceeding, depending on the remedy sought and
granted, could materially adversely affect our results of
operations and financial condition.
For more information, refer to Note 14 (Guarantees and Legal
Actions) to Financial Statements in this Report.
101
Controls and Procedures
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of December 31, 2010, of the Company’s
disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation.
Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure
controls and procedures were effective as of December 31, 2010.
Internal Control Over Financial Reporting
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the
Company’s Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles
(GAAP) and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of
the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management
and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during any quarter in
2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s report on internal control over financial reporting is set forth below, and should be read with these limitations in mind.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the
Company. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010,
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework. Based on this assessment, management concluded that as of December 31, 2010, the Company’s internal
control over financial reporting was effective.
KPMG LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this
Annual Report, issued an audit report on the Company’s internal control over financial reporting. KPMG’s audit report appears on the
following page.
102
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wells Fargo & Company:
We have audited Wells Fargo & Company and Subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of December 31, 2010 and 2009, and the related consolidated statements of income,
changes in equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2010,
and our report dated February 25, 2011, expressed an unqualified opinion on those consolidated financial statements.
San Francisco, California
February 25, 2011
103
Financial Statements
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Income
(in millions, except per share amounts)
Interest income
Trading assets
Securities available for sale
Mortgages held for sale
Loans held for sale
Loans
Other interest income
Total interest income
Interest expense
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains (losses) on debt securities available for sale (1)
Net gains (losses) from equity investments (2)
Operating leases
Other
Total noninterest income
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other
Total noninterest expense
Income before income tax expense
Income tax expense
Net income before noncontrolling interests
Less: Net income from noncontrolling interests
Wells Fargo net income
Less: Preferred stock dividends and accretion and other
Wells Fargo net income applicable to common stock
Per share information
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
Average common shares outstanding
Diluted average common shares outstanding
Year ended December 31,
2010
2009
2008
$
1,098
9,666
1,736
101
39,760
435
52,796
2,832
92
4,888
227
8,039
44,757
15,753
29,004
4,916
10,934
3,652
3,990
9,737
2,126
1,648
(324)
779
815
2,180
40,453
13,869
8,692
4,651
2,636
3,030
2,199
1,197
14,182
50,456
19,001
6,338
12,663
301
$
12,362
$
$
730
11,632
2.23
2.21
0.20
5,226.8
5,263.1
918
11,319
1,930
183
41,589
335
56,274
3,774
222
5,782
172
9,950
46,324
21,668
24,656
5,741
9,735
3,683
3,804
12,028
2,126
2,674
(127)
185
685
1,828
42,362
13,757
8,021
4,689
2,506
3,127
2,577
1,849
12,494
49,020
17,998
5,331
12,667
392
12,275
4,285
7,990
177
5,287
1,573
48
27,632
181
34,898
4,521
1,478
3,756
-
9,755
25,143
15,979
9,164
3,190
2,924
2,336
2,097
2,525
1,830
275
1,037
(757)
427
850
16,734
8,260
2,676
2,004
1,357
1,619
186
120
6,376
22,598
3,300
602
2,698
43
2,655
286
2,369
1.76
1.75
0.49
4,545.2
4,562.7
0.70
0.70
1.30
3,378.1
3,391.3
(1) Includes other-than-temporary impairment (OTTI) losses of $672 million and $1,012 million recognized in earnings ($500 million and $2,352 million of total OTTI losses, net
of $(172) million and $1,340 million recognized as an increase (decrease) to non-credit related OTTI losses recorded in other comprehensive income) for the year ended
December 31, 2010 and 2009, respectively.
(2) Includes OTTI losses of $268 million and $655 million for the year ended December 31, 2010 and 2009, respectively.
The accompanying notes are an integral part of these statements.
104
Wells Fargo & Company and Subsidiaries
Consolidated Balance Sheet
(in millions, except shares)
Assets
Cash and due from banks
Federal funds sold, securities purchased under resale agreements and other short-term investments
Trading assets
Securities available for sale
Mortgages held for sale (includes $47,531 and $36,962 carried at fair value)
Loans held for sale (includes $873 and $149 carried at fair value)
Loans (includes $309 carried at fair value at December 31, 2010)
Allowance for loan losses
Net loans
Mortgage servicing rights:
Measured at fair value
Amortized
Premises and equipment, net
Goodwill
Other assets
Total assets (1)
Liabilities
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt (includes $306 carried at fair value at December 31, 2010)
Total liabilities (2)
Equity
Wells Fargo stockholders' equity:
Preferred stock
Common stock – $1-2/3 par value, authorized 9,000,000,000 shares;
issued 5,272,414,622 shares and 5,245,971,422 shares
Additional paid-in capital
Retained earnings
Cumulative other comprehensive income
Treasury stock – 10,131,394 shares and 67,346,829 shares
Unearned ESOP shares
Total Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
December 31,
2010
2009
$
16,044
80,637
51,414
172,654
51,763
1,290
27,080
40,885
43,039
172,710
39,094
5,733
757,267
(23,022)
782,770
(24,516)
734,245
758,254
14,467
1,419
9,644
24,770
99,781
16,004
1,119
10,736
24,812
104,180
$
1,258,128
1,243,646
$
191,256
656,686
847,942
55,401
69,913
156,983
181,356
642,662
824,018
38,966
62,442
203,861
1,130,239
1,129,287
8,689
8,485
8,787
53,426
51,918
4,738
(487)
(663)
8,743
52,878
41,563
3,009
(2,450)
(442)
126,408
1,481
111,786
2,573
127,889
114,359
Total liabilities and equity
$
1,258,128
1,243,646
(1) Our consolidated assets at December 31, 2010, include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those
VIEs: Cash and due from banks, $200 million; Trading assets, $143 million; Securities available for sale, $2.2 billion; Net loans, $16.7 billion; Other assets, $2.0 billion, and
Total assets, $21.2 billion.
(2) Our consolidated liabilities at December 31, 2010, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Short-term
borrowings, $7 million; Accrued expenses and other liabilities, $71 million; Long-term debt, $8.3 billion; and Total liabilities, $8.4 billion.
The accompanying notes are an integral part of these statements.
105
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity and Comprehensive Income
Shares
Preferred stock
Amount
449,804 $
450
Shares
3,297,102,208 $
Common stock
Amount
5,788
449,804
450
3,297,102,208
5,788
538,877,525
429,084,786
(52,154,513)
781
704
25,000
9,566,921
520,500
22,674
8,071
521
(450,404)
(451)
15,720,883
67
9,662,017
10,111,821 $
30,882
31,332
931,528,681
4,228,630,889 $
1,485
7,273
10,111,821
31,332
4,228,630,889
7,273
953,285,636
(8,274,015)
1,470
(25,000)
(25,000)
(105,881)
(106)
4,982,083
2,259
(130,881)
9,980,940
(22,847)
8,485
$
949,993,704
5,178,624,593
$
1,470
8,743
(in millions, except shares)
Balance December 31, 2007
Cumulative effect from change in accounting for postretirement benefits
Adjustment for change of measurement date related to pension and
other postretirement benefits
Balance January 1, 2008
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Translation adjustments
Net unrealized losses on securities available for sale
Net unrealized gains on derivatives and hedging activities
Unamortized losses under defined benefit plans, net of amortization
Total comprehensive income
Noncontrolling interests
Common stock issued
Common stock issued for acquisitions
Common stock repurchased
Preferred stock issued
Preferred stock issued for acquisitions
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock converted to common shares
Stock warrants issued
Common stock dividends
Preferred stock dividends and accretion
Tax benefit upon exercise of stock options
Stock incentive compensation expense
Net change in deferred compensation and related plans
Other
Net change
Balance December 31, 2008
Cumulative effect from change in accounting for
other-than-temporary impairment on debt securities
Effect of change in accounting for noncontrolling interests
Balance January 1, 2009
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Translation adjustments
Net unrealized gains on securities available for sale
Net unrealized losses on derivatives and hedging activities
Unamortized gains under defined benefit plans, net of amortization
Total comprehensive income
Noncontrolling interests:
Purchase of Prudential’s noncontrolling interest
All other
Common stock issued
Common stock repurchased
Preferred stock redeemed
Preferred stock released by ESOP
Preferred stock converted to common shares
Common stock dividends
Preferred stock dividends and accretion
Tax benefit upon exercise of stock options
Stock incentive compensation expense
Net change in deferred compensation and related plans
Net change
Balance December 31, 2009
The accompanying notes are an integral part of these statements.
(continued on following pages)
106
Additional
paid-in
capital
8,212
8,212
Retained
earnings
38,970
(20)
(8)
38,942
2,655
Cumulative
other
comprehensive
income
725
Treasury
stock
(6,035)
Wells Fargo stockholders' equity
Total
Wells Fargo
stockholders'
equity
47,628
(20)
Unearned
ESOP
shares
(482)
Noncontrolling
interests
286
725
(6,035)
(482)
(8)
47,600
286
Total
equity
47,914
(20)
(8)
47,886
2,655
43
2,698
(58)
(6,610)
436
(1,362)
11,555
13,689
(456)
(4,312)
(286)
2,291
208
(1,623)
512
(19)
(551)
478
(58)
(6,610)
436
(1,362)
(4,939)
-
14,171
14,601
(1,623)
22,674
8,071
-
451
-
2,326
(4,312)
(219)
123
177
24
(41)
51,484
99,084
(58)
(6,610)
436
(1,362)
(4,896)
2,903
14,171
14,601
(1,623)
22,674
8,071
-
451
-
2,326
(4,312)
(219)
123
177
24
(41)
54,430
102,316
43
2,903
2,946
3,232
(2,399)
36,543
(7,594)
(6,869)
1,369
(4,666)
(73)
(555)
53
(53)
36,596
(6,922)
(4,666)
(555)
(3,716)
95,368
3,716
6,948
-
102,316
12,275
12,275
392
12,667
73
9,806
(221)
273
(898)
(2,125)
(4,285)
2,293
(220)
160
113
4,967
41,563
9,931
3,009
(17)
2,216
(2,450)
113
(442)
73
9,806
(221)
273
22,206
1,440
(79)
21,976
(220)
(25,000)
106
-
(2,125)
(2,026)
18
245
(123)
16,418
111,786
(7)
5
390
(4,500)
(265)
(4,375)
2,573
66
9,811
(221)
273
22,596
(3,060)
(344)
21,976
(220)
(25,000)
106
-
(2,125)
(2,026)
18
245
(123)
12,043
114,359
107
30
(27)
(61)
2,326
123
177
43
(41)
27,814
36,026
(3,716)
32,310
1,440
(79)
19,111
(7)
(54)
18
245
(106)
20,568
52,878
(continued from previous pages)
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity and Comprehensive Income
(in millions, except shares)
Shares
Preferred stock
Amount
Shares
Common stock
Amount
Balance December 31, 2009
9,980,940
$
8,485
5,178,624,593
$
8,743
Balance January 1, 2010
Cumulative effect from change in accounting for VIEs
Cumulative effect from change in accounting for
embedded credit derivatives
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Translation adjustments
Net unrealized gains on securities available for sale
Net unrealized gains on derivatives and hedging activities
Unamortized gains under defined benefit plans,
net of amortization
Total comprehensive income
Noncontrolling interests
Common stock issued
Common stock repurchased
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock converted to common shares
Common stock warrants repurchased
Common stock dividends
Preferred stock dividends
Tax benefit upon exercise of stock options
Stock incentive compensation expense
Net change in deferred compensation and related plans
Net change
9,980,940
8,485
5,178,624,593
8,743
1,000,000
1,000
58,375,566
(3,010,451)
27
(795,637)
(796)
28,293,520
17
204,363
204
83,658,635
44
Balance December 31, 2010
10,185,303
$
8,689
5,262,283,228
$
8,787
The accompanying notes are an integral part of these statements.
108
Additional
paid-in
capital
Retained
earnings
Cumulative
other
comprehensive
income
Treasury
stock
Wells Fargo stockholders' equity
Total
Wells Fargo
stockholders'
equity
Unearned
ESOP
shares
Noncontrolling
interests
Total
equity
52,878
41,563
3,009
(2,450)
(442)
111,786
2,573
114,359
3,009
(2,450)
(442)
111,786
183
2,573
114,359
183
52,878
41,563
183
(28)
12,362
375
(376)
80
(63)
212
(545)
4
97
436
(48)
548
45
1,525
89
70
1,349
(91)
567
(1,080)
859
(1,049)
(737)
10,355
1,729
138
1,963
(221)
(28)
12,362
-
45
1,525
89
70
14,091
-
1,375
(91)
-
796
-
(545)
(1,045)
(737)
97
436
90
14,622
301
12
13
326
(1,418)
(1,092)
(28)
12,663
-
57
1,538
89
70
14,417
(1,418)
1,375
(91)
-
796
-
(545)
(1,045)
(737)
97
436
90
13,530
53,426
51,918
4,738
(487)
(663)
126,408
1,481
127,889
109
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Cash Flows
(in millions)
Cash flows from operating activities:
Net income before noncontrolling interests
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Changes in fair value of MSRs, MHFS and LHFS carried at fair value
Depreciation and amortization
Other net losses (gains)
Preferred stock released by ESOP
Stock incentive compensation expense
Excess tax benefits related to stock option payments
Originations of MHFS
Proceeds from sales of and principal collected on mortgages originated for sale
Originations of LHFS
Proceeds from sales of and principal collected on LHFS
Purchases of LHFS
Net change in:
Trading assets
Deferred income taxes
Accrued interest receivable
Accrued interest payable
Other assets, net
Other accrued expenses and liabilities, net
Net cash provided (used) by operating activities
Cash flows from investing activities:
Net change in:
Federal funds sold, securities purchased under resale agreements
and other short-term investments
Securities available for sale:
Sales proceeds
Prepayments and maturities
Purchases
Loans:
Loans originated by banking subsidiaries, net of principal collected
Proceeds from sales (including participations) of loans originated for
investment by banking subsidiaries
Purchases (including participations) of loans by banking subsidiaries
Principal collected on nonbank entities’ loans
Loans originated by nonbank entities
Net cash acquired from (paid for) acquisitions
Proceeds from sales of foreclosed assets
Changes in MSRs from purchases and sales
Other, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Net change in:
Deposits
Short-term borrowings
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Proceeds from issuance
Redeemed
Cash dividends paid
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Stock warrants:
Proceeds from issuance
Repurchased
Excess tax benefits related to stock option payments
Change in noncontrolling interests:
Purchase of Prudential's noncontrolling interest
Other, net
Net cash provided (used) by financing activities
Net change in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Supplemental cash flow disclosures:
Cash paid for interest
Cash paid for income taxes
The accompanying notes are an integral part of these statements. See Note 1 for noncash activities.
110
2010
Year ended December 31,
2008
2009
$
12,663
12,667
2,698
15,753
(1,025)
1,924
1,345
796
436
(98)
(370,175)
355,325
(4,596)
17,828
(7,470)
12,356
4,287
1,051
(268)
(19,631)
(1,729)
18,772
21,668
(20)
2,841
(3,867)
106
245
(18)
(414,299)
399,261
(10,800)
20,276
(8,614)
13,983
9,453
(293)
(1,028)
(15,018)
2,070
28,613
15,979
3,789
1,669
2,065
451
177
(121)
(213,498)
220,254
-
-
-
(3,045)
(1,642)
(2,676)
1,634
(21,578)
(10,944)
(4,788)
(39,752)
8,548
51,049
8,668
47,919
(53,466)
53,038
38,811
(95,285)
60,806
24,317
(105,341)
15,869
52,240
(54,815)
6,517
(2,297)
15,560
(10,836)
(36)
5,444
(65)
2,800
(3,675)
6,162
(3,363)
14,428
(9,961)
(138)
3,759
(10)
3,556
71,785
1,988
(5,513)
21,846
(19,973)
11,203
1,746
92
(5,566)
(18,161)
23,924
11,308
42,473
(69,108)
7,697
(14,888)
3,489
(63,317)
8,396
(66,260)
35,701
(29,859)
-
-
(737)
1,375
(91)
(1,045)
-
(545)
98
-
(592)
(26,133)
(11,036)
27,080
16,044
-
(25,000)
(2,178)
21,976
(220)
(2,125)
-
-
18
(4,500)
(553)
(97,081)
3,317
23,763
27,080
22,674
-
-
14,171
(1,623)
(4,312)
2,326
-
121
-
(53)
31,955
9,006
14,757
23,763
8,307
1,187
10,978
3,042
8,121
2,554
$
$
See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Statements and related Notes of this
Form 10-K.
Note 1: Summary of Significant Accounting Policies
Wells Fargo & Company is a nation-wide diversified,
community-based 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-K, 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 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 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 other-
than-temporary impairment (OTTI) on investment securities
(Note 5), allowance for credit losses and purchased credit-
impaired (PCI) loans (Note 6), valuations of residential
mortgage servicing rights (MSRs) (Notes 8 and 9) and financial
instruments (Note 16), liability for mortgage loan repurchase
losses (Note 9) and income taxes (Note 20). Actual results could
differ from those estimates.
On December 31, 2008, Wells Fargo acquired Wachovia
Corporation (Wachovia). Because the acquisition was completed
at the end of 2008, Wachovia's results of operations are included
in the income statement and average balances beginning in
2009. Wachovia's assets and liabilities are included in the
consolidated balance sheet beginning on December 31, 2008.
The accounting policies of Wachovia have been conformed to
those of Wells Fargo as described herein.
On January 1, 2009, the Company adopted new accounting
guidance on noncontrolling interests on a retrospective basis.
Accordingly, prior period information reflects the adoption. The
guidance requires that noncontrolling interests be reported as a
component of total equity. In addition, the consolidated income
statement must disclose amounts attributable to both
Wells Fargo interests and the noncontrolling interests.
Accounting Standards Adopted in 2010
In first quarter 2010, we adopted the following accounting
updates to the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC or Codification):
• Accounting Standards Update (ASU or Update) 2010-6,
Improving Disclosures about Fair Value Measurements;
• ASU 2009-16, Accounting for Transfers of Financial Assets
(Statement of Financial Accounting Standards (FAS) 166,
Accounting for Transfers of Financial Assets – an
amendment of FASB Statement No. 140);
• ASU 2009-17, Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities (FAS
167, Amendments to FASB Interpretation No. 46(R)); and
• ASU 2010-10, Amendments for Certain Investment Funds.
In third quarter 2010, we adopted the following new
accounting guidance:
• ASU 2010-18, Effect of a Loan Modification When the Loan
is Part of a Pool That is Accounted for as a Single Asset;
and
• ASU 2010-11, Scope Exception Related to Embedded Credit
Derivatives.
In fourth quarter 2010, we adopted the following new
accounting guidance:
• ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses.
Information about these accounting updates is further
described in more detail below.
ASU 2010-6 amends the disclosure requirements for fair value
measurements. Companies are now required to disclose
significant transfers in and out of Levels 1 and 2 of the fair value
hierarchy, whereas the previous rules only required the
disclosure of transfers in and out of Level 3. Additionally, in the
rollforward of Level 3 activity, companies must present
information on purchases, sales, issuances, and settlements on a
gross basis rather than on a net basis. The Update also clarifies
that fair value measurement disclosures should be presented for
each class of assets and liabilities. A class is typically a subset of
a line item in the statement of financial position. Companies
should also provide information about the valuation techniques
and inputs used to measure fair value for both recurring and
nonrecurring instruments classified as either Level 2 or Level 3.
We adopted this guidance in first quarter 2010 with prospective
application, except for the new requirement related to the
Level 3 rollforward. Gross presentation in the Level 3
rollforward is effective for us in first quarter 2011 with
prospective application. Our adoption of the Update did not
affect our consolidated financial statement results since it
amends only the disclosure requirements for fair value
measurements.
111
Note 1: Summary of Significant Accounting Policies (continued)
ASU 2009-16 (FAS 166) modifies certain guidance contained
in ASC 860, Transfers and Servicing. This pronouncement
eliminates the concept of qualifying special purpose entities
(QSPEs) and provides additional criteria transferors must use to
evaluate transfers of financial assets. The Update also requires
that any assets or liabilities retained from a transfer accounted
for as a sale must be initially recognized at fair value. We
adopted this guidance in first quarter 2010 with prospective
application for transfers that occurred on and after
January 1, 2010.
ASU 2009-17 (FAS 167) amends several key consolidation
provisions related to variable interest entities (VIEs), which are
included in ASC 810, Consolidation. The scope of the new
guidance includes entities that were previously designated as
QSPEs. The Update also changes the approach companies must
use to identify VIEs for which they are deemed to be the primary
beneficiary and are required to consolidate. Under the new
guidance, a VIE's primary beneficiary is the entity that has the
power to direct the VIE's significant activities, and has an
obligation to absorb losses or the right to receive benefits that
could be potentially significant to the VIE. The Update also
requires companies to continually reassess whether they are the
primary beneficiary of a VIE, whereas the previous rules only
required reconsideration upon the occurrence of certain
triggering events. We adopted this guidance in first quarter
2010, which resulted in the consolidation of $18.6 billion of
incremental assets onto our consolidated balance sheet and a
$183 million increase to beginning retained earnings as a
cumulative effect adjustment.
We also elected the fair value option for those newly
consolidated VIEs for which our interests, prior to
January 1, 2010, were predominantly carried at fair value with
changes in fair value recorded to earnings. Accordingly, the fair
value option was elected to effectively continue fair value
accounting through earnings for those interests. Conversely, we
did not elect the fair value option for those newly consolidated
VIEs that did not share these characteristics. At January 1, 2010,
the fair value of loans and long-term debt for which we elected
the fair value option was $1.0 billion and $1.0 billion,
respectively. The incremental impact of electing the fair value
option (compared to not electing) on the cumulative effect
adjustment to retained earnings was an increase of $15 million.
See Notes 8 and 16 for additional information.
ASU 2010-10 amends consolidation accounting guidance to
defer indefinitely the application of ASU 2009-17 to certain
investment funds. The amendment was effective for us in first
quarter 2010. As a result, we did not consolidate any investment
funds upon adoption of ASU 2009-17.
ASU 2010-18 provides guidance for modified PCI loans that are
accounted for within a pool. Under the new guidance, modified
PCI loans should not be removed from a pool even if those loans
would otherwise be deemed troubled debt restructurings
(TDRs). The Update also clarifies that entities should consider
the impact of modifications on a pool of PCI loans when
112
evaluating that pool for impairment. These accounting changes
were effective for us in third quarter 2010. Our adoption of the
Update did not affect our consolidated financial statement
results, as the new guidance is consistent with our previous
accounting practice.
ASU 2010-11 provides guidance clarifying when entities should
evaluate embedded credit derivative features in financial
instruments issued from structures such as collateralized debt
obligations (CDOs) and synthetic CDOs. The Update clarifies
that bifurcation and separate accounting is not required for
embedded credit derivative features that are only related to the
transfer of credit risk that occurs when one financial instrument
is subordinate to another. Embedded derivatives related to other
types of credit risk must be analyzed to determine the
appropriate accounting treatment. The guidance also allows
companies to elect fair value option upon adoption for any
investment in a beneficial interest in securitized financial assets.
By making this election, companies would not be required to
evaluate whether embedded credit derivative features exist for
those interests. This guidance was effective for us in third
quarter 2010. In conjunction with our adoption of this standard,
we recorded a $28 million decrease to beginning retained
earnings as a cumulative effect adjustment.
ASU 2010-20 requires enhanced disclosures for the allowance
for credit losses and financing receivables, which include certain
loans and long-term accounts receivable. Companies are
required to disaggregate credit quality information, including
receivables on nonaccrual status and aging of past due
receivables by class of financing receivable, and roll forward the
allowance for credit losses by portfolio segment. Portfolio
segment is the level at which an entity develops and documents a
systematic method to determine its allowance for credit losses.
Class of financing receivable is generally a disaggregation of
portfolio segment. This guidance was effective for us in fourth
quarter 2010 with prospective application. Companies must also
provide supplemental information on the nature and extent of
TDRs and their effect on the allowance for credit losses. Under
ASU 2011-01, Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20, these
TDR disclosures have been deferred to coincide with a separate
FASB TDR project, with an expected effective date in second
quarter 2011. Our adoption did not affect our consolidated
financial statement results since it amends only the disclosure
requirements for financing receivables and the allowance for
credit losses.
Consolidation
Our consolidated financial statements include the accounts of
the Parent and our majority-owned subsidiaries and VIEs
(defined below) in which we are the primary beneficiary.
Significant intercompany accounts and transactions are
eliminated in consolidation. If we own at least 20% of an entity,
we generally account for the investment using the equity
method. If we own less than 20% of an entity, we generally carry
the investment at cost, except marketable equity securities,
which we carry at fair value with changes in fair value included
in other comprehensive income (OCI). Investments accounted
for under the equity or cost method are included in other assets.
We are a variable interest holder in certain special-purpose
entities (SPEs) in which equity investors do not have the
characteristics of a controlling financial interest or where the
entity does not have enough equity at risk to finance its activities
without additional subordinated financial support from other
parties (referred to as VIEs). Our variable interest arises from
contractual, ownership or other monetary interests in the entity,
which change with fluctuations in the fair value of the entity's
assets. We consolidate a VIE if we are the primary beneficiary,
defined as the party that that has both the power to direct the
activities that most significantly impact the VIE and a variable
interest that could potentially be significant to the VIE. A
variable interest is a contractual, ownership or other interest
that changes with changes in the fair value of the VIE’s net
assets. To determine whether or not a variable interest we hold
could potentially be significant to the VIE, we consider both
qualitative and quantitative factors regarding the nature, size
and form of our involvement with the VIE. We assess whether or
not we are the primary beneficiary of a VIE on an on-going basis.
Trading Assets
Trading assets are primarily securities, including corporate debt,
U.S. government agency obligations and other securities that we
acquire for short-term appreciation or other trading purposes,
and the fair value of derivatives held for customer
accommodation purposes or risk mitigation and hedging.
Interest-only strips and other retained interests in
securitizations that can be contractually prepaid or otherwise
settled in a way that the holder would not recover substantially
all of its recorded investment are classified as trading assets.
Trading assets are carried at fair value, with realized and
unrealized gains and losses recorded in noninterest income.
Securities
SECURITIES AVAILABLE FOR SALE Debt securities that we
might not hold until maturity and marketable equity securities
are classified as securities available for sale and reported at fair
value. Unrealized gains and losses, after applicable taxes, are
reported in cumulative OCI. Fair value measurement is based
upon quoted prices in active markets, if available. If quoted
prices in active markets are not available, fair values are
measured using independent pricing models or other model-
based valuation techniques such as the present value of future
cash flows, adjusted for the security's credit rating, prepayment
assumptions and other factors such as credit loss assumptions
and market liquidity. See Note 16 for more information on fair
value measurement of our securities.
We conduct OTTI analysis on a quarterly basis or more often
if a potential loss-triggering event occurs. The initial indicator of
OTTI for both debt and equity securities is a decline in market
value below the amount recorded for an investment and the
severity and duration of the decline.
For a debt security for which there has been a decline in the
fair value below amortized cost basis, we recognize OTTI if we
(1) have the intent to sell the security, (2) it is more likely than
not that we will be required to sell the security before recovery of
its amortized cost basis, or (3) we do not expect to recover the
entire amortized cost basis of the security.
Estimating recovery of the amortized cost basis of a debt
security is based upon an assessment of the cash flows expected
to be collected. If the cash flows expected to be collected are less
than amortized cost, OTTI is considered to have occurred. In
performing an assessment of the cash flows expected to be
collected, we consider all relevant information including:
•
the length of time and the extent to which the fair value has
been less than the amortized cost basis;
the historical and implied volatility of the fair value of the
security;
the cause of the price decline, such as the general level of
interest rates or adverse conditions specifically related to
the security, an industry or a geographic area;
the issuer's financial condition, near-term prospects and
ability to service the debt;
the payment structure of the debt security and the
likelihood of the issuer being able to make payments that
increase in the future;
for asset-backed securities, the credit performance of the
underlying collateral, including delinquency rates, level of
non-performing assets, cumulative losses to date, collateral
value and the remaining credit enhancement compared with
expected credit losses;
any change in rating agencies' credit ratings at evaluation
date from acquisition date and any likely imminent action;
independent analyst reports and forecasts, sector credit
ratings and other independent market data; and
recoveries or additional declines in fair value subsequent to
the balance sheet date.
•
•
•
•
•
•
•
•
If we intend to sell the security, or if it is more likely than not
we will be required to sell the security before recovery, an OTTI
write-down is recognized in earnings equal to the entire
difference between the amortized cost basis and fair value of the
security. For debt securities that are considered other-than-
temporarily impaired that we do not intend to sell or it is more
likely than not that we will not be required to sell 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
OCI. The measurement of the credit loss component is equal to
the difference between the debt security's cost basis and the
present value of its expected future cash flows discounted at the
security's effective yield. The remaining difference between the
security’s fair value and the present value of future expected cash
flows is due to factors that are not credit-related and, therefore,
are recognized in OCI. We believe that we will fully collect the
carrying value of securities on which we have recorded a non-
credit-related impairment in OCI.
We hold investments in perpetual preferred securities (PPS)
that are structured in equity form, but have many of the
characteristics of debt instruments, including periodic cash flows
in the form of dividends, call features, ratings that are similar to
debt securities and pricing like long-term callable bonds.
Because of the hybrid nature of these securities, we evaluate
PPS for OTTI using a model similar to the model we use for debt
113
Note 1: Summary of Significant Accounting Policies (continued)
securities as described above. Among the factors we consider in
our evaluation of PPS are whether there is any evidence of
deterioration in the credit of the issuer as indicated by a decline
in cash flows or a rating agency downgrade to below investment
grade and the estimated recovery period. Additionally, in
determining if there was evidence of credit deterioration, we
evaluate: (1) the severity of decline in market value below cost,
(2) the period of time for which the decline in fair value has
existed, and (3) the financial condition and near-term prospects
of the issuer, including any specific events which may influence
the operations of the issuer. We consider PPS to be other-than-
temporarily impaired if cash flows expected to be collected are
insufficient to recover our investment or if we no longer believe
the security will recover within the estimated recovery period.
None of our investments in PPS that have not been impaired
have been downgraded below investment grade subsequent to
purchase, and we believe that there are no factors to suggest that
we will not fully realize our investment in these instruments over
a reasonable recovery period. OTTI write-downs of PPS are
recognized in earnings equal to the difference between the cost
basis and fair value of the security.
For marketable equity securities other than PPS, OTTI
evaluations focus on whether evidence exists that supports
recovery of the unrealized loss within a timeframe consistent
with temporary impairment. This evaluation considers the
severity of and length of time fair value is below cost, our intent
and ability to hold the security until forecasted recovery of the
fair value of the security, and the investee's financial condition,
capital strength, and near-term prospects.
The securities portfolio is an integral part of our
asset/liability management process. We manage these
investments to provide liquidity, manage interest rate risk and
maximize portfolio yield within capital risk limits approved by
management and the Board of Directors and monitored by the
Corporate Asset/Liability Management Committee (Corporate
ALCO). We recognize realized gains and losses on the sale of
these securities in noninterest income using the specific
identification method.
Unamortized premiums and discounts are recognized in
interest income over the contractual life of the security using the
interest method. As principal repayments are received on
securities (i.e., primarily mortgage-backed securities (MBS)) a
proportionate amount of the related premium or discount is
recognized in income so that the effective interest rate on the
remaining portion of the security continues unchanged.
NONMARKETABLE EQUITY SECURITIES Nonmarketable equity
securities include venture capital equity securities that are not
publicly traded and securities acquired for various purposes,
such as to meet regulatory requirements (for example, Federal
Reserve Bank and Federal Home Loan Bank (FHLB) stock).
These securities are accounted for under the cost or equity
method and are included in other assets. We review those assets
accounted for under the cost or equity method at least quarterly
for possible OTTI. Our review typically includes an analysis of
the facts and circumstances of each investment, the expectations
for the investment's cash flows and capital needs, the viability of
its business model and our exit strategy. We reduce the asset
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value when we consider declines in value to be other than
temporary. We recognize the estimated loss as a loss from equity
investments in noninterest income.
Nonmarketable equity securities also include principal
investments, which include certain public equity and non-public
securities and certain investments in private equity funds.
Principal investments are recorded at fair value with realized
and unrealized gains and losses included in gains and losses
from equity investments in noninterest income and are included
in other assets on the balance sheet. In situations where a
portion of an investment in a non-public security or fund is sold,
we recognize a realized gain or loss on the portion sold and an
unrealized gain or loss on the portion retained.
Securities Purchased and Sold Agreements
Securities purchased under resale agreements and securities sold
under repurchase agreements are accounted for as collateralized
financing transactions and are recorded at the acquisition or sale
price plus accrued interest. It is our policy to take possession of
securities purchased under resale agreements, which are
primarily U.S. Government and Government agency securities.
We monitor the market value of securities purchased and sold,
and obtain collateral from or return it to counterparties when
appropriate. These financing transactions do not create material
credit risk given the collateral provided and the related
monitoring process.
Mortgages Held for Sale
Mortgages held for sale (MHFS) include commercial and
residential mortgages originated for sale and securitization in
the secondary market, which is our principal market, or for sale
as whole loans. We elect the fair value option for substantially all
residential MHFS (see Note 16). The remaining residential
MHFS are held at the lower of cost or market value (LOCOM),
and are valued on an aggregate portfolio basis. Commercial
MHFS are held at LOCOM and are valued on an individual loan
basis.
Gains and losses on MHFS are recorded in mortgage banking
noninterest income. Direct loan origination costs and fees for
MHFS under fair value option are recognized in mortgage
banking noninterest income at origination. For MHFS recorded
at LOCOM, loan costs and fees are deferred at origination and
are recognized in mortgage banking noninterest income at time
of sale. Interest income on MHFS for which the fair value option
is elected is calculated based upon the note rate of the loan and
is recorded to interest income.
Our lines of business are authorized to originate held-for-
investment loans that meet or exceed established loan product
profitability criteria, including minimum positive net interest
margin spreads in excess of funding costs. When a
determination is made at the time of commitment to originate
loans as held for investment, it is our intent to hold these loans
to maturity or for the “foreseeable future,” subject to periodic
review under our corporate asset/liability management process.
In determining the “foreseeable future” for these loans,
management considers (1) the current economic environment
and market conditions, (2) our business strategy and current
business plans, (3) the nature and type of the loan receivable,
including its expected life, and (4) our current financial
condition and liquidity demands. Consistent with our core
banking business of managing the spread between the yield on
our assets and the cost of our funds, loans are periodically
reevaluated to determine if our minimum net interest margin
spreads continue to meet our profitability objectives. If
subsequent changes in interest rates significantly impact the
ongoing profitability of certain loan products, we may
subsequently change our intent to hold these loans, and we
would take actions to sell such loans in response to the
Corporate ALCO directives to reposition our balance sheet
because of the changes in interest rates. These directives identify
both the type of loans to be sold and the weighted average
coupon rate of such loans no longer meeting our ongoing
investment criteria. Upon the issuance of such directives, we
immediately transfer these loans to the MHFS portfolio at
LOCOM.
Loans Held for Sale
Loans held for sale (LHFS) are carried at LOCOM or at fair value
for certain portfolios that we intend to hold for trading purposes.
Generally, consumer loans are valued on an aggregate portfolio
basis, and commercial loans are valued on an individual loan
basis. Gains and losses on LHFS are recorded in other
noninterest income. For LHFS recorded at LOCOM, direct loan
origination costs and fees are deferred at origination and are
recognized in other noninterest income at time of sale. For loans
recorded at fair value, direct loan origination costs and fees are
recorded in other noninterest income at origination. The fair
value of LHFS is based on what secondary markets are currently
offering for portfolios with similar characteristics, and related
gains and losses are recorded in noninterest income.
Loans
Loans are reported at their outstanding principal balances net of
any unearned income, cumulative charge-offs, unamortized
deferred fees and costs on originated loans and unamortized
premiums or discounts on purchased loans. PCI loans are
reported net of any remaining purchase accounting adjustments.
See the “Purchased Credit-Impaired Loans” section in this Note
for our accounting policy for PCI loans.
Unearned income, deferred fees and costs, and discounts and
premiums are amortized to interest income over the contractual
life of the loan using the interest method. Loan commitment fees
are generally deferred and amortized into noninterest income on
a straight-line basis over the commitment period.
Loans also include direct financing leases that are recorded at
the aggregate of minimum lease payments receivable plus the
estimated residual value of the leased property, less unearned
income. Leveraged leases, which are a form of direct financing
leases, are recorded net of related nonrecourse debt. Leasing
income is recognized as a constant percentage of outstanding
lease financing balances over the lease terms in interest income.
NONACCRUAL AND PAST DUE LOANS 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) 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 and no
restructuring has occurred.
PCI loans are written down at acquisition to fair value using
an estimate of cash flows deemed to be collectible. Accordingly,
such loans are no longer 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 purchase accounting).
When we place a loan on nonaccrual status, we reverse the
accrued unpaid interest receivable against interest income and
amortization of any net deferred fees is suspended. A loan will
remain in accruing status provided it is both well-secured and in
the process of collection. If the ultimate collectability of a loan is
in doubt and the loan is on nonaccrual, the cost recovery method
is used and cash collected is applied to first reduce the principal
outstanding. Generally, we return a loan to accrual status when
all delinquent interest and principal become current under the
terms of the loan agreement and collectability of remaining
principal and interest is no longer doubtful.
For modified loans, we underwrite at the time of a
restructuring to determine if there is sufficient evidence of
sustained repayment capacity based on the borrower’s financial
strength, including documented income, debt to income ratios
and other factors. If the borrower has demonstrated
performance under the previous terms and the underwriting
process shows the capacity to continue to perform under the
restructured terms, the loan will remain in accruing status.
When a loan classified as a TDR performs in accordance with its
modified terms, the loan either continues to accrue interest (for
performing loans) or will return to accrual status after the
borrower demonstrates a sustained period of performance
(generally six consecutive months of payments, or equivalent,
inclusive of consecutive payments made prior to the
modification). Loans will be placed on nonaccrual status and a
corresponding charge-off is recorded if we believe it is probable
that principal and interest contractually due under the modified
terms of the agreement will not be collectible.
Generally, consumer loans not secured by real estate or autos
are placed on nonaccrual status only when part of the principal
has been charged off. Loans are fully charged off or charged
down to net realizable value (fair value of collateral less
estimated costs to sell) when deemed uncollectible due to
bankruptcy or other factors, or when they reach a defined
number of days past due based on loan product, industry
practice, country, terms and other factors.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
LOAN CHARGE-OFF POLICIES For commercial loans, we
generally fully charge off or charge down to net realizable value
for loans secured by collateral when:
• management judges the loan to be uncollectible;
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Note 1: Summary of Significant Accounting Policies (continued)
•
•
•
•
repayment is deemed to be protracted beyond reasonable
time frames;
the loan has been classified as a loss by either our internal
loan review process or our banking regulatory agencies;
the customer has filed bankruptcy and the loss becomes
evident owing to a lack of assets; or
the loan is 180 days past due unless both well-secured and
in the process of collection.
For consumer loans, our charge-off policies are as follows:
•
1-4 family first and junior lien mortgages – We generally
charge down to net realizable value when the loan is
180 days past due.
• Auto loans – We generally fully charge off when the loan is
120 days past due.
• Credit card loans – We generally fully charge off when the
loan is 180 days past due.
• Unsecured loans (closed end) – We generally charge off
when the loan is 120 days past due.
• Unsecured loans (open end) – We generally charge off when
the loan is 180 days past due.
• Other secured loans – We generally fully or partially charge
down to net realizable value when the loan is 120 days past
due.
IMPAIRED LOANS We consider a loan to be impaired when,
based on current information and events, we determine that we
will not be able to collect all amounts due according to the loan
contract, including scheduled interest payments. Our impaired
loans include commercial and industrial, commercial real estate
(CRE), and foreign loans on nonaccrual status for which we
determine that we will not be able to collect all amounts due and
consumer, commercial and industrial, CRE, and foreign loans
modified in a TDR, on both accrual and nonaccrual status.
When we identify a loan as impaired, we measure the
impairment based on the present value of expected future cash
flows, discounted at the loan’s effective interest rate. When
collateral is the sole source of repayment for the loan, we may
measure impairment based on the fair value of the collateral. If
foreclosure is probable, we use the current fair value of the
collateral less selling costs, instead of discounted cash flows.
If we determine that the value of an impaired loan is less than
the recorded investment in the loan (net of previous charge-offs,
deferred loan fees or costs and unamortized premium or
discount), we recognize impairment. When the value of an
impaired loan is calculated by discounting expected cash flows,
interest income is recognized using the loan’s effective interest
rate over the remaining life of the loan.
TROUBLED DEBT RESTRUCTURINGS (TDRs) In situations
where, for economic or legal reasons related to a borrower’s
financial difficulties, we grant a concession for other than an
insignificant period of time to the borrower that we would not
otherwise consider, the related loan is classified as a TDR. We
strive to identify borrowers in financial difficulty early and work
with them to modify their loan to more affordable terms before it
reaches nonaccrual status. These modified terms may include
rate reductions, principal forgiveness, term extensions, payment
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forbearance and other actions intended to minimize our
economic loss and to avoid foreclosure or repossession of the
collateral. For modifications where we forgive principal, the
entire amount of such principal forgiveness is immediately
charged off. Loans classified as TDRs are considered impaired
loans.
PURCHASED CREDIT-IMPAIRED (PCI) LOANS Loans acquired
in a transfer, including business combinations, where there is
evidence of credit deterioration since origination and it is
probable at the date of acquisition that we will not collect all
contractually required principal and interest payments are
accounted for as PCI loans. PCI loans are initially recorded at
fair value, which includes estimated future credit losses expected
to be incurred over the life of the loan. Accordingly, the historical
allowance for credit losses related to these loans is not carried
over. Some loans that otherwise meet the definition as credit-
impaired are specifically excluded from the PCI loan portfolios,
such as revolving loans where the borrower still has revolving
privileges.
Evidence of credit quality deterioration as of the purchase
date may include statistics such as past due and nonaccrual
status, commercial risk ratings, recent borrower credit scores
and recent loan-to-value percentages. Generally, acquired loans
that meet our definition for nonaccrual status are considered to
be credit-impaired.
Substantially all commercial and industrial, CRE and foreign
PCI loans are accounted for as individual loans. Conversely,
Pick-a-Pay and other consumer PCI loans have been aggregated
into several pools based on common risk characteristics. Each
pool is accounted for as a single asset with a single composite
interest rate and an aggregate expectation of cash flows.
Accounting for PCI loans involves estimating fair value, at
acquisition, using the principal and interest cash flows expected
to be collected discounted at the prevailing market rate of
interest. The excess of cash flows expected to be collected over
the carrying value (estimated fair value at acquisition date) is
referred to as the accretable yield and is recognized in interest
income using an effective yield method over the remaining life of
the loan, or pool of loans, in situations where there is a
reasonable expectation about the timing and amount of cash
flows to be collected. The difference between contractually
required payments and the cash flows expected to be collected at
acquisition, considering the impact of prepayments, is referred
to as the nonaccretable difference.
Subsequent to acquisition, we regularly evaluate our
estimates of cash flows expected to be collected. If we have
probable decreases in cash flows expected to be collected (other
than due to decreases in interest rate indices and changes in
prepayment assumptions), we charge the provision for credit
losses, resulting in an increase to the allowance for loan losses. If
we have probable and significant increases in cash flows
expected to be collected, we first reverse any previously
established allowance for loan losses and then increase interest
income as a prospective yield adjustment over the remaining life
of the loan, or pool of loans. Estimates of cash flows are
impacted by changes in interest rate indices for variable rate
loans and prepayment assumptions, both of which are treated as
prospective yield adjustments included in interest income.
Resolutions of loans may include sales of loans to third
parties, receipt of payments in settlement with the borrower, or
foreclosure of the collateral. For individual PCI loans, gains or
losses on sales to third parties are included in noninterest
income and gains or losses as a result of a settlement with the
borrower are included in interest income. Our policy is to
remove an individual loan from a pool based on comparing the
amount received from its resolution with its contractual amount.
Any difference between these amounts is absorbed by the
nonaccretable difference for the entire pool. This removal
method assumes that the amount received from resolution
approximates pool performance expectations. The remaining
accretable yield balance is unaffected and any material change in
remaining effective yield caused by this removal method is
addressed by our quarterly cash flow evaluation process for each
pool. For loans that are resolved by payment in full, there is no
release of the nonaccretable difference for the pool because there
is no difference between the amount received at resolution and
the contractual amount of the loan. Modified PCI loans are not
removed from a pool even if those loans would otherwise be
deemed TDRs. Modified PCI loans that are accounted for
individually are considered TDRs, and removed from PCI
accounting if there has been a concession granted in excess of
the original nonaccretable difference.
FORECLOSED ASSETS Foreclosed assets obtained through our
lending activities primarily include real estate. These assets are
recorded at net realizable value with a charge to the allowance
for credit losses at foreclosure. We allow up to 90 days after
foreclosure to finalize determination of net realizable value.
Thereafter, changes in net realizable value are recorded to
noninterest expense. The net realizable value of these assets is
reviewed and updated periodically depending on the type of
property.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit
losses, which consists of the allowance for loan losses and the
allowance for unfunded credit commitments, is management’s
estimate of credit losses inherent in the loan portfolio at the
balance sheet date.
Securitizations and Beneficial Interests
In certain asset securitization transactions that meet the
applicable criteria to be accounted for as a sale, assets are sold to
an entity referred to as an SPE, which then issues beneficial
interests in the form of senior and subordinated interests
collateralized by the assets. In some cases, we may retain up to
90% of the beneficial interests issued by the entity. Additionally,
from time to time, we may also re-securitize certain assets in a
new securitization transaction.
The assets and liabilities transferred to an SPE are excluded
from our consolidated balance sheet if the transfer qualifies as a
sale and we are not required to consolidate the SPE.
For transfers of financial assets recorded as sales, we
recognize and initially measure at fair value all assets obtained
(including beneficial interests) and liabilities incurred. We
record a gain or loss in other fee income for the difference
between the carrying amount and the fair value of the assets
sold. Fair values are based on quoted market prices, quoted
market prices for similar assets, or if market prices are not
available, then the fair value is estimated using discounted cash
flow analyses with assumptions for credit losses, prepayments
and discount rates that are corroborated by and independently
verified against market observable data, where possible.
Retained interests from securitizations with off-balance sheet
entities, including SPEs and VIEs where we are not the primary
beneficiary, are classified as available for sale securities, trading
account assets or loans, and are accounted for as described
herein.
Mortgage Servicing Rights (MSRs)
We recognize the rights to service mortgage loans for others, or
MSRs, as assets whether we purchase the MSRs or the MSRs
result from a sale or securitization of loans we originate (asset
transfers). We initially record all of our MSRs at fair value.
Subsequently, residential loan MSRs are carried at either fair
value or LOCOM based on our strategy for managing interest
rate risk. Currently, substantially all of our residential loan
MSRs are carried at fair value. All of our MSRs related to our
commercial mortgage loans are subsequently measured at
LOCOM.
We base the fair value of MSRs on the present value of
estimated future net servicing income cash flows. We estimate
future net servicing income cash flows with assumptions that
market participants would use to estimate fair value, including
estimates of prepayment speeds (including housing price
volatility), discount rate, default rates, cost to service (including
delinquency and foreclosure costs), escrow account earnings,
contractual servicing fee income, ancillary income and late fees.
Our valuation approach is independently validated by our
internal valuation model validation group.
Changes in the fair value of MSRs occur primarily due to the
collection/realization of expected cash flows, as well as changes
in valuation inputs and assumptions. For MSRs carried at fair
value, changes in fair value are reported in noninterest income in
the period in which the change occurs. MSRs subsequently
measured at LOCOM are amortized in proportion to, and over
the period of, estimated net servicing income. The amortization
of MSRs is reported in noninterest income analyzed monthly
and adjusted to reflect changes in prepayment speeds, as well as
other factors.
MSRs accounted for at LOCOM are periodically evaluated for
impairment based on the fair value of those assets. For purposes
of impairment evaluation and measurement, we stratify MSRs
based on the predominant risk characteristics of the underlying
loans, including investor and product type. If, by individual
stratum, the carrying amount of these MSRs exceeds fair value, a
valuation reserve is established. The valuation reserve is
adjusted as the fair value changes.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Capital leases, where we are the
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Note 1: Summary of Significant Accounting Policies (continued)
lessee, are included in premises and equipment at the capitalized
amount less accumulated amortization.
We primarily use the straight-line method of depreciation
and amortization. Estimated useful lives range up to 40 years for
buildings, up to 10 years for furniture and equipment, and the
shorter of the estimated useful life or lease term for leasehold
improvements. We amortize capitalized leased assets on a
straight-line basis over the lives of the respective leases.
Goodwill and Identifiable Intangible Assets
Goodwill is recorded in business combinations under the
purchase method of accounting when the purchase price is
higher than the fair value of net assets, including identifiable
intangible assets.
We assess goodwill for impairment annually, and more
frequently in certain circumstances. We have determined that
our reporting units are one level below the operating segments.
We assess goodwill for impairment on a reporting unit level and
apply various valuation methodologies as appropriate to
compare the estimated fair value to the carrying value of each
reporting unit. Valuation methodologies include discounted cash
flow and earnings multiple approaches. If the fair value is less
than the carrying amount, a second test is required to measure
the amount of impairment. We recognize impairment losses as a
charge to noninterest expense (unless related to discontinued
operations) and an adjustment to the carrying value of the
goodwill asset. Subsequent reversals of goodwill impairment are
prohibited.
We amortize core deposit and other customer relationship
intangibles on an accelerated basis over useful lives not
exceeding 10 years. We review such intangibles for impairment
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Impairment is
indicated if the sum of undiscounted estimated future net cash
flows is less than the carrying value of the asset. Impairment is
permanently recognized by writing down the asset to the extent
that the carrying value exceeds the estimated fair value.
Operating Lease Assets
Operating lease rental income for leased assets is recognized in
other income on a straight-line basis over the lease term. Related
depreciation expense is recorded on a straight-line basis over the
life of the lease, taking into account the estimated residual value
of the leased asset. On a periodic basis, leased assets are
reviewed for impairment. Impairment loss is recognized if the
carrying amount of leased assets exceeds fair value and is not
recoverable. The carrying amount of leased assets is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the lease payments and the estimated
residual value upon the eventual disposition of the equipment.
Liability for Mortgage Loan Repurchase Losses
We sell residential mortgage loans to various parties, including
(1) Freddie Mac and Fannie Mae (government-sponsored
entities (GSEs)), which include the mortgage loans in GSE-
guaranteed mortgage securitizations, (2) special purpose entities
that issue private label MBS, and (3) other financial institutions
that purchase mortgage loans for investment or private label
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securitization. In addition, we pool Federal Housing
Administration (FHA)-insured and Department of Veterans
Affairs (VA)-guaranteed mortgage loans, which back securities
guaranteed by the Government National Mortgage Association
(GNMA).
We may be required to repurchase mortgage loans,
indemnify the securitization trust, investor or insurer, or
reimburse the securitization trust, investor or insurer for credit
losses incurred on loans (collectively “repurchase”) in the event
of a breach of specified contractual representations or warranties
that are not remedied within a period (usually 90 days or less)
after we receive notice of the breach. Typically, we would only be
required to repurchase securitized loans if a breach is deemed to
have material and adverse effect on the value of the mortgage
loan or to the interests of the security holders in the mortgage
loan.
We establish mortgage repurchase liabilities related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
have repurchase obligation, whether or not we currently service
those loans, based on a combination of factors. Such factors
incorporate estimated levels of defects based on internal quality
assurance sampling, default expectations, historical investor
repurchase demand and appeals success rates (where the
investor rescinds the demand based on a cure of the defect or
acknowledges that the loan satisfies the investor’s applicable
representations and warranties), reimbursement by
correspondent and other third party originators, and projected
loss severity. We establish a liability at the time loans are sold
and continually update our liability estimate during their life.
Although investors may demand repurchase at any time, the
majority of repurchase demands occur in the first 24 to 36
months following origination of the mortgage loan and can vary
by investor.
The liability for mortgage loan repurchase losses is included
in other liabilities. For additional information on our repurchase
liability, see Note 9.
Pension Accounting
We account for our defined benefit pension plans using an
actuarial model as more fully discussed in Note 19. In 2008, we
changed our measurement date for our plan assets and benefit
obligations from November 30 to December 31, which did not
change the amount of net periodic benefit expense recognized in
our income statement.
Income Taxes
We file consolidated and separate company federal income tax
returns, foreign tax returns and various combined and separate
company state tax returns.
We evaluate two components of income tax expense: current
and deferred. Current income tax expense approximates taxes to
be paid or refunded for the current period and includes income
tax expense related to our uncertain tax positions. We determine
deferred income taxes using the balance sheet method. Under
this method, the net deferred tax asset or liability is based on the
tax effects of the differences between the book and tax bases of
assets and liabilities, and recognizes enacted changes in tax rates
and laws in the period in which they occur. Deferred income tax
expense results from changes in deferred tax assets and
liabilities between periods. Deferred tax assets are recognized
subject to management's judgment that realization is more likely
than not. A tax position that meets the “more likely than not”
recognition threshold is measured to determine the amount of
benefit to recognize. The tax position is measured at the largest
amount of benefit that is greater than 50% likely of being
realized upon settlement. Foreign taxes paid are generally
applied as credits to reduce federal income taxes payable.
Interest and penalties are recognized as a component of income
tax expense.
Stock-Based Compensation
We have stock-based employee compensation plans as more
fully discussed in Note 18. Our compensation expense includes
the associated costs for all share-based awards.
Earnings Per Common Share
We compute earnings per common share by dividing net income
(after deducting dividends and related accretion on preferred
stock) by the average number of common shares outstanding
during the year. We compute diluted earnings per common
share by dividing net income (after deducting dividends and
related accretion on preferred stock) by the average number of
common shares outstanding during the year, plus the effect of
common stock equivalents (for example, stock options, restricted
share rights, convertible debentures and warrants) that are
dilutive.
Derivatives and Hedging Activities
We recognize all derivatives in the balance sheet at fair value. On
the date we enter into a derivative contract, we designate the
derivative as (1) a hedge of the fair value of a recognized asset or
liability, including hedges of foreign currency exposure (“fair
value” hedge), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a
recognized asset or liability (“cash flow” hedge), or (3) held for
trading, customer accommodation or asset/liability risk
management purposes, including economic hedges not
qualifying for hedge accounting. For a fair value hedge, we
record changes in the fair value of the derivative and, to the
extent that it is effective, changes in the fair value of the hedged
asset or liability attributable to the hedged risk, in current period
earnings in the same financial statement category as the hedged
item. For a cash flow hedge, we record changes in the fair value
of the derivative to the extent that it is effective in OCI, with any
ineffectiveness recorded in current period earnings. We
subsequently reclassify these changes in fair value to net income
in the same period(s) that the hedged transaction affects net
income in the same financial statement category as the hedged
item. For free-standing derivatives, we report changes in the fair
values in current period noninterest income.
For fair value and cash flow hedges qualifying for hedge
accounting, we formally document at inception the relationship
between hedging instruments and hedged items, our risk
management objective, strategy and our evaluation of
effectiveness for our hedge transactions. This includes linking all
derivatives designated as fair value or cash flow hedges to
specific assets and liabilities in the balance sheet or to specific
forecasted transactions. Periodically, as required, we also
formally assess whether the derivative we designated in each
hedging relationship is expected to be and has been highly
effective in offsetting changes in fair values or cash flows of the
hedged item using the regression analysis method or, in limited
cases, the dollar offset method.
We discontinue hedge accounting prospectively when (1) a
derivative is no longer highly effective in offsetting changes in
the fair value or cash flows of a hedged item, (2) a derivative
expires or is sold, terminated or exercised, (3) a derivative is de-
designated as a hedge, because it is unlikely that a forecasted
transaction will occur, or (4) we determine that designation of a
derivative as a hedge is no longer appropriate.
When we discontinue hedge accounting because a derivative
no longer qualifies as an effective fair value hedge, we continue
to carry the derivative in the balance sheet at its fair value with
changes in fair value included in earnings, and no longer adjust
the previously hedged asset or liability for changes in fair value.
Previous adjustments to the hedged item are accounted for in
the same manner as other components of the carrying amount of
the asset or liability.
When we discontinue cash flow hedge accounting because
the hedging instrument is sold, terminated or no longer
designated (de-designated), the amount reported in OCI up to
the date of sale, termination or de-designation continues to be
reported in OCI until the forecasted transaction affects earnings.
When we discontinue cash flow hedge accounting because it
is probable that a forecasted transaction will not occur, we
continue to carry the derivative in the balance sheet at its fair
value with changes in fair value included in earnings, and
immediately recognize gains and losses that were accumulated in
OCI in earnings.
In all other situations in which we discontinue hedge
accounting, the derivative will be carried at its fair value in the
balance sheet, with changes in its fair value recognized in current
period earnings.
We occasionally purchase or originate financial instruments
that contain an embedded derivative. At inception of the
financial instrument, we assess (1) if the economic
characteristics of the embedded derivative are not clearly and
closely related to the economic characteristics of the financial
instrument (host contract), (2) if the financial instrument that
embodies both the embedded derivative and the host contract is
not measured at fair value with changes in fair value reported in
earnings, and (3) if a separate instrument with the same terms as
the embedded instrument would meet the definition of a
derivative. If the embedded derivative meets all of these
conditions, we separate it from the host contract by recording
the bifurcated derivative at fair value and the remaining host
contract at the difference between the basis of the hybrid
instrument and the fair value of the bifurcated derivative. The
bifurcated derivative is carried as a free-standing derivative at
fair value with changes recorded in current period earnings.
119
Note 1: Summary of Significant Accounting Policies (continued)
SUPPLEMENTAL CASH FLOW INFORMATION Noncash activities are presented below, including information on transfers affecting
MHFS, LHFS, and MSRs.
Year ended December 31,
(in millions)
2010
2009
854
(258)
2,993
-
6,287
162
144
(111)
7,604
-
-
-
-
-
-
-
2,299
2008
-
(283)
-
544
3,498
136
(1,195)
1,640
3,031
-
-
-
-
-
-
-
-
-
-
-
22,672
-
-
Transfers from trading assets to securities available for sale
Transfers from (to) loans to (from) securities available for sale
Transfers from MHFS to trading assets
Transfers from MHFS to securities available for sale
Transfers from MHFS to MSRs
Transfers from MHFS to foreclosed assets
Transfers from (to) loans to (from) MHFS
Transfers from (to) loans to (from) LHFS
Transfers from loans to foreclosed assets
Changes in consolidations of variable interest entities:
Trading assets
Securities available for sale
Loans
Other assets
Short-term borrowings
Long-term debt
Accrued expenses and other liabilities
Net transfer from additional paid-in capital to noncontrolling interests
Issuance of common and preferred stock for purchase accounting
Decrease in noncontrolling interests due to deconsolidation of subsidiaries
Transfer from noncontrolling interests to long-term debt
SUBSEQUENT EVENTS We have evaluated the effects of
subsequent events that have occurred subsequent to period end
December 31, 2010, and there have been no material events that
would require recognition in our 2010 consolidated financial
statements or disclosure in the Notes to the financial statements.
$
-
3,476
19,815
-
4,570
262
230
1,313
8,699
155
(7,590)
26,117
212
5,127
13,613
(32)
-
-
440
345
120
Note 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. For information on
additional consideration related to acquisitions, which is
considered to be a guarantee, see Note 14.
(in millions)
2010
Certain assets of GMAC Commercial Finance, LLC, New York, New York
Other (1)
2009
Capital TempFunds, Fort Lauderdale, Florida
Other (2)
2008
Flatiron Credit Company, Inc., Denver, Colorado
Transcap Associates, Inc., Chicago, Illinois
United Bancorporation of Wyoming, Inc., Jackson, Wyoming (3)
Farmers State Bank of Fort Morgan Colorado, Fort Morgan, Colorado
Century Bancshares, Inc., Dallas, Texas
Wells Fargo Merchant Services, LLC (4)
Other (5)
In addition to the 2008 Wachovia acquisition, business
combinations completed in 2010, 2009 and 2008 are presented
below. At December 31, 2010, we had no pending business
combinations.
Date
Assets
April 30
$
Various
March 2
Various
$
$
$
April 30
$
June 27
July 1
December 6
December 31
December 31
Various
430
40
470
74
39
113
332
22
2,110
186
1,604
1,251
52
$
5,557
(1) Consists of five acquisitions of insurance brokerage businesses.
(2) Consists of eight acquisitions of insurance brokerage businesses.
(3) Consists of five affiliated banks of United Bancorporation of Wyoming, Inc., located in Wyoming and Idaho, and certain assets and liabilities of United Bancorporation of
Wyoming, Inc.
(4) Represents a step acquisition resulting from the increase in Wells Fargo's ownership from a 47.5% interest to a 60% interest in the Wells Fargo Merchant Services, LLC joint
venture.
(5) Consists of 12 acquisitions of insurance brokerage businesses.
On December 31, 2008, Wells Fargo acquired Wachovia. The
purchase accounting for the Wachovia acquisition was finalized
as of December 31, 2009, which included costs associated with
involuntary employee termination, contract terminations and
closing duplicate facilities. These exit costs were estimates and
subject to changes as the exit plans were executed. The final exit
costs as of December 31, 2010, were less than originally
estimated, resulting in the reversal of exit cost accruals, with the
offset reducing the amount of goodwill recorded with the
Wachovia acquisition by $123 million.
The following table summarizes the usage of the exit cost
accruals and changes in estimates.
(in millions)
Balance, December 31, 2008
Purchase accounting adjustments (1)
Cash payments/utilization
Balance, December 31, 2009
Cash payments/utilization
Change in estimates
Balance, December 31, 2010
(1) Certain purchase accounting adjustments have been refined during 2009 as additional information became available.
Employee
termination
Contract
termination
Facilities
related
$
57
596
(298)
$
355
(300)
(55)
$
-
13
61
(16)
58
(56)
(2)
-
129
354
(139)
344
(278)
(66)
Total
199
1,011
(453)
757
(634)
(123)
-
-
121
Note 3: Cash, Loan and Dividend Restrictions
Federal Reserve Board (FRB) regulations require that each of
our subsidiary banks maintain reserve balances on deposit with
the Federal Reserve Banks. The average required reserve balance
was $6.0 billion in 2010 and $2.4 billion in 2009.
Federal law restricts the amount and the terms of both credit
and non-credit transactions between a bank and its nonbank
affiliates. These transaction amounts may not exceed 10% of the
bank's capital and surplus, which for this purpose represents
total capital, as calculated under the risk-based capital (RBC)
guidelines, plus the balance of the allowance for credit losses in
excess of the amount included in total capital with any single
nonbank affiliate and 20% of the bank's capital and surplus with
all its nonbank affiliates. Transactions that are extensions of
credit may require collateral to be held to provide added security
to the bank. For further discussion of RBC, see Note 25.
Dividends paid by our subsidiary banks are subject to various
federal and state regulatory limitations. Dividends that may be
paid by a national bank without the express approval of the
Office of the Comptroller of the Currency (OCC) are limited to
that bank's retained net profits for the preceding two calendar
years plus retained net profits up to the date of any dividend
declaration in the current calendar year. Retained net profits, as
defined by the OCC, consist of net income less dividends
declared during the period.
We also have state-chartered subsidiary banks that are
subject to state regulations that limit dividends. Under those
provisions, our national and state-chartered subsidiary banks
could have declared additional dividends of $1.6 billion at
December 31, 2010, without obtaining prior regulatory approval.
Our nonbank subsidiaries are also limited by certain federal and
state statutory provisions and regulations covering the amount
of dividends that may be paid in any given year. Based on
retained earnings at December 31, 2010, our nonbank
subsidiaries could have declared additional dividends of
$4.7 billion at December 31, 2010, without obtaining prior
approval.
The FRB published clarifying supervisory guidance in 2009,
SR 09-4 Applying Supervisory Guidance and Regulations on
the Payment of Dividends, Stock Redemptions, and Stock
Repurchases at Bank Holding Companies, pertaining to FRB's
criteria, assessment and approval process for reductions in
capital including the redemption of Troubled Asset Relief
Program (TARP) and the payment of dividends. The effect of this
guidance is to require the approval of the FRB for the Company
to repurchase or redeem common or perpetual preferred stock
as well as to increase the per share dividend from its current
level of $0.05 per share. In November 2010, the FRB updated
the SR 09-4 guidance to require the original 19 Supervisory
Capital Assessment Program (SCAP) banks to submit a Capital
Plan Review to the FRB no later than January 7, 2011. The
Capital Plan Review outlines proposed capital actions by the
Company including per share dividend increases and share
repurchases from the Company’s benefit plans and the market.
The Company has submitted a Capital Plan Review to the FRB.
Note 4: 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, other short-term
investments and collateral we have received from other entities
under resale agreements and securities borrowing arrangements.
(in millions)
December 31,
2010
2009
Federal funds sold and securities
purchased under resale agreements
Interest-earning deposits
$
Other short-term investments
24,880
53,433
2,324
8,042
31,668
1,175
Total
$
80,637
40,885
Collateral received with the right
to sell or repledge (1)
Collateral sold or repledged (1)
$
22,495
14,624
9,663
7,952
(1) Prior period has been revised to correct previously reported amounts.
122
Note 5: 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 OCI. There were no securities
classified as held to maturity as of the periods presented.
(in millions)
December 31, 2010
Gross
Gross
unrealized unrealized
Cost
gains
losses
Fair
value
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
1,570
18,923
49
568
(15)
(837)
1,604
18,654
Mortgage-backed securities:
Federal agencies
Residential
Commercial
78,578
18,294
12,990
3,555
2,398
1,199
(96)
82,037
(489)
(635)
20,203
13,554
Total mortgage-backed securities
109,862
7,152
(1,220)
115,794
Corporate debt securities
Collateralized debt obligations
Other (1)
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total (2)
December 31, 2009
9,015
4,638
16,063
1,301
369
576
(37)
(229)
(283)
10,279
4,778
16,356
160,071
10,015
(2,621)
167,465
3,671
587
250
771
(89)
(1)
3,832
1,357
4,258
1,021
(90)
5,189
$
164,329
11,036
(2,711)
172,654
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
2,256
13,212
38
683
(14)
(365)
2,280
13,530
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Other (1)
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total (2)
79,542
28,153
12,221
3,285
2,480
602
(9)
(2,043)
(1,862)
82,818
28,590
10,961
119,916
6,367
(3,914)
122,369
8,245
3,660
15,025
1,167
432
1,099
(77)
(367)
(245)
9,335
3,725
15,879
162,314
9,786
(4,982)
167,118
3,677
1,072
4,749
263
654
917
(65)
(9)
(74)
3,875
1,717
5,592
$
167,063
10,703
(5,056)
172,710
(1) Included in the “Other” category are asset-backed securities collateralized by auto leases or loans and cash reserves with a cost basis and fair value of $6.2 billion and
$6.4 billion, respectively, at December 31, 2010, and $8.2 billion and $8.5 billion, respectively, at December 31, 2009. Also included in the "Other" category are asset-
backed securities collateralized by home equity loans with a cost basis and fair value of $927 million and $1.1 billion, respectively, at December 31, 2010, and $2.3 billion
and $2.5 billion, respectively, at December 31, 2009. The remaining balances primarily include asset-backed securities collateralized by credit cards and student loans.
(2) At December 31, 2010 and 2009, we held no securities of any single issuer (excluding the U.S. Treasury and federal agencies) with a book value that exceeded 10% of
stockholders’ equity.
123
Note 5: Securities Available for Sale (continued)
As part of our liquidity management strategy, we pledge
securities to secure borrowings from the FHLB and the Federal
Reserve Bank. We also pledge securities to secure trust and
public deposits and for other purposes as required or permitted
by law. Securities pledged where the secured party does not have
the right to sell or repledge totaled $94.2 billion and
$98.9 billion at December 31, 2010 and 2009, respectively. We
did not pledge any securities where the secured party has the
right to sell or repledge the collateral as of the same periods,
respectively.
Gross Unrealized Losses and Fair Value
The following table shows the gross unrealized losses and fair
value of securities in the securities available-for-sale portfolio by
length of time that individual securities in each category had
been in a continuous loss position. Debt securities on which we
have taken only credit-related OTTI write-downs are categorized
as being “less than 12 months” or “12 months or more” in a
continuous loss position based on the point in time that the fair
value declined to below the cost basis and not the period of time
since the credit-related OTTI write-down.
(in millions)
December 31, 2010
Less than 12 months
12 months or more
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Total
Fair
value
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
(15)
(322)
544
6,242
-
(515)
-
2,720
(15)
(837)
544
8,962
Mortgage-backed securities:
Federal agencies
Residential
Commercial
(95)
(35)
(9)
8,103
1,023
441
(1)
(454)
(626)
60
4,440
5,141
(96)
(489)
(635)
8,163
5,463
5,582
Total mortgage-backed securities
(139)
9,567
(1,081)
9,641
(1,220)
19,208
Corporate debt securities
Collateralized debt obligations
Other
(10)
(13)
(13)
477
679
1,985
(27)
(216)
(270)
157
456
757
(37)
(229)
(283)
634
1,135
2,742
Total debt securities
(512)
19,494
(2,109)
13,731
(2,621)
33,225
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total
December 31, 2009
(41)
-
(41)
962
-
962
(48)
(1)
(49)
467
7
474
(89)
(1)
1,429
7
(90)
1,436
$
(553)
20,456
(2,158)
14,205
(2,711)
34,661
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
(14)
(55)
530
1,120
-
(310)
-
2,826
(14)
(365)
530
3,946
Mortgage-backed securities:
Federal agencies
Residential
Commercial
(9)
(243)
(37)
767
2,991
816
-
(1,800)
(1,825)
-
9,697
6,370
(9)
767
(2,043)
(1,862)
12,688
7,186
Total mortgage-backed securities
(289)
4,574
(3,625)
16,067
(3,914)
20,641
Corporate debt securities
Collateralized debt obligations
Other
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
(7)
(55)
(73)
281
398
746
(70)
(312)
(172)
442
512
286
(77)
(367)
(245)
723
910
1,032
(493)
7,649
(4,489)
20,133
(4,982)
27,782
(1)
(9)
(10)
93
175
268
(64)
-
(64)
527
-
527
(65)
(9)
(74)
620
175
795
Total
$
(503)
7,917
(4,553)
20,660
(5,056)
28,577
124
We recognized $252 million of OTTI in 2010 on $14.5 billion
of agency mortgage-backed securities we intended to sell as of
December 31, 2010. These securities have been disposed of in
first quarter 2011 and are not included in the preceding table, as
any related unrealized losses were recognized in earnings. We do
not intend to sell any other securities in an unrealized loss
position. For debt securities included in the table, we have
concluded it is more likely than not that we will not be required
to sell prior to recovery of the amortized cost basis. We have
assessed each security for credit impairment. For debt securities,
we evaluate, where necessary, whether credit impairment exists
by comparing the present value of the expected cash flows to the
securities amortized cost basis. For equity securities, we consider
numerous factors in determining whether impairment exists,
including our intent and ability to hold the securities for a period
of time sufficient to recover the cost basis of the securities.
See Note 1 – “Securities” for the factors that we consider in
our analysis of OTTI for debt and equity securities available for
sale.
SECURITIES OF U.S. TREASURY AND FEDERAL AGENCIES AND
FEDERAL AGENCY MORTGAGE-BACKED SECURITIES (MBS)
The unrealized losses associated with U.S. Treasury and federal
agency securities and federal agency MBS are primarily driven
by changes in interest rates and not due to credit losses given the
explicit or implicit guarantees provided by the U.S. government.
SECURITIES OF U.S. STATES AND POLITICAL SUBDIVISIONS
The unrealized losses associated with securities of U.S. states
and political subdivisions are primarily driven by changes in
interest rates and not due to the credit quality of the securities.
Substantially all of these investments are investment grade. The
securities were generally underwritten in accordance with our
own investment standards prior to the decision to purchase,
without relying on a bond insurer’s guarantee in making the
investment decision. These investments will continue to be
monitored as part of our ongoing impairment analysis, but are
expected to perform, even if the rating agencies reduce the credit
rating of the bond insurers. As a result, we expect to recover the
entire amortized cost basis of these securities.
RESIDENTIAL AND COMMERCIAL MORTGAGE-BACKED
SECURITIES (MBS) The unrealized losses associated with
private residential MBS and commercial MBS are primarily
driven by changes in projected collateral losses, credit spreads
and interest rates. We assess for credit impairment using a cash
flow model. The key assumptions include default rates, severities
and prepayment rates. We estimate losses to a security by
forecasting the underlying mortgage loans in each transaction.
We use forecasted loan performance to project cash flows to the
various tranches in the structure. We also consider cash flow
forecasts and, as applicable, independent industry analyst
reports and forecasts, sector credit ratings, and other
independent market data. Based upon our assessment of the
expected credit losses of the security given the performance of
the underlying collateral compared with our credit
enhancement, we expect to recover the entire amortized cost
basis of these securities.
CORPORATE DEBT SECURITIES The unrealized losses
associated with corporate debt securities are primarily related to
securities backed by commercial loans and individual issuer
companies. For securities with commercial loans as the
underlying collateral, we have evaluated the expected credit
losses in the security and concluded that we have sufficient
credit enhancement when compared with our estimate of credit
losses for the individual security. For individual issuers, we
evaluate the financial performance of the issuer on a quarterly
basis to determine that the issuer can make all contractual
principal and interest payments. Based upon this assessment, we
expect to recover the entire cost basis of these securities.
COLLATERALIZED DEBT OBLIGATIONS (CDOS) The unrealized
losses associated with CDOs relate to securities primarily backed
by commercial, residential or other consumer collateral. The
losses are primarily driven by changes in projected collateral
losses, credit spreads and interest rates. We assess for credit
impairment using a cash flow model. The key assumptions
include default rates, severities and prepayment rates. We also
consider cash flow forecasts and, as applicable, independent
industry analyst reports and forecasts, sector credit ratings, and
other independent market data. Based upon our assessment of
the expected credit losses of the security given the performance
of the underlying collateral compared with our credit
enhancement, we expect to recover the entire amortized cost
basis of these securities.
OTHER DEBT SECURITIES The unrealized losses associated with
other debt securities primarily relate to other asset-backed
securities, which are primarily backed by auto, home equity and
student loans. The losses are primarily driven by changes in
projected collateral losses, credit spreads and interest rates. We
assess for credit impairment using a cash flow model. The key
assumptions include default rates, severities and prepayment
rates. Based upon our assessment of the expected credit losses of
the security given the performance of the underlying collateral
compared with our credit enhancement, we expect to recover the
entire amortized cost basis of these securities.
MARKETABLE EQUITY SECURITIES Our marketable equity
securities include investments in perpetual preferred securities,
which provide very attractive tax-equivalent yields. 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 are
not considered to be other-than-temporarily impaired if there is
no evidence of credit deterioration or investment rating
downgrades of any issuers to below investment grade, and we
expect to continue to receive full contractual payments. We will
continue to evaluate the prospects for these securities for
recovery in their market value in accordance with our policy for
estimating OTTI. We have recorded impairment write-downs on
perpetual preferred securities where there was evidence of credit
deterioration.
125
Note 5: Securities Available for Sale (continued)
The fair values of our investment securities could decline in
the future if the underlying performance of the collateral for the
residential and commercial MBS 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.
The following table shows the gross unrealized losses and fair
value of debt and perpetual preferred securities available for sale
by those rated investment grade and those rated less than
investment grade, according to their lowest credit rating by
Standard & Poor’s Rating Services (S&P) or Moody’s Investors
Service (Moody’s). Credit ratings express opinions about the
credit quality of a security. Securities rated investment grade,
that is those rated BBB- or higher by S&P or Baa3 or higher by
Moody’s, are generally considered by the rating agencies and
market participants to be low credit risk. Conversely, securities
rated below investment grade, labeled as “speculative grade” by
the rating agencies, are considered to be distinctively higher
credit risk than investment grade securities. We have also
included securities not rated by S&P or Moody’s in the table
below based on the internal credit grade of the securities (used
for credit risk management purposes) equivalent to the credit
rating assigned by major credit agencies. The unrealized losses
and fair value of unrated securities categorized as investment
grade based on internal credit grades were $83 million and
$1.3 billion, respectively, at December 31, 2010. There were no
unrated securities included in investment grade in a loss position
categorized as investment grade based on internal credit grades
as of December 31, 2009. If an internal credit grade was not
assigned, we categorized the security as non-investment grade.
Investment grade
Non-investment grade
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
$
(15)
544
-
(722)
8,423
(115)
Fair
value
-
539
(96)
(23)
8,163
888
(299)
4,679
-
(466)
(336)
-
4,575
903
(418)
13,730
(802)
5,478
(22)
(42)
330
613
(180)
2,510
(15)
(187)
(103)
304
522
232
(1,399)
(81)
26,150
1,327
(1,222)
(8)
7,075
102
$
(1,480)
27,477
(1,230)
7,177
$
(14)
(275)
530
3,621
-
(90)
-
325
(9)
(480)
(1,247)
767
5,661
6,543
-
-
(1,563)
7,027
(615)
643
(1,736)
12,971
(2,178)
7,670
(31)
(104)
(85)
260
471
644
(46)
(263)
(160)
463
439
388
(2,245)
(65)
18,497
620
(2,737)
-
9,285
-
$
(2,310)
19,117
(2,737)
9,285
(in millions)
December 31, 2010
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Other
Total debt securities
Perpetual preferred securities
Total
December 31, 2009
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Other
Total debt securities
Perpetual preferred securities
Total
126
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 MBS do
not consider prepayments. Remaining expected maturities will
differ from contractual maturities because borrowers may have
the right to prepay obligations before the underlying mortgages
mature.
Weighted-
After one year
After five years
Total average
Within one year through five years
through ten years
After ten years
Remaining contractual principal maturity
(in millions)
amount
yield
Amount Yield
Amount Yield
Amount Yield
Amount Yield
December 31, 2010
Securities of U.S. Treasury
and federal agencies
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized debt
obligations
Other
Total debt securities
$
1,604
2.54 % $
9 5.07 % $
641 1.72 % $
852 2.94 % $
102 4.15 %
18,654
5.99
322 3.83
3,210 3.57
1,884 6.13
13,238 6.60
82,037
20,203
5.01
4.98
13,554
5.39
5 6.63
-
-
-
-
28 6.58
-
-
420 5.23
341 3.20
81,584 5.00
19,862 5.01
1 1.38
215 5.28
13,338 5.39
115,794
5.05
5 6.63
29 6.38
976 4.53
114,784 5.05
10,279
5.94
545 7.82
3,853 6.01
4,817 5.62
1,064 6.21
4,778
16,356
0.80
2.53
-
-
1,588 2.89
545 0.88
7,887 3.00
2,581 0.72
4,367 2.01
1,652 0.90
2,514 1.72
at fair value
$ 167,465
4.81 % $ 2,469 4.12 % $ 16,165 3.72 % $ 15,477 3.63 % $ 133,354 5.10 %
December 31, 2009
Securities of U.S. Treasury
and federal agencies
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed
securities
$
2,280
2.80 % $
413 0.79 % $
669 2.14 % $
1,192 3.87 % $
6 4.03 %
13,530
6.75
77 7.48
703 6.88
1,055 6.56
11,695 6.76
82,818
5.50
28,590
10,961
5.40
5.29
12 4.68
51 4.80
85 0.68
50 5.91
271 5.56
82,485 5.50
115 0.45
71 5.55
283 5.69
169 5.66
28,141 5.41
10,636 5.32
122,369
5.46
148 2.44
236 3.14
723 5.63
121,262 5.46
Corporate debt securities
9,335
5.53
684 4.00
3,937 5.68
3,959 5.68
755 5.32
Collateralized debt obligations
Other
3,725
15,879
1.70
4.22
2 5.53
2,128 5.62
492 4.48
7,762 5.96
1,837 1.56
697 2.46
1,394 0.90
5,292 1.33
Total debt securities
at fair value
$
167,118
5.33 % $
3,452 4.63 % $ 13,799 5.64 % $
9,463 4.51 % $ 140,404 5.37 %
127
Note 5: Securities Available for Sale (continued)
Realized Gains and Losses
The following table shows the gross realized gains and losses on
sales and OTTI write-downs related to the securities available-
for-sale portfolio, which includes marketable equity securities, as
well as net realized gains and losses on nonmarketable equity
securities (see Note 7 – Other Assets).
(in millions)
Gross realized gains
Gross realized losses
OTTI write-downs
Year ended
December 31,
2010
2009
2008
$
645 1,601
1,920
(32)
(101)
(692) (1,094) (1,790)
(160)
Net realized gains (losses) from
securities available for sale
(79)
347
29
Net realized gains (losses) from principal
and private equity investments
534
(289)
251
Net realized gains from
debt and equity securities
$
455
58
280
Year ended December 31,
2010
2009
2008
$
16
7
14
267
175
120
10
15
69
-
595
137
69
125
79
-
183
23
176
147
3
672
1,012
546
15
5
20
50
32
1,057
187
82
1,244
692
1,094
1,790
248
573
220
Other-Than-Temporary Impairment
The following table shows the detail of total OTTI write-downs
included in earnings for debt securities and marketable and
nonmarketable equity securities.
(in millions)
OTTI write-downs included in earnings
Debt securities:
U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies (1)
Residential
Commercial
Corporate debt securities
Collateralized debt obligations
Other debt securities
Total debt securities
Equity securities:
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total securities available for sale
Nonmarketable equity securities
Total OTTI write-downs included in earnings
$
940
1,667
2,010
(1) Represents OTTI recognized on federal agency MBS because we had the intent to sell, of which $252 million relates to securities with a fair value of $14.5 billion that were
sold subsequent to December 31, 2010.
128
Other-Than-Temporarily Impaired Debt Securities
The following table shows the detail of OTTI write-downs on
debt securities available for sale included in earnings and the
related changes in OCI for the same securities.
(in millions)
OTTI on debt securities
Recorded as part of gross realized losses:
Credit-related OTTI
Intent-to-sell OTTI (1)
Total recorded as part of gross realized losses
Recorded directly to OCI for non-credit-related impairment:
U.S. states and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Other debt securities
Total recorded directly to OCI for non-credit-related impairment (2)
Year ended December 31,
2010
2009
$
400
272
982
30
672
1,012
(4)
(326)
138
(1)
54
(33)
3
1,124
179
(2)
20
16
(172)
1,340
Total OTTI on debt securities
$
500
2,352
(1) Amount includes $252 million related to securities with a fair value of $14.5 billion that were sold subsequent to December 31, 2010.
(2) Represents amounts recorded to OCI on debt securities in periods OTTI write-downs have occurred. Changes in fair value in subsequent periods on such securities, to the
extent additional credit-related OTTI did not occur, are not reflected in this total. For the year ended December 31, 2010, the non-credit-related impairment recorded to OCI
was a $172 million reduction in total OTTI because the fair value of the security increased due to factors other than credit.
The following table presents a rollforward of the credit loss
component recognized in earnings for debt securities we still
own (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. OTTI recognized in earnings for
credit-impaired debt securities is presented as additions in two
components based upon whether the current period is the first
time the debt security was credit-impaired (initial credit
impairment) or is not the first time the debt security was credit
impaired (subsequent credit impairments). The credit loss
component is reduced if we sell, intend to sell or believe we will
be required to sell previously credit-impaired debt securities.
Additionally, the credit loss component is reduced if we receive
or expect to receive cash flows in excess of what we previously
expected to receive over the remaining life of the credit-
impaired debt security, the security matures or is fully written
down.
Changes in the credit loss component of credit-impaired
debt securities that we do not intend to sell were:
(in millions)
Credit loss component, beginning of year
Additions:
Initial credit impairments
Subsequent credit impairments
Total additions
Reductions:
For securities sold
For securities derecognized resulting from adoption of consolidation accounting guidance
Due to change in intent to sell or requirement to sell
For recoveries of previous credit impairments (1)
Total reductions
Credit loss component, end of year
Year ended December 31,
2010
2009
$
1,187
471
122
278
625
357
400
982
(263)
(242)
(2)
(37)
(255)
-
(1)
(10)
(544)
(266)
$
1,043
1,187
(1) Recoveries of previous credit impairments result from increases in expected cash flows subsequent to credit loss recognition. Such recoveries are reflected prospectively as
interest yield adjustments using the effective interest method.
129
Note 5: Securities Available for Sale (continued)
For asset-backed securities (e.g., residential MBS), 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 subordinated 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 consider current delinquencies and nonperforming assets
(NPAs), 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. Total credit impairment losses on
residential MBS that we do not intend to sell are shown in the
table below. The table also presents a summary of the significant
inputs considered in determining the measurement of the credit
loss component recognized in earnings for residential MBS.
($ in millions)
Credit impairment losses on residential MBS
Investment grade
Non-investment grade
Total credit impairment losses on residential MBS
Significant inputs (non-agency – non-investment grade MBS)
Expected remaining life of loan losses (1):
Range (2)
Credit impairment distribution (3):
0 - 10% range
10 - 20% range
20 - 30% range
Greater than 30%
Weighted average (4)
Current subordination levels (5):
Range (2)
Weighted average (4)
Prepayment speed (annual CPR (6)):
Range (2)
Weighted average (4)
Year ended December 31,
2010
2009
$
$
5
170
175
24
567
591
1-43 %
0-58
52
29
17
2
9
0-25
7
2-27
14
56
27
12
5
11
0-44
8
5-25
11
(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) Represents distribution of credit impairment losses recognized in earnings categorized based on range of expected remaining life of loan losses. For example 52% of credit
impairment losses recognized in earnings for the year ended December 31, 2010, had expected remaining life of loan loss assumptions of 0 to 10%.
(4) Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
(5) Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance.
(6) Constant prepayment rate.
130
Note 6: Loans and Allowance for Credit Losses
The following table presents total loans outstanding by portfolio
segment and class of financing receivable. Outstanding balances
are presented net of unearned income, net deferred loan fees,
and unamortized discounts and premiums totaling a net
reduction of $11.3 billion and $14.6 billion at December 31, 2010
and 2009, respectively. Outstanding balances also include PCI
loans net of any remaining purchase accounting adjustments.
Information about PCI loans is presented separately in the
“Purchased Credit-Impaired Loans” section of this Note.
Effective June 30, 2010, real estate construction outstanding
balances and all other related data include certain commercial
real estate secured loans acquired from Wachovia previously
classified as real estate mortgage. Balances for 2009 and 2008
have been revised to conform with the current presentation.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign (1)
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loans
2010
2009
2008
2007
2006
December 31,
$
151,284
99,435
158,352
97,527
202,469
94,923
25,333
13,094
36,978
14,210
42,861
15,829
90,468
36,747
18,854
6,772
70,404
30,112
15,935
5,614
32,912
29,398
33,882
7,441
6,666
322,058
336,465
389,964
160,282
128,731
230,235
96,149
229,536
103,708
247,894
110,164
22,260
86,565
24,003
89,058
23,555
93,253
71,415
75,565
18,762
56,171
53,228
68,926
14,697
53,534
435,209
446,305
474,866
221,913
190,385
$
757,267
782,770
864,830
382,195
319,116
(1) Substantially all of our foreign loan portfolio is commercial loans. Loans are classified as foreign if the borrower’s primary address is outside of the United States.
We pledge loans to secure borrowings from the FHLB and
the Federal Reserve Bank as part of our liquidity management
strategy. Loans pledged where the secured party does not have
the right to sell or repledge totaled $312.6 billion for both
December 31, 2010 and 2009. We did not have any pledged
loans where the secured party has the right to sell or repledge for
the same respective periods.
Loan concentrations may exist when there are amounts
loaned to borrowers engaged in similar activities or similar types
of loans extended to a diverse group of borrowers that would
cause them to be similarly impacted by economic or other
conditions. At December 31, 2010 and 2009, we did not have
concentrations representing 10% or more of our total loan
portfolio in domestic commercial and industrial loans and lease
financing by industry or CRE loans (real estate mortgage and
real estate construction) by state or property type. Our real
estate 1-4 family mortgage loans to borrowers in the state of
California represented approximately 14% of total loans at both
December 31, 2010 and 2009. Of this amount, 3% of total loans
were PCI loans at December 31, 2010. These loans are generally
diversified among the larger metropolitan areas in California,
with no single area consisting of more than 3% of total loans.
Changes in real estate values and underlying economic or market
conditions for these areas are monitored continuously within our
credit risk management process.
Some of our real estate 1-4 family mortgage loans, including
first mortgage and home equity products, include an interest-
only feature as part of the loan terms. At December 31, 2010,
these loans were approximately 25% of total loans, compared
with 26% at December 31, 2009. Substantially all of these loans
are considered to be prime or near prime. We do not offer option
adjustable-rate mortgage (ARM) products, nor do we offer
variable-rate mortgage products with fixed payment amounts,
commonly referred to within the financial services industry as
negative amortizing mortgage loans.
The following table summarizes the proceeds paid or received
for purchases and sales of loans, respectively. It also includes
transfers from (to) mortgages/loans held for sale at lower of cost
or market. The table excludes PCI loans and loans recorded at
fair value, including loans originated for sale. This activity
primarily includes purchases or sales of commercial loan
participation interests, whereby we receive or transfer a portion
of a loan after origination.
(in millions)
Purchases
December 31, 2010
Commercial Consumer
Total
$
2,135
162
2,297
Sales
Transfers from/(to) MHFS/LHFS
(5,930)
(1,461)
(553)
(82)
(6,483)
(1,543)
131
Note 6: Loans and Allowance for Credit Losses (continued)
Commitments to Lend
A commitment to extend credit is a legally binding agreement to
lend funds to a customer, usually at a stated interest rate and for
a specified purpose. These commitments have fixed expiration
dates and generally require a fee. When we make such a
commitment, we have credit risk. The liquidity requirements or
credit risk will be lower than the contractual amount of
commitments to extend credit because a significant portion of
these commitments are expected to expire without being used.
Certain commitments are subject to loan agreements with
covenants regarding the financial performance of the customer
or borrowing base formulas that must be met before we are
required to fund the commitment. Also, in some cases we
participate a portion of our commitment to others in an
arrangement that reduces our contractual commitment amount.
We use the same credit policies in extending credit for unfunded
commitments and letters of credit that we use in making loans.
See Note 14 for information on standby letters of credit.
In addition, we manage the potential risk in credit
commitments by limiting the total amount of arrangements,
both by individual customer and in total, by monitoring the size
and maturity structure of these portfolios and by applying the
same credit standards for all of our credit activities.
For certain extensions of credit, we may require collateral,
based on our assessment of a customer’s credit risk. We hold
various types of collateral, including accounts receivable,
inventory, land, buildings, equipment, autos, financial
instruments, income-producing commercial properties and
residential real estate. Collateral requirements for each customer
may vary according to the specific credit underwriting, terms
and structure of loans funded immediately or under a
commitment to fund at a later date.
The contractual amount of our unfunded credit
commitments, net of participations and net of all standby and
commercial letters of credit issued under the terms of these
commitments, is summarized by portfolio segment and class of
financing receivable in the following table:
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
December 31,
2010
2009
$
185,947
187,319
4,596
5,698
7,775
5,138
9,385
4,468
Total commercial
204,016
206,310
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family
junior lien mortgage
Credit card
36,562
33,460
58,618
62,019
63,338
65,952
Other revolving credit and installment
18,458
20,778
Total consumer
175,657
183,528
Total unfunded
credit commitments
$
379,673
389,838
132
CONSUMER PORTFOLIO SEGMENT ACL METHODOLOGY For
consumer loans, not identified as a TDR, we determine the
allowance on a collective basis utilizing forecasted losses to
represent our best estimate of inherent loss. We pool loans,
generally by product types with similar risk characteristics, such
as residential real estate mortgages and credit cards. As
appropriate, to achieve greater accuracy, we may further stratify
selected portfolios by sub-product, origination channel, vintage,
loss type, geographic location and other predictive
characteristics. Models designed for each pool are utilized to
develop the loss estimates. We use assumptions for these pools
in our forecast models, such as historic delinquency and default,
loss severity, home price trends, unemployment trends, and
other key economic variables that may influence the frequency
and severity of losses in the pool.
In addition, we establish an allowance for consumer loans
that have been modified in a TDR, whether on accrual or
nonaccrual status.
OTHER ACL MATTERS Commercial and consumer PCI loans
may require an allowance subsequent to their acquisition. This
allowance requirement is due to probable decreases in expected
principal and interest cash flows (other than due to decreases in
interest rate indices and changes in prepayment assumptions).
The allowance for credit losses for both portfolio segments
includes an amount for imprecision or uncertainty that may
change from period to period. This amount represents
management’s judgment of risks inherent in the processes and
assumptions used in establishing the allowance. This
imprecision considers economic environmental factors,
modeling assumptions and performance, process risk, and other
subjective factors, including industry trends.
Allowance for Credit Losses (ACL)
The ACL is management’s estimate of credit losses inherent in
the loan portfolio, including unfunded credit commitments, at
the balance sheet date. We have an established process to
determine the adequacy of the allowance for credit losses that
assesses the losses inherent in our portfolio and related
unfunded credit commitments. While we attribute portions of
the allowance to specific portfolio segments, the entire allowance
is available to absorb credit losses inherent in the total loan
portfolio and unfunded credit commitments.
Our process involves procedures to appropriately consider
the unique risk characteristics of our commercial and consumer
loan portfolio segments. For each portfolio segment, impairment
is measured collectively for groups of smaller loans with similar
characteristics, individually for larger impaired loans or, for PCI
loans, based on the changes in cash flows expected to be
collected.
Our allowance levels are influenced by loan volumes, loan
grade migration or delinquency status, historic loss experience
influencing loss factors, and other conditions influencing loss
expectations, such as economic conditions. We have had limited
changes in our allowance methodology primarily associated with
integration alignment of loss estimation processes between
Wells Fargo and Wachovia. Those changes did not significantly
impact the allowance for credit losses.
COMMERCIAL PORTFOLIO SEGMENT ACL METHODOLOGY
Generally, commercial loans are assessed for estimated losses by
grading each loan using various risk factors as identified through
periodic reviews. We apply historic grade-specific loss factors to
the aggregation of each funded grade pool. These historic loss
factors are also used to estimate losses for unfunded credit
commitments. In the development of our statistically derived
loan grade loss factors, we observe historical losses over a
relevant period for each loan grade. These loss estimates are
adjusted as appropriate based on additional analysis of long-
term average loss experience compared to previously forecasted
losses, external loss data or other risks identified from current
economic conditions and credit quality trends.
The allowance also includes an amount for the estimated
impairment on nonaccrual commercial loans and commercial
loans modified in a TDR, whether on accrual or nonaccrual
status.
133
Note 6: Loans and Allowance for Credit Losses (continued)
The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded credit commitments.
Changes in the allowance for credit losses were:
(in millions)
Balance, beginning of year
Provision for credit losses
Interest income on certain impaired loans (1)
Loan charge-offs:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loan charge-offs
Loan recoveries:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loan recoveries
Year ended December 31,
2010
2009
2008
2007
2006
$
25,031
15,753
(266)
21,711
21,668
5,518
15,979
3,964
4,939
4,057
2,204
-
-
-
-
(2,775)
(3,365)
(1,653)
(629)
(414)
(1,151)
(1,189)
(120)
(198)
(670)
(1,063)
(229)
(237)
(29)
(178)
(65)
(245)
(6)
(14)
(33)
(265)
(5)
(2)
(30)
(281)
(5,433)
(5,564)
(2,170)
(947)
(732)
(4,900)
(3,318)
(540)
(4,934)
(2,396)
(4,812)
(2,708)
(2,204)
(1,563)
(109)
(648)
(832)
(103)
(154)
(505)
(2,437)
(3,423)
(2,300)
(1,913)
(1,685)
(14,667)
(14,261)
(6,607)
(3,502)
(2,447)
(20,100)
(19,825)
(8,777)
(4,449)
(3,179)
427
68
110
20
53
678
522
211
218
718
254
114
119
111
33
16
20
40
5
3
13
49
8
2
17
65
19
3
21
76
363
184
211
230
185
174
180
755
37
89
147
481
22
53
120
504
26
36
96
537
1,669
1,294
754
699
695
2,347
1,657
938
910
925
Net loan charge-offs (2)
(17,753)
(18,168)
(7,839)
(3,539)
(2,254)
Allowances related to business combinations/other (3)
698
(180)
8,053
154
(43)
Balance, end of year
Components:
$
23,463
25,031
21,711
5,518
3,964
Allowance for loan losses
Allowance for unfunded credit commitments
$
23,022
441
24,516
515
21,013
698
5,307
211
3,764
200
Allowance for credit losses (4)
$
23,463
25,031
21,711
5,518
3,964
Net loan charge-offs as a percentage of average total loans (2)
Allowance for loan losses as a percentage of total loans (4)
Allowance for credit losses as a percentage of total loans (4)
2.30 %
3.04
3.10
2.21
3.13
3.20
1.97
2.43
2.51
1.03
1.39
1.44
0.73
1.18
1.24
(1) Effective 2010, certain impaired loans with an allowance calculated by discounting expected cash flows using the loan’s effective interest rate over the remaining life of the
loan recognize reductions in allowance as interest income.
(2) For PCI loans, charge-offs are only recorded to the extent that losses exceed the purchase accounting estimates.
(3) Includes $693 million related to the adoption of consolidation accounting guidance on January 1, 2010.
(4) The allowance for credit losses includes $298 million and $333 million at December 31, 2010 and 2009, respectively, related to PCI loans acquired from Wachovia. Loans
acquired from Wachovia are included in total loans net of related purchase accounting net write-downs.
134
The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.
(in millions)
Balance, beginning of year
Provision for credit losses
Interest income on certain impaired loans
Loan charge-offs
Loan recoveries
Net loan charge-offs
Allowance related to business combinations/other
Year ended December 31, 2010
Commercial
Consumer
Total
$
8,141
4,913
(139)
16,890
10,840
(127)
25,031
15,753
(266)
(5,433)
(14,667)
(20,100)
678
1,669
2,347
(4,755)
(12,998)
(17,753)
9
689
698
Balance, end of year
$
8,169
15,294
23,463
The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
(in millions)
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
December 31, 2010
Commercial
Consumer
Total
Commercial
Consumer
Total
$
5,424
2,479
266
11,539
3,723
16,963
6,202
302,392
11,731
387,707 690,099
25,738
14,007
32
298
7,935
33,495
41,430
$
8,169
15,294
23,463
322,058
435,209 757,267
(1) Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to amendments by ASU 2010-20
regarding allowance for unimpaired loans.
(2) Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by ASU 2010-20
regarding allowance for impaired loans.
(3) Represents the allowance and related loan carrying value determined in accordance with ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated
Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI loans.
135
Note 6: Loans and Allowance for Credit Losses (continued)
Credit Quality
We monitor credit quality as indicated by evaluating various
attributes and utilize such information in our evaluation of the
adequacy of the allowance for credit losses. The following
sections provide the credit quality indicators we most closely
monitor. The majority of credit quality indicators are based on
December 31, 2010, information, with the exception of updated
FICO and updated loan-to-value (LTV)/combined LTV (CLTV),
which are obtained at least quarterly. Generally, these indicators
are updated in the second month of each quarter, with updates
no older than September 30, 2010.
COMMERCIAL CREDIT QUALITY INDICATORS In addition to
monitoring commercial loan concentration risk, we manage a
consistent process for assessing commercial loan credit quality.
Commercial loans are subject to individual risk assessment using
our internal borrower and collateral quality ratings. Our ratings
are aligned to Pass and Criticized categories. The Criticized
category includes Special Mention, Substandard, and Doubtful
categories which are defined by banking regulatory agencies.
The table below provides a breakdown of outstanding
commercial loans (excluding PCI loans) by risk category. Both
the CRE mortgage and construction criticized totals are
relatively high as a result of the current conditions in the real
estate market. Of the $37.1 billion in criticized CRE loans,
$7.9 billion has been placed on nonaccrual status and written
down to net realizable value. Loans in both populations have a
high level of surveillance and monitoring in place to manage
these assets and mitigate any loss exposure. See the “Purchased
Credit-Impaired Loans” section of this Note for credit quality
information on our commercial PCI portfolio.
(in millions)
By risk category:
Pass
Criticized
Commercial
Real
Real
and
estate
industrial mortgage construction
estate
December 31, 2010
Lease
financing
Foreign
Total
$
126,058
70,597
11,256
12,411
30,341
250,663
24,508
25,983
11,128
683
1,158
63,460
Total commercial loans (excluding PCI)
$
150,566
96,580
22,384
13,094
31,499
314,123
In addition, while we monitor past due status, we do not
consider it a key driver of our credit risk management practices
for commercial loans. The following table provides past due
information for commercial loans, excluding PCI loans.
(in millions)
By delinquency status:
Current or 1-29 DPD
30-89 DPD
90+ DPD and still accruing
Nonaccrual loans
Commercial
and
Real
estate
Real
estate
Lease
industrial mortgage construction
financing
Foreign
Total
December 31, 2010
$
146,135
90,233
19,005
12,927
31,350
299,650
910
308
3,213
1,016
104
5,227
510
193
2,676
59
-
108
-
22
2,495
627
127
11,351
Total commercial loans (excluding PCI)
$
150,566
96,580
22,384
13,094
31,499
314,123
CONSUMER CREDIT QUALITY INDICATORS We have various
classes of consumer loans that present respective unique risks.
Loan delinquency, FICO credit scores and LTV for loan types are
common credit quality indicators that we monitor and utilize in
our evaluation of the adequacy of the allowance for credit losses
for the consumer portfolio segment.
The majority of our loss estimation techniques used for the
allowance for credit losses rely on delinquency matrix models or
delinquency roll rate models. Therefore, delinquency is an
important indicator of credit quality and the establishment of
our allowance for credit losses.
136
The following table provides the outstanding balances of our consumer portfolio by delinquency status, excluding PCI loans.
(in millions)
By delinquency status:
Current
1-29 DPD
30-59 DPD
60-89 DPD
90-119 DPD
120-179 DPD
180+ DPD
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
junior lien
first
Other
revolving
credit and
Credit
mortgage mortgage
card installment
Total
$
159,321
5,597
89,408
3,104
20,546
730
74,083
8,635
343,358
18,066
4,993
2,911
4,152
5,363
14,653
917
608
476
764
622
262
207
190
324
1
1,802
691
371
349
634
7,974
4,417
5,189
6,800
15,910
Total consumer loans (excluding PCI)
$
196,990
95,899
22,260
86,565
401,714
Of the $27.9 billion of loans 90 days or more past due in the
previous table, $14.1 billion, which excludes MHFS, represents
insured/guaranteed loans whose repayments are insured by the
FHA or guaranteed by the VA. Of the remaining $13.7 billion of
loans that are 90 days or more past due, $3.1 billion was
accruing. Consumer loans are placed on nonaccrual status and
written down to net realizable value depending on the loan type
and the extent of delinquency (see Note 1).
Of the $14.1 billion in delinquent insured/guaranteed loans,
$8.0 billion are more than 180 days past due. Excluding these
insured/guaranteed loans, real estate 1-4 family first mortgage
loans 180 days or more past due totaled $6.6 billion, or 3.4% of
total first mortgages. The aging of the delinquent real estate
1-4 family first mortgage loans is a result of the prolonged
foreclosure process and our effort to help customers stay in their
homes through various loan modification programs.
The following table provides a breakdown of our consumer
portfolio by updated FICO. We obtain FICO scores at loan
origination and the scores are updated at least quarterly. FICO is
not available for certain loan types and may not be obtained if we
deem it unnecessary due to strong collateral and other borrower
attributes, primarily for government guaranteed student loans of
$17.5 billion and securities-based margin loans of $4.1 billion.
The majority of our portfolio is underwritten with a FICO score
of 680 and above. The table excludes PCI loans, which are
included in the “Purchased Credit-Impaired Loans” section of
this Note.
(in millions)
By updated FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
Other
revolving
junior lien
first
mortgage mortgage
Credit
credit and
card installment
Total
$
34,207
14,422
18,794
26,435
29,335
47,054
19,702
7,041
-
9,037
4,509
7,729
13,768
20,322
27,214
10,607
2,713
-
2,872
10,809
56,925
1,826
3,305
4,522
4,441
3,215
1,794
285
-
5,970
8,354
9,495
8,827
9,368
4,693
7,457
21,592
26,727
38,182
54,220
62,925
86,851
36,796
17,496
21,592
Total consumer loans (excluding PCI)
$
196,990
95,899
22,260
86,565
401,714
137
Note 6: Loans and Allowance for Credit Losses (continued)
NONACCRUAL LOANS The following table provides loans on
nonaccrual status. PCI loans are excluded from this table due to
the existence of the accretable yield.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
December 31,
2010
2009
$
3,213
4,397
5,227
2,676
3,696
3,313
108
127
171
146
Total commercial (1)
11,351 11,723
Consumer:
Real estate 1-4 family first mortgage (2)
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
Total consumer
Total nonaccrual loans
12,289 10,100
2,302
300
2,263
332
14,891 12,695
(excluding PCI)
$
26,242 24,418
(1) Includes LHFS of $3 million and $27 million at December 31, 2010 and 2009,
respectively.
(2) Includes MHFS of $426 million and $339 million at December 31, 2010 and
2009, respectively.
LTV refers to the ratio comparing the loan’s unpaid principal
balance to the property’s collateral value. CLTV refers to the
combination of first mortgage and junior lien mortgage ratios.
LTVs and CLTVs are updated quarterly using a cascade approach
which first uses values provided by automated valuation models
(AVMs) for the property. If an AVM is not available, then the
value is estimated using the original appraised value adjusted by
the change in Home Price Index (HPI) for the property location.
If an HPI is not available, the original appraised value is used.
The HPI value is normally the only method considered for high
value properties as the AVM values have proven less accurate for
these properties.
The following table shows the most updated LTV and CLTV
distribution of the real estate 1-4 family first and junior lien
mortgage loan portfolios excluding PCI loans. In recent years,
the residential real estate markets have experienced significant
declines in property values and several markets, particularly
California and Florida have experienced declines that turned out
to be more significant than the national decline. These trends are
considered in the way that we monitor credit risk and establish
our allowance for credit losses. LTV does not necessarily reflect
the likelihood of performance of a given loan, but does provide
an indication of collateral value. In the event of a default, any
loss should be limited to the portion of the loan amount in excess
of the net realizable value of the underlying real estate collateral
value. Certain loans do not have an LTV or CLTV primarily due
to industry data availability and portfolios acquired from or
serviced by other institutions.
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
junior lien
first
mortgage mortgage
by CLTV
by LTV
Total
$
48,905
14,814
63,719
46,453
44,892
28,587
24,578
17,744
24,255
17,887
18,628
64,197
69,147
46,474
43,206
(in millions)
By LTV/CLTV:
0-60%
60.01-80%
80.01-100%
100.01-120% (1)
> 120% (1)
No LTV/CLTV available
3,575
2,571
6,146
Total (excluding PCI)
$
196,990
95,899
292,889
(1) Reflects total loan balances with LTV/CLTV amounts in excess of 100%. In the
event of default, the loss content would generally be limited to only the amount
in excess of 100% LTV/CLTV.
138
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Certain loans 90 days or more past due as to interest or principal
are still accruing, because they are (1) well-secured and in the
process of collection or (2) real estate 1-4 family mortgage loans
or consumer loans exempt under regulatory rules from being
classified as nonaccrual until later delinquency, usually 120 days
past due. PCI loans of $11.6 billion at December 31, 2010, and
$16.1 billion at December 31, 2009, are excluded from this
disclosure even though they are 90 days or more contractually
past due. These PCI loans are considered to be accruing due to
the existence of the accretable yield and not based on
consideration given to contractual interest payments.
Non-PCI loans 90 days or more past due and still accruing
were $18.5 billion at December 31, 2010, and $22.2 billion at
December 31, 2009. Those balances which include mortgage
loans held for sale, have $14.7 billion and $15.3 billion,
respectively, of insured/guaranteed loans whose repayments are
insured by the FHA or guaranteed by the VA. The following table
shows non-PCI loans 90 days or more past due and still
accruing, but excludes insured/guaranteed loans.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage (1)
Real estate 1-4 family
junior lien mortgage (1)
Credit card
$
December 31,
2010
2009
308
104
193
22
590
1,014
909
73
627
2,586
941
1,623
366
516
515
795
Other revolving credit and installment
1,305
1,333
Total consumer
3,128
4,266
Total (excluding PCI)
$
3,755
6,852
(1) Includes mortgage loans held for sale 90 days or more past due and still
accruing.
139
Note 6: Loans and Allowance for Credit Losses (continued)
IMPAIRED LOANS The table below summarizes key information
for impaired loans. Our impaired loans include loans on
nonaccrual status in the commercial portfolio segment and loans
modified in a TDR, whether on accrual or nonaccrual status.
These impaired loans may have estimated impairment which is
included in the allowance for credit losses. Impaired loans
exclude PCI loans. See the “Loans” section in Note 1 for our
policies on impaired loans and PCI loans.
December 31, 2010
Recorded investment
Unpaid
Impaired loans
with related
Related
principal
balance
Impaired
loans
allowance for allowance for
credit losses credit losses
$
8,190
7,439
4,676
149
215
3,600
5,239
2,786
91
15
3,276
5,163
2,786
91
15
607
1,282
548
34
8
20,669
11,731
11,331
2,479
12,834
1,759
11,603
1,626
548
231
548
230
11,603
1,626
548
230
2,754
578
333
58
15,372
14,007
14,007
3,723
$
36,041
25,738
25,338
6,202
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total (excluding PCI)
The following table summarizes key information for impaired
loans as of December 31, 2009.
December 31, 2009 (1)
(in millions)
Commercial Consumer
Total
Recorded investment:
Impaired loans
Impaired loans with a related
$
10,562
8,268
18,830
allowance for credit losses
9,666
8,268
17,934
Related allowance for credit losses
1,502
1,765
3,267
(1) Balances have been revised to conform to our current classification of certain
small commercial loans as impaired.
140
The following table presents the average recorded investment
in impaired loans and interest income recognized on impaired
loans after impairment.
Year ended December 31,
(in millions)
2010
2009
2008
Average recorded investment
in impaired loans
$
23,268
10,557
1,952
Interest income:
Cash basis of accounting
Other (1)
$
250
448
130
102
Total interest income
$
698
232
34
9
43
(1) Includes interest recognized on accruing TDRs, interest recognized related to
the passage of time, and amortization of purchase accounting adjustments
related to certain impaired loans. See footnote 1 to the table of changes in the
allowance for credit losses.
Commitments to lend additional funds on loans whose terms
have been modified in a TDR amounted to $1.2 billion and
$452 million at December 31, 2010 and 2009, respectively.
These commitments primarily relate to CRE loans, which, at the
time of modification, had an amount of availability to the
borrower that continues under the modified terms of the TDR
and totaled $861 million and $134 million at December 31, 2010
and 2009, respectively.
The following table provides the average recorded investment
in impaired loans and the amount of interest income recognized
on impaired loans after impairment by portfolio segment and
class.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Year ended
December 31, 2010
Average Recognized
recorded
investment
interest
income
$
4,098
4,598
3,203
166
47
64
41
28
-
-
Total commercial
12,112
133
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family
junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
9,221
494
1,443
360
132
11,156
Total impaired loans
$
23,268
55
13
3
565
698
141
Note 6: Loans and Allowance for Credit Losses (continued)
Purchased Credit-Impaired Loans
Certain loans acquired in the Wachovia acquisition are
accounted for as PCI loans. The following table presents PCI
loans net of any remaining purchase accounting adjustments.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
Total consumer
Total PCI loans (carrying value)
Total PCI loans (unpaid principal balance)
December 31,
2010
2009
2008
$
718
1,911
4,580
2,855
2,949
4,137
5,207
5,803
6,462
1,413
1,733
1,859
7,935
12,988
18,704
33,245
250
38,386
331
39,214
728
-
-
151
33,495
38,717
40,093
41,430
51,705
58,797
64,331
83,615
98,182
$
$
ACCRETABLE YIELD The excess of cash flows expected to be
collected over the carrying value of PCI loans is referred to as the
accretable yield and is recognized in interest income using an
effective yield method over the remaining life of the loan, or
pools of loans. The accretable yield is affected by:
• Changes in interest rate indices for variable rate PCI loans –
Expected future cash flows are based on the variable rates in
effect at the time of the regular evaluations of cash flows
expected to be collected;
• Changes in prepayment assumptions – Prepayments affect
the estimated life of PCI loans which may change the
amount of interest income, and possibly principal, expected
to be collected; and
• Changes in the expected principal and interest payments
over the estimated life – Updates to expected cash flows are
driven by the credit outlook and actions taken with
borrowers. Changes in expected future cash flows from loan
modifications are included in the regular evaluations of cash
flows expected to be collected.
The change in the accretable yield related to PCI loans is
presented in the following table.
(in millions)
Total, beginning of year
Accretion
Reclassification from nonaccretable difference for loans with improving cash flows
Changes in expected cash flows that do not affect nonaccretable difference (1)
Total, end of year
Year ended December 31,
2010
2009
$
14,559
10,447
(2,435)
3,399
(2,606)
441
1,191
6,277
$
16,714
14,559
(1) Represents changes in cash flows expected to be collected, changes in interest rates on variable rate PCI loans, and the impact of modifications on expected cash flows.
142
PCI ALLOWANCE When it is estimated that the cash flows
expected to be collected have decreased subsequent to
acquisition for a PCI loan or pool of loans, an allowance is
established and a provision for additional loss is recorded as a
charge to income. The following table summarizes the changes in
allowance for PCI loan losses.
(in millions)
Balance, December 31, 2008
Provision for losses due to credit deterioration
Charge-offs
Balance, December 31, 2009
Provision for losses due to credit deterioration
Charge-offs
Commercial Pick-a-Pay
consumer
Other
$
-
850
(520)
330
712
(776)
Total
-
853
(520)
333
771
(806)
-
3
-
3
59
(30)
-
-
-
-
-
-
-
Balance, December 31, 2010
$
266
32
298
COMMERCIAL PCI CREDIT QUALITY INDICATORS The following table provides a breakdown of commercial PCI loans by risk category.
(in millions)
By risk category:
Pass
Criticized
Total commercial PCI loans
December 31, 2010
Commercial
and
Real
estate
Real
estate
industrial mortgage construction
Foreign
Total
$
$
214
504
352
128
210
904
2,503
2,821
1,203
7,031
718
2,855
2,949
1,413
7,935
CONSUMER PCI CREDIT QUALITY INDICATORS Our consumer
PCI loans were aggregated into several pools of loans at
acquisition. Below, we have provided credit quality indicators
based on the individual loans included in the pool, but we have
not allocated the remaining purchase accounting adjustments,
which were established at a pool level. The following table
provides the delinquency status of consumer PCI loans.
(in millions)
By delinquency status:
Current
1-29 DPD
30-59 DPD
60-89 DPD
90-119 DPD
120-179 DPD
180+ DPD
Total consumer PCI loans
Total consumer PCI loans (carrying value)
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
junior lien
first
mortgage mortgage
Total
$
29,253
357
29,610
44
3,586
1,364
881
1,346
7,214
79
30
17
13
19
220
123
3,616
1,381
894
1,365
7,434
$
$
43,688
735
44,423
33,245
250
33,495
143
Note 6: Loans and Allowance for Credit Losses (continued)
The following table provides FICO scores for consumer PCI loans.
(in millions)
By FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
Total consumer PCI loans
Total consumer PCI loans (carrying value)
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
first
junior lien
mortgage mortgage
Total
$
22,334
7,563
363
109
22,697
7,672
6,185
3,949
2,057
1,087
232
281
96
60
17
7
2
81
6,281
4,009
2,074
1,094
234
362
$
$
43,688
735
44,423
33,245
250
33,495
The following table shows the distribution of consumer PCI loans by LTV for real estate 1-4 family first mortgages and by CLTV for real
estate 1-4 family junior lien mortgages.
(in millions)
By LTV/CLTV:
0-60%
60.01-80%
80.01-100%
100.01-120%
> 120%
No LTV/CLTV available
Total consumer PCI loans
Total consumer PCI loans (carrying value)
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
first
junior lien
mortgage mortgage
by LTV
by CLTV
Total
$
$
$
1,653
5,513
11,861
9,525
15,047
89
43
42
89
116
314
131
1,696
5,555
11,950
9,641
15,361
220
43,688
735
44,423
33,245
250
33,495
144
Note 7: Premises, Equipment, Lease Commitments and Other Assets
Total premises and equipment
17,785
18,048
Cost method:
8,141
7,312
Federal bank stock
Private equity investments
$
Less: Accumulated depreciation
and amortization
Net book value,
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
Premises and equipment leased
under capital leases
December 31,
2010
2009
$
1,825
2,140
7,440
6,689
8,143
6,232
1,683
1,381
148
152
premises and equipment
$
9,644
10,736
Depreciation and amortization expense for premises and
equipment was $1.5 billion, $1.3 billion and $861 million in
2010, 2009 and 2008, respectively.
Dispositions of premises and equipment, included in
noninterest expense, resulted in net losses of $115 million in
2010, net losses of $22 million in 2009 and net gains of
$3 million in 2008.
We have obligations under a number of noncancelable
operating leases for premises and equipment. The terms of these
leases are predominantly up to 15 years, with the longest up to
95 years, and many provide for periodic adjustment of rentals
based on changes in various economic indicators. Some leases
also include a renewal option. The following table provides the
future minimum payments under capital leases and
noncancelable operating leases, net of sublease rentals, with
terms greater than one year as of December 31, 2010.
(in millions)
Year ended December 31,
2011
2012
2013
2014
2015
Thereafter
Executory costs
Amounts representing interest
Present value of net minimum
lease payments
Total minimum lease payments
$
8,605
Operating lease rental expense (predominantly for premises),
net of rental income, was $1.3 billion, $1.4 billion and
$709 million in 2010, 2009 and 2008, respectively.
The components of other assets were:
(in millions)
Nonmarketable equity investments:
Total cost method
Equity method
Principal investments (1)
Total nonmarketable
equity investments
Corporate/bank-owned life insurance
Accounts receivable
Interest receivable
Core deposit intangibles
Customer relationship and
other amortized intangibles
Net deferred tax assets
Foreclosed assets:
GNMA (2)
Other
Operating lease assets
Due from customers on acceptances
Other
December 31,
2010
2009
3,240
5,254
8,494
7,624
305
3,808
5,985
9,793
5,138
1,423
16,423
19,845
23,763
4,895
16,354
19,515
20,565
5,946
8,904
10,774
1,847
-
2,154
3,212
1,479
4,530
1,873
960
2,199
2,395
229
15,993
810
19,296
Total other assets
$
99,781
104,180
(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) These are foreclosed real estate securing FHA insured and VA guaranteed loans.
Both principal and interest for these loans secured by the foreclosed real estate
are collectible because they are insured/guaranteed.
Income related to nonmarketable equity investments was:
Operating
Capital
leases
leases
$
1,134
14
1,235
1,099
944
788
3,405
$
5
5
4
3
21
52
(14)
(12)
(in millions)
2010
2009
2008
Year ended December 31,
Net gains (losses) from:
Private equity investments (1)
Principal investments
All other nonmarketable
$
492
(368)
251
42
79
-
equity investments
(188)
(234)
(10)
$
26
nonmarketable equity
Net gains (losses) from
investments
$
346
(523)
241
(1) Net gains in 2008 include $334 million gain from our ownership in Visa, which
completed its initial public offering in March 2008.
145
Note 8: Securitizations and Variable Interest Entities
SPEs are generally considered variable interest entities
(VIEs). A VIE is an entity that has either a total equity
investment that is insufficient to finance its activities without
additional subordinated financial support or whose equity
investors lack the ability to control the entity’s activities. A VIE is
consolidated by its primary beneficiary, the party that has both
the power to direct the activities that most significantly impact
the VIE and a variable interest that could potentially be
significant to the VIE. A variable interest is a contractual,
ownership or other interest that changes with changes in the fair
value of the VIE’s net assets. To determine whether or not a
variable interest we hold could potentially be significant to the
VIE, we consider both qualitative and quantitative factors
regarding the nature, size and form of our involvement with the
VIE. We assess whether or not we are the primary beneficiary of
a VIE on an on-going basis.
We have segregated our involvement with VIEs between
those VIEs which we consolidate, those which we do not
consolidate and transfers of financial assets that are accounted
for as secured borrowings. Secured borrowings are transactions
involving transfers of our financial assets to third parties that are
accounted for as financings with the assets pledged as collateral.
Accordingly, the transferred assets remain recognized on our
balance sheet. Subsequent tables within this Note further
segregate these transactions by structure type.
Involvement with SPEs
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. Historically, the
majority of SPEs were 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. In addition, we may
purchase the right to service loans in an SPE that were
transferred to the SPE by a third party.
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.
•
•
•
•
•
•
146
The classifications of assets and liabilities in our balance sheet associated with our transactions with VIEs follow:
(in millions)
December 31, 2010
Cash
Trading assets
Securities available for sale (1)
Loans
Mortgage servicing rights
Other assets
Total assets
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Noncontrolling interests
Net assets
December 31, 2009
Cash
Trading assets
Securities available for sale (1)
Loans
Mortgage servicing rights
Other assets
Total assets
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt (3)
Total liabilities
Noncontrolling interests
Net assets
VIEs that we
Transfers that
we account
VIEs
do not
consolidate
that we
consolidate
for as secured
borrowings
Total
$
-
5,351
24,001
12,400
13,262
3,783
200
143
2,159
16,708
-
2,039
398
32
7,834
1,613
-
90
598
5,526
33,994
30,721
13,262
5,912
58,797
21,249
9,967
90,013
-
3,514
-
3,636 (2)
716 (2)
8,377 (2)
7,773
14
1,700
11,409
4,244
10,077
3,514
12,729
9,487
25,730
-
40
-
40
$
55,283
8,480
480
64,243
$
-
6,097
35,186
15,698
16,233
5,604
273
77
1,794
561
-
2,595
328
35
7,126
2,007
-
68
601
6,209
44,106
18,266
16,233
8,267
78,818
5,300
9,564
93,682
-
3,352
-
351
708
1,163
1,996
4,864
1,938
2,347
8,924
3,101
3,352
2,222
8,798
14,372
-
68
-
68
$
75,466
3,010
766
79,242
(1) Excludes certain debt securities related to loans serviced for the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and
GNMA.
(2) Includes the following VIE liabilities at December 31, 2010, with recourse to the general credit of Wells Fargo: Short-term borrowings, $3.6 billion; Accrued expenses and
other liabilities, $645 million; and Long-term debt, $53 million.
(3) “VIEs that we consolidate” has been revised to correct previously reported amount.
Transactions with Unconsolidated VIEs
Our transactions with VIEs include securitizations of consumer
loans, CRE loans, student loans, auto loans and municipal
bonds; investment and financing activities involving CDOs
backed by asset-backed and CRE 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. These involvements with
unconsolidated VIEs are recorded on our balance sheet
primarily in trading assets, securities available for sale, loans,
MSRs, other assets and other liabilities, as appropriate.
The following tables provide a summary of unconsolidated
VIEs with which we have significant continuing involvement, but
are not the primary beneficiary. The balances presented for
December 31, 2010, represent our unconsolidated VIEs for
which we consider our involvement to be significant. The
balances presented for December 31, 2009, include
unconsolidated VIEs with which we have continuing
involvement that we no longer consider significant. Accordingly,
we have excluded these transactions from the balances presented
for December 31, 2010. We have refined our definition of
significant continuing involvement in accordance with
consolidation accounting guidance to exclude unconsolidated
VIEs when our continuing involvement relates to third-party
sponsored VIEs for which we were not the transferor, and
unconsolidated VIEs for which we were the sponsor but do not
have any other significant continuing involvement.
Significant continuing involvement includes transactions
where we were the sponsor or transferor and have other
significant forms of involvement. Sponsorship includes
transactions with unconsolidated VIEs where we solely or
materially participated in the initial design or structuring of the
entity or marketing of the transaction to investors. When we
147
Note 8: Securitizations and Variable Interest Entities (continued)
transfer assets to a VIE and account for the transfer as a sale, we
are considered the transferor. We consider investments in
securities held outside of trading, loans, guarantees, liquidity
agreements, written options and servicing of collateral to be
other forms of involvement that may be significant. We have
excluded certain transactions with unconsolidated VIEs from the
December 31, 2010, balances presented in the table below where
we have determined that our continuing involvement is not
significant due to the temporary nature and size of our variable
interests, because we were not the transferor or because we were
not involved in the design or operations of the unconsolidated
VIEs.
Total
VIE
Debt and
equity
Servicing
Other
commitments
and
Net
assets
interests (1)
assets Derivatives
guarantees
assets
Carrying value - asset (liability)
$
1,068,737
76,304
190,377
20,046
9,970
12,055
20,981
13,196
10,522
20,031
5,527
2,997
5,506
1,436
9,689
6,556
3,614
2,804
1,416
3,221
12,115
495
-
6
(928)
(107)
608
261
-
-
-
-
-
-
43
844
-
(118)
-
56
-
377
-
-
-
-
(1,129)
-
-
(6)
16,714
3,391
6,375
2,280
9,689
6,438
2,485
2,860
1,416
3,635
$
1,442,219
42,766
13,261
1,426
(2,170)
55,283
Maximum exposure to loss
$
5,527
2,997
5,506
1,436
9,689
6,556
3,614
2,804
1,416
3,221
12,115
495
608
-
-
-
-
-
-
43
-
6
488
2,850
-
118
-
56
-
916
4,248
21,890
233
-
3,731
6,602
7
-
2,175
1
519
87
162
4,293
9,689
8,849
3,615
3,379
1,503
4,342
$
42,766
13,261
4,434
7,432
67,893
(in millions)
December 31, 2010
Residential mortgage loan
securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Residential mortgage loan
securitizations:
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
(continued on following page)
148
(continued from previous page)
(in millions)
December 31, 2009
Residential mortgage loan securitizations (4):
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Multi-seller commercial paper conduit (5)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Residential mortgage loan securitizations (4):
Conforming
Other/nonconforming
Commercial mortgage securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Multi-seller commercial paper conduit (5)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds (6)
Other (3)
Total
Total
VIE
Debt and
equity
Servicing
Other
commitments
and
Net
assets interests (1)
assets Derivatives
guarantees
assets
Carrying value - asset (liability)
$ 1,150,515
5,846
13,949
251,850
345,561
11,683
3,760
1,538
696
-
16
489
1,746
-
-
(72)
-
64
-
-
-
-
-
-
-
-
50
1,015
(869)
18,926
(15)
-
13,222
4,945
-
-
-
(248)
(653)
-
(129)
(293)
4,770
9,964
-
9,867
4,006
3,666
1,702
4,398
45,684
10,215
5,160
17,467
27,537
23,830
84,642
23,538
3,024
9,964
-
10,187
4,659
3,602
1,831
3,626
$ 1,985,999
58,182
16,233
3,258
(2,207)
75,466
$
5,846
11,683
3,760
13,949
1,538
696
3,024
9,964
-
10,187
4,659
3,702
2,331
3,626
-
-
-
-
-
-
-
50
Maximum exposure to loss
-
30
766
3,586
-
5,263
72
-
64
500
1,818
4,567
218
24,362
13,469
-
5,222
33
-
-
968
4
473
218
1,774
6,643
9,964
5,263
11,227
4,663
4,239
3,049
7,268
$
58,782
16,233
12,099
8,255
95,369
(1) Excludes certain debt securities held related to loans serviced for FNMA, FHLMC and GNMA.
(2) Represents senior loans to trusts that are collateralized by asset-backed securities. The trusts invest primarily in senior tranches from a diversified pool of primarily U.S.
asset securitizations, of which all are current, and over 91% were rated as investment grade by the primary rating agencies at December 31, 2010. These senior loans were
acquired in the Wachovia business combination and are accounted for at amortized cost as initially determined under purchase accounting and are subject to the Company’s
allowance and credit charge-off policies.
(3) Includes student loan securitizations, auto loan securitizations and credit-linked note structures. Also contains investments in auction rate securities (ARS) issued by VIEs
that we do not sponsor and, accordingly, are unable to obtain the total assets of the entity.
(4) Total VIE assets at December 31, 2009, includes $20.9 billion of nonconforming residential mortgage securitizations that were consolidated in first quarter 2010.
(5) The multi-seller commercial paper conduit was consolidated in first quarter 2010.
(6) “Other commitments and guarantees” has been revised to correct previously reported amount.
149
Note 8: Securitizations and Variable Interest Entities (continued)
COMMERCIAL MORTGAGE LOAN SECURITIZATIONS
Commercial mortgage loan securitizations are financed through
the issuance of fixed- or floating-rate-asset-backed-securities,
which are collateralized by the loans transferred to the VIE. In a
typical securitization, we may transfer loans we originate to
these VIEs, account for the transfers as sales, retain the right to
service the loans and may hold other beneficial interests issued
by the VIEs. In certain instances, we may service commercial
mortgage loan securitizations structured by third parties whose
loans we did not originate or transfer. We typically serve as
primary or master servicer of these VIEs. The primary or master
servicer in a commercial mortgage loan securitization typically
cannot make the most significant decisions impacting the
performance of the VIE and therefore does not have power over
the VIE. We do not consolidate the commercial mortgage loan
securitizations included in the disclosure because we either do
not have power or do not have a variable interest that could
potentially be significant to the VIE.
COLLATERALIZED DEBT OBLIGATIONS (CDOs) A CDO is a
securitization where an SPE purchases a pool of assets consisting
of asset-backed securities and issues multiple tranches of equity
or notes to investors. In some transactions, a portion of the
assets are obtained synthetically through the use of derivatives
such as credit default swaps or total return swaps.
Prior to 2008, we engaged in the structuring of CDOs on
behalf of third party asset managers who would select and
manage the assets for the CDO. Typically, the asset manager has
some discretion to manage the sale of assets of, or derivatives
used by the CDO, which generally gives the asset manager the
power over the CDO. We have not structured these types of
transactions since the credit market disruption began in late
2007.
In addition to our role as arranger we may have other forms
of involvement with these transactions, including transactions
established prior to 2008. Such involvement may include acting
as liquidity provider, derivative counterparty, secondary market
maker or investor. For certain transactions, we may also act as
the collateral manager or servicer. We receive fees in connection
with our role as collateral manager or servicer.
We assess whether we are the primary beneficiary of CDOs
based on our role in the transaction in combination with the
variable interests we hold. Subsequently, we monitor our
ongoing involvement in these transactions to determine if the
nature of our involvement has changed. We are not the primary
beneficiary of these transactions in most cases because we do not
act as the collateral manager or servicer, which generally denotes
power. In cases where we are the collateral manager or servicer,
we are not the primary beneficiary because we do not hold
interests that could potentially be significant to the VIE.
In the two preceding tables, “Total VIE assets” represents the
remaining principal balance of assets held by unconsolidated
VIEs using the most current information available. For VIEs that
obtain exposure to assets synthetically through derivative
instruments, the remaining notional amount of the derivative is
included in the asset balance. “Carrying value” is the amount in
our consolidated balance sheet related to our involvement with
the unconsolidated VIEs. “Maximum exposure to loss” from our
involvement with off-balance sheet entities, which is a required
disclosure under GAAP, is determined as the carrying value of
our involvement with off-balance sheet (unconsolidated) VIEs
plus the remaining undrawn liquidity and lending commitments,
the notional amount of net written derivative contracts, and
generally the notional amount of, or stressed loss estimate for,
other commitments and guarantees. It represents estimated loss
that would be incurred under severe, hypothetical
circumstances, for which we believe the possibility is extremely
remote, such as 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.
RESIDENTIAL MORTGAGE LOANS Residential mortgage loan
securitizations are financed through the issuance of fixed- or
floating-rate-asset-backed-securities, which are collateralized by
the loans transferred to a VIE. We typically transfer loans we
originated to these VIEs, account for the transfers as sales, retain
the right to service the loans and may hold other beneficial
interests issued by the VIEs. We also may be exposed to limited
liability related to recourse agreements and repurchase
agreements we make to our issuers and purchasers, which are
included in other commitments and guarantees. In certain
instances, we may service residential mortgage loan
securitizations structured by third parties whose loans we did
not originate or transfer. Our residential mortgage loan
securitizations consist of conforming and nonconforming
securitizations.
Conforming residential mortgage loan securitizations are
those that are guaranteed by GSEs, including GNMA. We do not
consolidate our conforming residential mortgage loan
securitizations because we do not have power over the VIEs.
The loans sold to the VIEs in nonconforming residential
mortgage loan securitizations are those that do not qualify for a
GSE guarantee. We do not consolidate the nonconforming
residential mortgage loan securitizations included in the table
because we do not have a variable interest that could potentially
be significant or we do not have power to direct the activities
that most significantly impact the performance of the VIE.
Other commitments and guarantees include amounts related
to loans sold that we may be required to repurchase, or
otherwise indemnify or reimburse the investor or insurer for
losses incurred, due to material breach of contractual
representations and warranties. The maximum exposure to loss
for material breach of contractual representations and
warranties represents a stressed case estimate we utilize for
determining stressed case regulatory capital needs.
150
COLLATERALIZED LOAN OBLIGATIONS (CLOs) A CLO is a
securitization where an SPE purchases a pool of assets consisting
of loans and issues multiple tranches of equity or notes to
investors. Generally, CLOs are structured on behalf of a third
party asset manager that typically selects and manages the assets
for the term of the CLO. Typically, the asset manager has the
power over the significant decisions of the VIE through its
discretion to manage the assets of the CLO. We assess whether
we are the primary beneficiary of CLOs based on our role in the
transaction and the variable interests we hold. In most cases, we
are not the primary beneficiary of these transactions because we
do not have the power to manage the collateral in the VIE.
In addition to our role as arranger, we may have other forms
of involvement with these transactions. Such involvement may
include acting as underwriter, derivative counterparty,
secondary market maker or investor. For certain transactions,
we may also act as the servicer, for which we receive fees in
connection with that role. We also earn fees for arranging these
transactions and distributing the securities.
ASSET-BASED FINANCE STRUCTURES We engage in various
forms of structured finance arrangements with VIEs that are
collateralized by various asset classes including energy contracts,
auto and other transportation leases, intellectual property,
equipment and general corporate credit. We typically provide
senior financing, and may act as an interest rate swap or
commodity derivative counterparty when necessary. In most
cases, we are not the primary beneficiary of these structures
because we do not have power over the significant activities of
the VIEs involved in these transactions.
For example, we have investments in asset-backed securities
that are collateralized by auto leases or loans and cash reserves.
These fixed-rate and variable-rate securities have been
structured as single-tranche, fully amortizing, unrated bonds
that are equivalent to investment-grade securities due to their
significant overcollateralization. The securities are issued by
VIEs that have been formed by third party auto financing
institutions primarily because they require a source of liquidity
to fund ongoing vehicle sales operations. The third party auto
financing institutions manage the collateral in the VIEs, which is
indicative of power in these transactions and we therefore do not
consolidate these VIEs.
TAX CREDIT STRUCTURES We co-sponsor and make
investments in affordable housing and sustainable energy
projects that are designed to generate a return primarily through
the realization of federal tax credits. In some instances, our
investments in these structures may require that we fund future
capital commitments at the discretion of the project sponsors.
While the size of our investment in a single entity may at times
exceed 50% of the outstanding equity interests, we do not
consolidate these structures due to the project sponsor’s ability
to manage the projects, which is indicative of power in these
transactions.
INVESTMENT FUNDS At December 31, 2010, we had
investments of $1.4 billion and lending arrangements of
$14 million with certain funds managed by one of our majority
owned subsidiaries compared with investments of $1.3 billion
and lending arrangements of $20 million at December 31, 2009.
In addition, we also provide a default protection agreement to a
third party lender to one of these funds. Our involvement in
these funds is either senior or of equal priority to third party
investors. We do not consolidate the investment funds because
we do not absorb the majority of the expected future variability
associated with the funds’ assets, including variability associated
with credit, interest rate and liquidity risks.
OTHER TRANSACTIONS WITH VIEs In August 2008, Wachovia
reached an agreement to purchase at par auction rate securities
(ARS) that were sold to third-party investors by certain of its
subsidiaries. ARS are debt instruments with long-term
maturities, but which re-price more frequently, and preferred
equities with no maturity. All remaining ARS issued by VIEs
subject to the agreement were redeemed. At December 31, 2010,
we held in our securities available-for-sale portfolio $1.6 billion
of ARS issued by VIEs redeemed pursuant to this agreement,
compared with $3.2 billion at December 31, 2009.
On November 18, 2009, we reached agreements to purchase
additional ARS from eligible investors who bought ARS through
one of our broker-dealer subsidiaries. All remaining ARS issued
by VIEs subject to the agreement were redeemed. As of
December 31, 2010, we held in our securities available-for-sale
portfolio $892 million of ARS issued by VIEs redeemed pursuant
to this agreement. No securities had been redeemed related to
this agreement at December 31, 2009.
We do not consolidate the VIEs that issued the ARS because
we do not have power over the activities of the VIEs.
TRUST PREFERRED SECURITIES In addition to the
involvements disclosed in the preceding table, we had
$19.3 billion and $19.1 billion of junior subordinated debt
financing through the issuance of trust preferred securities at
December 31, 2010 and 2009, respectively. In these
transactions, VIEs that we wholly own issue preferred equity or
debt securities to third party investors. All of the proceeds of the
issuance are invested in debt securities that we issue to the VIEs.
The VIEs’ operations and cash flows relate only to the issuance,
administration and repayment of the securities held by third
parties. We do not consolidate these VIEs because the sole assets
of the VIEs are receivables from us. This is the case even though
we own all of the voting equity shares of the VIEs, have fully
guaranteed the obligations of the VIEs and may have the right to
redeem the third party securities under certain circumstances.
We report the debt securities that we issue to the VIEs as long-
term debt in our consolidated balance sheet. See Note 13 and
Note 17 for additional information related to our trust preferred
security issuances.
151
Note 8: Securitizations and Variable Interest Entities (continued)
Securitization Activity Related to Unconsolidated
VIEs
We use VIEs to securitize consumer and CRE 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
the VIEs. We may also provide liquidity to investors in the
beneficial interests and credit enhancements in 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.
We recognized net gains of $27 million from transfers
accounted for as sales of financial assets in securitizations in
2010, and net gains of $1 million in 2009. Additionally, we had
the following cash flows with our securitization trusts that were
involved in transfers accounted for as sales.
(in millions)
Year ended December 31,
2010
Other
financial
2009
Other
financial
Mortgage
Mortgage
loans
assets
loans
assets
Sales proceeds from securitizations (1)
$
374,488
-
394,632
Servicing fees
Other interests held (2)
Purchases of delinquent assets
Net servicing advances
4,316
1,786
25
49
34
442
-
-
4,283
3,757
45
257
-
42
310
-
-
(1) Represents cash flow data for all loans securitized in the period presented.
(2) “Other financial assets” for 2009 has been revised to correct previously reported amount.
Sales with continuing involvement during 2010
predominantly related to conforming residential mortgage
securitizations. During 2010 we transferred $379.0 billion in fair
value of conforming residential mortgages to unconsolidated
VIEs and recorded the transfers as sales. These transfers did not
result in a gain or loss because the loans are already carried at
fair value. In connection with these transfers, in 2010 we
recorded a $4.5 billion servicing asset and a $144 million
liability for repurchase reserves, which are both initially
measured at fair value.
We used the following key assumptions to measure mortgage
servicing assets at the date of securitization:
Prepayment speed (annual CPR (1))
Life (in years)
Discount rate
(1) Constant prepayment rate.
Mortgage servicing rights
2010
2009
13.5 %
13.4
5.4
8.0 %
5.6
8.3
152
Key economic assumptions and the sensitivity of the current
fair value to immediate adverse changes in those assumptions at
December 31, 2010, for residential and commercial mortgage
servicing rights, and other interests held related primarily to
residential mortgage loan securitizations are presented in the
following table. In the following table “Other interests held”
exclude securities retained in securitizations issued through
GSEs such as FNMA, FHLMC and GNMA because we do not
believe the value of these securities would be materially affected
by the adverse changes in assumptions noted in the table.
Subordinated interests include only those bonds whose credit
rating was below AAA by a major rating agency at issuance.
Senior interests include only those bonds whose credit rating
was AAA by a major rating agency at issuance. The information
presented excludes trading positions held in inventory.
(in millions)
Fair value of interests held at December 31, 2010
Expected weighted-average life (in years)
Other interests held
Mortgage
Interest-
servicing
rights
$
16,279
5.2
only
strips
226
5.2
Subordinated
bonds
47
8.3
Senior
bonds
441
4.5
Prepayment speed assumption (annual CPR)
12.6 %
11.4
4.8
18.1
Decrease in fair value from:
10% adverse change
25% adverse change
Discount rate assumption
Decrease in fair value from:
100 basis point increase
200 basis point increase
Credit loss assumption
Decrease in fair value from:
10% higher losses
25% higher losses
$
844
1,992
7
16
-
-
2
6
8.1 %
17.8
10.2
6.8
$
777
1,487
6
13
3
6
14
27
0.7 %
3.7
$
-
-
1
3
The sensitivities in the preceding table are hypothetical and
caution should be exercised when relying on this data. Changes
in value based on variations in assumptions generally cannot be
extrapolated because the relationship of the change in the
assumption to the change in value may not be linear. Also, the
effect of a variation in a particular assumption on the 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 credit
losses), which might magnify or counteract the sensitivities.
The following table presents information about the principal
balances of off-balance sheet securitized loans, including
residential mortgages sold to FNMA, FHLMC and GNMA and
securitizations where servicing is our only form of continuing
involvement. Delinquent loans include loans 90 days or more
past due and still accruing interest as well as nonaccrual loans.
Delinquent loans and net charge-offs exclude loans sold to
FNMA, FHLMC and GNMA. We continue to service those 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 their required underwriting
standards.
(in millions)
Commercial:
Commercial and industrial
Real estate mortgage
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
Total loans
Delinquent loans
Year ended
December 31,
December 31,
December 31,
2010
2009
2010
2009
2010
2009
Net charge-offs
$
1
78
-
65
-
-
207,015
221,516
11,515
7,208
919
108
207,016
221,594
11,515
7,273
919
108
1,090,755 1,062,938
3,292
1
5,275
-
7,501
76
1,408
-
1,287
54
2,454
5,104
102
100
-
107
Total consumer
1,093,210 1,071,334
5,377
7,677
1,408
1,448
Total off-balance sheet securitized loans
$
1,300,226 1,292,928
16,892
14,950
2,327
1,556
153
Note 8: Securitizations and Variable Interest Entities (continued)
Transactions with Consolidated VIEs and Secured
Borrowings
The following table presents a summary of transfers of financial
assets accounted for as secured borrowings and involvements
with consolidated VIEs. “Consolidated assets” are presented
using GAAP measurement methods, which may include fair
value, credit impairment or other adjustments, and therefore in
some instances will differ from “Total VIE assets.” On the
consolidated balance sheet, we separately disclose the
consolidated assets of certain VIEs that can only be used to settle
the liabilities of those VIEs.
(in millions)
December 31, 2010
Total
VIE
assets
Consolidated
assets
Third
party
liabilities
Noncontrolling
interests
Net
assets
Carrying value
Secured borrowings:
Municipal tender option bond securitizations
Auto loan securitizations
Commercial real estate loans
Residential mortgage securitizations
$
10,687
154
1,321
700
7,874
154
1,321
618
(7,779)
-
(1,272)
(436)
Total secured borrowings
12,862
9,967
(9,487)
Consolidated VIEs:
Nonconforming residential
mortgage loan securitizations
Multi-seller commercial paper conduit
Auto loan securitizations
Structured asset finance
Investment funds
Other
14,518
13,529
3,197
1,010
146
1,197
2,173
3,197
1,010
146
1,197
2,170
(6,723)
(3,279)
(955)
(21)
(54)
(1,697)
Total consolidated VIEs
22,241
21,249
(12,729)
Total secured borrowings and consolidated VIEs
$
35,103
31,216
(22,216)
December 31, 2009
Secured borrowings:
Municipal tender option bond securitizations (1)
Auto loan securitizations
Commercial real estate loans
Residential mortgage securitizations
Total secured borrowings
Consolidated VIEs:
Structured asset finance (2)
Investment funds
Other (2)
$
9,649
274
1,309
901
7,189
274
1,309
792
(6,856)
(121)
(1,269)
(552)
12,133
9,564
(8,798)
2,791
2,257
2,697
1,074
2,245
1,981
(919)
(271)
(1,032)
Total consolidated VIEs
7,745
5,300
(2,222)
Total secured borrowings and consolidated VIEs
$
19,878
14,864
(11,020)
-
-
-
-
-
-
-
-
(11)
(14)
(15)
(40)
(40)
-
-
-
-
-
(10)
(33)
(25)
(68)
(68)
95
154
49
182
480
6,806
(82)
55
114
1,129
458
8,480
8,960
333
153
40
240
766
145
1,941
924
3,010
3,776
(1) “Total VIE assets” has been revised to correct previously reported amount.
(2) “Third party liabilities” has been revised to correct previously reported amounts.
In addition to the transactions included in the table above, at
December 31, 2010, we had issued approximately $6.0 billion of
private placement debt financing through a consolidated VIE.
The issuance is classified as long-term debt in our consolidated
financial statements. At December 31, 2010, we had pledged
approximately $6.0 billion in loans, $478 million in securities
available for sale and $180 million in cash and cash equivalents
to collateralize the VIE’s borrowings. Such assets were not
transferred to the VIE and accordingly we have excluded the VIE
from the previous table.
We have raised financing through the securitization of certain
financial assets in transactions with VIEs accounted for as
secured borrowings. We also consolidate VIEs where we are the
154
primary beneficiary. In certain transactions other than the
multi-seller commercial paper conduit, we provide contractual
support in the form of limited recourse and liquidity to facilitate
the remarketing of short-term securities issued to third party
investors. Other than this limited contractual support, the assets
of the VIEs are the sole source of repayment of the securities
held by third parties. The liquidity support we provide to the
multi-seller commercial paper conduit ensures timely repayment
of commercial paper issued by the conduit and is described
further below.
NONCONFORMING RESIDENTIAL MORTGAGE LOAN
SECURITIZATIONS We have consolidated certain of our
nonconforming residential mortgage loan securitizations in
accordance with consolidation accounting guidance. We have
determined we are the primary beneficiary of these
securitizations because we have the power to direct the most
significant activities of the entity through our role as primary
servicer and also hold variable interests that we have determined
to be significant. The nature of our variable interests in these
entities may include beneficial interests issued by the VIE,
mortgage servicing rights and recourse or repurchase reserve
liabilities.
MULTI-SELLER COMMERCIAL PAPER CONDUIT We administer
a multi-seller asset-based commercial paper conduit that
finances certain client transactions. This conduit is a bankruptcy
remote entity that makes loans to, or purchases certificated
interests, generally from SPEs, established by our clients
(sellers) and which are secured by pools of financial assets. The
conduit funds itself through the issuance of highly rated
commercial paper to third party investors. The primary source of
repayment of the commercial paper is the cash flows from the
conduit’s assets or the re-issuance of commercial paper upon
maturity. The conduit’s assets are structured with deal-specific
credit enhancements generally in the form of
overcollateralization provided by the seller, but may also include
subordinated interests, cash reserve accounts, third party credit
support facilities and excess spread capture. The timely
repayment of the commercial paper is further supported by
asset-specific liquidity facilities in the form of liquidity asset
purchase agreements that we provide. Each facility is equal to
102% of the conduit’s funding commitment to a client. The
aggregate amount of liquidity must be equal to or greater than
all the commercial paper issued by the conduit. At the discretion
of the administrator, we may be required to purchase assets
from the conduit at par value plus accrued interest or discount
on the related commercial paper, including situations where the
conduit is unable to issue commercial paper. Par value may be
different from fair value.
We receive fees in connection with our role as administrator
and liquidity provider. We may also receive fees related to the
structuring of the conduit’s transactions. In 2010, the conduit
terminated its subordinated note to a third party investor and
repaid all amounts due under the terms of the note agreement.
We incurred a loss on the termination of the subordinated note
of $16 million. We are the primary beneficiary of the conduit
because we have power over the significant activities of the
conduit and have a significant variable interest due to our
liquidity arrangement.
155
Note 9: Mortgage Banking Activities
Mortgage banking activities, included in the Community
Banking and Wholesale Banking operating segments, consist of
residential and commercial mortgage originations and servicing.
We apply the amortization method to all commercial and
some residential MSRs and apply the fair value method to only
residential MSRs. The changes in MSRs measured using the fair
value method were:
(in millions)
Fair value, beginning of year
Adjustments from adoption of consolidation accounting guidance
Purchases
Acquired from Wachovia (1)
Servicing from securitizations or asset transfers
Sales
Net additions
Changes in fair value:
Due to changes in valuation model inputs or assumptions (2)
Other changes in fair value (3)
Total changes in fair value
Fair value, end of year
Year ended December 31,
2010
2009
2008
$
16,004
14,714
16,763
(118)
-
-
4,092
-
-
-
191
34
6,226
479
3,450
-
-
(269)
3,974
6,260
3,851
(2,957)
(2,554)
(1,534)
(3,436)
(3,341)
(2,559)
(5,511)
(4,970)
(5,900)
$
14,467
16,004
14,714
(1) The 2009 amount reflects refinements to initial December 31, 2008, Wachovia purchase accounting adjustments.
(2) Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates, and costs to service, including delinquency and
foreclosure costs.
(3) Represents changes due to collection/realization of expected cash flows over time.
The changes in amortized MSRs were:
(in millions)
Balance, beginning of year
Adjustments from adoption of consolidation accounting guidance
Purchases
Acquired from Wachovia (1)
Servicing from securitizations or asset transfers
Amortization
Balance, end of year (2)
Valuation allowance:
Balance, beginning of year
Provision for MSRs in excess of fair value
Balance, end of year (3)
Amortized MSRs, net
Fair value of amortized MSRs:
Beginning of year
End of year (4)
Year ended December 31,
2010
2009
2008
$
1,119
1,446
(5)
58
-
478
(228)
-
11
(135)
61
(264)
466
-
10
1,021
24
(75)
1,422
1,119
1,446
-
(3)
(3)
-
-
-
-
-
-
$
1,419
1,119
1,446
$
1,261
1,812
1,555
1,261
573
1,555
(1) The 2009 amount reflects refinements to initial December 31, 2008, Wachovia purchase accounting adjustments.
(2) Includes $400 million in residential amortized MSRs at December 31, 2010. The 2009 and 2008 balances are commercial amortized MSRs. For the year ended
December 31, 2010, servicing from securitizations or asset transfers on the residential MSR portfolio was $405 million and the residential MSR amortization was $(5) million.
(3) Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) and non-agency. There was no valuation allowance recorded
for the periods presented on the commercial amortized MSRs. Residential amortized MSRs are evaluated for impairment purposes by the following risk strata: Mortgages
sold to GSEs (FHLMC and FNMA) and mortgages sold to GNMA, each by interest rate stratifications. A valuation allowance of $3 million was recorded on the residential
amortized MSRs for the year ended December 31, 2010.
(4) Includes fair value of $441 million in residential amortized MSRs and $1,371 million in commercial amortized MSRs at December 31, 2010.
156
We present the components of our managed servicing
portfolio in the following table at unpaid principal balance for
loans serviced and subserviced for others and at book value for
owned loans serviced.
(in billions)
Residential mortgage servicing:
Serviced for others
Owned loans serviced
Subservicing
Total residential servicing
Commercial mortgage servicing:
Serviced for others
Owned loans serviced
Subservicing
Total commercial servicing
Total managed servicing portfolio
Total serviced for others
Ratio of MSRs to related loans serviced for others
The components of mortgage banking noninterest income were:
(in millions)
Servicing income, net:
Servicing fees (1)(2)
Changes in fair value of MSRs carried at fair value:
Due to changes in valuation model inputs or assumptions (3)
Other changes in fair value (4)
Total changes in fair value of MSRs carried at fair value
Amortization, net of impairment
Provision for MSRs in excess of fair value
Net derivative gains from economic hedges (5)
Total servicing income, net
Net gains on mortgage loan origination/sales activities (2)
Total mortgage banking noninterest income
Market-related valuation changes to MSRs, net of hedge results (3) + (5)
December 31,
2010
2009
2008
$
1,429
1,422
1,388
371
9
364
10
378
15
1,809
1,796
1,781
408
99
13
520
454
105
10
472
103
11
569
586
$
$
2,329
2,365
2,367
1,837
0.86 %
1,876
0.91
1,860
0.87
Year ended December 31,
2010
2009
2008
$
4,597
4,176
4,109
(2,957)
(1,534)
(3,341)
(2,554)
(3,436)
(2,559)
(5,511)
(4,970)
(5,900)
(228)
(3)
(264)
-
(75)
-
4,485
6,849
3,099
3,340
6,397
5,791
6,237
1,233
1,292
9,737
12,028
2,525
1,528
5,315
(242)
$
$
(1) Amounts are presented net of certain unreimbursed direct servicing obligations primarily associated with workout activities.
(2) 2009 and 2008 amounts have been revised to conform with current period presentation.
(3) Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates and costs to service, including delinquency and
foreclosure costs.
(4) Represents changes due to collection/realization of expected cash flows over time.
(5) Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 15 – Free-Standing Derivatives for
additional discussion and detail.
157
Note 9: Mortgage Banking Activities (continued)
In addition, servicing fees in the previous table included:
(in millions)
Contractually specified
servicing fees
Late charges
Ancillary fees
Year ended December 31,
2010
2009
2008
$
4,566
4,473
3,904
360
434
330
287
283
148
The table below summarizes the changes in our liability for
mortgage loan repurchase losses. This liability is in “Accrued
expenses and other liabilities” in our consolidated financial
statements and the provision for repurchase losses reduces net
gains on mortgage loan origination/sales activities.
(in millions)
Year ended December 31,
2010
2009
2008
Balance, beginning of year
$
1,033
589
253
Wachovia acquisition (1)
-
31
187
Provision for repurchase losses:
Loan sales
144
302
165
Change in estimate – primarily
due to credit deterioration
1,474
625
234
Total additions
Losses
1,618
(1,362)
958
(514)
586
(250)
Balance, end of year
$
1,289
1,033
589
(1) The 2009 amount is refinement to initial December 31, 2008, Wachovia
purchase accounting adjustments.
158
Note 10: Intangible Assets
The gross carrying value of intangible assets and accumulated amortization was:
(in millions)
Amortized intangible assets:
MSRs (1)
Core deposit intangibles
Customer relationship and other intangibles
Total amortized intangible assets
MSRs (carried at fair value) (1)
Goodwill
Trademark
(1) See Note 9 for additional information on MSRs.
Gross
2010
Net
Gross
December 31,
2009
Net
carrying Accumulated carrying
value
value amortization
carrying Accumulated
value amortization
carrying
value
$
$
$
2,131
15,133
(712)
(6,229)
1,419
8,904
3,077
(1,230)
1,847
1,606
15,140
3,050
(487)
(4,366)
1,119
10,774
(896)
2,154
20,341
(8,171)
12,170
19,796
(5,749)
14,047
14,467
24,770
14
14,467
24,770
14
16,004
24,812
14
16,004
24,812
14
We based our projections of amortization expense shown below on existing asset balances at December 31, 2010. Future amortization
expense may vary from these projections.
The following table provides the current year and estimated future amortization expense for amortized intangible assets.
(in millions)
Year ended December 31, 2010 (actual)
Estimate for year ended December 31,
2011
2012
2013
2014
2015
Core
Customer
relationship
deposit
and other
intangibles
intangibles
Total
Amortized
MSRs
$
$
228
1,872
334
2,434
247
222
189
161
139
1,593
1,396
1,241
1,113
1,022
286
269
249
234
212
2,126
1,887
1,679
1,508
1,373
159
Note 10: Intangible Assets (continued)
For our goodwill impairment analysis, we allocate all of the
goodwill to the individual operating segments. We identify
reporting units that are one level below an operating segment
(referred to as a component), and distinguish these reporting
units based on how the segments and components are managed,
taking into consideration the economic characteristics, nature of
the products and customers of the components. We allocate
goodwill to reporting units based on relative fair value, using
certain performance metrics. See Note 23 for further
information on management reporting.
The following table shows the allocation of goodwill to our
operating segments for purposes of goodwill impairment testing.
In fourth quarter 2010, we realigned certain lending businesses
into Wholesale Banking from Community Banking to reflect our
previously announced restructuring of Wells Fargo Financial.
Prior periods have been revised to reflect these changes. The
reduction in 2010 was predominately due to reversals of excess
exit reserves as discussed in Note 2.
(in millions)
December 31, 2008
Goodwill from business combinations
Foreign currency translation adjustments
December 31, 2009
Goodwill from business combinations, net
Wealth,
Community
Banking
Wholesale Brokerage and
Retirement
Banking
Consolidated
Company
$
16,638
5,621
1,329
7
17,974
(52)
844
-
6,465
10
368
5
-
373
-
22,627
2,178
7
24,812
(42)
December 31, 2010
$
17,922
6,475
373
24,770
160
Note 11: Deposits
Time certificates of deposit (CDs) and other time deposits issued
by domestic offices totaled $90.6 billion and $117.0 billion at
December 31, 2010 and 2009, respectively. Substantially all of
these deposits were interest bearing. The contractual maturities
of these deposits follow.
Of these deposits, the amount of time deposits with a
denomination of $100,000 or more was $33.9 billion and
$43.7 billion at December 31, 2010 and 2009, respectively. The
contractual maturities of these deposits follow.
(in millions)
December 31, 2010
(in millions)
2011
2012
2013
2014
2015
Thereafter
Total
December 31, 2010
Three months or less
$
43,612
After three months through six months
After six months through twelve months
After twelve months
Total
$
5,320
1,358
8,086
19,097
$
33,861
15,624
17,977
3,831
7,024
2,500
$
90,568
Time CDs and other time deposits issued by foreign offices
with a denomination of $100,000 or more were $16.7 billion and
$20.4 billion at December 31, 2010 and 2009, respectively.
Demand deposit overdrafts of $557.0 million and
$667.0 million were included as loan balances at
December 31, 2010 and 2009, respectively.
161
Note 12: Short-Term Borrowings
The table below shows selected information for short-term
borrowings, which generally mature in less than 30 days.
(in millions)
As of December 31,
Commercial paper and other short-term borrowings
Federal funds purchased and securities sold
2010
2009
2008
Amount
Rate
Amount
Rate
Amount
Rate
$
17,454
0.26 % $
12,950
0.39 % $
45,871
0.93 %
under agreements to repurchase
37,947
0.15
26,016
0.08
62,203
1.12
Total
$
55,401
0.19 $
38,966
0.18 $
108,074
1.04
Year ended December 31,
Average daily balance
Commercial paper and other short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase
$
16,330
0.31 $
27,793
0.43 $
43,792
2.43
30,494
0.18
24,179
0.46
22,034
1.88
Total
$
46,824
0.22 $
51,972
0.44 $
65,826
2.25
Maximum month-end balance
Commercial paper and other short-term borrowings (1)
Federal funds purchased and securities sold
$
17,646
N/A $
62,871
N/A $
76,009
N/A
under agreements to repurchase (2)
37,947
N/A
30,608
N/A
62,203
N/A
N/A- Not Applicable
(1) Highest month-end balance in each of the last three years was March 2010, February 2009 and August 2008.
(2) Highest month-end balance in each of the last three years was December 2010, February 2009 and December 2008.
We pledge certain financial instruments that we own to
collateralize repurchase agreements and other securities
financings. The types of collateral we pledge include securities
issued by federal agencies, GSEs, and domestic and foreign
companies. We pledged $27.3 billion and $14.8 billion at
December 31, 2010 and 2009, respectively, under agreements
that permit the secured parties to sell or repledge the collateral.
Pledged collateral where the secured party cannot sell or
repledge was $5.9 billion and $434 million at December 31, 2010
and 2009, respectively.
162
Note 13: Long-Term Debt
As a part of our overall interest rate risk management strategy,
we often use derivatives to manage interest rate risk. As a result,
much of the long-term debt presented below is hedged in a fair
value or cash flow hedge relationship. See Note 15 for further
information on qualifying hedge contracts.
Following is a summary of our long-term debt based on
original maturity (reflecting unamortized debt discounts and
premiums, and purchase accounting adjustments for debt
assumed in the Wachovia acquisition, where applicable):
(in millions)
Wells Fargo & Company (Parent only)
Senior
Fixed-rate notes (2)
Floating-rate notes (2)
Market-linked notes (3)
Total senior debt - Parent
Subordinated
Fixed-rate notes
Floating-rate notes
Total subordinated debt - Parent
Junior subordinated
Fixed-rate notes - hybrid trust securities
Floating-rate notes
FixFloat notes - income trust securities (4)
Total junior subordinated debt - Parent (5)
Total long-term debt - Parent
Wells Fargo Bank, N.A. and other bank entities (Bank)
Senior
Fixed-rate notes
Floating-rate notes
Fixed-rate advances - Federal Home Loan Bank (FHLB)
Floating-rate advances - FHLB
Market-linked notes (3)
Capital leases (Note 7)
Total senior debt - Bank
Subordinated
Fixed-rate notes
Floating-rate notes
Total subordinated debt - Bank
Junior subordinated
Fixed-rate notes
Floating-rate notes
Total junior subordinated debt - Bank (5)
Long-term debt issued by VIE - Fixed rate
Long-term debt issued by VIE - Floating rate
Mortgage notes and other debt
Total long-term debt - Bank
(continued on following page)
Maturity
date(s)
Stated
interest rate(s)
December 31,
2010
2009 (1)
2011-2035
2011-2048
2011-2018
2.125-6.75% $
Varies
Varies
40,630
26,750
545
46,266
41,231
458
67,925
87,955
2011-2035
2015-2016
4.375-7.574%
Varies
12,370
1,118
12,148
1,096
13,488
13,244
2026-2068
2027-2036
2042-2044
5.625-10.18%
Varies
11,257
289
11,086
282
5.20-9.75% to 2011-2013,
varies
6,786
6,786
18,332
18,154
99,745
119,353
2011-2013
2011-2040
2011-2031
2011-2013
2011-2016
2011-2024
3.37-6.00%
Varies
1.60-8.45%
Varies
Varies
Varies
2,185
4,186
812
7,103
229
26
2,609
8,323
2,665
31,146
515
77
14,541
45,335
2011-2038
2014-2017
4.75-7.74%
Varies
16,520
1,945
18,220
1,937
18,465
20,157
2026
2027
2012-2049
2012-2042
2011-2038
8.00%
Varies
0.05-7.50%
Varies
Varies
317
278
595
3,751
4,053
8,639
318
270
588
105
70
8,216
50,044
74,471
163
Note 13: Long-Term Debt (continued)
(continued from previous page)
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
Floating-rate notes - FHLB
FixFloat notes
Total senior debt - Other consolidated subsidiaries
Junior subordinated
Fixed-rate notes
Floating-rate notes
FixFloat notes
Total junior subordinated debt - Other
consolidated subsidiaries (5)
Long-term debt issued by VIE - Fixed rate
Long-term debt issued by VIE - Floating rate
Mortgage notes and other debt of subsidiaries
Maturity
date(s)
Stated
interest rate(s)
2011-2015
3.97-6.125%
2020
6.795% through 2015, varies
2011
2027-2036
5.50%
Varies
2036
7.064% through 2011, varies
2012-2020
2015-2021
2013-2018
5.16-5.98%
Varies
Varies
December 31,
2010
2009 (1)
6,147
-
20
6,167
10
239
78
327
84
489
127
6,682
1,625
-
8,307
63
241
79
383
978
10
359
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
7,194
10,037
$
156,983
203,861
(1) Balances have been revised to conform with current period presentation.
(2) On December 10, 2008, Wells Fargo issued $3 billion of 3% fixed senior unsecured notes and $3 billion of floating senior unsecured notes both maturing on
December 9, 2011. On March 30, 2009, Wells Fargo issued $1.75 billion of 2.125% fixed senior unsecured notes and $1.75 billion of floating senior unsecured notes both
maturing on June 15, 2012. These notes are guaranteed under the Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program (TGLP) and are
backed by the full faith and credit of the United States.
(3) Consists of long-term notes where the performance of the note is linked to an embedded equity, commodity, or currency index, or basket of indices accounted for separately
from the note as a free-standing derivative. For information on embedded derivatives, see Note 15 – Free-standing derivatives.
(4) We expect to issue preferred stock to the unconsolidated wholly-owned trusts that hold the income trust securities. The preferred stock issuance is contingent on the ability
to raise sufficient proceeds through the sale of the income trust securities to third party investors. See Note 8 for our additional information on our trust preferred security
structures and Note 17 for the preferred stock we expect to issue.
(5) Represents junior subordinated debentures held by unconsolidated wholly owned trusts formed for the sole purpose of issuing trust preferred securities. See Note 8 for
additional information on our trust preferred security structures.
164
We participated in the FDIC’s Temporary Liquidity
Guarantee Program (TLGP). The TLGP had two components: the
Debt Guarantee Program, which provided a temporary
guarantee of newly issued senior unsecured debt issued by
eligible entities; and the Transaction Account Guarantee
Program, which provided a temporary unlimited guarantee of
funds in noninterest-bearing transaction accounts at FDIC-
insured institutions. We opted out of the TLGP effective
January 1, 2010.
The aggregate annual maturities of long-term debt
obligations (based on final maturity dates) as of
December 31, 2010, follow.
The interest rates on floating-rate notes are determined
periodically by formulas based on certain money market rates,
subject, on certain notes, to minimum or maximum interest
rates.
As part of our long-term and short-term borrowing
arrangements, we are subject to various financial and
operational covenants. Some of the agreements under which
debt has been issued have provisions that may limit the merger
or sale of certain subsidiary banks and the issuance of capital
stock or convertible securities by certain subsidiary banks. At
December 31, 2010, we were in compliance with all the
covenants.
(in millions)
2011
2012
2013
2014
2015
Thereafter
Total
Parent
Company
$
21,771
36,223
15,696
10,088
7,739
3,584
19,779
15,750
11,032
8,553
40,867
65,646
$
99,745
156,983
165
Note 14: Guarantees and Legal Actions
Guarantees are contracts that contingently require us to make
payments to a guaranteed party based on an event or a change in
an underlying asset, liability, rate or index. Guarantees are
generally in the form of standby letters of credit, securities
lending and other indemnifications, liquidity agreements,
written put options, recourse obligations, residual value
guarantees, and contingent consideration. The following table
shows carrying value, maximum exposure to loss on our
guarantees and the amount with a higher risk of performance.
(in millions)
Standby letters of credit
Securities lending and other indemnifications
Liquidity agreements (1)
Written put options (1)(2)
Loans and MHFS sold with recourse
Residual value guarantees
Contingent consideration
Other guarantees
Total guarantees
2010
December 31,
2009
Maximum
Non-
Maximum
Non-
Carrying
value
exposure investment
grade
to loss
Carrying
value
exposure investment
grade
to loss
$
142
42,159
45
-
747
119
8
23
-
13,645
49
8,134
5,474
197
118
73
19,596
3,993
1
2,615
3,564
-
116
-
148
49,997
21,112
51
66
803
96
8
11
-
20,002
2,512
7,744
8,392
5,049
197
145
55
-
3,674
2,400
-
102
2
$
1,084
69,849
29,885
1,183
91,581
29,802
(1) Certain of these agreements included in this table are related to off-balance sheet entities and, accordingly, are also disclosed in Note 8.
(2) Written put options, which are in the form of derivatives, are also included in the derivative disclosures in Note 15.
SECURITIES LENDING AND OTHER INDEMNIFICATIONS As a
securities lending agent, we lend securities from participating
institutional clients’ portfolios to third-party borrowers. We
indemnify our clients against default by the borrower in
returning these lent securities. This indemnity is supported by
collateral received from the borrowers. Collateral is generally in
the form of cash or highly liquid securities that are marked to
market daily. There was $14.0 billion at December 31, 2010, and
$20.7 billion at December 31, 2009, in collateral supporting
loaned securities with values of $13.6 billion and $ 20.0 billion,
respectively.
We enter into other types of indemnification agreements in
the ordinary course of business under which we agree to
indemnify third parties against any damages, losses and
expenses incurred in connection with legal and other
proceedings arising from relationships or transactions with us.
These relationships or transactions include those arising from
service as a director or officer of the Company, underwriting
agreements relating to our securities, acquisition agreements
and various other business transactions or arrangements.
Because the extent of our obligations under these agreements
depends entirely upon the occurrence of future events, our
potential future liability under these agreements we are unable
to determine. We do, however, record a liability for residential
mortgage loans that we may have to repurchase pursuant to
various representations and warranties. See Note 1 and Note 8
for additional information on the liability for mortgage loan
repurchase losses.
“Maximum exposure to loss” and “Non-investment grade” are
required disclosures under GAAP. Non-investment grade
represents those guarantees on which we have a higher risk of
being required to perform under the terms of the guarantee. If
the underlying assets under the guarantee are non-investment
grade (that is, an external rating that is below investment grade
or an internal credit default grade that is equivalent to a below
investment grade external rating), we consider the risk of
performance to be high. Internal credit default grades are
determined based upon the same credit policies that we use to
evaluate the risk of payment or performance when making loans
and other extensions of credit. These credit policies are more
fully described in Note 6.
Maximum exposure to loss represents the estimated loss that
would be incurred under an assumed hypothetical circumstance,
despite what we believe is its extremely remote possibility, where
the value of our interests and any associated collateral declines
to zero, without any consideration of recovery or offset from any
economic hedges. Accordingly, this required disclosure is not an
indication of expected loss. We believe the carrying value, which
is either fair value or cost adjusted for incurred credit losses, is
more representative of our exposure to loss than maximum
exposure to loss.
STANDBY LETTERS OF CREDIT We issue standby letters of
credit, which include performance and financial guarantees, for
customers in connection with contracts between our customers
and third parties. Standby letters of credit are agreements where
we are obligated to make payment to a third party on behalf of a
customer in the event the customer fails to meet their
contractual obligations. We consider the credit risk in standby
letters of credit and commercial and similar letters of credit in
determining the allowance for credit losses.
166
LIQUIDITY AGREEMENTS We provide liquidity facilities on all
commercial paper issued by the conduit we administer. We also
provide liquidity to certain off-balance sheet entities that hold
securitized fixed-rate municipal bonds and consumer or
commercial assets that are partially funded with the issuance of
money market and other short-term notes. The decrease in
maximum exposure to loss from December 31, 2009, is due to
the amounts related to the liquidity facility on the commercial
paper conduit being removed from the disclosed amounts due to
the consolidation of the commercial paper conduit upon
adoption of consolidation accounting guidance. See Note 8 for
additional information on these arrangements.
WRITTEN PUT OPTIONS Written put options are contracts that
give the counterparty the right to sell to us an underlying
instrument held by the counterparty at a specified price, and
include options, floors, caps and credit default swaps. These
written put option contracts generally permit net settlement.
While these derivative transactions expose us to risk in the event
the option is exercised, we manage this risk by entering into
offsetting trades or by taking short positions in the underlying
instrument. We offset substantially all put options written to
customers with purchased options. Additionally, for certain of
these contracts, we require the counterparty to pledge the
underlying instrument as collateral for the transaction. Our
ultimate obligation under written put options is based on future
market conditions and is only quantifiable at settlement. See
Note 8 for additional information regarding transactions with
VIEs and Note 15 for additional information regarding written
derivative contracts.
LOANS AND MHFS SOLD WITH RECOURSE In certain loan sales
or securitizations, we provide recourse to the buyer whereby we
are required to repurchase loans at par value plus accrued
interest on the occurrence of certain credit-related events within
a certain period of time. The maximum exposure to loss
represents the outstanding principal balance of the loans sold or
securitized that are subject to recourse provisions or the
maximum losses per the contractual agreements, but the
likelihood of the repurchase of the entire balance is remote and
amounts paid can be recovered in whole or in part from the sale
of collateral. In 2010, we did not repurchase a significant
amount of loans associated with these agreements. We do not
consider loans sold with representation and warranty
requirements, for which we have established a repurchase
liability, to be loans sold with recourse.
RESIDUAL VALUE GUARANTEES We have provided residual
value guarantees as part of certain leasing transactions of
corporate assets. At December 31, 2010, the only remaining
residual value guarantee is related to a leasing transaction on
certain corporate buildings. The lessors in these leases are
generally large financial institutions or their leasing subsidiaries.
These guarantees protect the lessor from loss on sale of the
related asset at the end of the lease term. To the extent that a
sale of the leased assets results in proceeds less than a stated
percent (generally 80% to 89%) of the asset’s cost, we would be
required to reimburse the lessor under our guarantee.
CONTINGENT CONSIDERATION In connection with certain
brokerage, asset management, insurance agency and other
acquisitions we have made, the terms of the acquisition
agreements provide for deferred payments or additional
consideration, based on certain performance targets.
We have entered into various contingent performance
guarantees through credit risk participation arrangements.
Under these agreements, if a customer defaults on its obligation
to perform under certain credit agreements with third parties,
we will be required to make payments to the third parties.
Legal Actions
Wells Fargo and certain of our subsidiaries are involved in a
number of judicial, regulatory and arbitration proceedings
concerning matters arising from the conduct of our business
activities. These proceedings include actions brought against
Wells Fargo and/or our subsidiaries with respect to corporate
related matters and transactions in which Wells Fargo and/or
our subsidiaries were involved. In addition, Wells Fargo and our
subsidiaries may be requested to provide information or
otherwise cooperate with government authorities in the conduct
of investigations of other persons or industry groups.
Although there can be no assurance as to the ultimate
outcome, Wells Fargo and/or our subsidiaries have generally
denied, or believe we have a meritorious defense and will deny,
liability in all significant litigation pending against us, including
the matters described below, and we intend to defend
vigorously each case, other than matters we describe as having
settled. Reserves are established for legal claims when
payments associated with the claims become probable and the
costs can be reasonably estimated. The actual costs of resolving
legal claims may be substantially higher or lower than the
amounts reserved for those claims.
ADELPHIA LITIGATION Wachovia Bank, N.A. and Wachovia
Capital Markets, LLC, along with numerous other financial
institutions were defendants in a case pending in the United
States District Court for the Southern District of New York
related to the bankruptcy of Adelphia Communications
Corporation (Adelphia). The plaintiff was the Adelphia
Recovery Trust. The complaint asserted claims against the
defendants under state law, bankruptcy law and the Bank
Holding Company Act and sought equitable relief and an
unspecified amount of compensatory and punitive damages. On
September 21, 2010, an agreement was reached between the
Adelphia Resolution Trust and all of the defendant banks to
settle the claims against the banks for the total amount of
$175 million. Wachovia’s share was a fraction of that amount
and was not material to Wells Fargo. The settlement has been
approved by the Court and the case is concluded.
167
Note 14: Guarantees and Legal Actions (continued)
ELAVON LITIGATION On January 16, 2009, Elavon, Inc., a
provider of merchant processing services, filed a complaint in
the U.S. District Court for the Northern District of Georgia
against Wachovia Corporation, Wachovia Bank, N.A., Wells
Fargo & Company, and Wells Fargo Bank, N.A. The complaint
seeks equitable relief, including specific performance, and
damages for Wachovia Bank’s allegedly wrongful termination of
its merchant referral contract with Elavon. Discovery has been
completed and both parties have moved for summary judgment
on various claims or defenses.
ERISA LITIGATION A purported class action, captioned In re
Wachovia Corporation ERISA Litigation, was pending against
Wachovia Corporation, its board of directors and certain senior
officers, in the U.S. District Court for the Western District of
North Carolina. The case was filed on behalf of employees of
Wachovia Corporation and its affiliates who held shares of
Wachovia Corporation common stock in their Wachovia Savings
Plan accounts. On August 6, 2010, an order was entered by the
Court dismissing, with prejudice, the plaintiffs’ complaint. The
dismissal was appealed. On December 8, 2010, an agreement in
principle was reached to settle the case for $12.35 million. The
settlement is subject to Court approval. A hearing on approval of
the settlement has not yet been scheduled.
On April 6, 2010, the U.S. District Court for the District of
Minnesota certified a class of participants in Wells Fargo’s
401(k) Plan in a case captioned Figas v. Wells Fargo &
Company, et al. Figas purports to bring claims on behalf of
participants who had assets in certain Wells Fargo affiliated
funds from November 2, 2001, to September 22, 2009, alleging
breach of fiduciary duty in connection with the offer of Wells
Fargo affiliated funds as investment choices in the Plan. On
October 18, 2010, an agreement in principle was reached to
settle the Figas v. Wells Fargo & Company, et al. case. The
agreement is subject to approval by the Court and an
independent fiduciary.
ILLINOIS ATTORNEY GENERAL LITIGATION On July 31, 2009,
the Attorney General for the State of Illinois filed a civil lawsuit
against Wells Fargo & Company, Wells Fargo Bank, N.A. and
Wells Fargo Financial Illinois, Inc. in the Circuit Court for Cook
County, Illinois. The Illinois Attorney General alleges that the
Wells Fargo defendants engaged in illegal discrimination by
“reverse redlining” and by steering African-American and Latino
customers into high cost, subprime mortgage loans while other
borrowers with similar incomes received lower cost mortgages.
Illinois also alleges that Wells Fargo Financial Illinois, Inc.
misled Illinois customers about the terms of mortgage loans.
Illinois’ complaint against all Wells Fargo defendants is based on
alleged violation of the Illinois Human Rights Act and the
Illinois Fairness in Lending Act. The complaint also alleges that
Wells Fargo Financial Illinois, Inc. violated the Illinois
Consumer Fraud and Deceptive Business Practices Act and the
Illinois Uniform Deceptive Trade Practices Act. Illinois’
complaint seeks an injunction against the defendants’ alleged
violation of these Illinois statutes, restitution to consumers and
civil money penalties. On October 9, 2009, the Company filed a
168
motion to dismiss Illinois’ complaint, and is awaiting the Court’s
ruling.
IN RE WELLS FARGO MORTGAGE-BACKED CERTIFICATES
LITIGATION This lawsuit is comprised of several securities law
based putative class actions, consolidated in the U.S. District
Court for the Northern District of California on July 16, 2009.
The case is brought against several Wells Fargo mortgage-
backed securities trusts, Wells Fargo Bank, N.A. and other
affiliated entities, individual employee defendants, along with
various underwriters and rating agencies. The plaintiffs allege
that the offering documents contain untrue statements of
material fact, or omit to state material facts necessary to make
the registration statements and accompanying prospectuses not
misleading. The allegations are regarding the underwriting
standards used in connection with the origination of the
underlying mortgages, the maximum loan-to-value ratios used to
qualify borrowers, and the appraisals of the properties
underlying the mortgages. Motions to dismiss, filed on behalf of
all defendants, were granted in part and denied in part by a court
order entered on April 22, 2010. The plaintiffs were granted
leave to amend some of their claims. On May 28, 2010, plaintiffs
filed an amended consolidated complaint. On June 25, 2010,
Wells Fargo moved to dismiss the amended complaint. On
October 5, 2010, Wells Fargo’s motion to dismiss the amended
complaint was granted in part and denied in part.
On June 29, 2010 and on July 15, 2010, two complaints, the
first captioned The Charles Schwab Corporation vs. Merrill
Lynch, Pierce, Fenner & Smith, Inc., et al., and the second
captioned The Charles Schwab Corporation v. BNP Paribas
Securities Corp., et al., were filed in the Superior Court for the
State of California, San Francisco County against a number of
defendants, including Wells Fargo Bank, N.A. and Wells Fargo
Asset Securities Corporation. As against the Wells Fargo entities,
the new cases assert opt out claims relating to the claims alleged
in the Mortgage-Backed Certificates Litigation.
On October 15, 2010, three actions, captioned Federal Home
Loan Bank of Chicago v. Banc of America Funding
Corporation, et al. (filed in the Cook County Circuit Court, State
of Illinois); Federal Home Loan Bank of Chicago v. Banc of
America Securities LLC, et al. (filed in the Superior Court of the
State of California for the County of Los Angeles); and Federal
Home Loan Bank of Indianapolis v. Banc of America Mortgage
America Securities, Inc., et al. (filed in the Superior Court of the
State of Indiana for the County of Marion), named multiple
defendants, described as issuers/depositors, and
underwriters/dealers of private label mortgage-backed
securities, in an action asserting claims that defendants used
false and misleading statements in offering documents for the
sale of such securities. The Bank of Chicago asserts that it
purchased approximately $4.2 billion and the Bank of
Indianapolis asserts that it purchased nearly $3 billion of such
securities from the defendants. Plaintiffs seek rescission of the
sales and damages under state securities and other laws and
Section 11 of the Securities Act of 1933. Wells Fargo Asset
Securities Corporation, Wells Fargo Bank, N.A. and Wells Fargo
& Company were named among the defendants.
INTERCHANGE LITIGATION Wells Fargo Bank, N.A., Wells
Fargo & Company, Wachovia Bank, N.A. and Wachovia
Corporation are named as defendants, separately or in
combination, in putative class actions filed on behalf of a
plaintiff class of merchants and in individual actions brought by
individual merchants with regard to the interchange fees
associated with Visa and MasterCard payment card
transactions. These actions have been consolidated in the
United States District Court for the Eastern District of New
York. Visa, MasterCard and several banks and bank holding
companies are named as defendants in various of these actions.
The amended and consolidated complaint asserts claims against
defendants based on alleged violations of federal and state
antitrust laws and seeks damages, as well as injunctive relief.
Plaintiff merchants allege that Visa, MasterCard and payment
card issuing banks unlawfully colluded to set interchange rates.
Plaintiffs also allege that enforcement of certain Visa and
MasterCard rules and alleged tying and bundling of services
offered to merchants are anticompetitive. Wells Fargo and
Wachovia, along with other defendants and entities, are parties
to Loss and Judgment Sharing Agreements, which provide that
they, along with other entities, will share, based on a formula, in
any losses from the Interchange Litigation.
LE-NATURE’S, INC. Wachovia Bank, N.A. was the administrative
agent on a $285 million credit facility extended to Le-Nature’s,
Inc. in September 2006, of which approximately $270 million
was syndicated to other lenders by Wachovia Capital Markets,
LLC. Le-Nature’s was the subject of a Chapter 7 bankruptcy
petition, which was converted to a Chapter 11 bankruptcy
petition in November 2006 in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. The filing was precipitated by
an apparent fraud relating to Le-Nature’s financial condition.
Wachovia Capital Markets, LLC and/or Wachovia Bank, N.A.
are named as defendants in a number of lawsuits including the
following: (1) a case filed in the New York State Supreme Court
for the County of Manhattan by hedge fund purchasers of the
bank debt seeking to recover from Wachovia on various theories
of liability (On May 10, 2010, the Court granted Wachovia’s
motion to dismiss two counts of the complaint and denied the
motion to dismiss two other counts); (2) a case filed on
April 28, 2008, by holders of a Le-Nature’s Senior Subordinated
Notes offering underwritten by Wachovia Capital Markets in
June 2003, alleging various fraud claims, pending in the
Superior Court of the State of California for the County of Los
Angeles; and (3) an action filed on October 30, 2008, on behalf
of the liquidation trust created in Le-Nature’s bankruptcy
against a number of individuals and entities, including
Wachovia Capital Markets, LLC and Wachovia Bank, N.A., in
the U.S. District Court for the Western District of Pennsylvania,
asserting a variety of claims on behalf of the bankruptcy estate.
On September 16, 2009, the Court dismissed a cause of action
for breach of fiduciary duty but denied the remainder of
Wachovia’s motion to dismiss. Discovery is underway in these
matters.
MERGER RELATED LITIGATION On October 4, 2008,
Citigroup, Inc. purported to commence an action in the
Supreme Court of the State of New York for the County of
Manhattan, captioned Citigroup, Inc. v. Wachovia Corp., et al.,
naming as defendants Wachovia Corporation, Wells Fargo &
Company, and the directors of both companies. The complaint
alleged that Wachovia breached an exclusivity agreement with
Citigroup, which by its terms was to expire on October 6, 2008,
by entering into negotiations and an eventual acquisition
agreement with Wells Fargo, and that Wells Fargo and the
individual defendants had tortiously interfered with the same
contract. On October 4, 2008, Wachovia filed a complaint in the
U.S. District Court for the Southern District of New York,
captioned Wachovia Corp. v. Citigroup, Inc. The complaint
sought declaratory and injunctive relief, stating that the Wells
Fargo merger agreement is valid, proper, and not prohibited by
the exclusivity agreement. On March 20, 2009, the U.S. District
Court for the Southern District of New York remanded the
Citigroup, Inc. v. Wachovia Corp., et al. case to the Supreme
Court of the State of New York for the County of Manhattan, but
retained jurisdiction over the Wachovia v. Citigroup case. These
cases were settled by Wells Fargo’s payment of $100 million to
Citigroup in November, 2010. On November 23, 2010, both
cases were dismissed at the request of the parties.
MORTGAGE FORECLOSURE DOCUMENT LITIGATION
Seven purported class actions and several individual borrower
actions related to foreclosure document practices were filed in
late 2010 and in early 2011 against Wells Fargo Bank, N.A. in its
status as mortgage servicer. The cases have been brought in state
and federal courts. Of the individual borrower cases, the
majority are filed in state courts in California and Ohio. Two
other class actions were filed against Wells Fargo Bank, but
Wells Fargo is named as a defendant as corporate trustee of the
mortgage trust and not as a mortgage servicer. The actions
generally claim that Wells Fargo submitted "fraudulent" or
"untruthful" affidavits or other foreclosure documents to courts
to support foreclosures filed in the state. Specifically, plaintiffs
allege that Wells Fargo signers did not have personal knowledge
of the facts alleged in the documents and did not verify the
information in the documents ultimately filed with courts to
foreclose. Plaintiffs attempt to state legal claims ranging from
wrongful foreclosure to deceptive practices to fraud and seek
relief ranging from cancellation of notes and mortgages to
money damages.
On December 20, 2010, the New Jersey Supreme Court, the
New Jersey Administrative Office of the Courts, and the Superior
Court of New Jersey for Mercer County jointly began an action
against Wells Fargo and other large mortgage servicing
companies in state court in New Jersey. This action seeks to
enjoin pending foreclosures and sales and to require servicers to
certify and prove compliance with new foreclosure procedures in
New Jersey, or be held in contempt of court. Wells Fargo has
filed its initial response to the New Jersey action.
169
Note 14: Guarantees and Legal Actions (continued)
MORTGAGE RELATED REGULATORY INVESTIGATIONS Several
government agencies are conducting investigations or
examinations of various mortgage related practices of Wells
Fargo Bank. The investigations relate to two main topics, (1)
whether Wells Fargo may have violated fair lending or other laws
and regulations relating to mortgage origination practices; and
(2) whether Wells Fargo’s practices and procedures relating to
mortgage foreclosure affidavits and documents relating to the
chain of title to notes and mortgage documents are adequate.
With regard to the investigations into foreclosure practices, it is
likely that one or more of the government agencies will initiate
some type of enforcement action against Wells Fargo, which may
include civil money penalties. Wells Fargo continues to provide
information requested by the various agencies.
MUNICIPAL DERIVATIVES BID PRACTICES INVESTIGATION
The Department of Justice (DOJ) and the SEC, beginning in
November 2006, have been requesting information from a
number of financial institutions, including Wachovia Bank,
N.A.’s municipal derivatives group, generally with regard to
competitive bid practices in the municipal derivative markets. In
connection with these inquiries, Wachovia Bank has received
subpoenas from both the DOJ and SEC as well as requests from
other regulatory agencies and several states seeking documents
and information. The DOJ and the SEC have advised Wachovia
Bank that they believe certain of its employees engaged in
improper conduct in conjunction with certain competitively bid
transactions and, in November 2007, the DOJ notified two
Wachovia Bank employees, both of whom have since been
terminated, that they are regarded as targets of the DOJ’s
investigation. Wachovia Bank has been cooperating fully with
the government investigations.
Wachovia Bank, along with a number of other banks and
financial services companies, has also been named as a
defendant in a number of substantially identical purported class
actions filed in various state and federal courts by various
municipalities alleging they have been damaged by the activity
which is the subject of the government investigations. These
cases are now consolidated under the caption In re Municipal
Derivatives Antitrust Litigation in the U.S. District Court for
the Southern District of New York. On April 30, 2009, the Court
granted a motion filed by Wachovia and certain other defendants
to dismiss the Consolidated Class Action Complaint and
dismissed all claims against Wachovia, with leave to replead. A
Second Consolidated Amended Complaint was filed on
June 18, 2009, and a motion to dismiss that complaint was
denied. A number of putative class and individual actions have
also been brought in various courts, including complaints which
were amended with new allegations and the addition of Wells
Fargo & Co. as a defendant. These cases all have allegations
substantially similar to those in the consolidated class
complaint. All of the cases are being coordinated in the U.S.
District Court for the Southern District of New York.
170
ORDER OF POSTING LITIGATION A series of putative class
actions have been filed against Wachovia Bank, N.A. and Wells
Fargo Bank, N.A., as well as many other banks, challenging the
high to low order in which the Banks post debit card transactions
to consumer deposit accounts. There are currently 12 such cases
pending against Wells Fargo Bank (including the Wachovia Bank
cases to which Wells Fargo succeeded), all but three of which
have been consolidated in multi-district litigation proceedings in
the U.S. District Court for the Southern District of Florida. On
August 10, 2010, the U.S. District Court for the Northern District
of California issued an order in Gutierrez v. Wells Fargo Bank,
N.A., one of the three cases that were not consolidated in the
multi-district proceedings, enjoining the Bank’s use of the high
to low posting method for debit card transactions with respect to
the plaintiff class of California depositors, directing that the
Bank establish a different posting methodology and ordering
remediation in the approximate amount of $203 million. On
October 26, 2010, a final judgment was entered in Gutierrez. On
October 28, 2010, Wells Fargo appealed to the U.S. Court of
Appeals for the Ninth Circuit.
WACHOVIA EQUITY SECURITIES AND BONDS/NOTES
LITIGATION A purported securities class action, Lipetz v.
Wachovia Corporation, et al., was filed on July 7, 2008, in the
U.S. District Court for the Southern District of New York alleging
violations of Sections 10 and 20 of the Securities Exchange Act of
1934. An amended complaint was filed on December 15, 2008.
Among other allegations, plaintiffs allege Wachovia’s common
stock price was artificially inflated as a result of allegedly
misleading disclosures relating to the Golden West Financial
Corp. mortgage portfolio, Wachovia’s exposure to other
mortgage related products such as CDOs, control issues and
auction rate securities. On March 19, 2009, the defendants filed
a motion to dismiss the amended class action complaint in the
Lipetz case, which has now been re-captioned as In re Wachovia
Equity Securities Litigation. There are four additional cases (not
class actions) containing allegations similar to the allegations in
the In re Wachovia Equity Securities Litigation captioned
Stichting Pensioenfonds ABP v. Wachovia Corp. et al., FC
Holdings AB, et al. v. Wachovia Corp., et al., Deka Investment
GmbH v. Wachovia Corp. et al. and Forsta AP-Fonden v.
Wachovia Corp., et al., respectively, which were filed in the U.S.
District Court for the Southern District of New York, and there
are a number of other similar actions filed in state courts in
North Carolina and South Carolina by individual shareholders.
Two of the individual shareholder actions in South Carolina have
been dismissed and the shareholders have appealed.
After a number of procedural motions, three purported class
action cases alleging violations of Sections 11, 12, and 15 of the
Securities Act of 1933 as a result of allegedly misleading
disclosures relating to the Golden West mortgage portfolio in
connection with Wachovia’s issuance of various preferred
securities and bonds were transferred to the U.S. District Court
for the Southern District of New York. A consolidated class
action complaint was filed on September 4, 2009, and the matter
is now captioned In Re Wachovia Preferred Securities and
Bond/Notes Litigation. On September 29, 2009, a non-class
action case containing allegations similar to the allegations in
the In re Wachovia Preferred Securities and Bond/Notes
litigation, and captioned City of Livonia Employees’ Retirement
System v. Wachovia Corp et al., was filed in the Southern
District of New York. On May 3, 2010, the judge in the Southern
District of New York issued an order granting Plaintiffs leave to
amend the class action and other complaints pending in that
court, and directing the parties to submit a schedule for the filing
of the amended complaints and new motions to dismiss. This
order terminates the motions to dismiss the prior complaints
which had been pending. Amended complaints were filed in all
the actions in May 2010 and renewed motions to dismiss have
been filed in each case.
OUTLOOK When establishing a liability for contingent litigation
losses, the Company determines a range of potential losses for
each matter that is both probable and estimable, and records
the amount it considers to be the best estimate within the range.
The high end of the range of potential litigation losses in excess
of the Company’s best estimates within the range of potential
losses used in establishing the total litigation liability was
$1.2 billion as of December 31, 2010. For these matters and
others where an unfavorable outcome is reasonably possible but
not probable, there may be a range of possible losses in excess
of the established liability that cannot be estimated. Based on
information currently available, advice of counsel, available
insurance coverage and established reserves, Wells Fargo
believes that the eventual outcome of the actions against Wells
Fargo and/or its subsidiaries, including the matters described
above, will not, individually or in the aggregate, have a material
adverse effect on Wells Fargo’s consolidated financial position.
However, in the event of unexpected future developments, it is
possible that the ultimate resolution of those matters, if
unfavorable, may be material to Wells Fargo’s results of
operations for any particular period.
171
Note 15: Derivatives
We use derivatives to manage exposure to market risk, interest
rate risk, credit risk and foreign currency risk, to generate profits
from proprietary trading and to assist customers with their risk
management objectives. Derivative transactions are measured in
terms of the notional amount, but this amount is not recorded
on the balance sheet and is not, when viewed in isolation, a
meaningful measure of the risk profile of the instruments. The
notional amount is generally not exchanged, but is used only as
the basis on which interest and other payments are determined.
Our asset/liability management approach to interest rate,
foreign currency and certain other risks includes the use of
derivatives. Such derivatives are typically designated as fair
value or cash flow hedges, or economic hedge derivatives for
those that do not qualify for hedge accounting. This helps
minimize significant, unplanned fluctuations in earnings, fair
values of assets and liabilities, and cash flows caused by interest
rate, foreign currency and other market value volatility. This
approach involves modifying the repricing characteristics of
certain assets and liabilities so that changes in interest rates,
foreign currency and other exposures do not have a significant
adverse effect on the net interest margin, cash flows and
earnings. As a result of fluctuations in these exposures, hedged
assets and liabilities will gain or lose market value. In a fair value
or economic hedge, the effect of this unrealized gain or loss will
generally be offset by the gain or loss on the derivatives linked to
the hedged assets and liabilities. In a cash flow hedge, where we
manage the variability of cash payments due to interest rate
fluctuations by the effective use of derivatives linked to hedged
assets and liabilities, the unrealized gain or loss on the
derivatives or the hedged asset or liability is generally not
reflected in earnings.
We also offer various derivatives, including interest rate,
commodity, equity, credit and foreign exchange contracts, to our
customers but usually offset our exposure from such contracts by
purchasing other financial contracts. The customer
accommodations and any offsetting financial contracts are
treated as free-standing derivatives. Free-standing derivatives
also include derivatives we enter into for risk management that
do not otherwise qualify for hedge accounting, including
economic hedge derivatives. To a lesser extent, we take positions
based on market expectations or to benefit from price
differentials between financial instruments and markets.
Additionally, free-standing derivatives include embedded
derivatives that are required to be separately accounted for from
their host contracts.
The following table presents the total notional or contractual
amounts and fair values for derivatives, the fair values of
derivatives designated as qualifying hedge contracts, which are
used as asset/liability management hedges, and free-standing
derivatives (economic hedges) not designated as hedging
instruments are recorded on the balance sheet in other assets or
other liabilities. Customer accommodation, trading and other
free-standing derivatives are recorded on the balance sheet at
fair value in trading assets or other liabilities.
172
(in millions)
Qualifying hedge contracts
Interest rate contracts (1)
Foreign exchange contracts
Total derivatives designated as
qualifying hedging instruments
Derivatives not designated as hedging instruments
Free-standing derivatives (economic hedges):
Interest rate contracts (2)
Equity contracts
Foreign exchange contracts
Credit contracts - protection purchased
Other derivatives
Subtotal
Customer accommodation, trading and other
free-standing derivatives (3):
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts - protection sold
Credit contracts - protection purchased
Other derivatives
Notional or
contractual
amount
December 31, 2010
December 31, 2009
Fair value
Notional or
Fair value
Asset
Liability
derivatives derivatives
contractual
Liability
amount derivatives derivatives
Asset
$
110,314
25,904
7,126
1,527
1,614
119,966
727
30,212
6,425
1,553
1,302
811
8,653
2,341
7,978
2,113
408,563
176
2,898
-
2,625
46
633,734
300
5,528
396
2,538
23
80
-
53
-
35
7,019
577
4,583
4,441
-
233
261
-
4,873
2
29
-
40
3,001
2,759
4,935
4,944
2,809,387
58,225
59,329
2,741,119
54,873
54,033
83,114
73,278
110,889
47,699
44,776
190
4,133
3,272
2,800
605
4,661
8
3,918
3,450
2,682
5,826
588
-
92,182
71,572
142,012
84,541
86,014
2,314
5,400
2,459
3,084
979
9,354
427
5,182
3,067
2,737
9,592
1,089
171
Subtotal
73,704
75,793
76,576
75,871
Total derivatives not designated as hedging instruments
76,705
78,552
81,511
80,815
Total derivatives before netting
85,358
80,893
89,489
82,928
Netting (4)
Total
(63,469)
(70,009)
(65,926)
(73,303)
$
21,889
10,884
23,563
9,625
(1) Notional amounts presented exclude $20.9 billion at both December 31, 2010 and 2009, of basis swaps that are combined with receive fixed-rate/pay floating-rate swaps
and designated as one hedging instrument.
(2) Includes free-standing derivatives (economic hedges) used to hedge the risk of changes in the fair value of residential MSRs, MHFS, interest rate lock commitments and
other interests held.
(3) Balances at December 31, 2009 have been revised to conform with the current presentation.
(4) Represents netting of derivative asset and liability balances, and related cash collateral, with the same counterparty subject to master netting arrangements. The amount of
cash collateral netted against derivative assets and liabilities was $5.5 billion and $12.1 billion, respectively, at December 31, 2010, and $5.3 billion and $14.1 billion,
respectively, at December 31, 2009.
173
Note 15: Derivatives (continued)
Fair Value Hedges
We use interest rate swaps to convert certain of our fixed-rate
long-term debt and CDs to floating rates to hedge our exposure
to interest rate risk. We also enter into cross-currency swaps,
cross-currency interest rate swaps and forward contracts to
hedge our exposure to foreign currency risk and interest rate risk
associated with the issuance of non-U.S. dollar denominated
long-term debt and repurchase agreements. In addition, we use
interest rate swaps and forward contracts to hedge against
changes in fair value of certain investments in available-for-sale
debt securities, due to changes in interest rates, foreign currency
rates, or both. The entire derivative gain or loss is included in the
assessment of hedge effectiveness, for all fair value hedge
relationships, except for those involving foreign-currency
denominated securities available for sale, short-term borrowings
and long-term debt hedged with foreign currency forward
derivatives for which the component of the derivative gain or
loss related to the changes in the difference between the spot and
forward price is excluded from the assessment of hedge
effectiveness.
We use statistical regression analysis to assess hedge
effectiveness, both at inception of the hedging relationship and
on an ongoing basis. The regression analysis involves regressing
the periodic change in fair value of the hedging instrument
against the periodic changes in fair value of the asset or liability
being hedged due to changes in the hedged risk(s). The
assessment includes an evaluation of the quantitative measures
of the regression results used to validate the conclusion of high
effectiveness.
The following table shows the net gains (losses) recognized in
the income statement related to derivatives in fair value hedging
relationships.
(in millions)
Year ended December 31, 2010
Interest rate
contracts hedging:
Foreign exchange Total net
gains
contracts hedging:
Securities
Securities
available Long-term
debt
for sale
available Short-term Long-term
debt
for sale borrowings
(losses)
on fair
value
hedges
Gains (losses) recorded in net interest income
$
(390)
1,755
(4)
-
374
1,735
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
(432)
1,565
269
469
(1,469)
(270)
Recognized on fair value hedges (ineffective portion) (1)
$
37
96
(1)
-
-
-
(1,030)
372
1,007
(263)
(23)
109
Year ended December 31, 2009
Gains (losses) recorded in net interest income
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
$
(289)
1,677
(56)
27
349
1,708
954
(936)
(3,270)
3,132
(713)
713
217
(217)
2,612
(2,626)
(200)
66
Recognized on fair value hedges (ineffective portion) (1)
$
18
(138)
-
-
(14)
(134)
(1) Included $3 million and $(10) million, respectively, for year ended December 31, 2010 and 2009, of gains (losses) on forward derivatives hedging foreign currency securities
available for sale, short-term borrowings and long-term debt, representing the portion of derivatives gains (losses) excluded from the assessment of hedge effectiveness
(time value).
174
Cash Flow Hedges
We hedge floating-rate debt against future interest rate increases
by using interest rate swaps, caps, floors and futures to limit
variability of cash flows due to changes in the benchmark
interest rate. We also use interest rate swaps and floors to hedge
the variability in interest payments received on certain floating-
rate commercial loans, due to changes in the benchmark interest
rate. Gains and losses on derivatives that are reclassified from
cumulative OCI to current period earnings are included in the
line item in which the hedged item’s effect on earnings is
recorded. All parts of gain or loss on these derivatives are
included in the assessment of hedge effectiveness. We assess
hedge effectiveness using regression analysis, both at inception
of the hedging relationship and on an ongoing basis. The
regression analysis involves regressing the periodic changes in
cash flows of the hedging instrument against the periodic
changes in cash flows of the forecasted transaction being hedged
due to changes in the hedged risk(s). The assessment includes an
evaluation of the quantitative measures of the regression results
used to validate the conclusion of high effectiveness.
Based upon current interest rates, we estimate that
$367 million of deferred net gains on derivatives in OCI at
December 31, 2010, will be reclassified as earnings during the
next twelve months, compared with $284 million at
December 31, 2009. Future changes to interest rates may
significantly change actual amounts reclassified to earnings. We
are hedging our exposure to the variability of future cash flows
for all forecasted transactions for a maximum of 8 years for both
hedges of floating-rate debt and floating-rate commercial loans.
The following table shows the net gains (losses) recognized
related to derivatives in cash flow hedging relationships.
(in millions)
Gains (after tax) recognized in OCI on derivatives
Gains (pre tax) reclassified from cumulative OCI into net interest income
Gains (pre tax) recognized in noninterest income on derivatives (1)
(1) Represents ineffectiveness recognized on cash flow hedge derivatives.
Free-Standing Derivatives
We use free-standing derivatives (economic hedges), in addition
to debt securities available for sale, to hedge the risk of changes
in the fair value of residential MSRs measured at fair value,
certain residential MHFS, derivative loan commitments and
other interests held. The resulting gain or loss on these economic
hedges is reflected in other income.
The derivatives used to hedge these MSRs measured at fair
value, which include swaps, swaptions, forwards, Eurodollar and
Treasury futures and options contracts, resulted in net derivative
gains of $4.5 billion in 2010 and $6.8 billion in 2009, which are
included in mortgage banking noninterest income. The
aggregate fair value of these derivatives was a net liability of
$943 million and $961 million at December 31, 2010 and 2009,
respectively. Changes in fair value of debt securities available for
sale (unrealized gains and losses) are not included in servicing
income, but are reported in cumulative OCI (net of tax) or, upon
sale, are reported in net gains (losses) on debt securities
available for sale.
Interest rate lock commitments for residential mortgage
loans that we intend to sell are considered free-standing
derivatives. Our interest rate exposure on these derivative loan
commitments, as well as substantially all residential MHFS, is
hedged with free-standing derivatives (economic hedges) such as
forwards and options, Eurodollar futures and options, and
Treasury futures, forwards and options contracts. The
commitments, free-standing derivatives and residential MHFS
are carried at fair value with changes in fair value included in
mortgage banking noninterest income. For the fair value
measurement of interest rate lock commitments we include, at
inception and during the life of the loan commitment, the
expected net future cash flows related to the associated servicing
Year ended
December 31,
2010
2009
468
613
6
107
531
42
$
of the loan. Fair value changes subsequent to inception are based
on changes in fair value of the underlying loan resulting from the
exercise of the commitment and changes in the probability that
the loan will not fund within the terms of the commitment
(referred to as a fall-out factor). The value of the underlying loan
is affected primarily by changes in interest rates and the passage
of time. However, changes in investor demand can also cause
changes in the value of the underlying loan value that cannot be
hedged. The aggregate fair value of derivative loan commitments
in the balance sheet was a net liability of $271 million and
$312 million at December 31, 2010 and 2009, respectively, and
is included in the caption “Interest rate contracts” under
“Customer accommodation, trading and other free-standing
derivatives” in the first table in this Note.
We also enter into various derivatives primarily to provide
derivative products to customers. To a lesser extent, we take
positions based on market expectations or to benefit from price
differentials between financial instruments and markets. These
derivatives are not linked to specific assets and liabilities in the
balance sheet or to forecasted transactions in an accounting
hedge relationship and, therefore, do not qualify for hedge
accounting. We also enter into free-standing derivatives for risk
management that do not otherwise qualify for hedge accounting.
They are carried at fair value with changes in fair value recorded
as part of other noninterest income.
Free-standing derivatives also include embedded derivatives
that are required to be accounted for separate from their host
contract. We periodically issue hybrid long-term notes and CDs
where the performance of the hybrid instrument notes is linked
to an equity, commodity or currency index, or basket of such
indices. These notes contain explicit terms that affect some or all
of the cash flows or the value of the note in a manner similar to a
175
Note 15: Derivatives (continued)
derivative instrument and therefore are considered to contain an
“embedded” derivative instrument. The indices on which the
performance of the hybrid instrument is calculated are not
clearly and closely related to the host debt instrument. The
“embedded” derivative is separated from the host contract and
accounted for as a free-standing derivative. Additionally, we may
invest in hybrid instruments that contain embedded derivatives,
such as credit derivatives, that are not clearly and closely related
to the host contract. In such instances, we either elect fair value
option for the hybrid instrument or separate the embedded
derivative from the host contract and account for the host
contract and derivative separately.
The following table shows the net gains recognized in the
income statement related to derivatives not designated as
hedging instruments.
(in millions)
Gains (losses) recognized on free-standing derivatives (economic hedges):
Interest rate contracts (1)
Recognized in noninterest income:
Mortgage banking
Other
Foreign exchange contracts
Credit contracts
Subtotal
Gains (losses) recognized on customer accommodation, trading and other free-standing derivatives:
Interest rate contracts (2)
Recognized in noninterest income:
Mortgage banking
Other
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other
Subtotal
Year ended
December 31,
2010
2009
$
1,611
(22)
103
(174)
5,582
(15)
133
(269)
1,518
5,431
3,305
2,035
224
65
441
565
(710)
10
1,139
29
(275)
607
(621)
(187)
3,900
2,727
Net gains recognized related to derivatives not designated as hedging instruments
$
5,418
8,158
(1) Predominantly mortgage banking noninterest income including gains (losses) on the derivatives used as economic hedges of MSRs measured at fair value, interest rate lock
commitments and mortgages held for sale.
(2) Predominantly mortgage banking noninterest income including gains (losses) on interest rate lock commitments.
Credit Derivatives
We use credit derivatives to manage exposure to credit risk
related to lending and investing activity and to assist customers
with their risk management objectives. This may include
protection sold to offset purchased protection in structured
product transactions, as well as liquidity agreements written to
special purpose vehicles. The maximum exposure of sold credit
derivatives is managed through posted collateral, purchased
credit derivatives and similar products in order to achieve our
desired credit risk profile. This credit risk management provides
an ability to recover a significant portion of any amounts that
would be paid under the sold credit derivatives. We would be
required to perform under the noted credit derivatives in the
event of default by the referenced obligors. Events of default
include events such as bankruptcy, capital restructuring or lack
of principal and/or interest payment. In certain cases, other
triggers may exist, such as the credit downgrade of the
referenced obligors or the inability of the special purpose vehicle
for which we have provided liquidity to obtain funding.
176
The following table provides details of sold and purchased credit derivatives.
Notional amount
Protection
Protection
sold -
non-
purchased
Net
with protection
Other
(in millions)
December 31, 2010
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-
Fair value Protection investment
liability
sold (A)
identical
grade underlyings (B)
sold protection
Range of
(A) - (B) purchased maturities
$
810
30,445
16,360
17,978
12,467
9,440 2011-2020
4,145
5,825
5,246
4,948
877
2,482 2016-2056
12
2,700
909
2,167
533
1,106 2011-2017
backed securities index
Asset-backed securities index
Loan deliverable credit default swaps
Other
717
128
2
12
1,977
144
481
6,127
612
144
456
5,348
924
46
391
41
1,053
98
90
6,086
779 2049-2052
142 2037-2046
261 2011-2014
2,745 2011-2056
Total credit derivatives
$
5,826
47,699
29,075
26,495
21,204
16,955
December 31, 2009
Credit default swaps on:
Corporate bonds
Structured products
Credit protection on:
Default swap index
Commercial mortgage-backed securities index
Asset-backed securities index
Loan deliverable credit default swaps
Other (1)
$
2,419
4,498
55,511
6,627
23,815
5,084
44,159
4,999
11,352
1,628
12,634
3,018
2010-2018
2014-2056
23
1,987
637
12
16
6,611
5,188
830
510
9,264
2,765
453
660
494
8,657
4,202
4,749
696
423
32
2,409
2,510
2010-2017
439
134
87
9,232
189
189
287
4,757
2049-2052
2037-2046
2010-2014
2010-2020
Total credit derivatives
$
9,592
84,541
41,928
59,260
25,281
23,584
(1) Balances at December 31, 2009, have been revised to conform with the current presentation.
Protection sold represents the estimated maximum exposure
to loss that would be incurred under an assumed hypothetical
circumstance, where the value of our interests and any
associated collateral declines to zero, without any consideration
of recovery or offset from any economic hedges. We believe this
hypothetical circumstance to be an extremely remote possibility
and accordingly, this required disclosure is not an indication of
expected loss. The amounts under non-investment grade
represent the notional amounts of those credit derivatives on
which we have a higher risk of being required to perform under
the terms of the credit derivative and are a function of the
underlying assets.
We consider the risk of performance to be high if the
underlying assets under the credit derivative have an external
rating that is below investment grade or an internal credit
default grade that is equivalent thereto. We believe the net
protection sold, which is representative of the net notional
amount of protection sold and purchased with identical
underlyings, in combination with other protection purchased, is
more representative of our exposure to loss than either non-
investment grade or protection sold. Other protection purchased
represents additional protection, which may offset the exposure
to loss for protection sold, that was not purchased with an
identical underlying of the protection sold.
177
Note 15: Derivatives (continued)
Credit-Risk Contingent Features
Certain of our derivative contracts contain provisions whereby if
the credit rating of our debt, based on certain major credit rating
agencies indicated in the relevant contracts, were to fall below
investment grade, the counterparty could demand additional
collateral or require termination or replacement of derivative
instruments in a net liability position. The aggregate fair value of
all derivative instruments with such credit-risk-related
contingent features that are in a net liability position was
$12.6 billion and $7.5 billion at December 31, 2010 and 2009,
respectively, for which we had posted $12.0 billion and
$7.1 billion, respectively, in collateral in the normal course of
business. If the credit-risk-related contingent features
underlying these agreements had been triggered on
December 31, 2010 or 2009, we would have been required to
post additional collateral of $1.0 billion, or potentially settle the
contract in an amount equal to its fair value.
Counterparty Credit Risk
By using derivatives, we are exposed to counterparty credit risk
if counterparties to the derivative contracts do not perform as
expected. If a counterparty fails to perform, our counterparty
credit risk is equal to the amount reported as a derivative asset
on our balance sheet. The amounts reported as a derivative asset
are derivative contracts in a gain position, and to the extent
subject to master netting arrangements, net of derivatives in a
loss position with the same counterparty and cash collateral
received. We minimize counterparty credit risk through credit
approvals, limits, monitoring procedures, executing master
netting arrangements and obtaining collateral, where
appropriate. To the extent the master netting arrangements and
other criteria meet the applicable requirements, derivatives
balances and related cash collateral amounts are shown net in
the balance sheet. Counterparty credit risk related to derivatives
is considered in determining fair value and our assessment of
hedge effectiveness.
178
Note 16: Fair Values of Assets and Liabilities
We use fair value measurements to record fair value adjustments
to certain assets and liabilities and to determine fair value
disclosures. Trading assets, securities available for sale,
derivatives, substantially all prime residential MHFS, certain
commercial LHFS, fair value MSRs, principal investments and
securities sold but not yet purchased (short sale liabilities) are
recorded at fair value on a recurring basis. Additionally, from
time to time, we may be required to record at fair value other
assets on a nonrecurring basis, such as certain residential and
commercial MHFS, certain LHFS, loans held for investment and
certain other assets. These nonrecurring fair value adjustments
typically involve application of lower-of-cost-or-market
accounting or write-downs of individual assets.
We adopted new guidance on fair value measurements
effective January 1, 2009, which addresses measuring fair value
in situations where markets are inactive and transactions are not
orderly. This guidance states transaction or quoted prices for
assets or liabilities in inactive markets may require adjustment
due to the uncertainty of whether the underlying transactions
are orderly. Prior to our adoption of the new provisions for
measuring fair value, we primarily used unadjusted independent
vendor or broker quoted prices to measure fair value for
substantially all securities available for sale.
In connection with the change in guidance for fair value
measurement, we developed policies and procedures to
determine when the level and volume of activity for our assets
and liabilities requiring fair value measurements has
significantly declined relative to normal conditions. For such
items that use price quotes, such as certain security classes
within securities available for sale, the degree of market
inactivity and distressed transactions was analyzed to determine
the appropriate adjustment to the price quotes.
The security classes where we considered the market to be
less orderly upon initial adoption of the new guidance included
non-agency residential MBS, commercial MBS, CDOs, home
equity asset-backed securities, auto asset-backed securities and
credit card-backed securities. The methodology used to adjust
the quotes involved weighting the price quotes and results of
internal pricing techniques such as the net present value of
future expected cash flows (with observable inputs, where
available) discounted at a rate of return market participants
require. The significant inputs utilized in the internal pricing
techniques, which were estimated by type of underlying
collateral, included credit loss assumptions, estimated
prepayment speeds and appropriate discount rates.
The more active and orderly markets for particular security
classes were determined to be, the more weighting assigned to
price quotes. The less active and orderly markets were
determined to be, the less weighting assigned to price quotes.
We continually assess the level and volume of market activity in
our investment security classes in determining adjustments, if
any, to price quotes. Given market conditions can change over
time, determination of which securities markets are considered
active or inactive, and if inactive, the degree to which price
quotes require adjustment, can also change.
Fair Value Hierarchy
We group our assets and liabilities measured at fair value in
three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used
to determine fair value. These levels are:
•
Level 1 – Valuation is based upon quoted prices for identical
instruments traded in active markets.
Level 2 – Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and
model-based valuation techniques for which all significant
assumptions are observable in the market.
Level 3 – Valuation is generated from model-based
techniques that use significant assumptions not observable
in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would
use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow
models and similar techniques.
•
•
In the determination of the classification of financial
instruments in Level 2 or Level 3 of the fair value hierarchy, we
consider all available information, including observable market
data, indications of market liquidity and orderliness, and our
understanding of the valuation techniques and significant inputs
used. For securities in inactive markets, we use a predetermined
percentage to evaluate the impact of fair value adjustments
derived from weighting both external and internal indications of
value to determine if the instrument is classified as Level 2 or
Level 3. Based upon the specific facts and circumstances of each
instrument or instrument category, judgments are made
regarding the significance of the Level 3 inputs to the
instruments' fair value measurement in its entirety. If Level 3
inputs are considered significant, the instrument is classified as
Level 3.
Determination of Fair Value
We base our fair values on the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date. We maximize the use of observable inputs and minimize
the use of unobservable inputs when developing fair value
measurements.
In instances where there is limited or no observable market
data, fair value measurements for assets and liabilities are based
primarily upon our own estimates or combination of our own
estimates and independent vendor or broker pricing, and the
measurements are often calculated based on current pricing for
products we offer or issue, the economic and competitive
environment, the characteristics of the asset or liability and
other such factors. As with any valuation technique used to
estimate fair value, changes in underlying assumptions used,
including discount rates and estimates of future cash flows,
could significantly affect the results of current or future values.
Accordingly, these fair value estimates may not be realized in an
actual sale or immediately settlement of the asset or liability.
179
Note 16: Fair Values of Assets and Liabilities (continued)
We incorporate lack of liquidity into our fair value
measurement based on the type of asset or liability measured
and the valuation methodology used. For example, for certain
residential MHFS and certain securities where the significant
inputs have become unobservable due to illiquid markets and
vendor or broker pricing is not used, we use a discounted cash
flow technique to measure fair value. This technique
incorporates forecasting of expected cash flows (adjusted for
credit loss assumptions and estimated prepayment speeds)
discounted at an appropriate market discount rate to reflect the
lack of liquidity in the market that a market participant would
consider. For other securities where vendor or broker pricing is
used, we use either unadjusted broker quotes or vendor prices or
vendor or broker prices adjusted by weighting them with
internal discounted cash flow techniques to measure fair value.
These unadjusted vendor or broker prices inherently reflect any
lack of liquidity in the market as the fair value measurement
represents an exit price from a market participant viewpoint.
Following are descriptions of the valuation methodologies
used for assets and liabilities recorded at fair value on a
recurring or nonrecurring basis and for estimating fair value for
financial instruments not recorded at fair value.
Assets
SHORT-TERM FINANCIAL ASSETS Short-term financial assets
include cash and due from banks, federal funds sold and
securities purchased under resale agreements and due from
customers on acceptances. These assets are carried at historical
cost. The carrying amount is a reasonable estimate of fair value
because of the relatively short time between the origination of
the instrument and its expected realization.
TRADING ASSETS (EXCLUDING DERIVATIVES) AND
SECURITIES AVAILABLE FOR SALE Trading assets and
securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted
prices in active markets, if available. Such instruments are
classified within Level 1 of the fair value hierarchy. Examples
include exchange-traded equity securities and some highly liquid
government securities such as U.S. Treasuries. When
instruments are traded in secondary markets and quoted market
prices do not exist for such securities, we generally rely on
internal valuation techniques or on prices obtained from
independent pricing services or brokers (collectively, vendors) or
combination thereof.
Trading securities are mostly valued using trader prices that
are subject to independent price verification procedures. The
majority of fair values derived using internal valuation
techniques are verified against multiple pricing sources,
including prices obtained from independent vendors. Vendors
compile prices from various sources and often apply matrix
pricing for similar securities when no price is observable. We
review pricing methodologies provided by the vendors in order
to determine if observable market information is being used,
versus unobservable inputs. When evaluating the
appropriateness of an internal trader price compared with
vendor prices, considerations include the range and quality of
vendor prices. Vendor prices are used to ensure the
180
reasonableness of a trader price; however valuing financial
instruments involves judgments acquired from knowledge of a
particular market and is not perfunctory. If a trader asserts that
a vendor price is not reflective of market value, justification for
using the trader price, including recent sales activity where
possible, must be provided to and approved by the appropriate
levels of management.
Similarly, while securities available for sale traded in
secondary markets are typically valued using unadjusted vendor
prices or vendor prices adjusted by weighting them with internal
discounted cash flow techniques, these prices are reviewed and,
if deemed inappropriate by a trader who has the most knowledge
of a particular market, can be adjusted. Securities measured with
these internal valuation techniques are generally classified as
Level 2 of the hierarchy and often involve using quoted market
prices for similar securities, pricing models, discounted cash
flow analyses using significant inputs observable in the market
where available or combination of multiple valuation techniques.
Examples include certain residential and commercial MBS,
municipal bonds, U.S. government and agency MBS, and
corporate debt securities.
Security fair value measurements using significant inputs
that are unobservable in the market due to limited activity or a
less liquid market are classified as Level 3 in the fair value
hierarchy. Such measurements include securities valued using
internal models or combination of multiple valuation techniques
such as weighting of internal models and vendor or broker
pricing, where the unobservable inputs are significant to the
overall fair value measurement. Securities classified as Level 3
include certain residential and commercial MBS, asset-backed
securities collateralized by auto leases or loans and cash
reserves, CDOs and CLOs, and certain residual and retained
interests in residential mortgage loan securitizations. CDOs are
valued using the prices of similar instruments, the pricing of
completed or pending third party transactions or the pricing of
the underlying collateral within the CDO. Where vendor or
broker prices are not readily available, management's best
estimate is used.
MORTGAGES HELD FOR SALE (MHFS) We carry substantially all
of our residential MHFS portfolio at fair value. Fair value is
based on independent quoted market prices, where available, or
the prices for other mortgage whole loans with similar
characteristics. As necessary, these prices are adjusted for typical
securitization activities, including servicing value, portfolio
composition, market conditions and liquidity. Most of our MHFS
are classified as Level 2. For the portion where market pricing
data is not available, we use a discounted cash flow model to
estimate fair value and, accordingly, classify as Level 3.
LOANS HELD FOR SALE (LHFS) LHFS are carried at the lower of
cost or market value, or at fair value for certain portfolios that
we intend to hold for trading purposes. The fair value of LHFS is
based on what secondary markets are currently offering for
portfolios with similar characteristics. As such, we classify those
loans subjected to nonrecurring fair value adjustments as
Level 2.
LOANS For the carrying value of loans, including PCI loans, see
Note 1 (Summary of Significant Accounting Policies – Loans).
We generally do not record loans at fair value on a recurring
basis. However, from time to time, we record nonrecurring fair
value adjustments to loans to reflect partial write-downs that are
based on the observable market price of the loan or current
appraised value of the collateral.
We provide fair value estimates in this disclosure for loans
that are not recorded at fair value on a recurring or nonrecurring
basis. Those estimates differentiate loans based on their
financial characteristics, such as product classification, loan
category, pricing features and remaining maturity. Prepayment
and credit loss estimates are evaluated by product and loan rate.
The fair value of commercial loans is calculated by
discounting contractual cash flows, adjusted for credit loss
estimates, using discount rates that reflect our current pricing
for loans with similar characteristics and remaining maturity.
For real estate 1-4 family first and junior lien mortgages, fair
value is calculated by discounting contractual cash flows,
adjusted for prepayment and credit loss estimates, using
discount rates based on current industry pricing (where readily
available) or our own estimate of an appropriate risk-adjusted
discount rate for loans of similar size, type, remaining maturity
and repricing characteristics.
For credit card loans, the portfolio's yield is equal to our
current pricing and, therefore, the fair value is equal to book
value adjusted for estimates of credit losses inherent in the
portfolio at the balance sheet date.
For all other consumer loans, the fair value is generally
calculated by discounting the contractual cash flows, adjusted
for prepayment and credit loss estimates, based on the current
rates we offer for loans with similar characteristics.
Loan commitments, standby letters of credit and commercial
and similar letters of credit generate ongoing fees at our current
pricing levels, which are recognized over the term of the
commitment period. In situations where the credit quality of the
counterparty to a commitment has declined, we record an
allowance. A reasonable estimate of the fair value of these
instruments is the carrying value of deferred fees plus the related
allowance. Certain letters of credit that are hedged with
derivative instruments are carried at fair value in trading assets
or liabilities. For those letters of credit fair value is calculated
based on readily quotable credit default spreads, using a market
risk credit default swap model.
DERIVATIVES Quoted market prices are available and used for
our exchange-traded derivatives, such as certain interest rate
futures and option contracts, which we classify as Level 1.
However, substantially all of our derivatives are traded in over-
the-counter (OTC) markets where quoted market prices are not
always readily available. Therefore we value most OTC
derivatives using internal valuation techniques. Valuation
techniques and inputs to internally-developed models depend on
the type of derivative and nature of the underlying rate, price or
index upon which the derivative's value is based. Key inputs can
include yield curves, credit curves, foreign-exchange rates,
prepayment rates, volatility measurements and correlation of
such inputs. Where model inputs can be observed in a liquid
market and the model does not require significant judgment,
such derivatives are typically classified as Level 2 of the fair
value hierarchy. Examples of derivatives classified as Level 2
include generic interest rate swaps, foreign currency swaps,
commodity swaps, and certain option and forward contracts.
When instruments are traded in less liquid markets and
significant inputs are unobservable, such derivatives are
classified as Level 3. Examples of derivatives classified as Level 3
include complex and highly structured derivatives, certain credit
default swaps, interest rate lock commitments written for our
residential mortgage loans that we intend to sell and long dated
equity options where volatility is not observable. Additionally,
significant judgments are required when classifying financial
instruments within the fair value hierarchy, particularly between
Level 2 and 3, as is the case for certain derivatives.
MORTGAGE SERVICING RIGHTS (MSRs) AND CERTAIN OTHER
INTERESTS HELD IN SECURITIZATIONS MSRs and certain
other interests held in securitizations (e.g., interest-only strips)
do not trade in an active market with readily observable prices.
Accordingly, we determine the fair value of MSRs using a
valuation model that calculates the present value of estimated
future net servicing income cash flows. The model incorporates
assumptions that market participants use in estimating future
net servicing income cash flows, including estimates of
prepayment speeds (including housing price volatility), discount
rate, default rates, cost to service (including delinquency and
foreclosure costs), escrow account earnings, contractual
servicing fee income, ancillary income and late fees. Commercial
MSRs and certain residential MSRs are carried at lower of cost
or market value, and therefore can be subject to fair value
measurements on a nonrecurring basis. Changes in the fair value
of MSRs occur primarily due to the collection/realization of
expected cash flows, as well as changes in valuation inputs and
assumptions. For other interests held in securitizations (such as
interest-only strips) we use a valuation model that calculates the
present value of estimated future cash flows. The model
incorporates our own estimates of assumptions market
participants use in determining the fair value, including
estimates of prepayment speeds, discount rates, defaults and
contractual fee income. Interest-only strips are recorded as
trading assets. Our valuation approach is validated by our
internal valuation model validation group. Fair value
measurements of our MSRs and interest-only strips use
significant unobservable inputs and, accordingly, we classify as
Level 3.
FORECLOSED ASSETS Foreclosed assets are carried at net
realizable value, which represents fair value less costs to sell.
Fair value is generally based upon independent market prices or
appraised values of the collateral and, accordingly, we classify
foreclosed assets as Level 2.
181
Note 16: Fair Values of Assets and Liabilities (continued)
SHORT-TERM FINANCIAL LIABILITIES Short-term financial
liabilities are carried at historical cost and include federal funds
purchased and securities sold under repurchase agreements,
commercial paper and other short-term borrowings. The
carrying amount is a reasonable estimate of fair value because of
the relatively short time between the origination of the
instrument and its expected realization.
OTHER LIABILITIES Other liabilities recorded at fair value on a
recurring basis, excluding derivative liabilities (see the
“Derivatives” section for derivative liabilities), includes
primarily short sale liabilities. Short sale liabilities are classified
as either Level 1 or Level 2, generally dependent upon whether
the underlying securities have readily obtained quoted prices in
active exchange markets.
LONG-TERM DEBT Long-term debt is generally carried at
amortized cost. For disclosure, we are required to estimate the
fair value of long-term debt. Generally, the discounted cash flow
method is used to estimate the fair value of our long-term debt.
Contractual cash flows are discounted using rates currently
offered for new notes with similar remaining maturities and, as
such, these discount rates include our current spread levels.
NONMARKETABLE EQUITY INVESTMENTS Nonmarketable
equity investments are recorded under the cost or equity method
of accounting. There are generally restrictions on the sale and/or
liquidation of these investments, including federal bank stock.
Federal bank stock carrying value approximates fair value. We
use facts and circumstances available to estimate the fair value of
our nonmarketable equity investments. We typically consider
our access to and need for capital (including recent or projected
financing activity), qualitative assessments of the viability of the
investee, evaluation of the financial statements of the investee
and prospects for its future. Public equity investments are valued
using quoted market prices and discounts are only applied when
there are trading restrictions that are an attribute of the
investment. Investments in non-public securities are recorded at
our estimate of fair value using metrics such as security prices of
comparable public companies, acquisition prices for similar
companies and original investment purchase price multiples,
while also incorporating a portfolio company's financial
performance and specific factors. For investments in private
equity funds, we use the NAV provided by the fund sponsor as an
appropriate measure of fair value. In some cases, such NAVs
require adjustments based on certain unobservable inputs.
Liabilities
DEPOSIT LIABILITIES Deposit liabilities are carried at historical
cost. The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, interest-bearing checking,
and market rate and other savings, is equal to the amount
payable on demand at the measurement date. The fair value of
other time deposits is calculated based on the discounted value
of contractual cash flows. The discount rate is estimated using
the rates currently offered for like wholesale deposits with
similar remaining maturities.
182
Fair Value Measurements from Independent
Brokers or Independent Third Party Pricing Services
For certain assets and liabilities, we obtain fair value
measurements from independent brokers or independent third
party pricing services and record the unadjusted fair value in our
financial statements. The detail by level is shown in the table
below. Fair value measurements obtained from independent
brokers or independent third party pricing services that we have
adjusted to determine the fair value recorded in our financial
statements are not included in the following table.
(in millions)
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Independent brokers
Third party pricing services
December 31, 2010
Trading assets (excluding derivatives)
Securities available for sale:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities
Other debt securities
Total debt securities
Total marketable equity securities
Total securities available for sale
Derivatives (trading and other assets)
Loans held for sale
Derivatives (liabilities)
Other liabilities
December 31, 2009
Trading assets (excluding derivatives)
Securities available for sale
Loans held for sale
Derivatives (trading and other assets)
Derivatives (liabilities)
Other liabilities
$
-
1,211
6
21
2,123
-
15
3
-
-
50
201
4,133
219
-
4,183
-
936
263
-
-
-
14,055
102,206
14,376
936
201
130,900
727
219
4,183
1,137
131,627
791
-
-
-
169
606
775
16
-
-
-
-
-
-
-
-
-
-
-
15
-
-
20
$
-
4,208
85
-
-
-
-
1,870
-
8
-
-
44
-
46
-
-
548
-
42
70
-
-
-
-
-
740
1
841
393
8
-
-
-
30
1,712
81
1,467
-
120,688
2
1,864
-
-
-
10
2,926
2,949
3,916
9
4
26
183
Note 16: Fair Values of Assets and Liabilities (continued)
Assets and Liabilities Recorded at Fair Value on a
Recurring Basis
The tables below present the balances of assets and liabilities
measured at fair value on a recurring basis.
(in millions)
December 31, 2010
Trading assets (excluding derivatives)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
Collateralized debt obligations
Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets (excluding derivatives)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities (1)
Other marketable equity securities
Total marketable equity securities
Total securities available for sale
Mortgages held for sale
Loans held for sale
Loans
Mortgage servicing rights (residential)
Derivative assets:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Netting
Total derivative assets (3)
Other assets
Total assets recorded at fair value
Derivative liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Netting
Level 1
Level 2
Level 3
Netting
Total
1,340
-
-
-
-
-
2,143
3,483
816
3,335
1,893
-
10,164
9,137
1,811
625
26,965
987
4,299
27,952
938
-
666
14,090
-
-
-
-
-
-
-
-
-
-
-
82,037
20,183
13,337
115,557
9,846
-
223
998
5,285
6,506
370
-
5
1,915
166
117
366
34
2,603
136
2,739
-
4,564
-
20
217
237
433
4,778
6,133
112
3,150
9,395
85
938
147,035
19,492
721
1,224
1,945
677
101
778
2,434
32
2,466
2,883
147,813
21,958
44,226
873
-
-
67,380
4,133
2,040
4,257
2,148
-
3,305
-
309
14,467
869
-
721
51
3,198
-
-
-
-
-
-
-
511
42
-
8
-
561
38
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,675
1,898
1,915
10,330
9,254
2,177
2,802
33,051
1,939
34,990
1,604
18,654
82,037
20,203
13,554
115,794
10,279
4,778
6,356
1,110
8,435
15,901
455
167,465
3,832
1,357
5,189
172,654
47,531
873
309
14,467
68,249
4,133
3,272
4,350
5,346
8
-
-
(63,469) (2)
(63,469)
79,958
4,839
(63,469)
45
314
-
21,889
397
$
$
7,781
300,867
47,931
(63,469)
293,110
(7)
-
(259)
(69)
-
-
-
(62,769)
(3,917)
(2,291)
(3,351)
(2,199)
-
(792)
(1)
(946)
(42)
(4,215)
(35)
-
-
-
-
-
-
(63,568)
(3,918)
(3,496)
(3,462)
(6,414)
(35)
-
-
70,009 (2)
70,009
Total derivative liabilities (4)
(335)
(74,527)
(6,031)
70,009
(10,884)
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities
(2,827)
-
(1,701)
-
(1,129)
(3,798)
(178)
(347)
(4,528)
(5,452)
-
-
-
-
-
-
(36)
(344)
-
-
-
-
-
-
(3,956)
(3,798)
(1,879)
(347)
(9,980)
(380)
Total liabilities recorded at fair value
$
(4,863)
(80,015)
(6,375)
70,009
(21,244)
(1) Perpetual preferred securities are primarily ARS. See Note 8 for additional information.
(2) Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to
certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.
(3) Derivative assets include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets.
(4) Derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading liabilities.
(continued on following page)
184
(continued from previous page)
(in millions)
December 31, 2009
Trading assets (excluding derivatives) (1)
Derivatives (trading assets)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Other
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total securities available for sale
Mortgages held for sale
Loans held for sale
Mortgage servicing rights
Other assets (3)
Total
Liabilities (4)
Level 1
Level 2
Level 3
Netting
Total
$
2,386
340
1,094
4
-
-
-
-
-
-
-
20,497
70,938
1,186
12,708
82,818
27,506
9,162
119,486
8,968
-
3,292
2,311
5,682
-
818
-
1,084
1,799
2,883
367
3,725
12,587
1,098
145,640
20,380
736
1,279
2,015
834
350
1,184
2,305
88
2,393
3,113
146,824
22,773
-
(59,115) (2)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
435
33,439
149
-
13,217
3,523
-
16,004
1,690
-
-
-
(6,812) (2)
25,194
17,845
2,280
13,530
82,818
28,590
10,961
122,369
9,335
3,725
15,879
167,118
3,875
1,717
5,592
172,710
36,962
149
16,004
8,530
$
$
6,274
285,064
51,983
(65,927)
277,394
(4,981)
(83,159)
(6,863)
73,299 (2)
(21,704)
(1) Includes trading securities of $24.0 billion.
(2) Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to
certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.
(3) Derivative assets other than trading and principal investments are included in this category. Balances have been revised to conform with current period presentation.
(4) Derivative liabilities are included in this category. Balances have been revised to conform with current period presentation.
185
(in millions)
Year ended December 31, 2010
Trading assets
(excluding derivatives):
Securities of U.S. states and
political subdivisions
Collateralized debt obligations
Corporate bonds
Mortgage-backed securities
Asset-backed securities
Equity securities
Total trading securities
Other trading assets
Total trading assets
Securities available for sale:
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Residential
Commercial
Total mortgage-backed
securities
Corporate debt securities
Collateralized debt obligations
Asset-backed securities:
Auto loans and leases
Home equity loans
Other asset-backed securities
Total asset-backed securities
Other debt securities
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable
equity securities
Total securities
Note 16: Fair Values of Assets and Liabilities (continued)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows.
Total net gains
(losses) included in
Other
compre-
hensive settlements,
net
income
Purchases,
sales,
issuances
Net
income
and Transfers Transfers
out of
into
Level 3
Level 3
Balance,
beginning
of year
Net unrealized
gains (losses)
included in net
income related
to assets and
liabilities held
at period end (1)
Balance,
end of
year
$
5
1,133
223
146
497
36
2,040
271
2
418
9
(7)
80
1
503
(35)
-
-
-
-
-
-
-
-
-
(11)
364
67
101
(141)
(5)
375
(19)
9
-
9
-
1
2
21
-
-
-
(142)
(123)
(71)
-
(336)
(81)
5
1,915
166
117
366
34
2,603
136
1
11
16
(17)
67
(2)
76
10
356
21
(417)
2,739
86 (2)
(excluding derivatives)
2,311
468
818
12
63
3,485
192
(6)
4,564
1,084
1,799
2,883
367
3,725
8,525
1,677
2,308
12,510
77
20,380
2,305
88
7
(28)
(21)
7
210
1
1
51
53
(15)
246
100
-
(21)
404
383
68
96
(246)
40
(19)
(225)
11
396
(31)
5
(48)
(10)
274
227
(1,276)
(2,175)
20
217
(58)
501
(3,451)
237
(113)
959
259
-
(155)
(212)
(2,403)
48
903
256
113
1,057
-
(1,767)
(1,150)
433
4,778
6,133
112
3,150
(1,452)
1,426
(2,917)
9,395
12
-
-
85
6
(21)
80
14
(26)
(54)
2,434
32
2,393
100
(26)
(15)
94
(80)
2,466
2,833
2,378
(6,741)
19,492
(40) (3)
4
(8)
(5)
(13)
-
(14)
-
(5)
(12)
(17)
-
-
-
- (4)
(40)
39 (5)
55 (5)
(2,957) (5)
(266)
(1)
(19)
-
(644)
-
(930) (6)
(38) (2)
-
(58)
available for sale
22,773
346
370
2,818
2,472
(6,821)
21,958
Mortgages held for sale
Loans
Mortgage servicing rights
Net derivative assets and liabilities:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts
Other derivative contracts
Total derivative contracts
Other assets
Short sale liabilities
(corporate debt securities)
Other liabilities (excluding derivatives)
3,523
-
16,004
43
55
(5,511)
(114)
-
(344)
(1)
(330)
(43)
3,514
(1)
(104)
21
(675)
4
(832)
2,759
1,373
29
(26)
(10)
(2)
(55)
-
-
-
-
-
-
-
-
-
-
-
-
-
(253)
(112)
4,092
380
1,035
-
(388)
(669)
(118)
(3,482)
-
169
(11)
(18)
4
(3,338)
(103)
159
-
-
-
6
-
165
-
-
54
-
-
-
54
3,305
309
14,467
77
(1)
(225)
9
(1,017)
(35)
(1,192)
4
(989)
314
(37)
94
-
(1,038)
65
665
-
(344)
(1) Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the
collection/realization of cash flows over time.
(2) Included in other noninterest income in the income statement.
(3) Included in debt securities available for sale in the income statement.
(4) Included in equity investments in the income statement.
(5) Included in mortgage banking in the income statement.
(6) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)
186
Securities of U.S. states and political subdivisions
903
23
25
(133)
818
Mortgage-backed securities:
Federal agencies
Residential
Commercial
4
3,510
286
-
(74)
(220)
-
1,092
894
-
(759)
41
(4)
(2,685)
798
-
1,084
1,799
Total mortgage-backed securities
3,800
(294)
1,986
(718)
(1,891)
2,883
(continued from previous page)
(in millions)
Year ended December 31, 2009
Trading assets (excluding derivatives)
Securities available for sale:
Corporate debt securities
Collateralized debt obligations
Other
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total securities available for sale
Mortgages held for sale
Mortgage servicing rights
Net derivative assets and liabilities
Other assets (excluding derivatives)
Liabilities (excluding derivatives)(7)
Year ended December 31, 2008
Trading assets (excluding derivatives)
Securities available for sale:
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations
Other
Total net gains
(losses) included in
Purchases,
sales,
Balance,
beginning
of year
Net
income
issuances
Other
compre-
and
hensive settlements,
net
income
Net
transfers
into and/
or out of
Level 3
Balance,
end
of year
Net unrealized
gains (losses)
included in net
income related
to assets and
liabilities held
at period end (1)
$
3,495
202
(1,749)
361
2,311
276 (2)
2
-
(8)
-
(227)
(112)
(339)
-
(84)
(94)
(1)
-
(1) (4)
(526)
(109) (5)
(1,534) (5)
(799) (6)
12 (2)
14
3
125
136
61
577
1,368
(7)
623
584
28
317
(2,300)
367
3,725
12,587
(7)
3,992
507
(3,979)
20,380
(525) (3)
282
2,083
12,799
19,867
2,775
50
2,825
104
-
104
144
(2)
142
(723)
63
(660)
5
(23)
(18)
2,305
88
2,393
$
$
22,692
97
4,134
(153)
(3,997)
22,773
4,718
14,714
37
1,231
(16)
(96)
(4,970)
1,439
10
(11)
-
-
-
-
-
(921)
6,260
(2,291)
132
1
(178)
-
(17)
-
(10)
3,523
16,004
(832)
1,373
(36)
$
418
(120)
-
3,197
-
3,495
(23) (2)
168
-
486
-
486
-
-
4,726
-
(81)
538
278
903
-
(180)
(10)
-
(302)
(210)
(190)
(512)
-
(152)
(15)
(44)
(280)
(572)
-
3,307
163
3,470
326
1,679
8,379
4
199
343
546
-
836
281
4
3,510
286
3,800
282
2,083
12,799
-
-
(150)
-
(150)
-
-
-
Total debt securities
5,380
(357)
(1,489)
14,392
1,941
19,867
(150) (3)
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total securities available for sale
Mortgages held for sale
Mortgage servicing rights
Net derivative assets and liabilities
Other assets (excluding derivatives)
Liabilities (excluding derivatives) (7)
-
1
1
-
-
-
-
-
-
2,775
49
2,824
-
-
-
2,775
50
2,825
$
$
5,381
(357)
(1,489)
17,216
1,941
22,692
146
16,763
6
-
(27)
(280)
(5,927)
(275)
-
6
-
-
1
-
-
561
3,878
303
1,231
5
4,291
-
2
-
-
4,718
14,714
37
1,231
(16)
-
-
- (4)
(150)
(268) (5)
(333) (5)
93 (6)
- (2)
6
(1) Represents only net gains (losses) that are due to changes in economic conditions and management’s estimates of fair value and excludes changes due to the
collection/realization of cash flows over time.
(2) Included in other noninterest income in the income statement.
(3) Included in debt securities available for sale in the income statement.
(4) Included in equity investments in the income statement.
(5) Included in mortgage banking in the income statement.
(6) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(7) Balances have been revised to conform with current period presentation.
187
Note 16: Fair Values of Assets and Liabilities (continued)
Changes in Fair Value Levels
We monitor the availability of observable market data to assess
the appropriate classification of financial instruments within the
fair value hierarchy. Changes in economic conditions or model-
based valuation techniques may require the transfer of financial
instruments from one fair value level to another. The amounts
reported as transfers represent the fair value as of the beginning
of the quarter in which the transfer occurred.
We evaluate the significance of transfers between levels based
upon the nature of the financial instrument and size of the
transfer relative to total assets, total liabilities or total earnings.
For the year ended December 31, 2010, there were no significant
transfers in or out of Level 1.
Significant changes to Level 3 assets for the year ended
December 31, 2010 are described as follows:
• Our adoption of new consolidation accounting guidance on
January 1, 2010, impacted Level 3 balances for certain
financial instruments. Reductions in Level 3 balances,
which represent derecognition of existing investments in
newly consolidated VIEs, are reflected as transfers out for
the following categories: trading assets, $276 million;
securities available for sale, $1.9 billion; and mortgage
servicing rights, $118 million. Increases in Level 3 balances,
which represent newly consolidated VIE assets, are reflected
as transfers in for the following categories: securities
available for sale, $829 million; loans, $366 million; and
long-term debt, $359 million.
• We transferred $4.9 billion of securities available for sale
from Level 3 to Level 2 due to an increase in the volume of
trading activity for certain mortgage-backed and other
asset-backed securities, which resulted in increased
occurrences of observable market prices. We also
transferred $1.7 billion of debt securities available for sale
from Level 2 to Level 3, primarily due to a decrease in
liquidity for certain asset-backed securities.
For the year ended December 31, 2009, we transferred
$4.0 billion of debt securities available for sale from Level 3 to
Level 2 due to increased trading activity.
Assets and Liabilities Recorded at Fair Value on a
Nonrecurring Basis
We may be required, from time to time, to measure certain
assets at fair value on a nonrecurring basis in accordance with
GAAP. These adjustments to fair value usually result from
application of LOCOM accounting or write-downs of individual
assets. For assets measured at fair value on a nonrecurring basis
in 2010 and 2009 that were still held in the balance sheet at each
respective year end, the following table provides the fair value
hierarchy and the carrying value of the related individual assets
or portfolios at year end.
(in millions)
December 31, 2010
Mortgages held for sale (1)
Loans held for sale
Loans:
Commercial
Consumer
Total loans (2)
Mortgage servicing rights (amortized)
Other assets (3)
December 31, 2009
Mortgages held for sale (1)
Loans held for sale
Loans (2)
Other assets (3)
Carrying value at year end
Level 1
Level 2
Level 3
Total
$
$
-
-
-
-
2,000
352
891
-
2,891
352
2,480
5,870
67
18
2,547
5,888
-
8,350
85
8,435
-
-
-
-
-
-
-
765
104
82
104
847
1,105
444
6,177
289
711
-
134
119
1,816
444
6,311
408
(1) Predominantly real estate 1-4 family first mortgage loans measured at LOCOM.
(2) Represents carrying value of loans for which adjustments are based on the appraised value of the collateral.
(3) Includes the fair value of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.
188
The following table presents the increase (decrease) in value of
certain assets that are measured at fair value on a nonrecurring
basis for which a fair value adjustment has been included in the
income statement.
(in millions)
Year ended December 31, 2010
Mortgages held for sale
Loans held for sale
Loans:
Commercial
Consumer
Total loans (1)
Mortgage servicing rights (amortized)
Other assets (2)
Total
Year ended December 31, 2009
Mortgages held for sale
Loans held for sale
Loans (1)
Other assets (2)
Total
$
(20)
(1)
(1,306)
(6,881)
(8,187)
(3)
(301)
$
(8,512)
$
(22)
158
(11,703)
(217)
$
(11,784)
(1) Represents write-downs of loans based on the appraised value of the collateral.
Prior year amount has been revised to conform with current period
presentation.
(2) Includes the losses on foreclosed real estate and other collateral owned that
were measured at fair value subsequent to their initial classification as
foreclosed assets.
189
Note 16: Fair Values of Assets and Liabilities (continued)
Alternative Investments
The following table summarizes our investments in various types
of funds, which are included in trading assets, securities
available for sale and other assets. We use the funds’ net asset
values (NAVs) per share as a practical expedient to measure fair
value on recurring and nonrecurring bases. The fair values
presented in the table are based upon the funds’ NAVs or an
equivalent measure.
Fair
Unfunded
value commitments
Redemption
frequency
Redemption
notice
period
$
1,665
63
23
1,830
88
$
3,669
$
1,559
69
35
901
93
$
2,657
-
Daily - Annually
- Monthly - Quarterly
- Monthly - Annually
N/A
669
1 - 180 days
10 - 90 days
30 - 120 days
N/A
36
705
N/A
N/A
-
-
Daily - Quarterly
Monthly - Annually
Monthly - Annually
N/A
N/A
-
340
47
387
1 - 90 days
10 - 120 days
30 - 180 days
N/A
N/A
Venture capital funds invest in domestic and foreign
companies in a variety of industries, including information
technology, financial services and healthcare. These investments
can never be redeemed with the funds. Instead, we receive
distributions as the underlying assets of the fund liquidate,
which we expect to occur over the next seven years.
(in millions)
December 31, 2010
Offshore funds
Funds of funds
Hedge funds
Private equity funds
Venture capital funds
Total
December 31, 2009
Offshore funds (1)
Funds of funds
Hedge funds
Private equity funds
Venture capital funds
Total
N/A - Not applicable
(1) “Fair value” has been revised to correct previously reported amount.
Offshore funds primarily invest in investment grade
European fixed-income securities. Redemption restrictions are
in place for investments with a fair value of $74 million and
$76 million at December 31, 2010 and 2009, respectively, due to
lock-up provisions that will remain in effect until
November 2012.
Private equity funds invest in equity and debt securities
issued by private and publicly-held companies in connection
with leveraged buyouts, recapitalizations and expansion
opportunities. Substantially all of these investments do not allow
redemptions. Alternatively, we receive distributions as the
underlying assets of the funds liquidate, which we expect to
occur over the next 10 years.
190
Fair Value Option
We measure MHFS at fair value for prime MHFS originations
for which an active secondary market and readily available
market prices exist to reliably support fair value pricing models
used for these loans. Loan origination fees on these loans are
recorded when earned, and related direct loan origination costs
are recognized when incurred. We also measure at fair value
certain of our other interests held related to residential loan
sales and securitizations. We believe fair value measurement for
prime MHFS and other interests held, which we hedge with free-
standing derivatives (economic hedges) along with our MSRs,
measured at fair value 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.
Upon the acquisition of Wachovia, we elected to measure at
fair value certain portfolios of LHFS that we intend to hold for
trading purposes and that may be economically hedged with
derivative instruments. In addition, we elected to measure at fair
value certain letters of credit that are hedged with derivative
instruments to better reflect the economics of the transactions.
These letters of credit are included in trading account assets or
liabilities.
Upon the adoption of new consolidation guidance on January
1, 2010, we elected to measure at fair value the eligible assets
(loans) and liabilities (long-term debt) of certain nonconforming
mortgage loan securitization VIEs. We elected the fair value
option for such newly consolidated VIEs to continue fair value
accounting as our interests prior to consolidation were
predominantly carried at fair value with changes in fair value
recognized in earnings.
The following table reflects the differences between fair value
carrying amount of certain assets and liabilities for which we
have elected the fair value option and the contractual aggregate
unpaid principal amount at maturity.
Dec. 31, 2010
Fair value
carrying
amount
less
Fair value Aggregate aggregate
carrying
amount
unpaid
principal
unpaid
principal
Fair value Aggregate
carrying
amount
unpaid
principal
Dec. 31, 2009
Fair value
carrying
amount
less
aggregate
unpaid
principal
$
47,531
325
47,818
662
(287) (1)
(337)
36,962
268
37,072
560
38
47
(9)
49
63
(110) (1)
(292)
(14)
873
1
309
13
2
306
897
7
348
16
2
353
(24)
(6)
(39)
(3)
-
(47)
149
5
159
2
(10)
3
-
-
-
-
-
-
-
-
-
-
-
-
(in millions)
Mortgages held for sale:
Total loans
Nonaccrual loans
Loans 90 days or more past due and still accruing
Loans held for sale:
Total loans
Nonaccrual loans
Loans:
Total loans
Nonaccrual loans
Loans 90 days or more past due and still accruing
Long-term debt
(1) The difference between fair value carrying amount and aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on
the related loan commitment prior to funding, and premiums on acquired loans.
191
Note 16: Fair Values of Assets and Liabilities (continued)
The assets accounted for under the fair value option are
initially measured at fair value. Gains and losses from initial
measurement and subsequent changes in fair value are
recognized in earnings. The changes in fair value related to
initial measurement and subsequent changes in fair value
included in earnings for these assets measured at fair value are
shown, by income statement line item, below.
(in millions)
Year ended December 31,
Mortgages held for sale
Loans held for sale
Loans
Long-term debt
Other interests held
2010
2009
Mortgage banking
noninterest income
Mortgage banking
noninterest income
Net gains on mortgage
Other
Net gains on mortgage
Other
loan origination/sales noninterest
activities
income
loan origination/sales noninterest
activities
income
$
6,512
-
55
(48)
-
-
24
-
-
(13)
4,891
-
-
-
-
-
99
-
-
117
The following table shows the estimated gains and losses
from earnings attributable to instrument-specific credit risk
related to assets accounted for under the fair value option.
(in millions)
Gains (losses) attributable to
instrument-specific credit risk:
Mortgages held for sale
Loans held for sale
Total
Year ended Dec. 31,
2010 2009
$
$
(28) (277)
63
24
(4) (214)
For performing loans, instrument-specific credit risk gains or
losses were derived principally by determining the change in fair
value of the loans due to changes in the observable or implied
credit spread. Credit spread is the market yield on the loans less
the relevant risk-free benchmark interest rate. Since the second
half of 2007, spreads have been significantly affected by the lack
of liquidity in the secondary market for mortgage loans. For
nonperforming loans, we attribute all changes in fair value to
instrument-specific credit risk.
192
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial
instruments, excluding short-term financial assets and liabilities
because carrying amounts approximate fair value, and excluding
financial instruments recorded at fair value on a recurring basis.
The carrying amounts in the following table are recorded in the
balance sheet under the indicated captions.
We have not included assets and liabilities that are not
financial instruments in our disclosure, such as the value of the
long-term relationships with our deposit, credit card and trust
customers, amortized MSRs, premises and equipment, goodwill
and other intangibles, deferred taxes and other liabilities. The
total of the fair value calculations presented does not represent,
and should not be construed to represent, the underlying value
of the Company.
(in millions)
Financial assets
Mortgages held for sale (1)
Loans held for sale (2)
Loans, net (3)
Nonmarketable equity investments (cost method)
Financial liabilities
Deposits
Long-term debt (3)(4)
2010
December 31,
2009
Carrying Estimated
amount
fair value
Carrying Estimated
fair value
amount
$
4,232
417
4,234
441
2,132
5,584
2,132
5,719
721,016
8,494
710,147
8,814
744,225
9,793
717,798
9,889
847,942
849,642
824,018
824,678
156,651
159,996
203,784
205,752
(1) Balance excludes MHFS for which the fair value option was elected.
(2) Balance excludes LHFS for which the fair value option was elected.
(3) At December 31, 2010, loans and long-term debt exclude balances for which the fair value option was elected. Loans exclude lease financing with a carrying amount of
$13.1 billion and $14.2 billion at December 31, 2010 and 2009, respectively.
(4) The carrying amount and fair value exclude obligations under capital leases of $26 million and $77 million at December 31, 2010 and 2009, respectively.
Loan commitments, standby letters of credit and commercial
and similar letters of credit are not included in the table above. A
reasonable estimate of the fair value of these instruments is the
carrying value of deferred fees plus the related allowance. This
amounted to $673 million and $725 million at
December 31, 2010 and 2009, respectively.
193
Note 17: Preferred Stock
We are authorized to issue 20 million shares of preferred stock
and 4 million shares of preference stock, both without par value.
Preferred shares outstanding rank senior to common shares
both as to dividends and liquidation preference but have no
general voting rights. We have not issued any preference shares
under this authorization. If issued, preference shares would be
limited to one vote per share. Our total issued and outstanding
preferred stock includes Dividend Equalization Preference
(DEP) shares and Series J, K and L, which are presented in the
table below, and Employee Stock Ownership Plan (ESOP)
Cumulative Convertible Preferred Stock, which is presented in
the table on the following page.
(in millions, except shares and liquidation preference per share)
per share authorized outstanding
Par value
value Discount
Liquidation
Shares
preference
Shares
issued and
Carrying
December 31, 2010 and 2009
DEP Shares
Dividend Equalization Preferred Shares
Series J (1)
$
10
97,000
96,546
$
-
-
-
8.00% Non-Cumulative Perpetual Class A Preferred Stock
1,000 2,300,000 2,150,375
2,150
1,995
155
Series K (1)
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred
Stock
Series L (1)
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
1,000 3,500,000 3,352,000
3,352
2,876
476
1,000 4,025,000 3,968,000
3,968
3,200
768
Total
9,922,000 9,566,921
$
9,470
8,071
1,399
(1) Preferred shares qualify as Tier 1 capital.
We may issue preferred stock for Series A ($2.5 billion in
March 2013), Series B ($1.8 billion in September 2013), and
Series I ($2.5 billion in March 2011) to unconsolidated wholly-
owned trusts. The issuance of the preferred stock is contingent
upon the sale of our income trust securities held by these trusts
to third party investors. See Note 8 for additional information on
our trust preferred security structures and Note 13 for
information about our income trust notes. We have no
commitment to issue Series G or H preferred stock.
In December 2009, we redeemed the Series D Preferred
Stock, which had been issued in October 2008 to the United
States Department of the Treasury. We paid $25.0 billion, which
was equal to the liquidation preference of the stock. In
connection with the redemption, we fully accreted the remaining
discount at the time of redemption of $1.9 billion.
In addition to the preferred stock issued and outstanding
described in the table above, at December 31, 2010, we have the
following preferred stock authorized with no shares issued and
outstanding:
•
Series A – Non-Cumulative Perpetual Preferred Stock,
Series A, $100,000 liquidation preference per share,
25,001 shares authorized
Series B – Non-Cumulative Perpetual Preferred Stock,
Series B, $100,000 liquidation preference per share, 17,501
shares authorized
Series G – 7.25% Class A Preferred Stock, Series G,
$15,000 liquidation preference per share, 50,000 shares
authorized
Series H – Floating Class A Preferred Stock, Series H,
$20,000 liquidation preference per share, 50,000 shares
authorized
Series I – 5.80% Fixed to Floating Class A Preferred Stock,
Series I, $100,000 liquidation preference per share,
25,010 shares authorized
•
•
•
•
194
ESOP CUMULATIVE CONVERTIBLE PREFERRED STOCK All
shares of our ESOP Cumulative Convertible Preferred Stock
(ESOP Preferred Stock) were issued to a trustee acting on behalf
of the Wells Fargo & Company 401(k) Plan (the 401(k) Plan).
Dividends on the ESOP Preferred Stock are cumulative from the
date of initial issuance and are payable quarterly at annual rates
based upon the year of issuance. Each share of ESOP Preferred
Stock released from the unallocated reserve of the 401(k) Plan is
converted into shares of our common stock based on the stated
value of the ESOP Preferred Stock and the then current market
price of our common stock. The ESOP Preferred Stock is also
convertible at the option of the holder at any time, unless
previously redeemed. We have the option to redeem the ESOP
Preferred Stock at any time, in whole or in part, at a redemption
price per share equal to the higher of (a) $1,000 per share plus
accrued and unpaid dividends or (b) the fair market value, as
defined in the Certificates of Designation for the ESOP Preferred
Stock.
(in millions, except shares)
ESOP Preferred Stock
$1,000 liquidation preference per share
2010
2008
2007
2006
2005
2004
2003
2002
2001
Total ESOP Preferred Stock (1)
Unearned ESOP shares (2)
Shares issued and outstanding
December 31,
Carrying value
December 31,
Adjustable
dividend rate
2010
2009
2010
2009
Minimum
Maximum
287,161
104,854
82,994
58,632
40,892
26,815
13,591
3,443
-
-
$
120,289
97,624
71,322
51,687
36,425
21,450
11,949
3,273
287
105
83
59
41
27
13
3
-
-
120
98
71
52
37
21
12
3
618,382
414,019 $
618
414
$
(663)
(442)
9.50 %
10.50
10.75
10.75
9.75
8.50
8.50
10.50
10.50
10.50
11.50
11.75
11.75
10.75
9.50
9.50
11.50
11.50
(1) At December 31, 2010 and December 31, 2009, additional paid-in capital included $45 million and $28 million, respectively, related to preferred stock.
(2) We recorded a corresponding charge to unearned ESOP shares in connection with the issuance of the ESOP Preferred Stock. The unearned ESOP shares are reduced as
shares of the ESOP Preferred Stock are committed to be released.
195
Note 18: Common Stock and Stock Plans
Common Stock
The following table presents our reserved, issued and authorized
shares of common stock at December 31, 2010.
Dividend reinvestment and
common stock purchase plans
Director plans
Stock plans (1)
Convertible securities and warrants
Total shares reserved
Shares issued
Shares not reserved
Total shares authorized
Number of shares
8,791,078
837,516
667,226,530
105,279,949
782,135,073
5,272,414,622
2,945,450,305
9,000,000,000
(1) Includes employee options, restricted shares and restricted share rights, 401(k),
profit sharing and compensation deferral plans.
At December 31, 2010, we have warrants outstanding and
exercisable to purchase 39,444,481 shares of our common stock
with an exercise price of $34.01 per share, expiring on October
28, 2018. These warrants were issued in connection with our
participation in the TARP CPP.
Dividend Reinvestment and Common Stock
Purchase Plans
Participants in our dividend reinvestment and common stock
direct purchase plans may purchase shares of our common stock
at fair market value by reinvesting dividends and/or making
optional cash payments, under the plan's terms.
Employee Stock Plans
We offer the stock based employee compensation plans
described below. We measure the cost of employee services
received in exchange for an award of equity instruments, such as
stock options, restricted share rights (RSRs) or performance
shares, based on the fair value of the award on the grant date.
The cost is normally recognized in our income statement over
the vesting period of the award; awards with graded vesting are
expensed on a straight line method. Awards that continue to vest
after retirement are expensed over the shorter of the period of
time between the grant date and the final vesting period or
between the grant date and when a team member becomes
retirement eligible; awards to team members who are retirement
eligible at the grant date are subject to immediate expensing
upon grant.
LONG-TERM INCENTIVE COMPENSATION PLANS Our Long
Term Incentive Compensation Plan (LTICP) provides for awards
of incentive and nonqualified stock options, stock appreciation
rights, restricted shares, RSRs, performance share awards and
stock awards without restrictions.
During 2010 we granted RSRs and performance shares as our
primary long-term incentive awards instead of stock options.
Holders of RSRs are entitled to the related shares of common
stock at no cost generally over three to five years after the RSRs
were granted. Holders of RSRs may be entitled to receive
196
additional RSRs (dividend equivalents) or cash payments equal
to the cash dividends that would have been paid had the RSRs
been issued and outstanding shares of common stock. RSRs
granted as dividend equivalents are subject to the same vesting
schedule and conditions as the underlying RSRs. RSRs generally
continue to vest after retirement according to the original vesting
schedule. Except in limited circumstances, RSRs are cancelled
when employment ends.
A target number of 1,602,336 and 949,000 performance
shares were granted in 2010 and 2009, respectively, with a fair
value of $27.46 per share and $27.09 per share, respectively.
The final number of performance shares that will vest is subject
to the achievement of specified performance criteria over a
three-year period ending June 30, 2013 and December 31, 2012,
for the 2010 and 2009 awards, respectively, and has a cap of
150% of the target number of performance shares. Holders of
each vested performance share are entitled to the related shares
of common stock at no cost. Performance shares continue to vest
after retirement according to the original vesting schedule
subject to satisfying the performance criteria and other vesting
conditions. As of December 31, 2010, no performance shares
were forfeited or vested and unrecognized compensation cost for
unvested performance shares was $18 million and is expected to
be recognized over a weighted-average period of 2.2 years.
Stock options must have an exercise price at or above fair
market value (as defined in the plan) of the stock at the date of
grant (except for substitute or replacement options granted in
connection with mergers or other acquisitions) and a term of no
more than 10 years. Except for options granted in 2004 and
2005, which generally vested in full upon grant, options
generally become exercisable over three years beginning on the
first anniversary of the date of grant. Except as otherwise
permitted under the plan, if employment is ended for reasons
other than retirement, permanent disability or death, the option
exercise period is reduced or the options are cancelled.
Options granted prior to 2004 may include the right to
acquire a “reload” stock option. If an option contains the reload
feature and if a participant pays all or part of the exercise price
of the option with shares of stock purchased in the market or
held by the participant for at least six months and, in either case,
not used in a similar transaction in the last six months, upon
exercise of the option, the participant is granted a new option to
purchase at the fair market value of the stock as of the date of the
reload, the number of shares of stock equal to the sum of the
number of shares used in payment of the exercise price and a
number of shares with respect to related statutory minimum
withholding taxes. Reload grants are fully vested upon grant and
are expensed immediately.
Compensation expense for RSRs and performance shares is
based on the quoted market price of the related stock at the
grant date. Stock option expense is based on the fair value of the
awards at the date of grant. The following table summarizes the
major components of stock incentive compensation expense and
the related recognized tax benefit.
(in millions)
RSRs
Performance shares
Stock options
Year ended December 31,
2010
2009
2008
$
252
66
118
3
21
221
3
-
174
Total stock incentive compensation
expense
Related recognized tax benefit
$
$
436
245
177
165
92
65
A portion of annual bonus awards recognized during 2009
that are normally paid in cash was paid in our common stock as
part of our agreement with the U.S. Treasury to repay our
participation in the TARP CPP. The fair value of the stock that
was issued was $94 million and there were no vesting conditions
or other restrictions on the stock. No annual bonus awards
recognized during 2010 were paid in common stock.
During 2009 the Board of Directors approved salary
increases for certain executive officers that were paid, after taxes
and other withholdings, in our common stock. In 2010 and
2009, respectively, 62,630 shares and 244,689 shares were
issued for salary increases at an average fair value of $27.44 and
$27.77, respectively. There are no restrictions on these shares
because we repaid the TARP CPP investment in Wells Fargo in
December 2009. No salary increases were paid in common stock
after February 2010.
For various acquisitions and mergers, we converted employee
and director stock options of acquired or merged companies into
stock options to purchase our common stock based on the terms
of the original stock option plan and the agreed-upon exchange
ratio. In addition, we converted restricted stock awards into
awards that entitle holders to our stock after the vesting
conditions are met. Holders receive cash dividends on
outstanding awards if provided in the original award.
The total number of shares of common stock available for
grant under the plans at December 31, 2010, was 255 million.
PARTNERSHARES PLAN In 1996, we adopted the
PartnerShares® Stock Option Plan, a broad-based employee
stock option plan. It covers full- and part-time employees who
generally were not included in the LTICP described above. No
options have been granted under the plan since 2002, and as a
result of action taken by the Board of Directors on
January 22, 2008, no future awards will be granted under the
plan. All of our PartnerShares Plan grants were fully vested as of
December 31, 2007.
Director Plan
We grant common stock and options to purchase common stock
to non-employee directors elected or re-elected at the annual
meeting of stockholders and prorated awards to directors who
join the Board at any other time. The stock award vests
immediately. Options granted in 2008 or earlier can be
exercised after six months through the tenth anniversary of the
grant date. Options granted prior to 2005 may include the right
to acquire a “reload” stock option. Prior to 2009, stock awards
and option grants were made to non-employee directors under
the Directors Stock Compensation and Deferral Plan. As a result
of action taken by the Board of Directors on September 30,
2008, stock awards and options granted in 2010 and 2009 were
made under our LTICP; options granted to directors under the
LTICP can be exercised after 12 months through the tenth
anniversary of the grant date.
Restricted Share Rights
A summary of the status of our RSRs and restricted share awards
at December 31, 2010, and changes during 2010 is in the
following table:
Number
Nonvested at January 1, 2010
Granted
1,908,955
22,364,160
$
Vested
Canceled or forfeited
(568,417)
(667,976)
Nonvested at December 31, 2010
23,036,722
Weighted-
average
grant-date
fair value
23.62
27.29
27.21
27.59
26.98
The weighted-average grant date fair value of RSRs granted
during 2009 and 2008 was $19.04 and $29.68, respectively.
At December 31, 2010, there was $363 million of total
unrecognized compensation cost related to nonvested RSRs. The
cost is expected to be recognized over a weighted-average period
of 4.0 years. The total fair value of RSRs that vested during 2010,
2009 and 2008 was $15 million, $2 million and $1 million,
respectively.
Stock Options
The table below summarizes stock option activity and related
information for the employee stock plans and the director plan.
Options assumed in mergers are included in the activity and
related information for Incentive Compensation Plans if
originally issued under an employee plan, and in the activity and
related information for Director Plans if originally issued under
a director plan.
197
Note 18: Common Stock and Stock Plans (continued)
Weighted-
Weighted-
average
average
remaining
Number
exercise
contractual
price term (in yrs.)
Aggregate
intrinsic
value
(in millions)
Incentive compensation plans
Options outstanding as of December 31, 2009
Granted
Canceled or forfeited
Exercised
344,371,676 $
1,841,989
(13,129,540)
(26,313,334)
37.11
30.88
48.24
19.44
Options outstanding as of December 31, 2010
306,770,791
38.11
5.1
$
1,514
As of December 31, 2010:
Options exercisable and expected to be exercisable (1)
Options exercisable
PartnerShares Plan
Options outstanding as of December 31, 2009
Canceled or forfeited
Exercised
306,278,488
238,094,894
38.12
43.85
5.1
4.3
1,514
625
16,865,597
(964,242)
(7,426,810)
24.33
23.48
23.44
Options outstanding as of December 31, 2010
8,474,545
25.21
1.2
As of December 31, 2010:
Options exercisable and expected to be exercisable
Options exercisable
Director plans
Options outstanding as of December 31, 2009
Granted
Canceled or forfeited
Exercised
8,474,545
8,474,545
25.21
25.21
1.2
1.2
853,633
24,684
(2,431)
(78,022)
28.53
30.43
30.86
23.18
Options outstanding as of December 31, 2010
797,864
29.10
4.2
As of December 31, 2010:
Options exercisable and expected to be exercisable
Options exercisable
(1) Adjusted for estimated forfeitures.
797,864
797,864
29.10
29.10
4.2
4.2
49
49
49
2
2
2
198
historical pattern of dividend increases and the market price of
our stock. We changed our method of estimating the expected
dividend assumption from a yield approach to a fixed amount
due to our participation in the TARP CPP during 2009, which
restricted us from increasing our dividend without approval
from the U.S. Treasury; although we repaid TARP in 2009,
federal approval continues to be required under FRB
Supervisory Letter 09-4, before we can increase our dividend. A
dividend yield approach models a constant dividend yield, which
was considered inappropriate given the restriction on our ability
to increase dividends. See Note 3.
The following table presents the weighted-average per share
fair value of options granted and the assumptions used, based on
a Black-Scholes option valuation model. Substantially all of the
options granted in 2010 resulted from the reload feature.
Per share fair value of options granted $
Expected volatility
Expected dividends (yield)
Expected dividends
Expected term (in years)
Risk-free interest rate
$
Year ended December 31,
2010
2009
2008
6.11
44.3 %
-
0.20
1.3
0.6 %
3.29
53.9
-
0.33
4.5
1.8
4.06
22.4
4.1
-
4.4
2.7
As of December 31, 2010, there was $71 million of
unrecognized compensation cost related to stock options. That
cost is expected to be recognized over a weighted-average period
of 1.1 years. The total intrinsic value of options exercised during
2010, 2009 and 2008 was $298 million, $50 million and
$348 million, respectively.
Cash received from the exercise of stock options for 2010,
2009 and 2008 was $687 million, $153 million and
$747 million, respectively.
We do not have a specific policy on repurchasing shares to
satisfy share option exercises. Rather, we have a general policy
on repurchasing shares to meet common stock issuance
requirements for our benefit plans (including share option
exercises), conversion of our convertible securities, acquisitions
and other corporate purposes. 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 regulatory 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.
The fair value of each option award granted on or after
January 1, 2006, is estimated using a Black-Scholes valuation
model. The expected term of non-reload options granted is
generally based on the historical exercise behaviour of full-term
options. Our expected volatilities are based on a combination of
the historical volatility of our common stock and implied
volatilities for traded options on our common stock. The risk-
free rate is based on the U.S. Treasury zero-coupon yield curve in
effect at the time of grant. Both expected volatility and the risk-
free rates are based on a period commensurate with our
expected term. For 2010 and 2009, the expected dividend is
based on a fixed dividend amount. For 2008 the expected
dividend was based on the current dividend, consideration of our
199
Note 18: Common Stock and Stock Plans (continued)
Employee Stock Ownership Plan
The Wells Fargo & Company 401(k) Plan (401(k) Plan) is a
defined contribution plan with an Employee Stock Ownership
Plan (ESOP) feature. Effective December 31, 2009, the Wachovia
Savings Plan, which also had an ESOP feature, merged into the
401(k) Plan, and all of its shares of our common stock were
transferred to the 401(k) Plan. The ESOP feature enables the
401(k) Plan to borrow money to purchase our preferred or
common stock. From 1994 through 2008, and in 2010, we
loaned money to the 401(k) Plan to purchase shares of our ESOP
Preferred Stock. As our employer contributions are made to the
401(k) Plan and are used by the Plan to make ESOP loan
payments, the ESOP Preferred Stock in the 401(k) Plan is
released and converted into our common shares. Dividends on
the common shares allocated as a result of the release and
conversion of the ESOP Preferred Stock reduce retained
earnings and the shares are considered outstanding for
computing earnings per share. Dividends on the unallocated
ESOP Preferred Stock do not reduce retained earnings, and the
shares are not considered to be common stock equivalents for
computing earnings per share. Loan principal and interest
payments are made from our employer contributions to the
401(k) Plan, along with dividends paid on the ESOP Preferred
Stock. With each principal and interest payment, a portion of the
ESOP Preferred Stock is released and converted to common
shares, which are allocated to the 401(k) Plan participants and
invested in the 401(k) Plan’s ESOP Fund.
The balance of common stock held in the ESOP fund, the
dividends on allocated shares of common stock and unreleased
ESOP Preferred Stock paid to the 401(k) Plan and the fair value
of unreleased ESOP Preferred Stock were:
(in millions, except shares)
Allocated shares (common)
Unreleased shares (preferred)
Unreleased shares (common)
Fair value of unreleased ESOP Preferred shares
Fair value of unreleased ESOP Common shares
Allocated shares (common)
Unreleased shares (preferred)
Shares outstanding
December 31,
2010
2009
2008
118,901,327 110,157,999 74,916,583
618,382
-
414,019
203,755
519,900
244,506
618
-
414
5
520
7
Dividends paid
Year ended December 31,
2010
2009
23
76
45
51
2008
100
66
$
$
Deferred Compensation Plan for Independent Sales
Agents
WF Deferred Compensation Holdings, Inc. is a wholly-owned
subsidiary of the Parent formed solely to sponsor a deferred
compensation plan for independent sales agents who provide
investment, financial and other qualifying services for or with
respect to participating affiliates.
The Nonqualified Deferred Compensation Plan for
Independent Contractors, which became effective
January 1, 2002, allows participants to defer all or part of their
eligible compensation payable to them by a participating
affiliate. The Parent has fully and unconditionally guaranteed
the deferred compensation obligations of WF Deferred
Compensation Holdings, Inc. under the plan.
200
Note 19: Employee Benefits and Other Expenses
As a result of freezing our pension plans, we revised our
amortization life for actuarial gains and losses from 5 years to 13
years to reflect the estimated average remaining participation
period.
These actions lowered pension cost by approximately
$500 million for 2009, including $67 million of one-time
curtailment gains.
We did not make a contribution to our Cash Balance Plan in
2010. We do not expect that we will be required to make a
contribution to the Cash Balance Plan in 2011; however, this is
dependent on the finalization of the actuarial valuation. Our
decision of whether to make a contribution in 2011 will be based
on various factors including the actual investment performance
of plan assets during 2011. Given these uncertainties, we cannot
estimate at this time the amount, if any, that we will contribute
in 2011 to the Cash Balance Plan. For the nonqualified pension
plans and postretirement benefit plans, there is no minimum
required contribution beyond the amount needed to fund benefit
payments; we may contribute more to our postretirement benefit
plans dependent on various factors.
We provide health care and life insurance benefits for certain
retired employees and reserve the right to terminate, modify or
amend any of the benefits at any time.
The information set forth in the following tables is based on
current actuarial reports using the measurement date of
December 31 for our pension and postretirement benefit plans.
Pension and Postretirement Plans
We sponsor a noncontributory qualified defined benefit
retirement plan, the Wells Fargo & Company Cash Balance Plan
(Cash Balance Plan), which covers eligible employees of
Wells Fargo; the benefits earned under the Cash Balance Plan
were frozen effective July 1, 2009.
On April 28, 2009, the Board of Directors approved
amendments to freeze the benefits earned under the Wells Fargo
qualified and supplemental Cash Balance Plans and the
Wachovia Corporation Pension Plan, a cash balance plan that
covered eligible employees of the legacy Wachovia Corporation,
and to merge the Wachovia Pension Plan into the qualified Cash
Balance Plan. These actions became effective on July 1, 2009.
Prior to July 1, 2009, eligible employees' cash balance plan
accounts were allocated a compensation credit based on a
percentage of their qualifying compensation. The compensation
credit percentage was based on age and years of credited service.
The freeze discontinues the allocation of compensation credit for
services after June 30, 2009. Investment credits continue to be
allocated to participants based on their accumulated balances.
Employees become vested in their Cash Balance Plan accounts
after completing three years of vesting service.
Freezing and merging the above plans effective July 1, 2009,
resulted in a re-measurement of the pension obligations and
plan assets as of April 30, 2009. Freezing and re-measuring
decreased the pension obligations by approximately
$945 million and decreased a cumulative loss in OCI by
approximately $725 million pre tax ($456 million after tax) in
second quarter 2009. The re-measurement resulted in a
decrease in the fair value of plan assets of approximately
$150 million. We used a discount rate of 7.75% for the
April 30, 2009, re-measurement based on our consistent
methodology of determining our discount rate based on an
established yield curve developed by our outside actuarial firm.
This methodology incorporates a broad group of top quartile Aa
or higher rated bonds.
201
Note 19: Employee Benefits and Other Expenses (continued)
The changes in the projected benefit obligation of pension
benefits and the accumulated benefit obligation of other benefits
and the fair value of plan assets, the funded status and the
amounts recognized in the balance sheet were:
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Curtailment (1)
Amendments
Actuarial loss (gain)
Benefits paid
Liability transfer
Foreign exchange impact
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Plan participants’ contributions
Benefits paid
Foreign exchange impact
2010
December 31,
2009
Pension benefits
Pension benefits
Non-
Qualified qualified
Other
benefits
Non-
Qualified qualified
Other
benefits
$
10,038
681
1,401
8,977
684
1,325
5
554
-
-
2
386
(652)
-
4
-
37
-
-
-
46
(71)
-
-
13
78
74
-
-
(5)
(147)
(17)
1
210
595
-
(910)
-
1,763
(605)
-
8
8
43
-
(35)
-
59
(79)
-
1
13
83
79
-
(54)
120
(167)
-
2
10,337
693
1,398
10,038
681
1,401
9,112
1,163
12
-
(652)
4
-
-
71
-
(71)
-
376
33
361
74
(147)
-
7,863
1,842
4
-
(605)
8
-
-
79
-
(79)
-
368
48
48
79
(167)
-
Fair value of plan assets at end of year
9,639
-
697
9,112
-
376
Funded status at end of year
Amounts recognized in the balance sheet at end of year:
Liabilities
$
$
(698)
(693)
(701)
(926)
(681)
(1,025)
(698)
(693)
(701)
(926)
(681)
(1,025)
(1) On April 28, 2009, the Board of Directors approved amendments to freeze the benefits earned under the Wells Fargo qualified and supplemental Cash Balance Plans and the
Wachovia Corporation Pension Plan, a cash balance plan that covered eligible employees of legacy Wachovia Corporation, and to merge the Wachovia Pension Plan into the
qualified Cash Balance Plan.
The accumulated benefit obligation for the defined benefit
pension plans was $11.0 billion and $10.7 billion at
December 31, 2010 and 2009, respectively.
The following table provides information for pension plans
with benefit obligations in excess of plan assets.
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31,
2010
2009
$
11,030
11,019
10,719
10,706
9,639
9,112
202
The components of net periodic benefit cost were:
2010
2009
December 31,
2008
Pension benefits
Pension benefits
Pension benefits
Non-
Qualified qualified
Other
benefits
Non-
Qualified qualified
Other
benefits
Non-
Qualified qualified
Other
benefits
$
5
554
(717)
105
-
3
(50)
(59)
(105)
2
-
(3)
-
-
-
37
-
3
-
-
40
46
(3)
-
-
-
-
-
13
78
(29)
1
(4)
(4)
55
(9)
(1)
-
4
4
-
-
210
595
(643)
194
-
(32)
324
(346)
(194)
-
-
32
-
3
8
43
-
2
(1)
(33)
19
25
(2)
-
1
33
-
-
13
83
(29)
3
(3)
-
67
99
(3)
-
3
-
(54)
2
291
276
(478)
1
-
-
90
2,102
(1)
-
-
-
-
(5)
15
22
-
13
(5)
-
45
(16)
(13)
-
5
-
-
-
13
40
(41)
1
(4)
-
9
79
(1)
-
4
-
-
(4)
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service cost
Curtailment loss (gain)
Net periodic benefit cost
Other changes in plan assets
and benefit obligations
recognized in other
comprehensive income:
Net actuarial loss (gain)
Amortization of net actuarial loss
Prior service cost
Amortization of prior service cost
Net loss (gain) in curtailment
Net gain on amendment
Translation adjustments
Total recognized in other
comprehensive income
(165)
43
(2)
(505)
57
47
2,096
(24)
78
Total recognized in net periodic
benefit cost and other
comprehensive income
$
(215)
83
53
(181)
76
114
2,186
21
87
203
Note 19: Employee Benefits and Other Expenses (continued)
Amounts recognized in accumulated OCI (pre tax) consist of:
(in millions)
Net actuarial loss
Net prior service credit
Net transition obligation
Translation adjustments
Total
We generally amortize net actuarial gain or loss in excess of a
5% corridor from accumulated OCI into net periodic pension
cost over the next 13 years. The net actuarial loss for the defined
benefit pension plans that will be amortized from accumulated
OCI into net periodic benefit cost in 2011 is $92 million. The net
prior service credit for the other post retirement plans that will
be amortized from accumulated OCI into net periodic benefit
cost in 2011 is $3 million.
2010
December 31,
2009
Pension benefits
Pension benefits
Qualified qualified
benefits
Qualified qualified
benefits
Non-
Other
Non-
Other
$
1,672
-
-
1
113
-
-
-
135
(30)
1
-
1,836
1
-
1
70
-
-
-
140
(34)
2
-
$
1,673
113
106
1,838
70
108
Plan Assumptions
The weighted-average discount rate used to determine the
projected benefit obligation for pension benefits (qualified and
nonqualified) and other postretirement benefits was 5.25% and
5.75% for year ended December 31, 2010 and 2009, respectively.
We use a consistent methodology to determine the discount rate
that is based on an established yield curve methodology. This
methodology incorporates a broad group of top quartile Aa or
higher rated bonds consisting of approximately 100-150 bonds.
The discount rate is determined by matching this yield curve
with the timing and amounts of the expected benefit payments
for our plans.
The weighted-average assumptions used to determine the net periodic benefit cost were:
Discount rate (2)
Expected return on plan assets
Rate of compensation increase
2010
Pension
Other
Pension
December 31,
2009
Other
Pension
2008
Other
benefits (1)
benefits
benefits (1)
benefits
benefits (1)
benefits
5.75 %
8.25
-
5.75
8.25
-
7.42
8.75
4.0
6.75
8.75
-
6.25
8.75
4.0
6.25
8.75
-
(1) Includes both qualified and nonqualified pension benefits.
(2) Due to the freeze of the Wells Fargo qualified and supplemental Cash Balance Plans and the Wachovia Corporation Pension Plan, the discount rate for the 2009 pension
benefits was the weighted average of 6.75% from January through April and 7.75% from May through December.
Our determination of the reasonableness of our expected
long-term rate of return on plan assets is highly quantitative by
nature. We evaluate the current asset allocations and expected
returns under two sets of conditions: projected returns using
several forward-looking capital market assumptions, and
historical returns for the main asset classes dating back to 1970,
the earliest period for which historical data was readily available
as of a common time frame for the asset classes included. Using
data dating back to 1970 allows us to capture multiple economic
environments, which we believe is relevant when using historical
returns. We place greater emphasis on the forward-looking
return and risk assumptions than on historical results. We use
the resulting projections to derive a base line expected rate of
return and risk level for the Cash Balance Plans' prescribed asset
mix. We then adjust the baseline projected returns for items not
already captured, including the anticipated return differential
from active over passive investment management and the
estimated impact of an asset allocation methodology that allows
for established deviations from the specified target allocations
when a compelling opportunity exists.
We evaluate the portfolio based on: (1) the established target
asset allocations over short term (one-year) and longer term
(ten-year) investment horizons, and (2) the range of potential
outcomes over these horizons within specific standard
deviations. We perform the above analyses to assess the
reasonableness of our expected long-term rate of return on plan
assets. We consider the expected rate of return to be a long-term
average view of expected returns. The expected rate of return
would be assessed for significant long-term changes in economic
conditions or in planned portfolio composition.
To account for postretirement health care plans we use
health care cost trend rates to recognize the effect of expected
changes in future health care costs due to medical inflation,
utilization changes, new technology, regulatory requirements
204
The investment strategy for assets held in the Retiree Medical
Plan Voluntary Employees' Beneficiary Association (VEBA) trust
is established separately from the strategy for the assets in the
Cash Balance Plan. The general target asset mix is 45-65%
equities and 35-55% fixed income. In addition, the strategy for
the VEBA trust assets considers the effect of income taxes by
utilizing a combination of variable annuity and low turnover
investment strategies. Members of the EBRC formally review the
investment risk and performance of these assets on a quarterly
basis.
Projected Benefit Payments
Future benefits that we expect to pay under the pension and
other benefit plans are presented in the following table. Other
benefits payments are expected to be reduced by prescription
drug subsidies from the federal government provided by the
Medicare Prescription Drug, Improvement and Modernization
Act of 2003.
(in millions)
Qualified qualified
benefits
receipts
Pension benefits
Other benefits
Non-
Future
Subsidy
Year ended
December 31,
2011
$
2012
2013
2014
2015
867
846
813
807
801
77
68
64
63
58
2016-2020
3,682
293
107
110
113
116
119
602
13
14
15
16
10
51
and Medicare cost shifting. In determining the end of year
benefit obligation we assume average annual increases of
approximately 8.0% for health care costs in 2011. This rate is
assumed to trend down 0.25% per year until the trend rate
reaches an ultimate rate of 5.0% in 2023. The 2010 periodic
benefit cost was determined using initial annual trend rates of
8.5% (before age 65) and 8.0% (after age 65). These rates were
assumed to decrease 0.5% per year until they reached ultimate
rates of 5% in 2017 (before age 65) and 2016 (after age 65).
Increasing the assumed health care trend by one percentage
point in each year would increase the benefit obligation as of
December 31, 2010, by $80 million and the total of the interest
cost and service cost components of the net periodic benefit cost
for 2010 by $5 million. Decreasing the assumed health care
trend by one percentage point in each year would decrease the
benefit obligation as of December 31, 2010, by $71 million and
the total of the interest cost and service cost components of the
net periodic benefit cost for 2010 by $4 million.
Investment Strategy and Asset Allocation
We seek to achieve the expected long-term rate of return with a
prudent level of risk given the benefit obligations of the pension
plans and their funded status. Our overall investment strategy is
designed to provide our Cash Balance Plan with a balance of
long-term growth opportunities and short-term benefit
strategies while ensuring that risk is mitigated through
diversification across numerous asset classes and various
investment strategies. We target the asset allocation for our Cash
Balance Plan at a target mix range of 35-65% equities, 30-50%
fixed income, and approximately 10-15% in real estate, venture
capital, private equity and other investments. The target ranges
referenced above account for the employment of an asset
allocation methodology designed to overweight stocks or bonds
when a compelling opportunity exists. The Employee Benefit
Review Committee (EBRC), which includes several members of
senior management, formally reviews the investment risk and
performance of our Cash Balance Plan on a quarterly basis.
Annual Plan liability analysis and periodic asset/liability
evaluations are also conducted.
205
Note 19: Employee Benefits and Other Expenses (continued)
Fair Value of Plan Assets
The following table presents the balances of pension plan assets
and other benefit plan assets measured at fair value. Other
benefit plan assets include assets held in a 401(h) trust, which
are invested using the same asset allocation targets as the Cash
Balance Plan, and assets held in a VEBA trust. See Note 16 for
fair value hierarchy level definitions.
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Pension plan assets
Other benefits plan assets
Carrying value at year end
December 31, 2010
Cash and cash equivalents
Intermediate (core) fixed income (1)
High-yield fixed income
$
International fixed income
Specialty fixed income
Domestic large-cap stocks (2)
Domestic mid-cap stocks
Domestic small-cap stocks (3)
International stocks (4)
Emerging market stocks
Real estate/timber (5)
Multi-strategy hedge funds (6)
Private equity
Other
47
297
1
-
-
1,323
263
851
948
-
105
-
-
-
488
1,964
406
263
95
867
129
37
403
700
-
-
-
31
-
10
1
-
-
4
-
-
6
-
360
313
112
41
535
2,271
408
263
95
2,194
392
888
1,357
700
465
313
112
72
2
10
-
-
-
43
9
28
31
-
3
-
-
-
252
109
14
8
3
40
20
20
46
23
-
-
-
2
Total plan investments
$
3,835
5,383
847
10,065
126
537
Payable upon return of securities loaned
Net receivables (payables)
Total plan assets
December 31, 2009
Cash and cash equivalents
Intermediate (core) fixed income (1)
$
52
277
515
1,827
High-yield fixed income
International fixed income
Specialty fixed income
Domestic large-cap stocks (2)
Domestic mid-cap stocks
Domestic small-cap stocks (3)
International stocks (4)
Emerging market stocks
Real estate/timber (5)
Multi-strategy hedge funds (6)
Private equity
Other
2
-
-
1,046
205
867
354
-
78
-
-
-
481
376
76
630
103
126
890
653
-
-
1
25
(145)
(281)
$
9,639
-
9
-
-
-
5
-
-
1
-
353
339
83
46
567
2,113
483
376
76
1,681
308
993
1,245
653
431
339
84
71
2
9
-
-
-
40
7
18
11
-
2
-
-
-
38
95
12
3
2
30
16
16
39
14
-
-
-
-
Total plan investments
$
2,881
5,703
836
9,420
89
265
Payable upon return of securities loaned
Net receivables (payables)
Total plan assets
(320)
12
$
9,112
-
-
-
-
-
-
-
-
-
-
12
10
4
22
48
-
-
-
-
-
-
-
-
-
-
4
5
2
21
32
254
119
14
8
3
83
29
48
77
23
15
10
4
24
711
(5)
(9)
697
40
104
12
3
2
70
23
34
50
14
6
5
2
21
386
(10)
-
376
(1) This category includes assets that are primarily intermediate duration, investment grade bonds held in investment strategies benchmarked to the Barclays Capital U.S.
Aggregate Bond Index. Includes U.S. Treasury securities, agency and non-agency asset-backed bonds and corporate bonds.
(2) This category covers a broad range of investment styles, both active and passive approaches, as well as style characteristics of value, core and growth emphasized
strategies. Assets in this category are currently diversified across ten unique investment strategies. For December 31, 2010 and 2009, respectively, approximately 33% and
40% of the assets within this category are passively managed to popular mainstream market indexes including the Standard & Poor's 500 Index; excluding the allocation to
the S&P 500 Index strategy, no single investment manager represents more than 2.5% of total plan assets.
(3) This category consists of a highly diversified combination of six distinct investment management strategies with no single strategy representing more than 2% of total plan
assets. Allocations in this category are primarily spread across actively managed approaches with distinct value and growth emphasized approaches in fairly equal
proportions.
(4) This category includes assets diversified across nine unique investment strategies providing exposure to companies based primarily in developed market, non-U.S. countries
with no single strategy representing more than 2.5% of total plan assets.
(5) This category primarily includes investments in private and public real estate, as well as timber specific limited partnerships; real estate holdings are diversified by
geographic location and sector (e.g., retail, office, apartments).
(6) This category consists of several investment strategies diversified over 30 hedge fund managers. Single manager allocation exposure is limited to 0.15% (15 basis points) of
total plan assets.
206
The changes in Level 3 pension plan and other benefit plan assets measured at fair value are summarized as follows:
(in millions)
of year
Realized Unrealized (1) settlements (net)
Level 3
year
Balance
beginning
Gains (losses)
and
into
end of
issuances
Transfers
Balance
Purchases,
sales,
Year ended December 31, 2010
Pension plan assets
Intermediate (core) fixed income
High-yield fixed income
Domestic large-cap stocks
International stocks
Real estate/timber
Multi-strategy hedge funds
Private equity
Other
Other benefits plan assets
Real estate/timber
Multi-strategy hedge funds
Private equity
Other
Year ended December 31, 2009
Pension plan assets
Intermediate (core) fixed income
High-yield fixed income
Domestic large-cap stocks
International stocks
Real estate/timber
Multi-strategy hedge funds
Private equity
Other
Other benefits plan assets
Real estate/timber
Multi-strategy hedge funds
Private equity
Other
$
$
$
$
$
$
$
$
9
-
5
1
353
339
83
46
836
4
5
2
21
32
5
6
1
-
433
310
88
41
884
4
3
2
20
29
-
-
-
-
(6)
6
1
9
10
(7)
(1)
-
(1)
(9)
-
(5)
-
-
1
1
-
-
2
-
1
2
8
12
10
(1)
34
10
(3)
1
-
8
1
-
1
-
(161)
36
(2)
(5)
(3)
(130)
-
-
-
-
-
(1)
1
-
-
-
(3)
1
(2)
3
5
(44)
18
(13)
(35)
5
9
1
2
17
3
(1)
3
1
80
(8)
(3)
10
85
1
1
-
1
3
2
-
-
-
-
-
-
-
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10
1
4
6
360
313
112
41
847
12
10
4
22
48
9
-
5
1
353
339
83
46
836
4
5
2
21
32
(1) All unrealized gains (losses) relate to instruments held at period end.
VALUATION METHODOLOGIES Following is a description of the
valuation methodologies used for assets measured at fair value.
Cash and Cash Equivalents – includes highly liquid government
securities such as U.S. Treasuries. Also includes investments in
collective investment funds valued at fair value based upon the
quoted market values of the underlying net assets. The unit price
is quoted on a private market that is not active; however, the unit
price is based on underlying investments traded on an active
market.
or combination of multiple valuation techniques. Also includes
investments in collective investment funds and government
securities described above.
Domestic, International and Emerging Market Stocks –
investments in exchange-traded equity securities are valued at
quoted market values. Investments in registered investment
companies are valued at the NAV of shares held at year end. Also
includes investments in collective investment funds described
above.
Intermediate (Core), High-Yield, International and Specialty
Fixed Income – includes investments traded on the secondary
markets; prices are measured by using quoted market prices for
similar securities, pricing models, discounted cash flow analyses
using significant inputs observable in the market where available
Real Estate and Timber – the fair value of real estate and timber
is estimated based primarily on appraisals prepared by third-
party appraisers. Market values are estimates and the actual
market price of the real estate can only be determined by
negotiation between independent third parties in a sales
207
Note 19: Employee Benefits and Other Expenses (continued)
In 2009, the 401(k) Plan was amended to permit us to make
discretionary profit sharing contributions. Based on 2010 and
2009 earnings, we committed to make a contribution in shares
of common stock to eligible employees’ 401(k) Plan accounts
equaling 2% and 1% of certified compensation, respectively,
which resulted in recognizing $316 million and $150 million of
defined contribution retirement plan expense recorded in 2010
and 2009, respectively. Total defined contribution retirement
plan expenses were $1,092 million, $862 million and
$411 million in 2010, 2009 and 2008, respectively.
Other Expenses
Expenses exceeding 1% of total interest income and noninterest
income in any of the years presented that are not otherwise
shown separately in the financial statements or Notes to
Financial Statements were:
(in millions)
Outside professional services
Contract services
$
Foreclosed assets
Operating losses
Outside data processing
Postage, stationery and supplies
Insurance
Year ended December 31,
2010
2009
2008
2,370 1,982
1,642 1,088
1,537 1,071
1,258
875
1,046 1,027
933
944
847
407
414
142
480
556
464
845
725
transaction. Also includes investments in exchange-traded
equity securities described above.
Multi-Strategy Hedge Funds and Private Equity – the fair values
of hedge funds are valued based on the proportionate share of
the underlying net assets of the investment funds that comprise
the fund, based on valuations supplied by the underlying
investment funds. Investments in private equity funds are valued
at the NAV provided by the fund sponsor. Market values are
estimates and the actual market price of the investments can
only be determined by negotiation between independent third
parties in a sales transaction.
Other – the fair values of miscellaneous investments are valued
at the NAV provided by the fund sponsor. Market values are
estimates and the actual market price of the investments can
only be determined by negotiation between independent third
parties in a sales transaction. Also includes insurance contracts
that are generally stated at cash surrender value.
The methods described above may produce a fair value
calculation that may not be indicative of net realizable value or
reflective of future fair values. While we believe our valuation
methods are appropriate and consistent with other market
participants, the use of different methodologies or assumptions
to determine the fair value of certain financial instruments could
result in a different fair value measurement at the reporting
date.
Defined Contribution Retirement Plans
We sponsor a defined contribution retirement plan named the
Wells Fargo & Company 401(k) Plan (401(k) Plan). The
Wachovia Savings Plan was merged with the 401(k) Plan
effective December 31, 2009. We also have a frozen defined
contribution plan resulting from a company acquired by
Wachovia; no contributions are permitted to this frozen plan
which will merge with the 401(k) Plan on June 30, 2011. Under
the 401(k) Plan, after one month of service, eligible employees
may contribute up to 50% of their certified compensation,
although there may be a lower limit for certain highly
compensated employees in order to maintain the qualified status
of the 401(k) Plan. Eligible employees who complete one year of
service are eligible for company matching contributions, which
are generally a 100% match up to 6% of an employee's certified
compensation. Effective January 1, 2010, previous and future
matching contributions are 100% vested for active participants.
208
Note 20: Income Taxes
The components of income tax expense were:
(in millions)
Current:
Federal
State and local
Foreign
Year ended December 31,
2010
2009
2008
$
1,425
548
(3,952)
(334)
2,043
171
78
164
30
Total current
2,051
(4,122)
2,244
Deferred:
Federal
State and local
Foreign
4,060
211
8,709
794
(1,506)
-
16
(50)
(136)
Total deferred
4,287
9,453
(1,642)
Total
$
6,338
5,331
602
Our net deferred tax asset (liability) and the tax effects of
temporary differences that gave rise to significant portions of
these deferred tax assets and liabilities are presented in the
following table.
(in millions)
Deferred tax assets
Allowance for loan losses
Deferred compensation
and employee benefits
Accrued expenses, deductible when paid
PCI loans
Basis difference in investments
Net operating loss and tax
credit carry forwards
Other
Year ended December 31,
2010
2009
$
8,157
9,178
3,473
3,026
1,989
4,933
2,598
2,235
8,645
208
1,514
1,891
3,370
1,706
Total deferred tax assets
24,555
28,368
Deferred tax assets valuation allowance
(711)
(827)
Deferred tax liabilities
Mortgage servicing rights
Leasing
Mark to market, net
Intangible assets
Net unrealized gains on
securities available for sale
Other
(8,020)
(8,073)
(3,703)
(5,161)
(3,439)
(4,853)
(3,322)
(5,567)
(3,243)
(2,875)
(2,079)
(318)
Total deferred tax liabilities
(26,324) (24,329)
Net deferred tax
asset (liability)
$
(2,480)
3,212
Deferred taxes related to net unrealized gains (losses) on
securities available for sale, net unrealized gains (losses) on
derivatives, foreign currency translation, and employee benefit
plan adjustments are recorded in cumulative OCI (see Note 22-
OCI). These associated adjustments decreased OCI by
$1.3 billion.
We have determined that a valuation reserve is required for
2010 in the amount of $711 million primarily attributable to
deferred tax assets in various state and foreign jurisdictions
where we believe it is more likely than not that these deferred tax
assets will not be realized. In these jurisdictions, carry back
limitations, lack of sources of taxable income, and tax planning
strategy limitations contributed to our conclusion that the
deferred tax assets would not be realizable. We have concluded
that it is more likely than not that the remaining deferred tax
assets will be realized based on our history of earnings, sources
of taxable income in carry back periods, and our ability to
implement tax planning strategies.
At December 31, 2010, we had net operating loss and credit
carry forwards with related deferred tax assets of $1.4 billion and
$128 million, respectively. If these carry forwards are not
utilized, they will expire in varying amounts through 2030.
At December 31, 2010, we had undistributed foreign earnings
of $1.6 billion related to foreign subsidiaries. We intend to
reinvest these earnings indefinitely outside the U.S. and
accordingly have not provided $508 million of income tax
liability on these earnings.
The following table reconciles the statutory federal income
tax expense and rate to the effective income tax expense and
rate. Effective January 1, 2009, we adopted new accounting
guidance that changed 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.
209
Note 20: Income Taxes (continued)
(in millions)
Amount
Rate
Amount
Rate
Amount
Rate
Statutory federal income tax expense and rate
$
6,545
35.0 %
$
6,162
35.0 %
$
1,140
35.0 %
2010
2009
2008
December 31,
Change in tax rate resulting from:
State and local taxes on income, net of
federal income tax benefit
Tax-exempt interest
Excludable dividends
Other deductible dividends
Tax credits
Life insurance
Leveraged lease tax expense
Other
586
(283)
(258)
(33)
(577)
(223)
461
120
3.1
(1.5)
(1.3)
(0.2)
(3.1)
(1.2)
2.5
0.6
468
(260)
(253)
(29)
(533)
(257)
400
(367)
2.7
(1.5)
(1.4)
(0.2)
(3.0)
(1.5)
2.3
(2.1)
94
(130)
(186)
(71)
(266)
(67)
-
88
2.9
(4.0)
(5.7)
(2.2)
(8.2)
(2.0)
-
2.7
Effective income tax expense and rate
$
6,338
33.9 %
$
5,331
30.3 %
$
602
18.5 %
Income tax expense for 2010 increased primarily due to the
new health care legislation and to fewer favorable settlements
with tax authorities.
The change in unrecognized tax benefits follows:
(in millions)
Year ended
December 31,
2010
2009
Balance at beginning of year
$
4,921 7,521
Additions:
For tax positions related to the current year
For tax positions related to prior years
For tax positions from business combinations (1)
Reductions:
For tax positions related to prior years
Lapse of statute of limitations
Settlements with tax authorities
579
438
301
-
898
6
(111)
(834)
(148)
(75)
(42) (3,033)
Balance at end of year
$
5,500 4,921
(1) Unrecognized tax benefits from the Wachovia acquisition.
Of the $5.5 billion of unrecognized tax benefits at December
31, 2010, approximately $3.1 billion would, if recognized, affect
the effective tax rate. The remaining $2.4 billion of unrecognized
tax benefits relates to income tax positions on temporary
differences.
We recognize interest and penalties as a component of
income tax expense. We accrued approximately $870 million
and $771 million for the payment of interest and penalties at
December 31, 2010 and 2009, respectively. A net expense from
interest expense and penalties expense of $45 million (after tax)
for 2010 and a net benefit from interest income and penalties
expense of $72 million (after tax) for 2009 was recognized as a
component of income tax expense.
During 2009, we and the IRS executed settlement
agreements in accordance with the IRS’s settlement initiative
related to certain leverage leases that the IRS considers sale-in,
lease-out (SILO) transactions. These settlement agreements
resolved the SILO transactions originally entered into by
Wachovia and reduced our tax exposure on our overall SILO
portfolio by approximately 90%. As a result of this resolution,
our unrecognized tax benefits decreased $2.7 billion in 2009.
We are subject to U.S. federal income tax as well as income
tax in numerous state and foreign jurisdictions. With few
exceptions, Wells Fargo and its subsidiaries are not subject to
federal income tax examinations for taxable years prior to 2007,
and state, local and foreign income tax examinations for taxable
years prior to 2006. Wachovia Corporation and its subsidiaries,
with few exceptions, are no longer subject to federal income tax
examinations for taxable years prior to 2006, and state, local and
foreign income tax examinations for taxable years prior to 2003.
We are routinely examined by tax authorities in various
jurisdictions. The IRS is examining the 2007 and 2008
consolidated federal income tax returns of Wells Fargo &
Company and its Subsidiaries. We are also litigating or appealing
various issues related to our prior IRS examinations for the
periods 1997-2006. We have paid the IRS the contested income
tax associated with these issues and refund claims have been
filed for the respective years. The IRS is also examining the
consolidated federal income tax returns of Wachovia and its
Subsidiaries for tax years 2006 through 2008. We are appealing
various issues related to Wachovia’s federal 2003 through 2005
tax years. In addition, we are currently subject to examination by
various state, local and foreign taxing authorities. While it is
possible that one or more of these examinations may be resolved
within the next twelve months, we do not anticipate that there
will be a significant impact to our unrecognized tax benefits as a
result of these examinations.
In September 2006, we filed a federal tax refund suit in the
U.S. Court of Federal Claims related to certain leveraged lease
transactions, which the IRS considers SILO transactions that we
entered into between 1997 and 2002. On February 19, 2010, the
Court of Federal Claims entered an adverse judgment, and on
April 15, 2010, we filed a Notice of Appeal to the U.S. Court of
Appeals for the Federal Circuit. Oral argument was heard on
December 7, 2010, and we expect a decision sometime during
2011. There will be no adverse financial statement impact if the
Court of Appeals affirms the judgment of the Court of Federal
Claims.
We estimate that our unrecognized tax benefits could
decrease by between $100 million and $500 million during the
next 12 months primarily related to statute expirations and
settlements.
210
Note 21: Earnings Per Common Share
The table below shows earnings per common share and diluted
earnings per common share and reconciles the numerator and
denominator of both earnings per common share calculations.
(in millions, except per share amounts)
Wells Fargo net income
Less: Preferred stock dividends and accretion and other (1)
Wells Fargo net income applicable to common stock (numerator)
Earnings per common share
Average common shares outstanding (denominator)
Per share
Diluted earnings per common share
Average common shares outstanding
Add: Stock Options
Restricted share rights
Diluted average common shares outstanding (denominator)
Per share
Year ended December 31,
2010
2009
2008
$
12,362
12,275
2,655
730
4,285
286
$
11,632
7,990
2,369
5,226.8
$
2.23
4,545.2
1.76
3,378.1
0.70
5,226.8
28.3
8.0
4,545.2
17.2
0.3
3,378.1
13.1
0.1
5,263.1
4,562.7
3,391.3
$
2.21
1.75
0.70
(1) Includes Series J, K and L preferred stock dividends of $737 million, $804 million and $67 million for the year ended 2010, 2009 and 2008, respectively. Also includes
$3.5 billion and $219 million in 2009 and 2008, respectively, for Series D Preferred Stock, which was redeemed in 2009. In conjunction with the redemption, we accelerated
accretion of the remaining discount of $1.9 billion. See Note 17 for additional information.
The following table presents the outstanding options and
warrants to purchase shares of common stock that were anti-
dilutive (the exercise price was higher than the weighted-average
market price), and therefore not included in the calculation of
diluted earnings per common share.
(in millions)
Options
Warrants
Weighted-average shares
Year ended December 31,
2010
2009
2008
212.1
247.2
169.3
66.9
110.3
25.4
211
Note 22: Other Comprehensive Income
The components of other comprehensive income (OCI) and the related tax effects were:
2010
2009
2008
Before
Tax Net of
Before
Tax
Net of
Before
Tax
Net of
Year ended December 31,
(in millions)
tax
effect
tax
tax
effect
tax
tax
effect
tax
Translation adjustments
$
71
(26)
45
118
(45)
73
(93)
35
(58)
Securities available for sale:
Net unrealized gains (losses)
arising during the year
Reclassification of gains (losses)
included in net income
Net unrealized gains (losses)
arising during the year
Derivatives and hedging activities:
Net unrealized gains
arising during the year
Reclassification of net gains on cash flow
2,611 (1,134)
1,477
15,998 (5,972) 10,026
(10,552)
3,960 (6,592)
77
(29)
48
(349)
129
(220)
(29)
11
(18)
2,688 (1,163)
1,525
15,649 (5,843)
9,806
(10,581)
3,971 (6,610)
750
(282)
468
193
(86)
107
955
(363)
592
hedges included in net income
(613)
234
(379)
(531)
203
(328)
(252)
96
(156)
Net unrealized gains (losses)
arising during the year
Defined benefit pension plans:
Net actuarial gain (loss)
Amortization of net actuarial loss and prior
137
(48)
89
(338)
117
(221)
703
(267)
436
20
(9)
11
222
(73)
149
(2,165)
799 (1,366)
service cost included in net income
104
(45)
59
184
(60)
124
6
(2)
4
Net gains (losses) arising during the year
124
(54)
70
406
(133)
273
(2,159)
797 (1,362)
Other comprehensive income
$
3,020 (1,291)
1,729
15,835 (5,904)
9,931
(12,130)
4,536 (7,594)
Cumulative OCI balances were:
(in millions)
Balance, December 31, 2007
Net change
Balance, December 31, 2008
Cumulative effect from change in accounting for
other-than-temporary impairment on debt securities
Net change
Balance, December 31, 2009
Net change
Translation
adjustments
$
52
(58)
Securities
available
for sale
398
(6,610)
(6)
(6,212)
-
73
67
45
(53)
9,806
3,541
1,525
Derivatives
and
hedging
activities
435
436
871
-
(221)
650
89
Defined
benefit
pension
plans
(160)
(1,362)
Cumulative
other
compre-
hensive
income
725
(7,594)
(1,522)
(6,869)
-
273
(1,249)
70
(53)
9,931
3,009
1,729
Balance, December 31, 2010
$
112
5,066
739
(1,179)
4,738
212
Note 23: Operating Segments
We have three operating segments for management reporting:
Community Banking; Wholesale Banking; and Wealth,
Brokerage and Retirement. The results for these operating
segments are based on our management accounting process, for
which there is no comprehensive, authoritative guidance
equivalent to GAAP for financial accounting. The management
accounting process measures the performance of the operating
segments based on our management structure and is not
necessarily comparable with similar information for other
financial services companies. We define our operating segments
by product type and customer segment. If the management
structure and/or the allocation process changes, allocations,
transfers and assignments may change. In first quarter 2010, we
conformed certain funding and allocation methodologies of
legacy Wachovia to those of Wells Fargo; in addition, integration
expense related to mergers other than the Wachovia merger is
now included in segment results. In fourth quarter 2010, we
aligned certain lending businesses into Wholesale Banking from
Community Banking to reflect our previously announced
restructuring of Wells Fargo Financial. Prior periods have been
revised to reflect these changes.
Community Banking offers a complete line of diversified
financial products and services to consumers and small
businesses with annual sales generally up to $20 million in
which the owner generally is the financial decision maker.
Community Banking also offers investment management and
other services to retail customers and securities brokerage
through affiliates. These products and services include the
Wells Fargo Advantage FundsSM, a family of mutual funds. Loan
products include lines of credit, auto floor plan lines, equity lines
and loans, equipment and transportation loans, education loans,
origination and purchase of residential mortgage loans and
servicing of mortgage loans and credit cards. Other credit
products and financial services available to small businesses and
their owners include equipment leases, real estate and other
commercial financing, Small Business Administration financing,
venture capital financing, cash management, payroll services,
retirement plans, Health Savings Accounts, credit cards, and
merchant payment processing. Community Banking also
purchases sales finance contracts from retail merchants
throughout the United States and directly from auto dealers in
Puerto Rico. Consumer and business deposit products include
checking accounts, savings deposits, market rate accounts,
Individual Retirement Accounts, time deposits and debit cards.
Community Banking serves customers through a complete
range of channels, including traditional banking stores, in-store
banking centers, business centers, ATMs, Online and Mobile
Banking, and Wells Fargo Customer Connection, a 24-hours a
day, seven days a week telephone service.
Wholesale Banking provides financial solutions to businesses
across the United States with annual sales generally in excess of
$20 million and to financial institutions globally. Wholesale
Banking provides a complete line of commercial, corporate,
capital markets, cash management and real estate banking
products and services. These include traditional commercial
loans and lines of credit, letters of credit, asset-based lending,
equipment leasing, international trade facilities, trade financing,
collection services, foreign exchange services, treasury
management, investment management, institutional fixed-
income sales, interest rate, commodity and equity risk
management, online/electronic products such as the
Commercial Electronic Office® (CEO®) portal, insurance,
corporate trust fiduciary and agency services, and investment
banking services. Wholesale Banking manages customer
investments through institutional separate accounts and mutual
funds, including the Wells Fargo Advantage Funds and Wells
Capital Management. Wholesale Banking also supports the CRE
market with products and services such as construction loans for
commercial and residential development, land acquisition and
development loans, secured and unsecured lines of credit,
interim financing arrangements for completed structures,
rehabilitation loans, affordable housing loans and letters of
credit, permanent loans for securitization, CRE loan servicing
and real estate and mortgage brokerage services.
Wealth, Brokerage and Retirement provides a full range of
financial advisory services to clients using a planning approach
to meet each client's needs. Wealth Management 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 Wealth meets the unique needs of ultra high net worth
customers. Brokerage serves customers' advisory, brokerage and
financial needs as part of one of the largest full-service brokerage
firms in the United States. Retirement is a national leader in
providing institutional retirement and trust services (including
401(k) and pension plan record keeping) for businesses, retail
retirement solutions for individuals, and reinsurance services for
the life insurance industry.
Other includes corporate items (such as integration expenses
related to the Wachovia merger) not specific to a business
segment and elimination of certain items that are included in
more than one business segment.
213
Note 23: Operating Segments (continued)
(income/expense in millions, average balances in billions)
Banking
Banking Retirement Other (1)
Company
Community Wholesale
Brokerage
and
Consolidated
Wealth,
2010
Net interest income (2)
Provision for credit losses
Noninterest income
Noninterest expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
Net income (loss) (3)
2009
Net interest income (2)
Provision for credit losses
Noninterest income
Noninterest expense
$
31,864
13,807
22,834
30,073
10,818
3,425
11,495
1,920
10,721
11,267
9,029
3,237
2,707
334
9,023
9,768
(1,309)
(308)
(2,125)
(652)
44,757
15,753
40,453
50,456
1,628
(2,474)
19,001
616
(940)
6,338
7,393
5,792
1,012
(1,534)
12,663
275
19
7
-
301
$
7,118
5,773
1,005
(1,534)
12,362
$
34,799
10,218
2,407
(1,100)
46,324
17,866
25,699
3,648
10,363
460
8,358
(306)
(2,058)
21,668
42,362
29,956
10,771
9,426
(1,133)
49,020
Income (loss) before income tax expense (benefit)
12,676
6,162
879
(1,719)
17,998
Income tax expense (benefit)
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
Net income (loss) (3)
2008
Net interest income (2)
Provision for credit losses
Noninterest income
Noninterest expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
Net income (loss) (3)
2010
Average loans
Average assets
Average core deposits
2009
Average loans
Average assets
Average core deposits
3,449
9,227
339
2,211
3,951
27
324
555
26
(653)
5,331
(1,066)
-
12,667
392
$
8,888
3,924
529
(1,066)
12,275
$
20,492
14,822
12,298
16,429
1,539
202
1,337
32
4,564
1,157
3,785
5,375
1,817
421
1,396
11
642
(555)
25,143
299
1,834
(299)
(1,183)
15,979
16,734
1,986
(1,192)
22,598
191
73
118
-
(247)
(94)
(153)
-
3,300
602
2,698
43
$
1,305
1,385
118
(153)
2,655
$
$
530.1
773.0
536.4
230.5
373.2
170.0
43.0
139.3
121.2
(33.0)
(58.6)
(55.6)
770.6
1,226.9
772.0
552.7
806.1
552.8
260.2
383.2
147.3
45.7
127.9
114.2
(35.8)
(54.8)
(51.8)
822.8
1,262.4
762.5
(1) Includes Wachovia integration expenses and the elimination of items that are included in both Community Banking and Wealth, Brokerage and Retirement, largely
representing services and products for wealth management customers provided in Community Banking stores.
(2) Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on
segment assets and, if the segment has excess liabilities, interest credits for providing funding to other segments. The cost of liabilities includes interest expense on segment
liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment.
(3) Represents segment net income (loss) for Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement segments and Wells Fargo net income for the
consolidated company.
214
Note 24: Condensed Consolidating Financial Statements
Following are the condensed consolidating financial statements
of the Parent and Wells Fargo Financial, Inc. and its owned
subsidiaries (WFFI). In 2002, the Parent issued a full and
unconditional guarantee of all outstanding term debt securities
and commercial paper of WFFI. WFFI ceased filing periodic
reports under the Securities Exchange Act of 1934 and is no
longer a separately rated company. The Parent also guaranteed
all outstanding term debt securities of Wells Fargo Financial
Canada Corporation (WFFCC), WFFI’s wholly owned Canadian
subsidiary. WFFCC has continued to issue term debt securities
and commercial paper in Canada, unconditionally guaranteed by
the Parent.
Condensed Consolidating Statement of Income
(in millions)
Year ended December 31, 2010
Dividends from subsidiaries:
Bank
Nonbank
Interest income from loans
Interest income from subsidiaries
Other interest income
Total interest income
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
Net interest income
Provision for credit losses
Other
consolidating
Parent
WFFI subsidiaries Eliminations
Consolidated
Company
$
12,896
21
-
1,375
304
-
-
2,674
-
116
-
-
37,404
14
12,616
(12,896)
(21)
(318)
(1,389)
-
-
-
39,760
-
13,036
14,596
2,790
50,034
(14,624)
52,796
-
277
2,910
2
-
46
963
-
2,832
586
1,905
225
-
(817)
(890)
-
2,832
92
4,888
227
3,189
1,009
5,548
(1,707)
8,039
11,407
-
1,781
1,064
44,486
14,689
(12,917)
-
44,757
15,753
Net interest income after provision for credit losses
11,407
717
29,797
(12,917)
29,004
Noninterest income
Fee income – nonaffiliates
Other
Total noninterest income
Noninterest expense
Salaries and benefits
Other
Total noninterest expense
Income (loss) before income tax expense (benefit) and
equity in undistributed income of subsidiaries
Income tax expense (benefit)
Equity in undistributed income of subsidiaries
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
-
363
107
145
23,385
17,111
-
(658)
23,492
16,961
363
252
40,496
(658)
40,453
143
1,192
150
632
26,919
22,078
-
(658)
27,212
23,244
1,335
782
48,997
(658)
50,456
10,435
(749)
1,178
12,362
-
187
62
-
125
-
21,296
7,025
-
(12,917)
-
(1,178)
14,271
301
(14,095)
-
19,001
6,338
-
12,663
301
Parent, WFFI, Other and Wells Fargo net income (loss)
$
12,362
125
13,970
(14,095)
12,362
215
Note 24: Condensed Consolidating Financial Statements (continued)
Condensed Consolidating Statements of Income
(in millions)
Year ended December 31, 2009
Dividends from subsidiaries:
Bank
Nonbank
Interest income from loans
Interest income from subsidiaries
Other interest income
Total interest income
Deposits
Short-term borrowings
Long-term debt
Other interest expense
Total interest expense
Net interest income
Provision for credit losses
Other
consolidating
Parent
WFFI subsidiaries Eliminations
Consolidated
Company
$
6,974
528
-
2,126
424
-
-
3,467
-
111
-
-
38,140
-
14,150
(6,974)
(528)
(18)
(2,126)
-
-
-
41,589
-
14,685
10,052
3,578
52,290
(9,646)
56,274
-
174
3,391
-
-
38
1,305
-
3,774
782
2,458
172
-
(772)
(1,372)
-
3,565
1,343
7,186
(2,144)
3,774
222
5,782
172
9,950
6,487
-
2,235
1,901
45,104
19,767
(7,502)
-
46,324
21,668
Net interest income after provision for credit losses
6,487
334
25,337
(7,502)
24,656
Noninterest income
Fee income – nonaffiliates
Other
Total noninterest income
Noninterest expense
Salaries and benefits
Other
Total noninterest expense
Income (loss) before income tax expense (benefit) and
equity in undistributed income of subsidiaries
Income tax expense (benefit)
Equity in undistributed income of subsidiaries
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
-
738
738
320
521
841
6,384
(164)
5,727
12,275
-
148
169
317
129
711
840
(189)
(86)
-
(103)
1
22,815
19,135
-
(643)
22,963
19,399
41,950
(643)
42,362
26,018
21,964
-
(643)
26,467
22,553
47,982
(643)
49,020
19,305
5,581
-
13,724
391
(7,502)
-
(5,727)
(13,229)
-
17,998
5,331
-
12,667
392
Parent, WFFI, Other and Wells Fargo net income (loss)
$
12,275
(104)
13,333
(13,229)
12,275
Year ended December 31, 2008
Dividends from subsidiaries:
Bank
Nonbank
Interest income from loans
Interest income from subsidiaries
Other interest income
Total interest income
Deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
Provision for credit losses
$
1,806
326
2
2,892
241
-
-
5,275
-
108
-
-
22,417
-
7,051
(1,806)
(326)
(62)
(2,892)
(134)
-
-
27,632
-
7,266
5,267
5,383
29,468
(5,220)
34,898
-
475
2,957
-
220
1,807
4,966
1,757
661
(445)
(974)
(1,669)
4,521
1,478
3,756
3,432
2,027
7,384
(3,088)
9,755
1,835
-
3,356
2,970
22,084
13,009
(2,132)
-
25,143
15,979
Net interest income after provision for credit losses
1,835
386
9,075
(2,132)
9,164
Noninterest income
Fee income – nonaffiliates
Other
Total noninterest income
Noninterest expense
Salaries and benefits
Other
Total noninterest expense
-
(101)
(101)
437
168
605
10,110
8,181
-
(2,061)
10,547
6,187
18,291
(2,061)
16,734
(385)
15
719
1,119
12,606
10,585
-
(2,061)
12,940
9,658
(370)
1,838
23,191
(2,061)
22,598
Income (loss) before income tax expense (benefit) and
equity in undistributed income of subsidiaries
Income tax expense (benefit)
Equity in undistributed income of subsidiaries
Net income (loss) before noncontrolling interests
Less: Net income from noncontrolling interests
2,104
(83)
468
2,655
-
(847)
(289)
-
(558)
-
4,175
974
-
3,201
43
(2,132)
-
(468)
(2,600)
-
Parent, WFFI, Other and Wells Fargo net income (loss)
$
2,655
(558)
3,158
(2,600)
3,300
602
-
2,698
43
2,655
216
Condensed Consolidating Balance Sheets
(in millions)
December 31, 2010
Assets
Cash and cash equivalents due from:
Subsidiary banks
Nonaffiliates
Securities available for sale
Mortgages and loans held for sale
Loans
Loans to subsidiaries:
Bank
Nonbank
Allowance for loan losses
Net loans
Investments in subsidiaries:
Bank
Nonbank
Other assets
Total assets
Liabilities and equity
Deposits
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Indebtedness to subsidiaries
Total liabilities
Other
consolidating
Parent
WFFI
subsidiaries Eliminations
Consolidated
Company
$
30,240
9
2,368
-
154
212
2,742
-
-
96,460
167,544
53,053
(30,394)
-
-
-
-
96,681
172,654
53,053
7
30,329
742,807
(15,876)
757,267
3,885
53,382
-
-
-
(1,709)
-
-
(21,313)
(3,885)
(53,382)
-
-
-
(23,022)
57,274
28,620
721,494
(73,143)
734,245
133,867
14,904
8,363
-
-
1,316
-
-
192,821
(133,867)
(14,904)
(1,005)
-
-
201,495
$
247,025
33,044 1,231,372
(253,313) 1,258,128
$
-
2,412
6,819
99,745
11,641
-
14,490
1,685
15,240
-
878,336
86,523
62,414
55,476
-
(30,394)
(48,024)
(1,005)
(13,478)
(11,641)
847,942
55,401
69,913
156,983
-
120,617
31,415 1,082,749
(104,542) 1,130,239
Parent, WFFI, Other and Wells Fargo stockholders' equity
Noncontrolling interests
126,408
-
1,618
11
147,153
1,470
(148,771)
-
126,408
1,481
Total equity
126,408
1,629
148,623
(148,771)
127,889
Total liabilities and equity
$
247,025
33,044 1,231,372
(253,313) 1,258,128
December 31, 2009
Assets
Cash and cash equivalents due from:
Subsidiary banks
Nonaffiliates
Securities available for sale
Mortgages and loans held for sale
Loans
Loans to subsidiaries:
Bank
Nonbank
Allowance for loan losses
Net loans
Investments in subsidiaries:
Bank
Nonbank
Other assets
Total assets
Liabilities and equity
Deposits
Short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Indebtedness to subsidiaries
Total liabilities
Parent, WFFI, Other and Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
$
27,303
11
4,666
-
205
249
2,665
-
-
67,705
165,379
44,827
(27,508)
-
-
-
-
67,965
172,710
44,827
7
35,199
750,045
(2,481)
782,770
6,760
56,316
-
-
-
(1,877)
-
-
(22,639)
(6,760)
(56,316)
-
-
-
(24,516)
63,083
33,322
727,406
(65,557)
758,254
134,063
12,816
10,758
-
-
1,500
-
-
189,049
(134,063)
(12,816)
(1,417)
-
-
199,890
$
252,700
37,941
1,194,366
(241,361)
1,243,646
$
-
1,546
7,878
119,353
12,137
-
10,599
1,439
24,437
-
851,526
59,813
54,542
80,499
-
(27,508)
(32,992)
(1,417)
(20,428)
(12,137)
824,018
38,966
62,442
203,861
-
140,914
36,475
1,046,380
(94,482)
1,129,287
111,786
-
1,456
10
145,423
2,563
(146,879)
-
111,786
2,573
111,786
1,466
147,986
(146,879)
114,359
Total liabilities and equity
$
252,700
37,941
1,194,366
(241,361)
1,243,646
217
Note 24: Condensed Consolidated Financial Statements (continued)
Condensed Consolidating Statements of Cash Flows
2010
Year ended December 31,
2009
Other
consolidating
subsidiaries/ Consolidated
Company
WFFI eliminations
Other
consolidating
subsidiaries/ Consolidated
Company
WFFI eliminations
Parent
(in millions)
Parent
Cash flows from operating activities:
Net cash provided
by operating activities
$
14,180
1,774
2,818
18,772
7,356
1,655
19,602
28,613
Cash flows from investing activities:
Securities available for sale:
Sales proceeds
Prepayments and maturities
Purchases
Loans:
Loans originated by banking
subsidiaries, net of principal
collected
Proceeds from sales (including
participations) of loans
originated for investment by
banking subsidiaries
Purchases (including participations)
of loans by banking
subsidiaries
Principal collected on nonbank
entities' loans
Loans originated by nonbank entities
Net repayments from
(advances to) subsidiaries
Capital notes and term loans
made to subsidiaries
Principal collected on notes/loans
made to subsidiaries
Net decrease (increase) in
investment in subsidiaries
Net cash paid for acquisitions
Other, net
Net cash provided (used)
by investing activities
Cash flows from financing activities:
Net change in:
Deposits
Short-term borrowings
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Cash dividends paid
Redeemed
Common stock warrants repurchased
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Excess tax benefits related to
stock option payments
Change in noncontrolling interests:
Purchase of Prudential's
noncontrolling interest
Other, net
Other, net
Net cash used by
2,441
-
(119)
796
229
(1,037)
5,431
47,690
(52,310)
8,668
47,919
(53,466)
1,184
-
925
290
(463) (1,667)
50,929
38,521
(93,155)
53,038
38,811
(95,285)
-
(206)
16,075
15,869
-
(981)
53,221
52,240
-
-
6,517
6,517
-
-
6,162
6,162
-
-
(2,297)
(2,297)
-
-
(3,363)
(3,363)
-
-
10,829
(6,336)
4,731
(4,500)
15,560
(10,836)
- 11,119
- (5,523)
3,309
(4,438)
14,428
(9,961)
(5,485)
(842)
6,327
-
11,369
(138)
(11,231)
-
11,282
1,198
-
15
-
-
-
-
64
-
-
(497) (1,000)
1,497
(11,282)
-
12,979
-
(12,979)
(1,198)
(36)
(31,652)
-
(36)
(31,573)
(1,382)
-
22,513
-
-
355
1,382
(138)
(7,015)
-
(138)
15,853
-
-
-
9,332
3,497
(16,504)
(3,675)
45,703
3,380
22,702
71,785
-
1,860
-
4,118
23,924
5,330
23,924
11,308
-
(19,100)
-
2,158
42,473
(52,166)
42,473
(69,108)
1,789
(23,281)
-
(9,478)
1,700
(30,558)
3,489
(63,317)
8,297
1,347
(22,931) (8,508)
(1,248)
(34,821)
8,396
(66,260)
(737)
-
(545)
1,375
(91)
(1,045)
98
-
-
-
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
(737)
-
(545)
(2,178)
(25,000)
-
1,375
(91)
(1,045)
21,976
(220)
(2,125)
98
18
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,178)
(25,000)
-
21,976
(220)
(2,125)
18
-
(593)
-
-
(592)
-
-
-
(140)
-
(4)
-
(4,500)
(549)
140
(4,500)
(553)
-
financing activities
(20,577)
(5,359)
(197)
(26,133)
(41,403) (5,007)
(50,671)
(97,081)
Net change in cash and
due from banks
Cash and due from banks
at beginning of year
Cash and due from banks
at end of year
218
2,935
(88)
(13,883)
(11,036)
11,656
28
(8,367)
3,317
27,314
454
(688)
27,080
15,658
426
7,679
23,763
$
30,249
366
(14,571)
16,044
27,314
454
(688)
27,080
Condensed Consolidating Statement of Cash Flows
(in millions)
Year ended December 31,2008
Cash flows from operating activities:
Other
consolidating
subsidiaries/ Consolidated
Company
WFFI eliminations
Parent
Net cash provided (used) by operating activities
$
730
2,023
(7,541)
(4,788)
Cash flows from investing activities:
Securities available for sale:
Sales proceeds
Prepayments and maturities
Purchases
Loans:
Loans originated by banking subsidiaries, net of principal collected
Proceeds from sales (including participations) of loans
originated for investment by banking subsidiaries
Purchases (including participations) of loans by banking subsidiaries
Principal collected on nonbank entities' loans
Loans originated by nonbank entities
Net repayments from (advances to) subsidiaries
Capital notes and term loans made to subsidiaries
Principal collected on notes/loans made to subsidiaries
Net decrease (increase) in investment in subsidiaries
Net cash acquired from acquisitions
Other, net
2,570
-
(3,514)
875
283
(1,258)
57,361
24,034
(100,569)
60,806
24,317
(105,341)
-
(1,684)
(53,131)
(54,815)
-
-
-
-
(12,415)
(2,008)
8,679
(37,108)
9,194
(21,823)
-
-
14,447
(12,362)
-
-
-
-
-
(91)
1,988
(5,513)
7,399
(7,611)
12,415
2,008
(8,679)
37,108
2,009
69,235
1,988
(5,513)
21,846
(19,973)
-
-
-
-
11,203
47,321
Net cash provided (used) by investing activities
(56,425)
210
38,054
(18,161)
Cash flows from financing activities:
Net change in:
Deposits
Short-term borrowings
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Proceeds from issuance
Proceeds from issuance of stock warrants
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Excess tax benefits related to stock option payments
Change in noncontrolling interests:
Other, net
-
17,636
-
5,580
7,697
(38,104)
7,697
(14,888)
21,931
(16,560)
1,113
(8,983)
12,657
(4,316)
35,701
(29,859)
22,674
2,326
14,171
(1,623)
(4,312)
121
-
-
-
-
-
-
-
-
-
-
-
-
-
-
22,674
2,326
14,171
(1,623)
(4,312)
121
(53)
(53)
Net cash provided (used) by financing activities
56,364
(2,290)
(22,119)
31,955
Net change in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
669
14,989
$
15,658
(57)
483
426
8,394
(715)
9,006
14,757
7,679
23,763
219
Note 25: Regulatory and Agency Capital Requirements
The Company and each of its subsidiary banks are subject to
regulatory capital adequacy requirements promulgated by
federal regulatory agencies. The Federal Reserve establishes
capital requirements, including well capitalized standards, for
the consolidated financial holding company, and the OCC has
similar requirements for the Company’s national banks,
including Wells Fargo Bank, N.A. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA),
federal regulatory agencies were required to adopt regulations
defining five capital tiers for banks: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on our financial
statements.
Quantitative measures, established by the regulators to
ensure capital adequacy, require that the Company and each of
its subsidiary banks maintain minimum ratios (set forth in the
following table) of capital to risk-weighted assets. Tier 1 capital is
considered core capital and generally includes common
stockholders’ equity, qualifying preferred stock, and trust
preferred securities, and noncontrolling interests in consolidated
subsidiaries, reduced by goodwill, net of related taxes, certain
intangible and other assets in excess of prescribed limitations,
and adjusted for the aggregate impact of certain items included
in other comprehensive income. Total capital includes Tier 1
capital, subordinated debt and other components that do not
qualify for Tier 1 capital, and the aggregate allowance for credit
losses up to a specified percentage of risk-weighted assets.
Risk-weighted assets reflect the perceived risk, expressed as a
percentage of the amount of each asset included on the balance
sheet, as well as certain off-balance sheet exposures, including
unfunded loan commitments, letters of credit and derivative
contracts. Additional information with respect to off-balance
sheet exposures is included in Notes 6 and 15.
We do not consolidate our wholly-owned trusts (the Trusts)
formed solely to issue trust preferred securities. Trust preferred
securities and perpetual preferred purchase securities issued by
the Trusts includable in Tier 1 capital were $19.2 billion at
December 31, 2010. The junior subordinated debentures held by
the Trusts were included in the Company's long-term debt. See
Note 13 for additional information on trust preferred securities.
Management believes that, as of December 31, 2010, the
Company and each of the covered subsidiary banks met all
capital adequacy requirements to which they are subject.
The most recent notification from the OCC categorized each of
the covered subsidiary banks as well capitalized, under the
FDICIA prompt corrective action provisions applicable to banks.
To be categorized as well capitalized, the institution must
maintain a total risk-based capital (RBC) ratio as set forth in the
table and not be subject to a capital directive order. There are no
conditions or events since that notification that management
believes have changed the RBC category of any of the covered
subsidiary banks.
Certain subsidiaries of the Company are approved
seller/servicers, and are therefore required to maintain
minimum levels of shareholders’ equity, as specified by various
agencies, including the United States Department of Housing
and Urban Development, GNMA, FHLMC and FNMA. At
December 31, 2010, each seller/servicer met these requirements.
Certain broker-dealer subsidiaries of the Company are subject to
SEC Rule 15c3-1 (the Net Capital Rule), which requires that we
maintain minimum levels of net capital, as defined. At
December 31, 2010, each of these subsidiaries met these
requirements.
The following table presents regulatory capital information
for Wells Fargo & Company and Wells Fargo Bank, N.A.
(in billions, except ratios)
2010
2009
2010
2009
ratios (1)
ratios (1)
Wells Fargo & Company
Wells Fargo Bank, N.A.
Well-
Minimum
December 31, capitalized
capital
Regulatory capital:
Tier 1
Total
Assets:
Risk-weighted
Adjusted average (2)
Capital ratios:
Tier 1 capital
Total capital
Tier 1 leverage (2)
$
109.4
93.8
90.2
147.1
134.4
117.1
43.8
58.4
$
980.0
1,013.6
895.2
492.0
1,189.5
1,191.6
1,057.7
583.3
11.16 %
9.25
10.07
8.90
6.00
15.01
9.19
13.26
7.87
13.09
8.52
11.87
10.00
7.50
5.00
4.00
8.00
4.00
(1) As defined by the regulations issued by the Federal Reserve, OCC and FDIC.
(2) The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is
3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective
management and monitoring of market risk and, in general, are considered top-rated, strong banking organizations.
220
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wells Fargo & Company:
We have audited the accompanying consolidated balance sheet of Wells Fargo & Company and Subsidiaries (the Company) as of
December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-
year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted a new accounting standard related to its
involvement with variable interest entities effective January 1, 2010, and the Company changed its method of evaluating other than
temporary impairment for debt securities in 2009 and certain investment securities in 2008.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated February 25, 2011, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
San Francisco, California
February 25, 2011
221
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2010
Quarter ended
2009
Quarter ended
(in millions, except per share amounts)
Dec. 31 Sept. 30
June 30 Mar. 31
Dec. 31 Sept. 30
June 30
Mar. 31
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit
losses
Noninterest income
Service charges on deposit accounts
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains from trading activities
Net gains (losses) on debt securities available for
sale
Net gains (losses) from equity investments
Operating leases
Other
$
12,969
13,130
13,472
13,225
13,692
13,968
14,301
14,313
1,906
2,032
2,023
2,078
2,192
2,284
2,537
2,937
11,063
2,989
11,098
3,445
11,449
3,989
11,147
5,330
11,500
5,913
11,684
6,111
11,764
5,086
11,376
4,558
8,074
7,653
7,460
5,817
5,587
5,573
6,678
6,818
1,035
1,132
1,417
1,332
1,421
1,478
1,448
1,394
2,958
941
1,063
2,757
564
532
(268)
317
79
453
2,564
935
1,004
2,499
397
470
(114)
131
222
536
2,743
911
982
2,011
2,669
865
941
2,470
2,605
961
990
3,411
2,502
946
950
3,067
2,413
923
963
3,046
544
109
30
288
329
581
621
537
28
43
185
610
482
516
110
273
163
264
468
622
(40)
29
224
536
595
749
(78)
40
168
476
2,215
853
901
2,504
581
787
(119)
(157)
130
552
Total noninterest income
10,431
9,776
9,945
10,301
11,196
10,782
10,743
9,641
Noninterest expense
Salaries
3,513
3,478
3,564
Commission and incentive compensation
2,195
2,280
2,225
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other
1,192
1,074
1,063
813
750
549
301
557
742
548
300
588
742
553
295
4,027
3,274
3,716
3,314
1,992
1,322
678
796
549
301
3,165
3,505
3,428
3,438
3,386
2,086
2,051
2,060
1,824
1,144
1,034
1,227
1,284
681
770
642
302
563
778
642
228
575
783
646
981
687
796
647
338
3,691
2,960
2,987
2,856
Total noninterest expense
13,340
12,253
12,746
12,117
12,821
11,684
12,697
11,818
Income before income tax expense
Income tax expense
5,165
5,176
4,659
1,672
1,751
1,514
4,001
1,401
3,962
4,671
4,724
4,641
949
1,355
1,475
1,552
Net income before
noncontrolling interests
Less: Net income from noncontrolling interests
3,493
79
3,425
3,145
86
83
2,600
53
3,013
3,316
3,249
3,089
190
81
77
44
Wells Fargo net income
$
3,414
3,339
3,062
2,547
2,823
3,235
3,172
3,045
Less: Preferred stock dividends
and accretion and other
Wells Fargo net income
182
189
184
175
2,429
598
597
661
applicable to common stock
$
3,232
3,150
2,878
2,372
394
2,637
2,575
2,384
Per share information
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
$
0.62
0.61
0.05
0.60
0.60
0.05
0.55
0.55
0.05
0.46
0.45
0.05
0.08
0.08
0.05
0.56
0.56
0.05
0.58
0.57
0.05
0.56
0.56
0.34
Average common shares outstanding
Diluted average common shares outstanding
5,256.2
5,293.8
5,240.1
5,273.2
5,219.7
5,260.8
5,190.4
5,225.2
4,764.8
4,796.1
4,678.3
4,706.4
4,483.1
4,501.6
4,247.4
4,249.3
Market price per common share (1)
High
Low
Quarter-end
$
31.61
28.77
34.25
31.99
31.53
29.56
28.45
30.47
23.37
30.99
23.02
25.12
25.52
25.60
26.37
31.12
25.00
26.99
22.08
28.18
13.65
24.26
7.80
14.24
(1) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
222
Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) - Quarterly (1) (2) - (Unaudited)
(in millions)
Earning assets
Federal funds sold, securities purchased under
resale agreements and other short-term investments
$
Trading assets
Debt securities available for sale (3):
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Mortgage-backed securities:
Federal agencies
Residential and commercial
Total mortgage-backed securities
Other debt securities (4)
Total debt securities available for sale (4)
Mortgages held for sale (5)
Loans held for sale (5)
Loans:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Credit card
Other revolving credit and installment
Total consumer
Total loans (5)
Other
Average
balance
Yields/
rates
72,029
33,871
0.40 % $
3.56
1,670
18,398
2.80
5.58
80,459
33,365
4.48
10.95
113,824
37,793
171,685
45,063
1,140
147,866
99,188
26,882
13,033
30,986
6.35
6.15
6.18
4.39
5.15
4.71
3.85
3.68
9.00
3.57
317,955
4.42
228,802
97,673
21,888
87,357
5.06
4.37
13.44
6.48
435,720
5.61
753,675
5,338
5.11
3.93
2010
Interest
income/
expense
74
302
12
255
859
850
1,709
545
2,521
495
15
1,755
961
250
293
279
3,538
2,901
1,075
736
1,427
6,139
9,677
51
Quarter ended December 31,
Average
balance
Yields/
rates
46,031
23,179
0.33 %
4.05
$
2,381
13,574
3.54
6.48
85,063
43,243
128,306
33,710
177,971
34,750
5,104
5.43
9.20
6.74
7.60
6.84
5.13
2.48
164,050
97,296
38,364
14,107
30,086
4.65
3.49
2.98
10.20
3.74
343,903
4.28
232,273
103,584
23,717
88,963
5.26
4.58
12.18
6.46
448,537
5.71
792,440
6,147
5.09
3.13
2009
Interest
income/
expense
39
235
21
217
1,099
1,000
2,099
600
2,937
446
32
1,918
855
289
360
283
3,705
3,066
1,195
723
1,450
6,434
10,139
49
Total earning assets
$
1,082,801
4.87 % $
13,135
1,085,622
5.12 % $
13,877
Funding sources
Deposits:
Interest-bearing checking
Market rate and other savings
Savings certificates
Other time deposits
Deposits in foreign offices
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Other liabilities
Total interest-bearing liabilities
Portion of noninterest-bearing funding sources
$
60,879
431,171
79,146
13,438
55,463
640,097
50,609
160,801
8,258
859,765
223,036
0.09 % $
0.25
1.43
2.00
0.21
0.41
0.24
2.86
3.13
0.89
-
15
266
285
67
29
662
31
1,153
65
1,911
-
61,229
389,905
109,306
16,501
59,870
636,811
32,757
210,707
5,587
885,862
199,760
0.15 % $
0.31
1.66
2.28
0.23
0.57
0.18
2.31
3.49
0.99
-
Total funding sources
$
1,082,801
0.71
1,911
1,085,622
0.81
23
303
458
94
35
913
14
1,218
50
2,195
-
2,195
Net interest margin and net interest income on
a taxable-equivalent basis (6)
Noninterest-earning assets
Cash and due from banks
Goodwill
Other
Total noninterest-earning assets
Noninterest-bearing funding sources
Deposits
Other liabilities
Total equity
Noninterest-bearing funding sources used to
fund earning assets
Net noninterest-bearing funding sources
Total assets
$
$
$
$
$
18,016
24,832
111,388
154,236
197,943
52,930
126,399
(223,036)
154,236
1,237,037
4.16 % $
11,224
4.31 % $
11,682
19,216
24,093
110,525
153,834
179,204
45,058
129,332
(199,760)
153,834
1,239,456
(1) Our average prime rate was 3.25% for the quarters ended December 31, 2010 and 2009. The average three-month London Interbank Offered Rate (LIBOR) was 0.29%
and 0.27% for the same quarters, respectively.
Interest rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(2)
(3) Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance
amounts include the effects of any unrealized gain or loss marks but those marks carried in other comprehensive income are not included in yield determination of affected
earning assets. Thus yields are based on amortized cost balances computed on a settlement date basis.
Includes certain preferred securities.
(4)
(5) Nonaccrual loans and related income are included in their respective loan categories.
(6)
Includes taxable-equivalent adjustments of $161 million and $182 million for the quarters ended December 31, 2010 and 2009, respectively primarily related to tax-
exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.
223
Glossary of Acronyms
ACL
Allowance for credit losses
ALCO
Asset/Liability Management Committee
LTV
MBS
Loan-to-value
Mortgage-backed security
ARS
ASC
ASU
ARM
AVM
CD
CDO
CLO
Auction rate security
MERS
Mortgage Electronic Registration Systems, Inc.
Accounting Standards Codification
MHFS
Mortgages held for sale
Accounting Standards Update
Adjustable-rate mortgage
Automated valuation model
Certificate of deposit
Collateralized debt obligation
Collateralized loan obligation
MSR
NAV
NPA
OCC
OCI
OTC
Mortgage servicing right
Net asset value
Nonperforming asset
Office of the Comptroller of the Currency
Other comprehensive income
Over-the-counter
CLTV
Combined loan-to-value
OTTI
Other-than-temporary impairment
CMO
Collateralized mortgage obligation
PCI Loans
Purchased credit-impaired loans
CPP
CPR
CRE
Capital Purchase Program
Constant prepayment rate
Commercial real estate
ESOP
Employee Stock Ownership Plan
FAS
Statement of Financial Accounting Standards
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FHA
Federal Housing Administration
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Company
FICO
Fair Isaac Corporation (credit rating)
FNMA
Federal National Mortgage Association
FRB
Federal Reserve Board
GAAP
Generally accepted accounting principles
GNMA
Government National Mortgage Association
GSE
Government-sponsored entity
HAMP
Home Affordability Modification Program
HPI
IRA
Home Price Index
Individual Retirement Account
LHFS
Loans held for sale
LIBOR
London Interbank Offered Rate
LOCOM
Lower of cost or market value
PPS
Perpetual preferred securities
PTPP
Pre-tax pre-provision profit
QSPE
Qualifying special purpose entity
RBC
ROA
ROE
Risk-based capital
Wells Fargo net income to average total assets
Wells Fargo net income applicable to common stock to
average Wells Fargo common stockholders' equity
RSR
Restricted share right
SCAP
Supervisory Capital Assessment Program
SEC
S&P
SIV
SPE
Securities and Exchange Commission
Standard & Poor’s
Structured investment vehicle
Special purpose entity
TARP
Troubled Asset Relief Program
TDR
Troubled debt restructuring
TLGP
Temporary Liquidity Guarantee Program
VA
VaR
VIE
Department of Veterans Affairs
Value-at-risk
Variable interest entity
WFFCC
Wells Fargo Financial Canada Corporation
WFFI
Wells Fargo Financial, Inc. and its wholly-owned
subsidiaries
224
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Stock Performance
These graphs compare the cumulative total stockholder return
and total compound annual growth rate (CAGR) for our common
stock (NYSE: WFC) for the five- and ten-year periods ended
December 31, 2010, with the cumulative total stockholder
returns for the same periods for the Keefe, Bruyette and Woods
(KBW) Total Return Bank Index (KBW Bank Index (BKX))
and the S&P 500 Index.
The cumulative total stockholder returns (including
reinvested dividends) in the graphs assume the investment
of $100 in Wells Fargo’s common stock, the KBW Bank Index
and the S&P 500 Index.
Five Year Performance Graph
Ten Year Performance Graph
225
Wells Fargo & Company
Common stock
Wells Fargo & Company is listed and trades on the
New York Stock Exchange: WFC
5,262,283,228 common shares outstanding (12/31/10)
Stock purchase and dividend reinvestment
You can buy Wells Fargo stock directly from Wells Fargo,
even if you’re not a Wells Fargo stockholder, through
optional cash payments or automatic monthly deductions
from a bank account. You can also have your dividends
reinvested automatically. It’s a convenient, economical
way to increase your Wells Fargo investment.
Call 1-877-840-0492 for an enrollment kit including
a plan prospectus.
Form 10-K
We will send Wells Fargo’s 2010 Annual Report on
Form 10-K (including the financial statements filed with
the Securities and Exchange Commission) free to any
stockholder who asks for a copy in writing. Stockholders
also can ask for copies of any exhibit to the Form 10-K.
We will charge a fee to cover expenses to prepare and send
any exhibits. Please send requests to: Corporate Secretary,
Wells Fargo & Company, Wells Fargo Center, MAC N9305-
173, Sixth and Marquette, Minneapolis, MN 55479.
SEC filings
Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to those reports are available free of charge on our website
(www.wellsfargo.com) as soon as practical after they are
electronically filed with or furnished to the SEC. Those
reports and amendments are also available free of charge
on the SEC’s website at www.sec.gov.
Independent registered public
accounting firm
KPMG LLP
San Francisco, California
1-415-963-5100
Contacts
Investor Relations
415-371-2921
investorrelations@wellsfargo.com
Shareholder Services and
Transfer Agent
Wells Fargo Shareowner Services
P.O. Box 64854
Saint Paul, Minnesota 55164-0854
1-877-840-0492
www.wellsfargo.com/com/
shareowner_services
Annual Stockholders’ Meeting
1:00 p.m., Tuesday, May 3, 2011
Julia Morgan Ballroom
Merchants Exchange Building
465 California Street
San Francisco, California
Our reputation
Fortune
Among the World’s Most Admired
Companies, Among the 20 Largest
in the U.S. based on revenue
Forbes
Top 100 Best Companies in the world
American Customer Satisfaction
Index (ACSI)
Best among large banks
Barron’s
Among World’s 50 Most
Respected Companies
BusinessWeek
America’s #2 Most Generous
Corporate Foundation
Newsweek
Among America’s Top 50
Greenest Big Companies
U.S. Banker and American Banker
One of America’s Top Banking Teams
DiversityInc
Among Top 50 Companies for
Diversity, Top 10 Companies for
Asian Americans, Top 10 Companies
for Lesbian, Gay, Bisexual, and
Transgender Employees
LATINAStyle
Among Best Companies for Latinas
CAREERS & the disABLED
Among Top 50 Employers
Human Rights Campaign
Perfect Score on Corporate
Equality Index
Workforce Diversity for
Engineering & IT Professionals
Among Top Employers
for Workforce Diversity
United Way of America
Summit Award for
Exceptional Volunteerism
Office of the Comptroller
of the Currency
“Outstanding” rating for
Community Reinvestment Act
performance (Wells Fargo Bank, N.A.)
Trade Finance
#2 Best Trade Bank in the U.S.
#4 Best Trade Bank in North America
Brand Keys
#1 Bank Brand in Customer Loyalty
Engagement Index
Forward-Looking Statements This Annual Report, including the Financial Review and the Financial Statements and related Notes, contains 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 may differ materially from our
forward-looking statements 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 “Forward-Looking Statements” and “Risk Factors” in the Financial Review.
226
2
To Our Owners
10
Standing Together
24
Standing Together
With Our Communities
31
Board of Directors, Senior Leaders
33
Financial Review
102 Controls and Procedures
104 Financial Statements
221 Report of Independent Registered
Public Accounting Firm
225 Stock Performance
Wells Fargo & Company
(NYSE:WFC)
We’re a diversifi ed fi nancial services company(cid:19)
—(cid:19)community-based and relationship-oriented(cid:19)—(cid:19)
serving people across the nation and around
the world.
Our corporate headquarters is in San Francisco, but
all our stores, regional commercial banking centers,
ATMs, Wells Fargo PhoneBank,SM and internet sites
are headquarters for satisfying all our customers’
fi nancial needs and helping them succeed fi nancially,
through banking, insurance, investments, mortgage,
and commercial and consumer fi nance.
Assets: $1.3 trillion, 4th among peers
Market value of stock: $163 billion,
2nd among peers (12/31/10)
Customers: 70 million,
(one of every three U.S. households)
Team members: 281,000
Stores: 9,000
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© 2011 Wells Fargo & Company. All rights reserved.
Wells Fargo across North America and around the world
Washington
207
Oregon
158
Montana
56
Idaho
104
Wyoming
36
Nevada
137
Utah
143
Colorado
224
North Dakota
32
South Dakota
62
Nebraska
60
Kansas
35
Minnesota
214
Iowa
91
California
1,286
Alaska
56
Arizona
321
New Mexico
105
Oklahoma
23
Texas
824
Hawaii
4
Missouri
49
Arkansas
32
Louisiana
26
Wisconsin
97
Michigan
70
Vt.
8
N.H.
17
New York
185
Illinois
109
Indiana
80
Ohio
88
Pennsylvania
387
Kentucky
15
Tennessee
55
W. Virginia
15
Virginia
362
North Carolina
402
South Carolina
179
Mississippi
27 Alabama
169
Georgia
338
New Jersey
388
Delaware
30
Maryland
128
D.C.
34
Florida
781
Puerto Rico
1
Countries
Argentina
Australia
Bangladesh
Brazil
Canada
Cayman Islands
Chile
China
Colombia
Dominican Republic
Ecuador
Egypt
England
France
Germany
Hong Kong
India
Indonesia
Ireland
Italy
Japan
Malaysia
Mexico
Philippines
Russia
Singapore
South Africa
South Korea
Spain
Taiwan
Thailand
Turkey
United Arab Emirates
Uruguay
Vietnam
Maine
6
Massachusetts
44
Rhode Island
6
Connecticut
97
Stores
9,000
state by state
(map)
ATMs
12,196
wellsfargo.com
23 million
active users
Wells Fargo
Customer
Connection
500+ million
calls, e-mails
and letters
Banking stores (Wells Fargo and Wachovia stores in 39 states & D.C.)
#1
#1 Retail banking deposits(cid:19)1
#1
#1
#1
#1
#1
#1
Total stores (Wells Fargo and Wachovia stores)
Total mortgage producer; Retail mortgage producer
Mortgage lender to low-to-moderate income home buyers
(2009 HMDA data)
Residential mortgage lender
Used car lender (AutoCount 2010)
Small business lender in dollars (2009 Community
Reinvestment Act government data)
SBA 7(a) lender in dollars (2010 Small Business Administration
federal fi scal year-end data)
Underwriter of preferred stock (FY 2010, Bloomberg)
REIT preferred stock (FY 2010, Thomas Financial)
Real estate lead arranger of loan syndications by volume and
number of transactions (FY 2010, Thomson Reuters LPC)
#2
U.S. Deposits
#2 Debit card issuer
#2
#2
#2
Mortgage servicer
Annuity distributor
REIT common stock (FY 2010, Dealogic)
#1
#1
#1
#1
1 FDIC-insured deposits up to $500 million in a single banking store, excludes credit unions.
#2
#2
#2
#3
#3
#3
#3
#4
#5
#5
#5
#6
#7
#7
#7
#8
High grade bond secondary trading (FY 2010, Thomson Reuters LPC)
Arranger of asset-based loans by volume and number of
transactions (FY 2010, Thomson Reuters LPC)
Non-investment grade loan issuer by number of transactions
(FY 2010, Thomson Reuters LPC)
Branded bank ATM owner (12,196 Wells Fargo and Wachovia ATMs)
Full-service retail brokerage provider based on number of
Financial Advisors and client assets
Loan syndication bookrunner by number of transactions
(FY 2010, Thomson Reuters LPC)
High grade corporate loan issuer by number of transactions
(FY 2010, Thomson Reuters LPC)
Wealth management provider
IRA provider
Family wealth provider
Equity capital markets bookrunner by number of transactions
(FY 2010, SDC)
Institutional retirement plan recordkeeper
Issuer of Credit Cards
Merchant processor for Credit and Debit Cards
Top senior manager of municipal competitive bond issues (FY 2010)
High yield bond issuer by number of transactions
(FY 2010, Bloomberg)
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94104
1-866-878-5865 wellsfargo.com
Our Vision:
Satisfy all our customers’ fi nancial needs and help them
succeed fi nancially.
Nuestra Vision:
Deseamos satisfacer todas las necesidades fi nancieras
de nuestros clientes y ayudarlos a tener éxito en el
área fi nanciera.
Notre Vision:
Satisfaire tous les besoins fi nanciers de nos clients
et les aider à atteindre le succès fi nancier.
Wells Fargo & Company Annual Report 2010
Standing together.
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