Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94104
1-866-878-5865 wellsfargo.com
Satisfy all our customers’ financial needs and help them
Our vision:
succeed financially.
Nuestra vision:
Deseamos satisfacer todas las necesidades financieras
de nuestros clientes y ayudarlos a tener éxito en el
área financiera.
Notre vision:
Satisfaire tous les besoins financiers de nos clients
et les aider à atteindre le succès financier.
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Together we’ll go far
Wells Fargo & Company Annual Report 2011
New opportunities. Unchanging vision.
“The reason we wake up in the morning is to help our
customers succeed financially and to satisfy all their
financial needs. The result is we make money because
of our focus on serving customers, not the other way
around. This time-tested vision will forever be what
matters to Wells Fargo. We’ll never put the stagecoach
ahead of the horses.”— John G. Stumpf, Chairman, President and Chief Executive Officer
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LITTLE&COMPANY
2/22/12 2:19 AM
Today’s Wells Fargo is a coast-to-coast company with vast
reach. We touch people and businesses billions of times a year —
at least 5 billion times a year in the Community Bank alone.
But we never forget that financial services is a people business.
Working one on one with customers to help them with the
decisions they face every day is at the core of who we are.
First we listen to customers like Tony Williamson, who started
a Minnesota-based IT staffing business, Ajasa Technologies,
with his wife, Shelley, in 1995. Then we offer guidance and
solutions. Wells Fargo helped their business with credit to
manage cash flow. Now Ajasa Technologies has 400 employees
and is developing mobile applications for digital payments.
“You can’t do what you were doing a year ago,” said Williamson.
“You have to change, and Wells Fargo has helped us adapt.”
Multiply that times our more than 270,000 team members who
share the same spirit. New opportunities. Unchanging vision.
2 To our owners
10 70,000,000 opportunities
23 Board of Directors, Senior Leaders
25 Financial Review
112 Controls and Procedures
114 Financial Statements
231 Report of Independent Registered
Public Accounting Firm
235 Stock Performance
Wells Fargo & Company
(NYSE:WFC)
We’re a diversified financial services company
— community-based and relationship-oriented —
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 Phone Bank,SM and internet sites
are headquarters for satisfying all our customers’
financial needs and helping them succeed financially,
through banking, insurance, investments, mortgage,
and commercial and consumer finance.
Assets: $1.3 trillion, 4th among all U.S. banks
Market value of stock: $145 billion,
1st among all U.S. banks (12/31/11)
Customers: 70 million,
(one of every three U.S. households)
team members: More than 270,000
(full time and part time)
Stores: 9,112
Wells Fargo coast to coast
Washington
233
Oregon
172
Montana
57
Idaho
106
Wyoming
32
North Dakota
36
South Dakota
57
Nevada
148
Utah
154
Colorado
243
Arizona
335
New Mexico
106
California
1,407
Alaska
59
Hawaii
4
Minnesota
244
Iowa
99
Wisconsin
106
Michigan
78
Nebraska
64
Kansas
43
Oklahoma
23
Texas
853
Illinois
143
Indiana
90
Ohio
98
Pennsylvania
419
Missouri
62
Arkansas
30
Louisiana
24
Kentucky
24
Tennessee
57
W. Virginia
29
Virginia
384
North Carolina
455
South Carolina
180
Mississippi
27 Alabama
Georgia
368
171
Vt.
8
N.H.
19
New York
230
New Jersey
393
Delaware
31
Maryland
136
D.C.
39
Florida
808
Around the world
Argentina
Australia
Bangladesh
Brazil
Canada
Chile
China
Colombia
Dominican Republic
Ecuador
Egypt
England
France
Germany
India
Indonesia
Ireland
Italy
Japan
Jersey
Malaysia
Mexico
Philippines
Russia
Singapore
South Africa
South Korea
Spain
Taiwan
Thailand
Turkey
Vietnam
United Arab Emirates
Maine
6
Massachusetts
59
Rhode Island
6
Connecticut
99
Stores
9,112
worldwide
ATMs
12,211
wellsfargo.com
22.4 million
active online
customers
Mobile banking
7.3 million
active mobile
customers
Wells Fargo
Customer
Connection
500+ million
customer
contacts
#1 Retail banking deposits 1
#1 Total stores
#1 Retail mortgage lender
#1 Home loan originator to minority and low- to moderate-income
consumers & in low- to moderate-income neighborhoods
(2010 HMDA data)
#1 Used car lender (AutoCount 2011)
#1 Small business lender (U.S. in dollars per 2010 Community
Reinvestment Act government data)
#1 U.S. Small Business Administration’s (SBA) 2011 Large 7(a)
Lender of the Year
#1 REIT preferred stock (FY 2011, Bloomberg)
#1
#1
Internet Bank in the U.S. (2011 Global Finance Magazine)
In mobile banking for ease-of-use, privacy, security, quality, and
availability (Keynote Mobile Banking Scorecard 2011)
#1
In the world for best social media strategy
(2011 Global Finance Magazine)
#1 Mortgage servicer
#2 Debit card issuer
#2 Annuity distributor
#2 Real estate lead arranger of loan syndications
(FY 2011, Thomson Reuters)
1 Deposits up to $500 million in a single banking store, excludes non-retail stores and
credit unions. Source: SNL.
#2 REIT common stock (FY 2011, Dealogic)
#2 Arranger of asset-based loans (FY 2011, Thomson Reuters)
#2 Non-investment grade loan issuer by number of transactions
(FY 2010, Thomson Reuters)
#2 Underwriter of preferred stock (FY 2010, Bloomberg)
#2 Provider of private student loans
#2 Overall auto finance lender (AutoCount 2011)
#3 Branded bank ATM owner
#3 Full-service retail brokerage provider based on number of
Financial Advisors
#4 Loan syndication bookrunner (FY 2011, Thomson Reuters)
#4 High-grade corporate loan issuer (FY 2011, Thomson Reuters)
#4 Wealth management provider
#5 IRA provider (Cerulli Associates)
#5 Family wealth provider (Family Wealth Alliance)
#6 Institutional retirement plan recordkeeper
(PLANSPONSOR Magazine)
#7 Issuer of credit cards
#7 Merchant processor for credit and debit cards
#8 Senior manager of total municipal bond issues
Tony Williamson of Ajasa
(FY 2011, Thomson Reuters)
Technologies, New Hope, Minn.
© 2012 Wells Fargo & Company. All rights reserved.
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Tony Williamson of Ajasa
Technologies, New Hope, Minn.
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To our owners,
Our more than 270,000 talented team
members — whom we believe to be
the best team in the business — pulled
together for our customers as never
before in 2011. They were guided, as
always, by our unchanging vision:
to satisfy all our customers’ financial
needs and help them succeed financially.
They were guided by our values, and
what we stand for: honoring and
supporting our people, striving for the
highest ethical standards, doing what’s
right for our customers, learning from
diversity, and calling on everyone
to be leaders.
Outstanding results
The results were outstanding. Wells Fargo
achieved record net income for the third
consecutive year, up 28 percent to $15.9 billion.
Diluted earnings per common share rose
28 percent to $2.82. Our customers entrusted
us with even more of their business. Total
deposits grew 9 percent to $920.1 billion. Total
loans grew 2 percent to $769.6 billion. Many
of our businesses had double-digit revenue
growth. As a result of our performance, we were
rewarded with a higher value in the market.
We were ranked No. 1 in the U.S. banking
industry in total market value of our company,
even though we’re the fourth largest by assets.
Our team achieved all this while successfully
executing the largest, most complex bank
merger in our nation’s history. We began our
integration with Wachovia at the beginning
of 2009. We completed it on schedule and
under budget early in the first quarter of 2012.
All of our more than 6,200 retail banking stores
are now on one system so our customers can
do their banking business when, where, and
how they want to do it, coast to coast. Your
hometown Wells Fargo bank is wherever you
happen to be.
Guided by our time-tested Vision & Values,
we also have more opportunities than ever
before to serve our customers and communities,
and help our country grow. We’re fortunate to
have the most extensive U.S. financial services
store network. We’re in more communities and
closer to more customers than anyone else.
We serve one of every three U.S. households.
We originate one of every four home mortgages.
We service more home loans than anyone else.
We’re the nation’s No. 1 small business lender in
dollars and the No. 1 middle-market commercial
lender. We’re first or second in home loans, car
loans, student loans, and business loans.
John G. Stumpf
Chairman, President and
Chief Executive Officer
Wells Fargo & Company
2
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1 in 3
Wells Fargo serves one in three
households in the U.S.
No. 1
Our company had the highest
market capitalization in the
U.S. banking industry.
1 in 500
Wells Fargo employs more than
270,000 team members. That’s
1 in 500 working adults — making
us the 12th largest private
employer in the U.S.
Betting on America
spending began trending upward again, but
Wells Fargo employs one of every 500 working
balances were often paid in full each month.
adults in America, making us the nation’s 12th
Consumers were not alone. Businesses also
largest private employer. Chances are you
faced significant obstacles. Our quarterly
know someone who works for Wells Fargo,
surveys of small business owners showed their
or someone who knows someone who does.
deep concerns about economic and credit
Thirty-seven percent of our team is racially and
market outlooks, along with pending regulatory
ethnically diverse. This is slightly more than
reforms, and their potential effect on sales and
the U.S. population, which is 36 percent diverse.
operating costs.
This diversity should enable us to better
Many Americans remained frustrated with
understand and respond to the financial needs
the slow, uneven economic recovery and the
of our customers and communities.
lack of job opportunities. As a result, they
Our reach is global, but at our heart we’re
have lost faith in many large companies and
a hometown American company. Ninety-
institutions. We understand their concerns.
seven percent of our assets and 98 percent of
We’re listening to our customers every day
our team members are based in the U.S. This
and helping them address their financial
makes us different from our large peers. Our
needs in any way we can. We’re contributing
roots are American roots, and we’ve grown as
to communities across the country, helping
they’ve spread wide and deep in American soil.
them find local solutions for local problems.
Since 1852, we’ve been betting on America.
We’re also at the table in Washington, D.C.,
We liked our bet then, and we like it even
discussing the merits of proposed reforms for
more now. We’re confident in the ingenuity,
the financial services industry. We want to be
resourcefulness, work ethic, and can-do attitude
a partner for thoughtful change, and we share
of Americans and our Wells Fargo team.
our government’s desire to do what’s right for
Together, we’re focused on the tremendous
consumers and businesses.
opportunities we now have ahead of us and
We don’t take trust for granted. We know we
on the responsibilities we have to help our
have to earn it every day in our conversations
customers, communities, and country succeed.
and actions with our customers. Here’s how we
We’re focused on providing you, our
try to do that.
shareholders, with sustainable, long-term
success. We returned more capital to
Helping our mortgage customers
shareholders in 2011 by increasing our quarterly
First, no financial product is more important
common stock dividend by 140 percent, to
to Americans, more interwoven with their
48 cents for the year. We also resumed the
financial security, than their home mortgage.
repurchase of our common stock.
Earning trust
Other financial services companies are backing
away from this business because of what they
perceive to be its high costs and its risks. Not
The U.S. economy’s recovery remained sluggish
Wells Fargo. Here’s why: Two-thirds of all
and continued to deliver disappointing
Americans are in the mortgage business. They
results. Millions of Americans struggled with
have mortgages on their homes. We want to be
unemployment and underemployment despite
there to satisfy not just their mortgage needs,
slight improvements in the job market. The
but all their other financial needs that connect
lack of jobs led to a decline in first-time home
to their mortgage. We believe we have the right
sales, even with historic low interest rates and
products to offer mortgage customers and
bargain-basement prices. A stagnant housing
the right underwriting principles to make sure
market placed a drag on the economy.
their loans are good loans. As a result, more
Consumers spent less and paid down their
than 92 percent of our mortgage customers
debt, including mortgages, credit cards, and
were current on their payments and fewer
auto loans. This made sense for consumers
than 2 percent of our owner-occupied home
who wanted to regain control of their financial
mortgages proceeded to a foreclosure sale.
situation, but less spending didn’t help the
recovery. By year’s end, credit balances and
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1 in 3
Wells Fargo serves one in three
households in the U.S.
No. 1
Our company had the highest
market capitalization in the
U.S. banking industry.
1 in 500
Wells Fargo employs more than
270,000 team members. That’s
1 in 500 working adults — making
us the 12th largest private
employer in the U.S.
Betting on America
Wells Fargo employs one of every 500 working
adults in America, making us the nation’s 12th
largest private employer. Chances are you
know someone who works for Wells Fargo,
or someone who knows someone who does.
Thirty-seven percent of our team is racially and
ethnically diverse. This is slightly more than
the U.S. population, which is 36 percent diverse.
This diversity should enable us to better
understand and respond to the financial needs
of our customers and communities.
Our reach is global, but at our heart we’re
a hometown American company. Ninety-
seven percent of our assets and 98 percent of
our team members are based in the U.S. This
makes us different from our large peers. Our
roots are American roots, and we’ve grown as
they’ve spread wide and deep in American soil.
Since 1852, we’ve been betting on America.
We liked our bet then, and we like it even
more now. We’re confident in the ingenuity,
resourcefulness, work ethic, and can-do attitude
of Americans and our Wells Fargo team.
Together, we’re focused on the tremendous
opportunities we now have ahead of us and
on the responsibilities we have to help our
customers, communities, and country succeed.
We’re focused on providing you, our
shareholders, with sustainable, long-term
success. We returned more capital to
shareholders in 2011 by increasing our quarterly
common stock dividend by 140 percent, to
48 cents for the year. We also resumed the
repurchase of our common stock.
Earning trust
The U.S. economy’s recovery remained sluggish
and continued to deliver disappointing
results. Millions of Americans struggled with
unemployment and underemployment despite
slight improvements in the job market. The
lack of jobs led to a decline in first-time home
sales, even with historic low interest rates and
bargain-basement prices. A stagnant housing
market placed a drag on the economy.
Consumers spent less and paid down their
debt, including mortgages, credit cards, and
auto loans. This made sense for consumers
who wanted to regain control of their financial
situation, but less spending didn’t help the
recovery. By year’s end, credit balances and
spending began trending upward again, but
balances were often paid in full each month.
Consumers were not alone. Businesses also
faced significant obstacles. Our quarterly
surveys of small business owners showed their
deep concerns about economic and credit
market outlooks, along with pending regulatory
reforms, and their potential effect on sales and
operating costs.
Many Americans remained frustrated with
the slow, uneven economic recovery and the
lack of job opportunities. As a result, they
have lost faith in many large companies and
institutions. We understand their concerns.
We’re listening to our customers every day
and helping them address their financial
needs in any way we can. We’re contributing
to communities across the country, helping
them find local solutions for local problems.
We’re also at the table in Washington, D.C.,
discussing the merits of proposed reforms for
the financial services industry. We want to be
a partner for thoughtful change, and we share
our government’s desire to do what’s right for
consumers and businesses.
We don’t take trust for granted. We know we
have to earn it every day in our conversations
and actions with our customers. Here’s how we
try to do that.
Helping our mortgage customers
First, no financial product is more important
to Americans, more interwoven with their
financial security, than their home mortgage.
Other financial services companies are backing
away from this business because of what they
perceive to be its high costs and its risks. Not
Wells Fargo. Here’s why: Two-thirds of all
Americans are in the mortgage business. They
have mortgages on their homes. We want to be
there to satisfy not just their mortgage needs,
but all their other financial needs that connect
to their mortgage. We believe we have the right
products to offer mortgage customers and
the right underwriting principles to make sure
their loans are good loans. As a result, more
than 92 percent of our mortgage customers
were current on their payments and fewer
than 2 percent of our owner-occupied home
mortgages proceeded to a foreclosure sale.
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Our Performance
$ in millions, except per share amounts
2011
2010
% Change
of 2009 through the end of 2011, we have:
“We value what’s right for our customers in
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)
$
$
15,869
15,025
2.82
1.25%
11.93
61.0
80,948
31,555
0.48
5,278.1
5,323.4
$ 757,144
1,270,265
826,735
595,851
3.94%
$ 222,613
769,631
19,372
25,115
1,313,867
872,629
140,241
141,687
113,952
148,469
10.78%
11.33
14.76
9.03
9.46
$
24.64
264,200
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
4.26
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
28%
29
28
24
15
3
(5)
(9)
140
1
1
(2)
4
7
4
(8)
29
2
(16)
1
4
9
11
11
4
1
6
2
(2)
(2)
14
10
(3)
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 26 (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
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$13.9 billion
In 2011, small business new loan
commitments grew to $13.9 billion
(an 8 percent increase from 2010).
92%
92 percent of our mortgage
customers remained current on
their home payments.
5.2 million
Since the beginning of 2009
through the end of 2011, we
helped more than 5.2 million
homeowners with new low-rate
loans, either to buy a home
or refinance their mortgage.
We’re taking major steps to help our
1. Putting customers first
customers avoid foreclosure. Since the beginning
From Wells Fargo’s Vision & Values:
• Completed more than 728,000 active trial
everything we do.”
or completed mortgage modifications
to help homeowners who are struggling
financially keep their homes. That’s an
average of 665 each and every day, or
28 every hour.
• Helped more than 5.2 million homeowners
with new low-rate loans, either to buy a
home or refinance their mortgage.
• Provided more than $4.1 billion in principal
reduction when that was the best solution
for the customer and the company.
Our customers come first, and we focus on
helping them succeed financially. Their success
comes before ours. We never put the stagecoach
ahead of the horses.
Consider our integration of Wachovia into
Wells Fargo. When most companies merge,
often the first thing they do is rush to change
signs and business cards. We did it differently.
It took us three years to integrate Wachovia’s
operations because it was important to get
the merger right for our customers. During
In 2011 alone, we hosted 33 home preservation
those three years, we provided 490,000 hours
workshops, where we met face-to-face with
of training for 35,000 retail banking team
thousands of our mortgage customers in cities
members who focused on making the transition
across the country and provided on-the-spot
as easy and effortless as possible for our
relief to many of them. While we can’t help
customers. Our team members never lost sight
every mortgage customer who falls behind on
of our guiding principle: The customer is always
payments, we’re proud of our progress and look
at the center of everything we do and every
forward to helping even more customers.
decision we make.
Helping small business grow
This principle is more important than ever
when you consider our size and scale. In the
Second, no part of the economy is getting
Community Bank alone, we touch people and
more attention today than our nation’s small
businesses at least 5 billion times a year. Every
businesses, widely viewed as the engine of
single one of those interactions is vital to each
America’s job growth. As the nation’s leading
customer. That gives us billions of chances
small business lender, we’ve been increasing
a year to be a customer’s hero, to put the
our small business lending, doing everything we
customer’s needs first and ensure we do things
can to say “yes” to creditworthy borrowers. Our
right. We will never be perfect. No company
new loan commitments for small businesses
can be flawless billions of times a year. Smart
grew to $13.9 billion in 2011, up 8 percent from
companies, however, learn from their mistakes.
2010. We were the nation’s No. 1 Small Business
When we make one, we want to admit it,
Administration (SBA) lender in dollar volume
apologize for it, fix it fast, and try to make sure
for the third consecutive year, approving a
it never happens again.
record $1.2 billion in SBA 7(a) loans.
Today, seven out of every 10 of our checking
Our five priorities
accounts are online. We’re finding new ways
to make this experience even better. This year,
Serving customers when, where, and how they
we launched a new program called Wells Fargo
want to be served, and helping them succeed
AssistSM to help customers who are behind on
financially, is the foundation for everything
payments or face financial hardship. In the first
we do. Our success depends on staying true to
12 months, we expect to have more than 100,000
those principles and focusing on executing our
customers visit this site, where they can connect
strategic priorities, including:
1. Putting customers first
2. Growing revenue
3. Reducing expenses
4. Living our Vision & Values
5. Connecting with communities
and stakeholders
with product specialists who can work with
them — privately and conveniently. Rather than
having to visit different Wells Fargo sites, the
Wells Fargo Assist site is organized to reflect the
way customers think of us, as One Wells Fargo
offering many financial services and products:
mortgages, home equity lines, credit cards,
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$13.9 billion
In 2011, small business new loan
commitments grew to $13.9 billion
(an 8 percent increase from 2010).
92%
92 percent of our mortgage
customers remained current on
their home payments.
5.2 million
Since the beginning of 2009
through the end of 2011, we
helped more than 5.2 million
homeowners with new low-rate
loans, either to buy a home
or refinance their mortgage.
We’re taking major steps to help our
customers avoid foreclosure. Since the beginning
of 2009 through the end of 2011, we have:
• Completed more than 728,000 active trial
or completed mortgage modifications
to help homeowners who are struggling
financially keep their homes. That’s an
average of 665 each and every day, or
28 every hour.
• Helped more than 5.2 million homeowners
with new low-rate loans, either to buy a
home or refinance their mortgage.
• Provided more than $4.1 billion in principal
reduction when that was the best solution
for the customer and the company.
In 2011 alone, we hosted 33 home preservation
workshops, where we met face-to-face with
thousands of our mortgage customers in cities
across the country and provided on-the-spot
relief to many of them. While we can’t help
every mortgage customer who falls behind on
payments, we’re proud of our progress and look
forward to helping even more customers.
Helping small business grow
Second, no part of the economy is getting
more attention today than our nation’s small
businesses, widely viewed as the engine of
America’s job growth. As the nation’s leading
small business lender, we’ve been increasing
our small business lending, doing everything we
can to say “yes” to creditworthy borrowers. Our
new loan commitments for small businesses
grew to $13.9 billion in 2011, up 8 percent from
2010. We were the nation’s No. 1 Small Business
Administration (SBA) lender in dollar volume
for the third consecutive year, approving a
record $1.2 billion in SBA 7(a) loans.
Our five priorities
Serving customers when, where, and how they
want to be served, and helping them succeed
financially, is the foundation for everything
we do. Our success depends on staying true to
those principles and focusing on executing our
strategic priorities, including:
1. Putting customers first
2. Growing revenue
3. Reducing expenses
4. Living our Vision & Values
5. Connecting with communities
and stakeholders
1. Putting customers first
From Wells Fargo’s Vision & Values:
“We value what’s right for our customers in
everything we do.”
Our customers come first, and we focus on
helping them succeed financially. Their success
comes before ours. We never put the stagecoach
ahead of the horses.
Consider our integration of Wachovia into
Wells Fargo. When most companies merge,
often the first thing they do is rush to change
signs and business cards. We did it differently.
It took us three years to integrate Wachovia’s
operations because it was important to get
the merger right for our customers. During
those three years, we provided 490,000 hours
of training for 35,000 retail banking team
members who focused on making the transition
as easy and effortless as possible for our
customers. Our team members never lost sight
of our guiding principle: The customer is always
at the center of everything we do and every
decision we make.
This principle is more important than ever
when you consider our size and scale. In the
Community Bank alone, we touch people and
businesses at least 5 billion times a year. Every
single one of those interactions is vital to each
customer. That gives us billions of chances
a year to be a customer’s hero, to put the
customer’s needs first and ensure we do things
right. We will never be perfect. No company
can be flawless billions of times a year. Smart
companies, however, learn from their mistakes.
When we make one, we want to admit it,
apologize for it, fix it fast, and try to make sure
it never happens again.
Today, seven out of every 10 of our checking
accounts are online. We’re finding new ways
to make this experience even better. This year,
we launched a new program called Wells Fargo
AssistSM to help customers who are behind on
payments or face financial hardship. In the first
12 months, we expect to have more than 100,000
customers visit this site, where they can connect
with product specialists who can work with
them — privately and conveniently. Rather than
having to visit different Wells Fargo sites, the
Wells Fargo Assist site is organized to reflect the
way customers think of us, as One Wells Fargo
offering many financial services and products:
mortgages, home equity lines, credit cards,
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student loans, personal loans, and lines of credit.
This can help our customers resolve past-due
accounts quickly and discreetly, and also reduce
our collection work.
We’re also putting the global needs of
our business customers first. This year we
relocated our branch in Shanghai, one of the
world’s most dynamic cities. This expanded
office will play a critical role in supporting the
increasing number of Wells Fargo customers
doing business in China and a growing number
of Chinese companies that want to grow their
business in the U.S. This is just one way we’re
positioned to continue to grow our international
business and serve our customers with an
expanded range of products and services.
2. Growing revenue
From Wells Fargo’s Vision & Values:
“We can’t control the economy, interest
rates, the markets, or world events. We focus
on what we can control and what we can
sustain long term: our core performance,
our revenue growth.”
When we put customers first and help
them succeed financially, we strengthen
relationships, build loyalty, and earn trust.
As a result, our customers bring us more
business, we create more opportunities
for our team members, and we earn more
revenue to support our operations, growing
our earnings and shareholder return.
In 2011, Wells Fargo grew its Tier 1
common equity 1 (a bank’s core equity capital)
by $13.8 billion, up 17 percent. This was the
greatest increase among the four largest U.S.
banks, based on assets.
We grew revenue in many of our businesses
within Community Banking; Wealth, Brokerage
and Retirement; Consumer Lending; and
Wholesale Banking, including Commercial
Banking. However, our total revenue declined
during the year, reflecting lower interest rates,
new regulations, and the sluggish economy.
We’re confident we can grow revenue if
we stay true to our vision and attract new
customers through organic growth and
disciplined acquisitions.
We have a huge opportunity to earn
more business from our current customers.
Our average retail bank household cross-sell
reached a record 5.92 products in 2011, up
from 5.70 in the fourth quarter of 2010. In our
Western markets it was a record 6.29, in the
East 5.43, and our top region had 7.38. The
opportunities, therefore, are immense. Even
if we get to eight products per retail bank
household, we still have room to grow. We
believe the average American household has
between 14 and 16 financial services products.
In Wholesale Banking, we’re building on
strong relationships with existing customers
and developing relationships with new
customers. Our loans in this important segment
grew 8 percent in 2011. Our Commercial
Banking business has increased loans for
17 straight months.
We also bought commercial portfolios
with favorable risk-reward characteristics
in 2011, including approximately $4 billion
of U.S.-based commercial real estate loans,
and made a number of other acquisitions,
expanding our product lines. We serve the
treasury management, investment banking,
and international needs of more than 28,000
relationships with middle-market and large
corporate businesses, governments, and
institutions worldwide.
We see huge growth opportunities in our
Wealth, Brokerage and Retirement segment.
Only one of about every 10 of our banking
households has an investment relationship
with us. More than 5 million affluent banking
households don’t have investment products
with us, but they have nearly $2 trillion in
investable assets. Increasing cross-sell only
5 percent with these customers could generate
$600 million in annual revenue. Our more
than 15,000 financial advisors have their work
cut out for them. They’re eager to earn all our
customers’ business. If you’re a Wells Fargo
customer with investable assets, we look
forward to talking to you soon.
Growing revenue comes down to how well
our team can help our customers succeed, one
customer at a time. In Scottsdale, Ariz., for
example, our financial advisors and private
bankers worked together to help a customer
open a $1 million line of credit to help his
business meet its short-term capital needs.
$13.8 billion
In 2011, Wells Fargo grew Tier 1
common equity 1 by $13.8 billion,
highest among the four largest
U.S. banks by assets.
5.92 products
Retail bank household cross-sell
reached a record 5.92 products in
2011, up from 5.70 in the fourth
quarter of 2010.
$1.5 million
We installed 7,000 LED signs
coast to coast, saving an estimated
$1.5 million in reduced energy
and maintenance costs.
He was so happy with the process and our
companywide view of how we work. Second,
service, he opened two more business accounts.
each of our individual businesses is looking
When he decided to expand his business, the
closely at how they do their work. For example,
same team helped him finance a $3.5 million
we’ve identified technology, human resources,
loan. When we delight our customers and help
and marketing functions that were handled
them succeed financially, great things happen.
in separate areas, and we’re bringing them
Another example can be found in San
together to serve the company more efficiently.
Francisco’s Mission District, where many low-
We combined our two separate automobile
income immigrant women sell food from their
finance businesses to better serve customers.
homes or in the streets to help support their
We simplified our Wealth Management
families. To help these women organize and
regional structure to operate seven instead of
grow their businesses, a nonprofit business
12 regions. Our businesses reduced the number
incubator called La Cocina was started in 2005.
of temporary resources and contractors in
Wells Fargo provided an equity equivalent,
high-cost locations by 29 percent in 2011.
or EQ2 (below-market rate), loan of $500,000
Reducing expenses also helps us achieve
to get it started. As La Cocina grew, we
other goals. During the merger integration
helped arrange another $500,000 loan and,
with Wachovia, we converted many of our retail
later, another $300,000 loan. La Cocina is
banking stores to more efficient “green” signs,
now recognized as a national model for
saving a lot of money for the company and our
moving low-income and immigrant women
shareholders. We installed 7,000 LED signs
entrepreneurs into the formal economy. It’s
coast to coast, saving an estimated $1.5 million
home for several women-owned businesses,
in reduced energy and maintenance costs.
generating $2 million in annual revenue and
As part of our current expense initiative,
creating jobs in the community.
we set a target to reduce our quarterly
3. Reducing expenses
From Wells Fargo’s Vision & Values:
“We’re making expense management a
noninterest expenses to $11 billion in the fourth
quarter of 2012. That means reducing our
quarterly noninterest expense by $1.5 billion,
or 12 percent, from the amount of noninterest
competitive advantage — just like our people,
expenses we incurred in the second quarter of
cross-sell, our solid capital position, our strong
2011, when we set our expense target. We’re on
balance sheet, and credit discipline.”
the right track to reach that goal.
We have the privilege and responsibility to
use our shareholders’ capital as efficiently and
effectively as possible so we can give them
a solid, long-term return on their investment.
That means managing our expenses well —
not cutting costs just for the sake of it, but
making sure everything we do is as efficient
4. Living our Vision & Values
From Wells Fargo’s Vision & Values: “We have
what it takes to be great. One vision. Shared
values that we live. A well-understood and
effective culture. A time-tested business model …
And most of all: great people.”
and simple as possible. We should spend
Living our Vision & Values is about trust,
money only on what really matters to our
personal responsibility, working together,
customers and on things that help us grow
admitting mistakes when we make them, and
revenue. We need to cut costs, but not corners,
making things right for our customers. Whether
when it comes to doing things right and doing
you’re a bank teller, a relationship manager,
the right things.
a computer programmer, or a leader of one
Through our current companywide
of our business groups, these are the values
expense initiative, we want to become more
that guide us.
cost-competitive and nimble by streamlining
We also value — and learn from — the
processes and eliminating unnecessary
diversity of team members, customers, and
expense. This work is moving forward on two
communities. We promote an environment that
fronts. First, we’re identifying cross-company
embraces and values differences, encouraging
opportunities that remove complexity,
diversity in our business practices. This
eliminate duplication, and take more of a
gives us multiple perspectives to respond to
6
1 Please see the “Financial Review – Capital Management” section
in this Report for more information.
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$13.8 billion
In 2011, Wells Fargo grew Tier 1
common equity 1 by $13.8 billion,
highest among the four largest
U.S. banks by assets.
5.92 products
Retail bank household cross-sell
reached a record 5.92 products in
2011, up from 5.70 in the fourth
quarter of 2010.
$1.5 million
We installed 7,000 LED signs
coast to coast, saving an estimated
$1.5 million in reduced energy
and maintenance costs.
He was so happy with the process and our
service, he opened two more business accounts.
When he decided to expand his business, the
same team helped him finance a $3.5 million
loan. When we delight our customers and help
them succeed financially, great things happen.
Another example can be found in San
Francisco’s Mission District, where many low-
income immigrant women sell food from their
homes or in the streets to help support their
families. To help these women organize and
grow their businesses, a nonprofit business
incubator called La Cocina was started in 2005.
Wells Fargo provided an equity equivalent,
or EQ2 (below-market rate), loan of $500,000
to get it started. As La Cocina grew, we
helped arrange another $500,000 loan and,
later, another $300,000 loan. La Cocina is
now recognized as a national model for
moving low-income and immigrant women
entrepreneurs into the formal economy. It’s
home for several women-owned businesses,
generating $2 million in annual revenue and
creating jobs in the community.
3. Reducing expenses
From Wells Fargo’s Vision & Values:
“We’re making expense management a
competitive advantage — just like our people,
cross-sell, our solid capital position, our strong
balance sheet, and credit discipline.”
We have the privilege and responsibility to
use our shareholders’ capital as efficiently and
effectively as possible so we can give them
a solid, long-term return on their investment.
That means managing our expenses well —
not cutting costs just for the sake of it, but
making sure everything we do is as efficient
and simple as possible. We should spend
money only on what really matters to our
customers and on things that help us grow
revenue. We need to cut costs, but not corners,
when it comes to doing things right and doing
the right things.
Through our current companywide
expense initiative, we want to become more
cost-competitive and nimble by streamlining
processes and eliminating unnecessary
expense. This work is moving forward on two
fronts. First, we’re identifying cross-company
opportunities that remove complexity,
eliminate duplication, and take more of a
companywide view of how we work. Second,
each of our individual businesses is looking
closely at how they do their work. For example,
we’ve identified technology, human resources,
and marketing functions that were handled
in separate areas, and we’re bringing them
together to serve the company more efficiently.
We combined our two separate automobile
finance businesses to better serve customers.
We simplified our Wealth Management
regional structure to operate seven instead of
12 regions. Our businesses reduced the number
of temporary resources and contractors in
high-cost locations by 29 percent in 2011.
Reducing expenses also helps us achieve
other goals. During the merger integration
with Wachovia, we converted many of our retail
banking stores to more efficient “green” signs,
saving a lot of money for the company and our
shareholders. We installed 7,000 LED signs
coast to coast, saving an estimated $1.5 million
in reduced energy and maintenance costs.
As part of our current expense initiative,
we set a target to reduce our quarterly
noninterest expenses to $11 billion in the fourth
quarter of 2012. That means reducing our
quarterly noninterest expense by $1.5 billion,
or 12 percent, from the amount of noninterest
expenses we incurred in the second quarter of
2011, when we set our expense target. We’re on
the right track to reach that goal.
4. Living our Vision & Values
From Wells Fargo’s Vision & Values: “We have
what it takes to be great. One vision. Shared
values that we live. A well-understood and
effective culture. A time-tested business model …
And most of all: great people.”
Living our Vision & Values is about trust,
personal responsibility, working together,
admitting mistakes when we make them, and
making things right for our customers. Whether
you’re a bank teller, a relationship manager,
a computer programmer, or a leader of one
of our business groups, these are the values
that guide us.
We also value — and learn from — the
diversity of team members, customers, and
communities. We promote an environment that
embraces and values differences, encouraging
diversity in our business practices. This
gives us multiple perspectives to respond to
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“Living our Vision & Values is about
trust, personal responsibility, working
together, admitting mistakes when we
make them, and making things right
for our customers. Whether you’re
a bank teller, a relationship manager,
a computer programmer, or a leader
of one of our business groups, these
are the values that guide us.”
the needs of our team members, customers,
and communities. More than 28,000 of
our team members — up 33 percent for the
year — participated in our nine team member
networks, groups that are aligned with our
company’s diverse customer segments and
business strategies. We’re committed to
diversity and diverse representation all across
Wells Fargo, including on my own leadership
team. I’m proud to serve as chair of our
company’s diversity council, and I take personal
responsibility for our progress.
We make our Vision & Values booklet
available to all of our team members. It’s a
living document. We encourage all our team
members and leaders to use it as a guide for
their daily work. It’s our gold standard for
serving our customers, working together as
team members, serving our communities, and
honoring our shareholders for investing in our
company. You can read our Vision & Values
in the “About Us” section on wellsfargo.com.
Check it out and let us know how we’re doing.
You can also read about the important role
our Vision & Values plays in the Wells Fargo
culture in the February 13, 2012, issue of
Forbes magazine. Search forbes.com for the
January 25, 2012, article titled “Wells Fargo:
The Bank That Works.”
5. Connecting with communities and
stakeholders
From Wells Fargo’s Vision & Values:
“Our responsibility goes far beyond protecting
our customers’ assets. We’re responsible
for being leaders to promote the long-term
economic prosperity and quality of life for
everyone in our communities. If they prosper,
so do we.”
For 160 years, Wells Fargo has been committed
to the communities where our customers live
and work. Each of these communities has
unique needs. Our teams in these communities
know how they can make a difference. They’re
closely connected to their customers. They
know them by name. They know how to help
them succeed financially, and they help support
them when the going gets rough. One such
crisis happened in the town of Bastrop, Texas,
near Austin, last year. Bastrop (population:
7,200) was one of many communities parched
by drought, record heat, and wildfires in the
summer of 2011. Ten of our 12 Wells Fargo team
members in Bastrop had to leave their homes
and live in shelters, churches, or with friends
and family. Despite that, they still chose to come
to work so they could serve our customers.
When the offer was made to bring bankers
from outside the community to help, they said,
“We know the customers. They’re our friends,
neighbors, and customers, and we don’t want
to leave.” I believe you can find similar courage
and selflessness among our team members in
every community where we do business.
Because of our record earnings in 2011,
Wells Fargo was also able to excel in giving to
nonprofit organizations and in team member
volunteerism. Wells Fargo contributed
$213.5 million to 25,000 nonprofits across the
U.S. Fortune ranked us 23rd among the 500
largest companies in America, and the Journal
of Philanthropy ranked Wells Fargo No. 3 in
corporate giving. Our team members set a
company record by contributing more than
$63.9 million of their own money to nonprofits
across the country, including $41.6 million
through our annual community support
campaign. That was a 16 percent increase over
2010, and the ninth straight year of double-digit
increases in pledges. Even though we’re the
12th largest private employer, not the largest, in
2010 Wells Fargo was recognized by United Way
Worldwide for the second year in a row for having
the No. 1 corporate campaign in the country.
New Board members
Our team members also set a company record
This year we welcomed two new directors to
by volunteering 1.5 million hours for causes they
our Board: Elaine L. Chao and Federico F. Peña.
cared about in 2011, up from 1.3 million hours
Ms. Chao, the former U. S. Secretary of Labor
in 2010. How do we get such outstanding results?
and the first Asian Pacific American woman
We follow a formula that’s worked for 160 years:
to be appointed to a presidential cabinet, was
local people making local decisions because they
elected effective July 1, 2011. She serves on the
know their communities best.
Board’s Finance and Corporate Responsibility
We’re proud to support many environmental
committees. Mr. Peña, a senior advisor of
initiatives. In 2011, Wells Fargo received the
Vestar Capital Partners, and former U.S.
2011 Leadership Award from the U.S. Green
Secretary of Transportation and U.S. Secretary
Building Council for our commitment to
of Energy, was elected effective November 1,
environmentally responsible building design,
2011. He serves on the Board’s Audit and
construction, and operation. We also achieved
Examination Committee, and his election
a milestone for our customers: All our deposit-
increased the Board to 16 directors. Both Elaine
taking ATMs are now entirely envelope-free,
and Federico bring years of experience from
adding convenience for our customers while
their distinguished careers, and we welcome
saving paper and transportation costs. Our
them as we focus on meeting the needs of our
team members are also actively involved. We
customers, communities, and stakeholders.
have 65 “green” teams, up 30 percent in a year.
These volunteer networks help Wells Fargo
Unmatched opportunities. Unmatched vision.
conserve resources, reduce waste, and promote
With the scale and scope of our combined
environmental awareness in the workplace and
company, our ability to serve our customers,
in the community.
communities, and country is greater than ever.
We’re doing important work to help revitalize
Our opportunities for service, growth, profitability,
neighborhoods hit hard by the economy. In
and shareholder return are significant. Our
2011, Wells Fargo donated $18.8 million in real
ability to seize those opportunities will depend,
estate-owned (REO) properties and $23.2 million
as always, on the degree to which we are
to organizations that build and rehabilitate
faithful to our Vision & Values. Our financial
affordable housing. The Wells Fargo Housing
strength enables us to continue to innovate,
Foundation mobilized more than 9,800 volunteers
invest in growth, and help our customers
who gave more than 70,000 hours to build
succeed financially. Our future is bright. We’re
or refurbish more than 550 homes in low- to
optimistic. We’re eager. We can’t wait to hop on
moderate-income communities.
Our company also supports our
the stagecoach and get to work every morning
to serve our customers.
communities and the economy by paying taxes.
We thank all our stakeholders — including
The past 10 years, Wells Fargo — combined
team members, customers, communities,
with Wachovia — paid more than $33 billion
and shareholders — for their confidence in
in federal and state corporate income taxes,
Wells Fargo. All have high expectations for us
including nearly $4 billion during 2011. The
to listen, lead, serve, and innovate.
company’s share of employment-related taxes,
What a privilege we have to rise to
property taxes, and other taxes totaled more
that challenge.
than an additional $2 billion in 2011. As with
every corporate and individual taxpayer, the
amount the company pays each year varies
based on its taxable income. The past three
years, Wells Fargo’s taxable income has been
significantly affected by the economic downturn
John G. Stumpf
and the merger with Wachovia. Wells Fargo
Chairman, President and
is proud to be a responsible corporate citizen
Chief Executive Officer
and honors its obligations at the federal, state,
and local levels, providing support for the
communities where we serve our customers.
$213.5 million
Wells Fargo contributed $213.5 million
to 25,000 nonprofit organizations
in 2011.
$33 billion
During the past 10 years,
Wells Fargo (combined with
Wachovia) has paid more than
$33 billion in federal and state
corporate income taxes,
including nearly $4 billion
during 2011.
1.5 million
Wells Fargo team members
volunteered 1.5 million hours
in 2011.
8
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the No. 1 corporate campaign in the country.
Our team members also set a company record
by volunteering 1.5 million hours for causes they
cared about in 2011, up from 1.3 million hours
in 2010. How do we get such outstanding results?
We follow a formula that’s worked for 160 years:
local people making local decisions because they
know their communities best.
We’re proud to support many environmental
initiatives. In 2011, Wells Fargo received the
2011 Leadership Award from the U.S. Green
Building Council for our commitment to
environmentally responsible building design,
construction, and operation. We also achieved
a milestone for our customers: All our deposit-
taking ATMs are now entirely envelope-free,
adding convenience for our customers while
saving paper and transportation costs. Our
team members are also actively involved. We
have 65 “green” teams, up 30 percent in a year.
These volunteer networks help Wells Fargo
conserve resources, reduce waste, and promote
environmental awareness in the workplace and
in the community.
We’re doing important work to help revitalize
neighborhoods hit hard by the economy. In
2011, Wells Fargo donated $18.8 million in real
estate-owned (REO) properties and $23.2 million
to organizations that build and rehabilitate
affordable housing. The Wells Fargo Housing
Foundation mobilized more than 9,800 volunteers
who gave more than 70,000 hours to build
or refurbish more than 550 homes in low- to
moderate-income communities.
Our company also supports our
communities and the economy by paying taxes.
The past 10 years, Wells Fargo — combined
with Wachovia — paid more than $33 billion
in federal and state corporate income taxes,
including nearly $4 billion during 2011. The
company’s share of employment-related taxes,
property taxes, and other taxes totaled more
than an additional $2 billion in 2011. As with
every corporate and individual taxpayer, the
amount the company pays each year varies
based on its taxable income. The past three
years, Wells Fargo’s taxable income has been
significantly affected by the economic downturn
and the merger with Wachovia. Wells Fargo
is proud to be a responsible corporate citizen
and honors its obligations at the federal, state,
and local levels, providing support for the
communities where we serve our customers.
New Board members
This year we welcomed two new directors to
our Board: Elaine L. Chao and Federico F. Peña.
Ms. Chao, the former U. S. Secretary of Labor
and the first Asian Pacific American woman
to be appointed to a presidential cabinet, was
elected effective July 1, 2011. She serves on the
Board’s Finance and Corporate Responsibility
committees. Mr. Peña, a senior advisor of
Vestar Capital Partners, and former U.S.
Secretary of Transportation and U.S. Secretary
of Energy, was elected effective November 1,
2011. He serves on the Board’s Audit and
Examination Committee, and his election
increased the Board to 16 directors. Both Elaine
and Federico bring years of experience from
their distinguished careers, and we welcome
them as we focus on meeting the needs of our
customers, communities, and stakeholders.
Unmatched opportunities. Unmatched vision.
With the scale and scope of our combined
company, our ability to serve our customers,
communities, and country is greater than ever.
Our opportunities for service, growth, profitability,
and shareholder return are significant. Our
ability to seize those opportunities will depend,
as always, on the degree to which we are
faithful to our Vision & Values. Our financial
strength enables us to continue to innovate,
invest in growth, and help our customers
succeed financially. Our future is bright. We’re
optimistic. We’re eager. We can’t wait to hop on
the stagecoach and get to work every morning
to serve our customers.
We thank all our stakeholders — including
team members, customers, communities,
and shareholders — for their confidence in
Wells Fargo. All have high expectations for us
to listen, lead, serve, and innovate.
What a privilege we have to rise to
that challenge.
John G. Stumpf
Chairman, President and
Chief Executive Officer
$213.5 million
Wells Fargo contributed $213.5 million
to 25,000 nonprofit organizations
in 2011.
$33 billion
During the past 10 years,
Wells Fargo (combined with
Wachovia) has paid more than
$33 billion in federal and state
corporate income taxes,
including nearly $4 billion
during 2011.
1.5 million
Wells Fargo team members
volunteered 1.5 million hours
in 2011.
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70,000,000
opportunities
Wells Fargo can serve customers today as never before, thanks
to our new scale and scope. But the opportunities we have
with our 70 million customers are guided by an unchanging
commitment: To listening. To partnering. To devising solutions
that work.
For Stuart and Justin Alboum of Irvington, N.J. — the third-
and fourth-generation owners of a business founded in 1921
— that means working with Business Banking’s Jeff Lenches
to refinance the mortgage on their factory. The financing
helped W. Alboum Hat Co. Inc. add new machines and boost
production while enhancing the trust they require in a business
relationship. “I feel very confident going to Jeff and his team
for financial advice,” said Stuart, who subsequently moved
checking and other business accounts to Wells Fargo.
New opportunities. Unchanging vision.
Justin (left) and Stuart Alboum of
W. Alboum Hat Co. Inc., Irvington, N.J.
10
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70,000,000
opportunities
Wells Fargo can serve customers today as never before, thanks
to our new scale and scope. But the opportunities we have
with our 70 million customers are guided by an unchanging
commitment: To listening. To partnering. To devising solutions
that work.
For Stuart and Justin Alboum of Irvington, N.J. — the third-
and fourth-generation owners of a business founded in 1921
— that means working with Business Banking’s Jeff Lenches
to refinance the mortgage on their factory. The financing
helped W. Alboum Hat Co. Inc. add new machines and boost
production while enhancing the trust they require in a business
relationship. “I feel very confident going to Jeff and his team
for financial advice,” said Stuart, who subsequently moved
checking and other business accounts to Wells Fargo.
New opportunities. Unchanging vision.
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1:1 mortgage relationships
When you’re behind on your mortgage payment, the
last thing you need is uncertainty about who to call.
That’s one reason Wells Fargo created a special Home
Preservation team providing a single point of contact.
12
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Shornell Essex, Des Moines, Iowa
Shornell Essex of Des Moines, Iowa, is
systems, send paperwork to multiple
a member of that team, which means
departments, or feel as if they’re alone
her customers contact her and
only
in the process. Essex said part of what
her in working through an issue —
she and other members of the Home
whether the likely outcome is a loan
Preservation team do is help customers
modification, short sale, deed-in-lieu,
understand their options so they are
or (at last resort) foreclosure. “Now the
prepared for what’s next in the process.
customer has a partner, an advocate,
and a ‘friend’ working with them from
start to finish,” she said. “It’s no longer
necessary to contact anyone else,
because I can assist with any issue,
even taking a payment.”
The team has completed nearly
“I like being in constant contact so
no one is surprised,” she said. “So if I
notify a customer that an underwriting
decision has been made, I also use that
time to discuss options and answer
questions. The best calls are when
I’m able to tell someone who’s been
50,000 modifications since the model
in financial distress that an issue has
launched in July 2011.
Another advantage of the individualized
approach: No one has to navigate phone
been resolved and that brighter days
are ahead. Customers sometimes cry
and often tell me what a difference this
makes in their lives.”
1 in 4
We provide one out of every four
home mortgages and are the largest
servicer of mortgages in the U.S.
$4.1 billion
Since the beginning of 2009
through the end of 2011,
Wells Fargo has provided more
than $4.1 billion in mortgage
principal reduction.
728,000+
Since the beginning of 2009
through the end of 2011, we’ve
completed more than 728,000
mortgage modifications that have
helped struggling homeowners
keep their homes.
13
2/21/12 10:12 PM
Shornell Essex, Des Moines, Iowa
Shornell Essex of Des Moines, Iowa, is
a member of that team, which means
only
her customers contact her and
her in working through an issue —
whether the likely outcome is a loan
modification, short sale, deed-in-lieu,
or (at last resort) foreclosure. “Now the
customer has a partner, an advocate,
and a ‘friend’ working with them from
start to finish,” she said. “It’s no longer
necessary to contact anyone else,
because I can assist with any issue,
even taking a payment.”
The team has completed nearly
50,000 modifications since the model
launched in July 2011.
Another advantage of the individualized
approach: No one has to navigate phone
systems, send paperwork to multiple
departments, or feel as if they’re alone
in the process. Essex said part of what
she and other members of the Home
Preservation team do is help customers
understand their options so they are
prepared for what’s next in the process.
“I like being in constant contact so
no one is surprised,” she said. “So if I
notify a customer that an underwriting
decision has been made, I also use that
time to discuss options and answer
questions. The best calls are when
I’m able to tell someone who’s been
in financial distress that an issue has
been resolved and that brighter days
are ahead. Customers sometimes cry
and often tell me what a difference this
makes in their lives.”
1 in 4
We provide one out of every four
home mortgages and are the largest
servicer of mortgages in the U.S.
$4.1 billion
Since the beginning of 2009
through the end of 2011,
Wells Fargo has provided more
than $4.1 billion in mortgage
principal reduction.
728,000+
Since the beginning of 2009
through the end of 2011, we’ve
completed more than 728,000
mortgage modifications that have
helped struggling homeowners
keep their homes.
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$1.3 trillion under management
Wells Fargo helps people with decisions about their
money every day. Our teams of financial advisors
and planners, private bankers, and retirement and
trust specialists manage more than $1.3 trillion
for customers — creating financial plans that meet
life goals.
One of those customers is “Bubba”
Danforth of Orangedale, Fla., who
was a crabber one day last August
and a millionaire the next, thanks
to a winning Florida Lotto ticket he
purchased at a local country store.
Today he’s confident he can leave a
healthy financial legacy to his family,
thanks to a team of Wells Fargo
professionals.
“The Wells Fargo team is giving us
information and options,” said his wife,
Cathy. “We want to make good choices
and manage the money well. We hope
the money can live on for generations.”
The Danforths chose Wells Fargo for
a simple reason: trust. The morning
after getting the news about their
$20 million windfall, the couple visited
the Green Coast Springs banking store
they knew so well. Team members
there previously had helped them
untangle a financial knot created when
fraudsters took advantage of Bubba’s
aging mother. The couple placed the
winning ticket in their safe deposit
box, and Teller Chrispian Boyd asked,
“Would you like me to recommend
someone who can help you?”
Wells Fargo Advisors’ David Berard
and Wells Fargo Private Bank’s Marty
Flack quickly assembled a team
(including specialists from The Private
Bank, Wells Fargo Insurance, and
Community Banking) and presented
a plan for the Danforths to consider.
Cathy concluded, “We’re modest people
and have never had a lot of money, but
we tried to manage what we did have.
Now we have peace of mind.”
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Bubba and Cathy Danforth,
Orangedale, Fla.
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9,054Wells Fargo operates the largest store network in the U.S., including 6,239 banking, 1,375 Wells Fargo Advisors, 725 mortgage, and 715 wholesale locations.15,000The brokerage team, Wells Fargo Advisors, has more than 15,000 financial advisors.No. 4Wells Fargo is the fourth largest wealth management firm. 80478_L3_L4_L5_p1_24.indd 15
Bubba and Cathy Danforth,
Orangedale, Fla.
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1,000s flavors, one
Helping small businesses grow in a tough economy
bank
of
is a goal many financial companies espouse but few
achieve. Wells Fargo has done just that — as 32 small
business owners in San Francisco can attest.
No. 1
Wells Fargo is the nation’s leading
small business lender in dollars.
$57.4 million
Since 2001, Wells Fargo has
invested $57.4 million in
microbusiness incubators
across the U.S., helping low- and
moderate-income entrepreneurs
start or expand their businesses.
A few years ago, a low-income
Initially, Wells Fargo provided a below-
entrepreneur in the city’s Mission
market-rate loan of $500,000 to renovate
District would have had a tough
La Cocina’s facility from a house to a
time finding working space, capital,
commercial kitchen. As the organization
and an understanding of how to
grew, Wells Fargo arranged another
navigate all the red tape involved in
$500,000 loan to expand capacity
starting a new food business. Today
and purchase commercial equipment,
32 business owners are generating
and provided $300,000 in foundation
$2 million in annual revenue, creating
grants. Wells Fargo team members are
nearly a hundred community jobs,
involved, too, regularly volunteering
and introducing thousands of people
to teach budding entrepreneurs the
to flavors of the world — thanks to
financial basics of running a business.
Wells Fargo and La Cocina.
Elvia Buendia, owner of La Luna
Wells Fargo was an early supporter of
Cupcakes, said, “Now I am able to help
La Cocina (“the kitchen,” in Spanish),
out my daughter financially as she
which is a nonprofit business incubator
goes to college. I have taught both of
originally focused on helping women
my children that difficult goals can
entrepreneurs. The organization
be accomplished. They are motivated
helps clients make the transition from
and know that with hard work and
catering from their homes or on the
perseverance, they too can accomplish
streets to growing their businesses and
whatever they set their minds to.”
contributing to a vibrant, local economy.
Community Development’s Brenda Wright (left)
with Elvia Buendia of La Luna Cupcakes,
San Francisco, Calif.
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1,000s flavors, one
bank
Helping small businesses grow in a tough economy
is a goal many financial companies espouse but few
achieve. Wells Fargo has done just that — as 32 small
business owners in San Francisco can attest.
of
No. 1
Wells Fargo is the nation’s leading
small business lender in dollars.
$57.4 million
Since 2001, Wells Fargo has
invested $57.4 million in
microbusiness incubators
across the U.S., helping low- and
moderate-income entrepreneurs
start or expand their businesses.
A few years ago, a low-income
entrepreneur in the city’s Mission
District would have had a tough
time finding working space, capital,
and an understanding of how to
navigate all the red tape involved in
starting a new food business. Today
32 business owners are generating
$2 million in annual revenue, creating
nearly a hundred community jobs,
and introducing thousands of people
to flavors of the world — thanks to
Wells Fargo and La Cocina.
Wells Fargo was an early supporter of
La Cocina (“the kitchen,” in Spanish),
which is a nonprofit business incubator
originally focused on helping women
entrepreneurs. The organization
helps clients make the transition from
catering from their homes or on the
streets to growing their businesses and
contributing to a vibrant, local economy.
Initially, Wells Fargo provided a below-
market-rate loan of $500,000 to renovate
La Cocina’s facility from a house to a
commercial kitchen. As the organization
grew, Wells Fargo arranged another
$500,000 loan to expand capacity
and purchase commercial equipment,
and provided $300,000 in foundation
grants. Wells Fargo team members are
involved, too, regularly volunteering
to teach budding entrepreneurs the
financial basics of running a business.
Elvia Buendia, owner of La Luna
Cupcakes, said, “Now I am able to help
out my daughter financially as she
goes to college. I have taught both of
my children that difficult goals can
be accomplished. They are motivated
and know that with hard work and
perseverance, they too can accomplish
whatever they set their minds to.”
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17
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Andrew Kho at SunEdison solar farm,
Carlsbad, N.M.
53.5 megawatts
Helping customers succeed financially means more
than providing advice to millions of individuals as
they earn, save, spend, and invest. It also means
working with thousands of innovative companies
with new ideas — like the one that now supplies
53.5 megawatts of solar energy in New Mexico.
18
A multi-site SunEdison solar farm
“Everyone wants a more sustainable
in the southeastern part of the state
energy future,” said the Cleantech
can generate enough power to supply
Group’s Andrew Kho. “The success
more than 8,000 U.S. homes each
of this project is one step toward
year. The project’s construction
that end — and a testament to
financing was made possible by a
Wells Fargo’s commitment to it.”
partnership among four teams in
Wells Fargo’s Wholesale Banking
group: the Cleantech Group in
Commercial Banking, Wells Fargo
Securities, Wells Fargo Equipment
Finance, and Wells Fargo
Environmental Finance.
Wells Fargo has seven business groups
across the company equipped to serve
different aspects of the cleantech
industry and environmental markets,
from solar financing for homeowners
and businesses to insurance brokerage
and trust services for large-scale
Wells Fargo also has committed to
environmental projects. Wells Fargo
provide permanent equity financing
began investing equity in solar projects
for the solar farm, which is the
in 2007, and in 2010 began offering
largest in New Mexico and one of
construction financing.
the largest in the U.S.
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$3.6 billionWells Fargo has provided more than $3.6 billion in equity and debt financing to 39 wind projects and more than 260 solar projects in 24 states since 2006.8%Wells Fargo’s Wholesale Bank saw loan growth of 8 percent in 2011. Andrew Kho at SunEdison solar farm,
Carlsbad, N.M.
A multi-site SunEdison solar farm
in the southeastern part of the state
can generate enough power to supply
more than 8,000 U.S. homes each
year. The project’s construction
financing was made possible by a
partnership among four teams in
Wells Fargo’s Wholesale Banking
group: the Cleantech Group in
Commercial Banking, Wells Fargo
Securities, Wells Fargo Equipment
Finance, and Wells Fargo
Environmental Finance.
Wells Fargo also has committed to
provide permanent equity financing
for the solar farm, which is the
largest in New Mexico and one of
the largest in the U.S.
“Everyone wants a more sustainable
energy future,” said the Cleantech
Group’s Andrew Kho. “The success
of this project is one step toward
that end — and a testament to
Wells Fargo’s commitment to it.”
Wells Fargo has seven business groups
across the company equipped to serve
different aspects of the cleantech
industry and environmental markets,
from solar financing for homeowners
and businesses to insurance brokerage
and trust services for large-scale
environmental projects. Wells Fargo
began investing equity in solar projects
in 2007, and in 2010 began offering
construction financing.
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$3.6 billionWells Fargo has provided more than $3.6 billion in equity and debt financing to 39 wind projects and more than 260 solar projects in 24 states since 2006.8%Wells Fargo’s Wholesale Bank saw loan growth of 8 percent in 2011. 25,000 partnerships
How did Wells Fargo become known as one of the
most generous companies in the U.S.? By investing
our resources in the thousands of communities we
are proud to call home — and by helping solve big
issues one at a time.
In 2011, Wells Fargo
partnered with nonprofits to:
Build and renovate
affordable housing.
Teach financial literacy and
workforce development skills.
Help struggling homeowners
stay in their homes.
Read to children in elementary
school classrooms.
Take Army Sgt. Buddy Mays of
“Community support, financing, and
Meansville, Ga., who returned home to
volunteers — Wells Fargo brings all of
an uncertain future after his Humvee
that,” Gallina said.
was hit by a roadside bomb in Iraq.
He was left a paraplegic and faced
not only supporting his wife and two
young daughters but also a drafty
house that he could barely navigate in
his wheelchair or afford because of its
high energy costs.
That all changed because of
With the help of an army of Wells Fargo
volunteers from Georgia Community
Banking, Environmental Affairs,
and Wells Fargo Home Mortgage,
Mays’s house today is a different
place: wheelchair accessible and
easier to maintain, thanks to energy-
efficient heating and cooling systems,
Wells Fargo’s partnership with Purple
enhanced insulation, and ENERGY
Heart Homes of Statesville, N.C., one
STAR® appliances.
of 25,000 nonprofits Wells Fargo
worked with in 2011 to make a
difference in the lives of others.
“It’s simplified everyday life and
everything in my house in a way that
most people will never understand,”
Purple Heart Homes founders John
Mays said. “The volunteers overwhelm
Gallina and Dale Beatty (also injured
me the most. That all of these people
Iraq combat veterans) turned to
who don’t know me would do this —
Wells Fargo to help rehabilitate Mays’s
well, there’s really not much I can say
home because of the company’s
but ‘thanks.’ ”
reputation for bringing community
leadership to bear when confronted
with a tough challenge.
Army Sgt. Buddy Mays and his family,
Meansville, Ga.
20
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››››2011 25,000 partnerships
How did Wells Fargo become known as one of the
most generous companies in the U.S.? By investing
our resources in the thousands of communities we
are proud to call home — and by helping solve big
issues one at a time.
In 2011, Wells Fargo
partnered with nonprofits to:
Build and renovate
affordable housing.
Teach financial literacy and
workforce development skills.
Help struggling homeowners
stay in their homes.
Read to children in elementary
school classrooms.
Take Army Sgt. Buddy Mays of
Meansville, Ga., who returned home to
an uncertain future after his Humvee
was hit by a roadside bomb in Iraq.
He was left a paraplegic and faced
not only supporting his wife and two
young daughters but also a drafty
house that he could barely navigate in
his wheelchair or afford because of its
high energy costs.
That all changed because of
Wells Fargo’s partnership with Purple
Heart Homes of Statesville, N.C., one
of 25,000 nonprofits Wells Fargo
worked with in 2011 to make a
difference in the lives of others.
Purple Heart Homes founders John
Gallina and Dale Beatty (also injured
Iraq combat veterans) turned to
Wells Fargo to help rehabilitate Mays’s
home because of the company’s
reputation for bringing community
leadership to bear when confronted
with a tough challenge.
“Community support, financing, and
volunteers — Wells Fargo brings all of
that,” Gallina said.
With the help of an army of Wells Fargo
volunteers from Georgia Community
Banking, Environmental Affairs,
and Wells Fargo Home Mortgage,
Mays’s house today is a different
place: wheelchair accessible and
easier to maintain, thanks to energy-
efficient heating and cooling systems,
enhanced insulation, and ENERGY
STAR® appliances.
“It’s simplified everyday life and
everything in my house in a way that
most people will never understand,”
Mays said. “The volunteers overwhelm
me the most. That all of these people
who don’t know me would do this —
well, there’s really not much I can say
but ‘thanks.’ ”
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››››2011 Investing in our communities
Board of Directors
$213,500,000
Wells Fargo contributed $213.5 million to 25,000
nonprofits in 2011. That equates to $4.1 million every
week or $585,000 every day or $24,000 every hour.
Environmental
progress
> More than $11.5 billion in
environmental financing
since 2005
> All deposit-taking ATMs in
our network of more than
12,000 machines across the
country are now entirely
Envelope-FreeSM
> Earned a 2011 Leadership
Award from the U.S. Green
Building Council for our
commitment to environmentally
responsible building design,
construction, and operation
$63.9 million
donated by team members
to more than 28,000 nonprofits
1.5 million
hours volunteered by team members
— average value of a volunteer hour:
$21.36, equivalent to $32.1 million
in time contributed
$67.8 million
to educational organizations —
which includes $18.5 million in
matched educational donations
from team members
$3.4 billion*
in community development
loans and investments in
projects that support affordable
housing, community services,
and economic development,
revitalization, and stabilization
* preliminary estimate; subject to change
pending regulatory filing
22
Where we give
Education
Community Development
Human Services
Arts and Culture
Civic
Environmental
32%
30%
23%
7%
6%
2%
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
Financial contributions
giving with purpose and focus
Compliance
conducting business ethically
and responsibly according
to legal requirements and our
own standards
80478_L3_L4_L5_p1_24.indd 22
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80478_L3_L4_L5_p1_24.indd 23
John D. Baker II 1, 2, 3
Executive Chairman
Patriot Transportation
Holding, Inc.
Jacksonville, Florida
(Transportation, real estate
management)
Elaine L. Chao 2, 4
Distinguished Fellow
The Heritage Foundation
Washington, D.C.
(Educational and
research organization)
John S. Chen 6
Chairman, CEO
Sybase, Inc.
Dublin, California
(Computer software)
Lloyd H. Dean 2, 3, 6, 7
President, CEO
Dignity Health
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)
Mackey J. McDonald 5, 6
Retired Chairman, CEO
VF Corporation
Greensboro, North Carolina
(Apparel manufacturer)
Cynthia H. Milligan 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)
Federico F. Peña 1
Senior Advisor
Vestar Capital Partners
Denver, Colorado
(Private equity)
Philip J. Quigley 1, 3, 5
Retired Chairman,
President, CEO
Pacific Telesis Group
San Francisco, California
(Telecommunications)
Judith M. Runstad 2, 3, 4, 7
Of Counsel
Foster Pepper PLLC
Seattle, Washington
(Law firm)
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
Retired 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
* Lead Director
Executive Officers, Corporate Staff
John G. Stumpf, Chairman, President and CEO *
Diane P. Lilly, Government Relations
Michael J. Loughlin, Chief Risk Officer *
Paul R. Ackerman, Treasurer
Kevin McCabe, Chief Auditor
Caryl J. Athanasiu, Chief Operational Risk Officer
Avid Modjtabai, Consumer Lending *
Patricia R. Callahan, Chief Administrative Officer *
Jamie Moldafsky, Chief Marketing Officer
Jon R. Campbell, Social Responsibility
Kevin A. Rhein, Chief Information Officer *
David M. Carroll, Wealth, Brokerage
Joseph J. Rice, Chief Credit Officer
and Retirement *
Donald E. Dana, Corporate Properties
Hope A. Hardison, Human Resources
Michael J. Heid, Home Mortgage *
Bruce E. Helsel, Corporate Development
Laurel A. Holschuh, Corporate Secretary
David A. Hoyt, Wholesale Banking *
David M. Julian, Chief Market Risk Officer
Richard D. Levy, Controller *
James H. Rowe, Investor Relations
Eric D. Shand, Chief Loan Examiner
Timothy J. Sloan, Chief Financial Officer *
James M. Strother, General Counsel *
Oscar Suris, Corporate Communications
Carrie L. Tolstedt, Community Banking *
* “ Executive officers” according to Securities and Exchange
Commission rules
23
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23 of 24
Board of Directors
John D. Baker II 1, 2, 3
Executive Chairman
Patriot Transportation
Holding, Inc.
Jacksonville, Florida
(Transportation, real estate
management)
Elaine L. Chao 2, 4
Distinguished Fellow
The Heritage Foundation
Washington, D.C.
(Educational and
research organization)
John S. Chen 6
Chairman, CEO
Sybase, Inc.
Dublin, California
(Computer software)
Lloyd H. Dean 2, 3, 6, 7
President, CEO
Dignity Health
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)
Mackey J. McDonald 5, 6
Retired Chairman, CEO
VF Corporation
Greensboro, North Carolina
(Apparel manufacturer)
Cynthia H. Milligan 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)
Federico F. Peña 1
Senior Advisor
Vestar Capital Partners
Denver, Colorado
(Private equity)
Philip J. Quigley 1, 3, 5
Retired Chairman,
President, CEO
Pacific Telesis Group
San Francisco, California
(Telecommunications)
Judith M. Runstad 2, 3, 4, 7
Of Counsel
Foster Pepper PLLC
Seattle, Washington
(Law firm)
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
Retired 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
* Lead Director
Executive Officers, Corporate Staff
John G. Stumpf, Chairman, President and CEO *
Diane P. Lilly, Government Relations
Michael J. Loughlin, Chief Risk Officer *
Paul R. Ackerman, Treasurer
Kevin McCabe, Chief Auditor
Caryl J. Athanasiu, Chief Operational Risk Officer
Avid Modjtabai, Consumer Lending *
Patricia R. Callahan, Chief Administrative Officer *
Jamie Moldafsky, Chief Marketing Officer
Jon R. Campbell, Social Responsibility
Kevin A. Rhein, Chief Information Officer *
David M. Carroll, Wealth, Brokerage
Joseph J. Rice, Chief Credit Officer
and Retirement *
Donald E. Dana, Corporate Properties
Hope A. Hardison, Human Resources
Michael J. Heid, Home Mortgage *
Bruce E. Helsel, Corporate Development
Laurel A. Holschuh, Corporate Secretary
David A. Hoyt, Wholesale Banking *
David M. Julian, Chief Market Risk Officer
Richard D. Levy, Controller *
James H. Rowe, Investor Relations
Eric D. Shand, Chief Loan Examiner
Timothy J. Sloan, Chief Financial Officer *
James M. Strother, General Counsel *
Oscar Suris, Corporate Communications
Carrie L. Tolstedt, Community Banking *
* “ Executive officers” according to Securities and Exchange
Commission rules
80478_L3_L4_L5_p1_24.indd 23
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Senior Business Leaders
COMMUNITY BANKING
Group Head
Carrie L. Tolstedt
Business Banking Group
Debra B. Rossi, Merchant Services
Robert D. Worth, Business Banking
Support Group
David J. Rader, SBA Lending
Consumer and Business Deposits
Kenneth A. Zimmerman
Daniel I. Ayala,
Global Remittance Services
Edward M. Kadletz, Debit and
Prepaid Products
Customer Connection
Diana L. Starcher
Internet Services Group
James P. Smith
Regional Banking
Regional Presidents
Paul W. “Chip” Carlisle, Southwest
John T. Gavin, Dallas-Fort Worth
Glenn V. Godkin, Houston
Don C. Kendrick, Jr., Central Texas
Suzanne M. Ramos, Border Banking
Lisa J. Riley, New Mexico
Kenneth A. Telg, Greater Texas
Thomas W. Honig, Mountain Midwest
Mary Bell, Indiana, Ohio
Fred Bertoldo,
Wisconsin, Michigan, Chicago
Nathan E. Christian, Colorado
Scott Johnson, Iowa, Illinois
Kirk L. Kellner,
Kansas, Missouri, Nebraska
Timothy S. Kugler, Wyoming
David R. Kvamme, Minnesota Great Lakes
Daniel P. Murphy, North Dakota,
South Dakota
Joy N. Ott, Montana
Gerrit van Huisstede, Western Mountain
Kirk V. Clausen, Nevada
Pamela M. Conboy, Arizona
Dana B. Reddington, Idaho
Richard Strutz, Alaska
Greg A. Winegardner, Utah
Patrick G. Yalung, Washington
Laura A. Schulte, Eastern
Shelley Freeman, Florida
Scott M. Coble, North Florida
Carl A. Miller, Jr., Greater Gulf Coast
Stanhope A. Kelly, Carolinas
Kendall K. Alley, Charlotte
Jack O. Clayton,
Triangle/Eastern North Carolina
Leslie L. Hayes,
Western/Triad North Carolina
Forrest R. (Rick) Redden III,
South Carolina
Michelle Y. Lee, Northeast
Lucia DiNapoli Gibbons,
Northern New Jersey
Joseph F. Kirk, New York and
Connecticut
Brenda K. Ross-Dulan,
Southern New Jersey
Hugh C. Long, Penn-Del
Vincent J. Liuzzi III,
WHOLESALE BANKING
Group Head
David A. Hoyt
Asset Management Group
Michael J. Niedermeyer
Robert W. Bissell,
Wells Capital Management
Thomas K. Hoops, Affiliated Managers
Karla M. Rabusch, Wells Fargo
Funds Management, LLC
Commercial Banking
Perry G. Pelos
John C. Adams, Northern Region
Mary Knell, Washington Division
Greater Philadelphia, Delaware
Tim M. Billerbeck, Business Development
Dave R. Golden, Mountain Division
Lisa N. Johnson, Midwest Division
Paul D. Kalsbeek, Southern Region
Rich J. Kerbis, Commercial Banking Credit
John P. Manning,
Greater Los Angeles Division
Laura S. Oberst, Central Division
Rob C. Yraceburu,
Southern California Division
Carlos E. Evans, Eastern Region
Jim E. Fitzgerald, Northeast Division
Stan F. Gibson, Carolinas Division
Howard M. Halle, Florida Division
Marybeth Howe, Great Lakes Division
Larry M. Levy, Mid-Atlantic Division
Susanne Svizeny,
Pennsylvania, Delaware Division
Commercial Real Estate
Mark L. Myers
Charles H. “Chip” Fedalen, Institutional
and Metro Markets Group
Christopher J. Jordan,
Hospitality Finance Group
Robin W. Michel, Regional Private
Markets Group
William A. Vernon, Real Estate
Merchant Banking
Corporate Banking Group
J. Michael Johnson
J. Nicholas Cole, Wells Fargo
Restaurant Finance
Gregory S. Redden,
Greater Pennsylvania
Lisa J. Stevens, West Coast
Michael F. Billeci, San Francisco Bay Area
James W. Foley, Greater Bay Area
David A. Galasso, Northern and
Central California
Donald J. Pearson, Oregon
John K. Sotoodeh, Los Angeles Metro,
Orange County
Kim M. Young, Southern California
Marc Bernstein, Enterprise Small
Business Segment
Todd Reimringer,
Business Payroll Services
CONSUMER LENDING
Group Head
Avid Modjtabai
Consumer Credit Solutions
Thomas A. Wolfe
Dan Abbott, Retail Services
R. Kirk Bare, Education Financial Services
Jerry Bowen, Commercial Auto
Dawn Martin Harp, Dealer Services
Paul S. Tsang, Strategic Auto Investments
Wells Fargo Home Mortgage
Michael J. Heid
Franklin R. Codel, Mortgage Production
Mary C. Coffin, Performing Servicing
Michael J. DeVito, Default Servicing
John P. Gibbons, Capital Markets
WEALTH , BROKERAGE
AND RETIREMENT
Group Head
Off-Balance Sheet Arrangements
Premises, Equipment, Lease Commitments and Other Assets
Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Risk Management
Capital Management
Regulatory Reform
Critical Accounting Policies
Current Accounting Developments
Forward-Looking Statements
Risk Factors
Controls and Procedures
112 Disclosure Controls and Procedures
26
30
41
44
46
84
87
89
95
96
97
114
115
116
Financial Statements
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity and
Comprehensive Income
120 Consolidated Statement of Cash Flows
Notes to Financial Statements
121
131
1
2
Business Combinations
132
132
133
141
159
171
174
175
176
177
179
181
184
190
212
219
221
223
225
3 Cash, Loan and Dividend Restrictions
4
Federal Funds Sold, Securities Purchased under
Resale Agreements and Other Short-Term Investments
Securities Available for Sale
Loans and Allowance for Credit Losses
5
6
7
160
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
15 Legal Actions
16 Derivatives
17 Fair Values of Assets and Liabilities
206
18 Preferred Stock
222
23 Other Comprehensive Income
24 Operating Segments
25 Condensed Consolidating Financial Statements
230
26 Regulatory and Agency Capital Requirements
231 Report of Independent Registered
Public Accounting Firm
232 Quarterly Financial Data
112
Internal Control over Financial Reporting
208
19 Common Stock and Stock Plans
112 Management’s Report on Internal Control over
Financial Reporting
20 Employee Benefits and Other Expenses
21
Income Taxes
113
Report of Independent Registered Public Accounting Firm
22 Earnings Per Common Share
Summary of Significant Accounting Policies
234 Glossary of Acronyms
International Group
Richard Yorke
Rajnish Bharadwaj,
Cross Border Governance
Peter P. Connolly,
Global Transaction Banking
James C. Johnston,
EMEA Regional President
John V. Rindlaub,
Asia Pacific Regional President
Sanjiv S. Sanghvi, Global Banking Group
Charles H. Silverman,
Global Financial Institutions
Specialized Lending,
Servicing and Trust
J. Edward Blakey
Brian Bartlett, Corporate Trust Services
Joseph R. Becquer, Commercial
Mortgage Servicing
Julie Caperton, Asset Backed Finance
Lesley A. Eckstein, Community Lending
and Investment
Douglas J. Mazer, Commercial
Mortgage Origination
John M. McQueen, Wells Fargo
Equipment Finance, Inc.
Alan Wiener, Multi-family Housing
Wells Fargo Capital Finance
Henry K. Jordan
Scott R. Diehl, Industries Group
Jim Dore, Commercial and Retail Finance
Guy K. Fuchs, Corporate Finance
Wells Fargo Securities
John R. Shrewsberry
Christopher Bartlett, Equity Sales
and Trading
Walter Dolhare and Tim Mullins,
Fixed Income Sales and Trading
Robert Engel and Jonathan Weiss,
Investment Banking and
Capital Markets
Benjamin V. Lambert and Roy March,
Eastdil Secured, LLC
Diane Schumaker-Krieg,
Research and Economics
Phil D. Smith, Government and
Institutional Banking
George Wick, Principal Investments
Frank Newman III, South Florida
David M. Carroll
Larisa F. Perry, Central Florida
Christine A. Deakin, Business Services
Darryl G. Harmon, Southeast
Daniel J. Ludeman, Wells Fargo Advisors
Michael S. Donnelly, Atlanta
John M. Papadopulos, Retirement
Glen M. Kelley, Greater Georgia
James P. Steiner, Abbot Downing
Leigh Vincent Collier, Mid-South
Jay S. Welker, Wealth Management
Pete Jones, Mid-Atlantic
Andrew M. Bertamini, Maryland
Timothy A. Butturini, Greater Virginia
Michael L. Golden,
Greater Washington, D.C.
Deborah E. O’Donnell, Western Virginia
24
James D. Heinz, U.S. Corporate Banking
Kyle G. Hranicky, Energy Group
Wholesale Credit
David Weber
John R. Hukari, Equity Funds Group
Lezlie J. Beam, Lending Manager
Jay J. Kornmayer, Gaming Division
Robert W. Belson, Lending Manager
James C. Johnston, Lending Manager
Kenneth C. McCorkle, AgriBusiness
Barry Neal, Environmental
Mike Sadilek, Loan Workout
Wholesale Services
Stephen M. Ellis
Michael J. Kennedy, Payment Strategies
Daniel C. Peltz, Treasury
Management Group
Brian J. Van Elslander,
Financial Sponsors Group
Daniel P. Weiler, Financial Institutions
Group; Power and Utilities Group
Insurance Group
Laura Schupbach
Neal R. Aton, Centralized
Insurance Business
Michael P. Day, Rural Community
Insurance Services, Inc.
Anne J. Doss, National Practice and
Specialty Group
Scott R. Isaacson, Insurance
Strategy Group
Kevin T. Kenny, Distributed Insurance
Brokerage Group
Robert A. Pinkerton, Flatiron Capital
H. David Wood, Insurance
Operations Group
25
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Financial Review
Overview
Earnings Performance
Balance Sheet Analysis
Off-Balance Sheet Arrangements
Risk Management
Capital Management
Regulatory Reform
Critical Accounting Policies
Current Accounting Developments
Forward-Looking Statements
Risk Factors
26
30
41
44
46
84
87
89
95
96
97
Controls and Procedures
112 Disclosure Controls and Procedures
132
132
133
141
159
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
160
8
Securitizations and Variable Interest Entities
171
174
175
176
177
179
181
184
190
9 Mortgage Banking Activities
10
Intangible Assets
11 Deposits
12 Short-Term Borrowings
13 Long-Term Debt
14 Guarantees
15 Legal Actions
16 Derivatives
17 Fair Values of Assets and Liabilities
206
18 Preferred Stock
112
Internal Control over Financial Reporting
208
19 Common Stock and Stock Plans
112 Management’s Report on Internal Control over
Financial Reporting
113
Report of Independent Registered Public Accounting Firm
114
115
116
Financial Statements
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity and
Comprehensive Income
120 Consolidated Statement of Cash Flows
Notes to Financial Statements
212
219
221
20 Employee Benefits and Other Expenses
21
Income Taxes
22 Earnings Per Common Share
222
23 Other Comprehensive Income
223
225
24 Operating Segments
25 Condensed Consolidating Financial Statements
230
26 Regulatory and Agency Capital Requirements
231 Report of Independent Registered
Public Accounting Firm
232 Quarterly Financial Data
121
131
1
2
Summary of Significant Accounting Policies
234 Glossary of Acronyms
Business Combinations
25
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. Factors that could cause our actual results to differ materially
from our forward-looking statements are described in this Report, including in 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, 2011 (2011 Form 10-K).
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). 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 diversified financial services
company with $1.3 trillion in assets. Founded in 1852 and
headquartered in San Francisco, we provide banking, insurance,
trust and investments, mortgage banking, investment banking,
retail banking, brokerage services and consumer and commercial
finance through more than 9,000 stores, 12,000 ATMs, the
internet and other distribution channels to individuals,
businesses and institutions across North America and
internationally. With approximately 264,000 active, full-time
equivalent team members, we serve one in three households in
America and ranked No. 23 on Fortune’s 2011 rankings of
America’s largest corporations. We ranked fourth in assets and
first in the market value of our common stock among all U.S.
banks at December 31, 2011.
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
utilize 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. Our retail bank household cross-sell
increased each quarter during 2011 to 5.92 products per
household in fourth quarter 2011, up from 5.70 in fourth quarter
2010. We believe there is more opportunity for cross-sell as we
continue to earn more business from our customers. Our goal is
eight products per customer, which is approximately half of our
estimate of potential demand for an average U.S. household.
Currently, one of every four of our retail banking households has
eight or more products.
Our pursuit of growth and earnings performance is
influenced by our belief that it is important to maintain a well
controlled operating environment. 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
26
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.
Expense management is also important to us, but we
approach this in a manner intended to help ensure our revenue
is not adversely affected. Our current company-wide expense
management initiative is focused on removing unnecessary
complexity and eliminating duplication as a way to improve the
customer experience and the work process of our team members.
With this initiative and the completion of Wachovia merger
integration activities, we are targeting fourth quarter 2012
noninterest expense of $11 billion. We expect first quarter 2012
noninterest expense to remain elevated because of seasonally
higher personnel expenses and our final quarter of Wachovia
integration expenses, partially offset by continued gains from
efficiency and cost save initiatives. We expect quarterly total
expenses to decline over the rest of 2012, driven by the benefit
from ongoing efficiency initiatives and the conclusion of
integration activities. However, quarterly expenses may vary due
to cyclical or seasonal factors, among others. In addition, we will
continue to invest in our businesses and add team members
where appropriate.
Financial Performance
Our 2011 results were strong despite continued economic
volatility during the year, with improved credit quality and lower
expenses as well as solid growth in deposits and capital, which
funded growth in loans and investment securities. Regulatory
reform and related initiatives also created a difficult
environment in which to achieve strong financial performance.
For example, changes mandated by Regulation E and related
overdraft policy changes implemented in third quarter 2010
decreased our service charges on deposit accounts. Also,
implementation of the Durbin Amendment to the Dodd-Frank
Act in fourth quarter 2011 reduced debit interchange fees and
the mortgage servicing regulatory consent orders that we
entered into with our regulators in April 2011 and other
regulatory activities contributed to lowered residential mortgage
servicing rights (MSRs) valuation and increased our estimate of
losses for repurchases of serviced loans.
Wells Fargo net income was $15.9 billion and diluted
earnings per common share were $2.82 for 2011, both up 28%
from 2010. Our net income growth from 2010 was primarily
driven by a lower provision for credit losses and lower
noninterest expense, which more than offset lower revenues. Net
income growth from 2010 included contributions from each of
our three business segments: Community Banking (up 30%);
Wholesale Banking (up 19%); and Wealth, Brokerage and
Retirement (up 28%). Return on average assets was 1.25% for
2011, compared with 1.01% for 2010. Our return on equity was
11.93% in 2011, up from 10.33% in 2010.
On a year-over-year basis, revenue was down 5% in 2011,
predominantly reflecting decreased interest income on securities
available for sale and loans due to lower yields as market rates
declined. The decline in revenue was also affected by lower
mortgage banking noninterest income as a result of lower
originations and higher servicing-related costs caused by the
regulatory consent orders and other mortgage-related regulatory
matters as well as lower net gains from trading activities. These
decreases in revenue were partially offset by increased interest
income on trading assets and decreased interest expense.
Noninterest expense was down 2% from 2010 reflecting the
benefit of reduced merger integration costs and lower foreclosed
asset expense.
We believe loan and deposit growth have positioned us for
continued improvement in financial performance. Total loans
were $769.6 billion at December 31, 2011, up from $757.3 billion
at December 31, 2010, and averaged $757.1 billion for 2011
compared with $770.6 billion for 2010. The net growth in loans
from December 31, 2010, included the consolidation of
$5.6 billion of reverse mortgage loans previously sold as well as
the purchases with a period end balance of $3.6 billion of U.S.-
based commercial real estate (CRE), offset by a $21.0 billion
decrease in our non-strategic and liquidating loan portfolios.
Our core deposits totaled $872.6 billion at December 31, 2011,
up 9% from December 31, 2010, and our average core deposits
grew 7% from 2010 to $826.7 billion for 2011. Average core
deposits were 109% of average loans for 2011, up from 100% for
2010. We continued to attract high quality core deposits in the
form of checking and savings deposits, which on average totaled
$757.0 billion, up 11% from 2010 as we added new customers
and deepened our relationships with existing customers. Average
core checking and savings deposits were 92% of average core
deposits, up from 89% for 2010.
Table 1 provides a six-year summary of selected financial
data and Table 2 presents key ratios and per common share data.
Credit Quality
As in 2010, we again experienced credit improvement during
2011 in our loan portfolios with lower net charge-offs and
improved or stable delinquency trends. The rate of improvement
moderated in some portfolios during the latter half of 2011,
consistent with our expectations at this point in the credit cycle.
The improvement in our credit portfolio was due in part to the
continued decline in balances in our non-strategic and
liquidating loan portfolios (primarily from the Wachovia
acquisition), which decreased $21.0 billion during 2011, and
$78.5 billion in total since the beginning of 2009, to
$112.3 billion at December 31, 2011.
Reflecting the continued improved credit performance in our
loan portfolios, the $7.9 billion provision for credit losses for
2011 was $7.9 billion less than a year ago. The 2011 provision for
credit losses was $3.4 billion less than net charge-offs, compared
with $2.0 billion less for 2010. Absent significant deterioration
in the economy, we expect future allowance releases in 2012,
although at more modest levels. Since first quarter 2010 net
charge-offs have decreased every quarter until fourth quarter
2011 when they were essentially flat compared with third quarter
2011. Nonperforming assets (NPAs) have decreased every
quarter since their peak in third quarter 2010. Net charge-offs
totaled $11.3 billion for 2011, compared with $17.8 billion for
2010. NPAs decreased to $26.0 billion at December 31, 2011,
from $32.3 billion at December 31, 2010. Loans 90 days or more
past due and still accruing (excluding government
insured/guaranteed loans) decreased to $2.0 billion at
December 31, 2011, from $2.6 billion at December 31, 2010. In
addition, our portfolio of purchased credit-impaired (PCI) loans
continued to perform better than expected at the time of
acquisition.
Capital
We continued to build capital in 2011, with total equity up
$13.8 billion to $141.7 billion from December 31, 2010. Our Tier
1 common equity ratio grew 116 basis points during 2011 to
9.46% of risk-weighted assets under Basel I, reflecting strong
internal capital generation. Based on our interpretation of
current Basel III capital proposals, we estimate that our Tier 1
common equity ratio was 7.50% at the end of 2011. Our other
regulatory capital ratios remained strong with a Tier 1 capital
ratio of 11.33% and Tier 1 leverage ratio of 9.03% at
December 31, 2011. See the “Capital Management” section in this
Report for more information regarding our capital, including
Tier 1 common equity.
During 2011 we redeemed $9.2 billion of trust preferred
securities that carried a higher cost than other funding sources
available to us, repurchased approximately 80 million shares of
our common stock and entered into two separate $150 million
private forward repurchase transactions. The first transaction
settled in fourth quarter 2011 for approximately 6 million shares
of common stock and the second transaction settled in first
quarter 2012 for approximately 6 million shares of common
stock. We also paid common stock dividends of $0.12 per share
each quarter in 2011.
27
Overview (continued)
Table 1: Six-Year Summary of Selected Financial Data
(in millions, except per share amounts)
2011
2010
2009
2008
2007
2006
$
42,763
44,757
46,324
25,143
20,974
19,951
38,185
40,453
42,362
16,734
18,546
15,817
80,948
85,210
88,686
41,877
39,520
35,768
7,899
49,393
15,753
50,456
21,668
49,020
15,979
22,598
4,939
22,746
2,204
20,767
16,211
12,663
12,667
2,698
8,265
8,567
28
14
%
Five-year
Change
compound
2011/
2010
growth
rate
(4) %
(6)
(5)
(50)
(2)
16
19
18
29
19
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
18
14
3
3
(15)
39
19
39
17
22
25
8
25
42
25
342
301
392
43
208
147
Wells Fargo net income
Earnings per common share
Diluted earnings per common share
Dividends declared per common share
15,869
2.85
12,362
2.23
12,275
1.76
2.82
0.48
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
14
28
28
28
140
Balance sheet (at year end)
Securities available for sale
Loans
Allowance for loan losses
Goodwill
Assets
Core deposits (1)
Long-term debt
$
222,613
769,631
172,654
757,267
172,710
782,770
151,569
864,830
72,951
382,195
42,629
319,116
29 %
2
19,372
23,022
24,516
21,013
5,307
3,764
(16)
25,115
24,770
24,812
22,627
13,106
11,275
1,313,867 1,258,128 1,243,646 1,309,639
745,432
872,629
780,737
798,192
575,442
311,731
481,996
288,068
1
4
9
125,354
156,983
203,861
267,158
99,393
87,145
(20)
Wells Fargo stockholders' equity
140,241
126,408
111,786
99,084
47,628
45,814
Noncontrolling interests
Total equity
1,446
141,687
1,481
127,889
2,573
114,359
3,232
102,316
286
47,914
254
46,068
11
(2)
11
(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).
28
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)
Tier 1 common equity (3)
Average balances:
Average Wells Fargo common stockholders' equity to average assets
Average total equity to average assets
Per common share data
Dividend payout (4)
Book value
Market price (5)
High
Low
Year end
Year ended December 31,
2011
2010
2009
1.25 %
1.01
0.97
11.93
61.0
10.33
59.2
9.88
55.3
9.87
10.78
9.41
10.16
8.34
9.20
11.33
14.76
9.03
9.46
11.16
15.01
9.19
8.30
9.25
13.26
7.87
6.46
9.91
10.80
9.17
9.96
6.41
9.34
17.0
24.64
9.0
22.49
27.9
20.03
$
34.25
22.58
27.56
34.25
23.02
30.99
31.53
7.80
26.99
(1) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(2) See Note 26 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.
(3) See the "Capital Management" section in this Report for additional information.
(4) Dividends declared per common share as a percentage of earnings per common share.
(5) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
29
Noninterest income was $38.2 billion in 2011, representing
47% of revenue, compared with $40.5 billion (47%) in 2010 and
$42.4 billion (48%) in 2009. The decrease in noninterest income
in 2011 was due largely to lower service charges on deposit
accounts, net gains on mortgage loan origination/sales activities
and net gains from trading activities.
Noninterest expense was $49.4 billion in 2011, compared
with $50.5 billion in 2010 and $49.0 billion in 2009.
Noninterest expense as a percentage of revenue was 61% in 2011,
59% in 2010 and 55% in 2009. Noninterest expense for 2011
included $1.7 billion of Wachovia merger-related integration
expense, compared with $1.9 billion in 2010 and $895 million in
2009.
Table 3 presents the components of revenue and noninterest
expense as a percentage of revenue for year-over-year results.
Earnings Performance
Wells Fargo net income for 2011 was $15.9 billion ($2.82 diluted
earnings per common share) compared with $12.4 billion
($2.21 diluted earnings per common share) for 2010 and
$12.3 billion ($1.75 diluted earnings per common share) for
2009. Our 2011 earnings reflected strong execution of our
business strategy in a difficult economic environment. The key
drivers of our financial performance in 2011 were improved
credit quality, lower operating costs, diversified sources of fee
income, balanced net interest and fee income, a diversified loan
portfolio and increased deposits.
Revenue, the sum of net interest income and noninterest
income, was $80.9 billion in 2011, compared with $85.2 billion
in 2010 and $88.7 billion in 2009. The decline in revenue in
2011 was predominantly due to lower net interest income,
mortgage banking and net gains from trading activities. Net
interest income of $42.8 billion in 2011, represented 53% of
revenue, compared with $44.8 billion (53%) in 2010 and
$46.3 billion (52%) in 2009. The 4% decline in 2011 net interest
income from 2010 reflected a 32 basis points decline in the net
interest margin and a 2% decline in average loans. The decline in
average loans from 2010 reflected reductions in the non-
strategic and liquidating loan portfolios, partially offset by loan
growth and loan acquisitions. Continued success in generating
low-cost deposits enabled the Company to grow assets by
funding loan and securities growth while reducing higher cost
long-term debt.
30
Table 3: Net Interest Income, Noninterest Income and Noninterest Expense as a Percentage of Revenue
% of
% of
% of
2011 revenue
2010 revenue
2009
revenue
Year ended December 31,
(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
$
1,463
9,107
1,644
58
37,302
548
50,122
2,275
94
3,978
316
6,663
2 %
$
11
2
-
46
1
62
3
-
5
-
8
54
(1)
53
5
14
5
5
10
2
1
-
2
1
2
1,121
10,236
1,736
101
39,808
437
1 %
$
12
2
-
47
1
53,439
63
2,832
106
4,888
227
8,053
3
-
6
-
9
45,386
54
(629)
(1)
44,757
53
4,916
10,934
3,652
3,990
9,737
2,126
1,648
(324)
779
815
2,180
6
12
4
5
11
2
2
-
1
1
3
944
11,941
1,930
183
41,659
336
56,993
3,774
231
5,786
172
9,963
47,030
(706)
46,324
5,741
9,735
3,683
3,804
12,028
2,126
2,674
(127)
185
685
1,828
1 %
13
2
-
48
-
64
4
-
7
-
11
53
(1)
52
6
11
4
4
15
2
3
-
-
1
2
Net interest income (on a taxable-equivalent basis)
43,459
Taxable-equivalent adjustment
Net interest income (A)
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 from equity investments
Operating leases
Other
(696)
42,763
4,280
11,304
3,653
4,193
7,832
1,960
1,014
54
1,482
524
1,889
Total noninterest income (B)
38,185
47
40,453
47
42,362
48
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
14,462
8,857
4,348
2,283
3,011
1,880
1,266
13,286
49,393
18
11
5
3
4
2
2
16
61
13,869
8,692
4,651
2,636
3,030
2,199
1,197
16
10
5
3
4
3
1
14,182
17
50,456
59
13,757
8,021
4,689
2,506
3,127
2,577
1,849
12,494
49,020
15
9
5
3
4
3
2
14
55
Revenue (A) + (B)
$
80,948
$
85,210
$
88,686
(1) See Table 7 – Noninterest Income in this Report for additional detail.
(2) See Table 8 – Noninterest Expense in this Report for additional detail.
31
Core deposits are an important low-cost source of funding
and affect both 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 $826.7 billion in 2011
from $772.0 billion in 2010 and funded 109% and 100% of
average loans, respectively. Average core deposits increased to
75% of average earning assets in 2011, compared with 73% a year
ago. The cost of these deposits declined significantly as the mix
shifted from higher cost certificates of deposit to checking and
savings products, which were also at lower yields relative to
2010. About 91% of our average core deposits are 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 2011, 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 and the net interest margin are
significantly influenced by the mix and overall size of our
earning asset portfolio and the cost of funding those assets. In
addition, some sources of interest income, such as loan
prepayment fees and collection of interest on nonaccrual loans,
can vary from period to period. Net interest income on a taxable-
equivalent basis was $43.5 billion in 2011, compared with
$45.4 billion in 2010 and $47.0 billion in 2009. The net interest
margin was 3.94% in 2011, down 32 basis points from 4.26% in
2010 and down 34 basis points from 4.28% in 2009. The decline
in net interest income and the net interest margin was largely
due to repricing of the balance sheet as higher-yielding loan and
security runoff was partially offset by new loans, investment
portfolio purchases and growth in short-term investments. The
decline in earning asset income was mitigated by a reduction in
funding costs resulting from disciplined deposit pricing, debt
maturities, and redemptions of higher cost trust preferred
securities.
Table 4 presents the components of earning assets and
funding sources as a percentage of earning assets and provides
an analysis of year-over-year changes that influenced net interest
income.
Soft consumer loan demand and the impact of liquidating
certain loan portfolios reduced average loans in 2011 to 69% of
average earning assets compared with 72% in 2010. Average
short-term investments and trading account assets were 12% of
earning assets in 2011 up from 9% in 2010.
32
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
2011
% of
earning
assets
$
8 %
4
-
2
7
3
10
4
16
3
-
15
9
2
1
3
30
21
8
2
8
39
69
-
Year ended December 31,
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
62,961
29,920
1,870
16,089
71,953
31,815
103,768
32,611
154,338
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
$
Average
balance
87,186
39,737
5,503
24,035
74,665
31,902
106,567
38,625
174,730
37,232
1,104
157,608
102,236
21,592
12,944
36,768
331,148
226,980
90,705
21,463
86,848
425,996
757,144
4,929
Total earning assets
$
1,102,062
100 %
$
1,064,158
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.
$
47,705
464,450
69,711
13,126
61,566
656,558
51,781
141,079
10,955
860,373
241,689
$
4 %
42
6
1
6
59
5
13
1
78
22
60,941
416,877
87,133
14,654
55,097
634,702
46,824
185,426
6,863
873,815
190,343
6 %
39
8
1
5
59
4
18
1
82
18
$
1,102,062
100 %
$
1,064,158
100 %
$
$
$
$
$
17,388
24,904
125,911
168,203
215,242
57,399
137,251
(241,689)
168,203
1,270,265
17,618
24,824
120,338
162,780
183,008
47,877
122,238
(190,343)
162,780
1,226,938
33
Earnings Performance (continued)
Table 5: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)(3)
(in millions)
Earning assets
Federal funds sold, securities purchased under
resale agreements and other short-term investments
$
Trading assets
Securities available for sale (4):
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 and equity securities
Total securities available for sale
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
87,186
39,737
5,503
24,035
74,665
31,902
106,567
38,625
174,730
37,232
1,104
157,608
102,236
21,592
12,944
36,768
0.40 % $
3.68
1.25
5.09
4.36
8.20
5.51
5.03
5.21
4.42
5.25
4.37
4.07
4.88
7.54
2.56
2011
Interest
income/
expense
345
1,463
69
1,223
3,257
2,617
5,874
1,941
9,107
1,644
58
6,894
4,163
1,055
976
941
331,148
4.24
14,029
226,980
90,705
21,463
86,848
4.89
4.33
13.02
6.29
425,996
5.46
757,144
4,929
4.93
4.12
11,090
3,926
2,794
5,463
23,273
37,302
203
Average
balance
Yields/
rates
2010
Interest
income/
expense
62,961
29,920
1,870
16,089
71,953
31,815
103,768
32,611
154,338
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
0.36 % $
3.75
230
1,121
3.24
6.09
5.14
10.67
6.84
6.45
6.63
4.73
2.67
4.80
3.89
3.36
9.21
3.49
4.45
5.18
4.45
13.35
6.49
5.68
5.17
3.56
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
14,349
12,206
4,519
2,987
5,747
25,459
39,808
207
Total earning assets
$
1,102,062
4.55 % $
50,122
1,064,158
5.02 % $
53,439
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
$
47,705
464,450
69,711
13,126
61,566
656,558
51,781
141,079
10,955
860,373
241,689
0.08 % $
0.18
1.43
2.04
0.22
0.35
0.18
2.82
2.88
0.77
-
Total funding sources
$
1,102,062
0.61
40
836
995
268
136
2,275
94
3,978
316
6,663
-
6,663
60,941
416,877
87,133
14,654
55,097
634,702
46,824
185,426
6,863
873,815
190,343
1,064,158
0.12 % $
0.26
1.43
2.07
0.22
0.45
0.22
2.64
3.31
0.92
-
0.76
72
1,088
1,247
302
123
2,832
106
4,888
227
8,053
-
8,053
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
$
$
$
$
$
17,388
24,904
125,911
168,203
215,242
57,399
137,251
(241,689)
168,203
1,270,265
3.94 % $
43,459
4.26 % $
45,386
17,618
24,824
120,338
162,780
183,008
47,877
122,238
(190,343)
162,780
1,226,938
(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%, 3.25%, 5.09%, and 8.05% for 2011, 2010, 2009, 2008, and 2007, respectively. The average three-month London Interbank
Offered Rate (LIBOR) was 0.34%, 0.34%, 0.69%, 2.93%, and 5.30% for the same years, respectively.
(3) Yields/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 represent amortized cost and the previously reported average balance amounts for all periods prior to 2011 have been changed to amortized cost, the basis used to
determine yields for those periods.
34
Average
balance
Yields/
rates
5,293
4,971
1,065
7,329
43,968
23,357
67,325
13,956
89,675
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
851
4,643
38,181
6,524
44,705
6,343
56,542
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
174,000
6.08
10,587
140,863
8.02
11,303
75,116
75,375
19,601
54,368
224,460
398,460
1,920
526,812
5,650
166,691
39,481
6,656
47,578
266,056
65,826
102,283
-
434,165
92,647
526,812
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
6.69 % $
35,219
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
61,527
72,075
15,874
54,436
203,912
344,775
1,402
445,440
5,057
147,939
40,484
8,937
36,761
239,178
25,854
93,193
-
358,225
87,215
445,440
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
7.93 % $
35,341
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
$
Average
balance
Yields/
rates
26,869
21,092
2,436
13,098
84,295
45,672
129,967
32,022
177,523
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
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
$
1,098,139
5.19 % $
56,993
0.14 % $
0.39
1.24
2.03
0.27
0.59
0.44
2.50
3.50
1.08
-
0.91
100
1,375
1,738
415
146
3,774
231
5,786
172
9,963
-
9,963
$
70,179
351,892
140,197
20,459
53,166
635,893
51,972
231,801
4,904
924,570
173,569
$
1,098,139
$
$
$
$
$
19,218
23,997
121,000
164,215
171,712
48,193
117,879
(173,569)
164,215
1,262,354
4.28 % $
47,030
4.83 % $
25,431
4.74 % $
21,120
11,175
13,353
53,056
77,584
87,820
28,658
53,753
(92,647)
77,584
604,396
11,806
11,957
51,549
75,312
88,907
26,287
47,333
(87,215)
75,312
520,752
(5) Nonaccrual loans and related income are included in their respective loan categories.
(6) Includes taxable-equivalent adjustments of $696 million, $629 million, $706 million, $288 million and $146 million for 2011, 2010, 2009, 2008 and 2007, respectively,
primarily related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 35% for the periods presented.
35
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
2011 over 2010
2010 over 2009
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 (1):
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
Total debt securities available for sale
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
89
363
62
424
135
9
26
(21)
(54)
(181)
115
342
8
243
148
349
(68)
(172)
(2)
338
(6)
(198)
80
177
(8)
140
(575)
(788)
(440)
(779)
(114)
(176)
(780)
(578)
(894)
(754)
144
(1,363)
(1,219)
(290)
(1,358)
(1,648)
349
(510)
(161)
79
(268)
(189)
979
24
(2,108)
(116)
(1,129)
(92)
(100)
57
(43)
125
(35)
(69)
(1,830)
(159)
(1,705)
(194)
(13)
(82)
373
(665)
(292)
(1,425)
147
(385)
(45)
215
180
389
(218)
(311)
327
4
(263)
(96)
81
(306)
(120)
968
390
167
(16)
(36)
(139)
(457)
471
(139)
(136)
(175)
305
(625)
(320)
(1,806)
1,370
(436)
(440)
(473)
(120)
(111)
(676)
(1,116)
(120)
(73)
(173)
(593)
(193)
(284)
(150)
(249)
(123)
(140)
(636)
(321)
269
(65)
(786)
(570)
146
(205)
(1,144)
(1,042)
(2,186)
(662)
(753)
(1,415)
(839)
(1,667)
(2,506)
(2,468)
617
(1,851)
(35)
31
(4)
(8)
29
21
Total increase (decrease) in interest income
481
(3,798)
(3,317)
(1,958)
(1,596)
(3,554)
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)
112
(252)
(30)
13
(19)
(364)
-
(4)
-
(32)
(252)
(252)
(34)
13
(170)
(387)
(557)
9
(1,227)
122
(21)
317
(33)
(12)
(910)
89
(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
Total increase (decrease) in interest expense
(1,266)
(124)
(1,390)
(1,799)
(111)
(1,910)
Increase (decrease) in net interest income
on a taxable-equivalent basis
$
1,747
(3,674)
(1,927)
(159)
(1,485)
(1,644)
(1) Volume and rate amounts for 2010 over 2009 have been revised to reflect the use of amortized cost as the basis for calculating the change between periods.
36
Noninterest Income
Table 7: Noninterest Income
(in millions)
Service charges on
deposit accounts
Trust and investment fees:
Year ended December 31,
2011
2010
2009
$
4,280
4,916
5,741
Trust, investment and IRA fees
4,099
4,038
Commissions and all other fees
7,205
6,896
3,588
6,147
Total trust and
investment fees
11,304
10,934
9,735
Card fees
Other fees:
3,653
3,652
3,683
Cash network fees
Charges and fees on loans
Processing and all other fees
389
1,641
260
1,690
2,163
2,040
231
1,801
1,772
Total other fees
4,193
3,990
3,804
Mortgage banking:
Servicing income, net
Net gains on mortgage loan
3,266
3,340
5,791
origination/sales activities
4,566
6,397
6,237
Total mortgage banking
7,832
9,737
12,028
Insurance
Net gains from trading activities
Net gains (losses) on debt
securities available for sale
Net gains from equity investments
Operating leases
All other
1,960
2,126
1,014
1,648
2,126
2,674
54
1,482
524
(324)
779
815
(127)
185
685
1,889
2,180
1,828
Total
$
38,185
40,453
42,362
Noninterest income of $38.2 billion represented 47% of revenue
for 2011 compared with $40.5 billion, or 47%, for 2010. The
decrease in noninterest income from 2010 was due largely to
lower service charges on deposit accounts, lower net gains on
mortgage loan origination/sales activities and lower net gains
from trading activities.
Our service charges on deposit accounts decreased in 2011 by
$636 million, or 13% from 2010, predominantly due to changes
implemented in third quarter 2010 mandated by Regulation E
(which limited certain overdraft fees) and related overdraft
policy changes.
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, 2011,
these assets totaled $2.2 trillion, up 5% from $2.1 trillion at
December 31, 2010. Trust, investment and IRA fees are largely
based on a tiered scale relative to the market value of the assets
under management or administration. These fees increased to
$4.1 billion in 2011 from $4.0 billion in 2010.
We receive commissions and other fees for providing services
to full-service and discount brokerage customers as well as from
investment banking activities including equity and bond
underwriting. These fees increased to $7.2 billion in 2011 from
$6.9 billion in 2010. Our commission and other 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 $1.1 trillion
and $1.2 trillion at December 31, 2011 and 2010, respectively.
Card fees were $3.7 billion in 2011, essentially flat from 2010.
Legislative and regulatory changes enacted in 2010 led to a
reduction in card fee income, which was offset by growth in
purchase volume and new accounts growth. The final Federal
Reserve Board (FRB) rules implementing the Durbin
Amendment to the Dodd-Frank Act became effective in October
2011, placing limits on debit card interchange fees. As a result,
debit card interchange fees were reduced by $365 million during
fourth quarter 2011 as compared to fees that would have been
earned without the limits. We currently expect future volume,
product or account changes may over time mitigate at least half
of the earnings reduction resulting from the FRB’s debit card
interchange rules.
Mortgage banking noninterest income, consisting of net
servicing income and net gains on loan origination/sales
activities, totaled $7.8 billion in 2011, compared with $9.7 billion
in 2010. The reduction in mortgage banking noninterest income
was primarily driven by a decline in net gains on mortgage loan
origination/sales activities as discussed below.
Net mortgage loan servicing income includes both changes in
the fair value of MSRs during the period as well as changes in the
value of derivatives (economic hedges) used to hedge the MSRs.
Net servicing income for 2011 included a $1.6 billion net MSR
valuation gain ($3.7 billion decrease in the fair value of the
MSRs offset by a $5.3 billion hedge gain) and for 2010 included
a $1.5 billion net MSR valuation gain ($3.0 billion decrease in
the fair value of MSRs offset by a $4.5 billion hedge gain). See
the “Risk Management – Mortgage Banking Interest Rate and
Market Risk” section of this Report for additional information
regarding our MSRs risks and hedging approach. The valuation
of our MSRs at the end of 2011 reflected our assessment of
expected future levels in servicing and foreclosure costs. See the
“Risk Management – Credit Risk Management – Risks Relating
to Servicing Activities” section in this Report for information on
the regulatory consent orders. Our portfolio of loans serviced for
others was $1.85 trillion at December 31, 2011, and $1.84 trillion
at December 31, 2010. At December 31, 2011, the ratio of MSRs
to related loans serviced for others was 0.76%, compared with
0.86% at December 31, 2010.
Income from loan origination/sale activities was $4.6 billion
in 2011 compared with $6.4 billion in 2010. The decrease in 2011
was driven by lower loan origination volume and margins on
loan originations, partially offset by lower provision for
mortgage loan repurchase losses. Residential real estate
originations were $357 billion in 2011, compared with
$386 billion a year ago, and mortgage applications were
$537 billion in 2011, compared with $620 billion in 2010. The
1-4 family first mortgage unclosed pipeline was $72 billion at
December 31, 2011, and $73 billion at December 31, 2010. For
additional information, 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 17 (Fair Values of Assets and
Liabilities) to Financial Statements in this Report.
37
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 2011
totaled $1.3 billion (compared with $1.6 billion for 2010), of
which $1.2 billion ($1.5 billion for 2010) was for subsequent
increases in estimated losses on prior year’s loan sales. For
additional information about mortgage loan repurchases, see the
“Risk Management – Credit Risk Management – Liability for
Mortgage Loan Repurchase Losses” section and Note 9
(Mortgage Banking Activities) to Financial Statements in this
Report.
Net gains from trading activities, which reflect unrealized
changes in fair value of our trading positions and realized gains
and losses, were $1.0 billion in 2011 and $1.6 billion in 2010.
The year-over-year decrease was driven by challenging market
conditions, including sovereign debt concerns, which pressured
credit spreads, reduced prices on financial assets and limited
new issue origination and trading opportunities. The decline also
reflects a loss of $377 million in 2011 relating to our resolution of
a legacy Wachovia position. Net gains from trading activities do
not include interest income and other fees earned from related
activities. Those amounts are reported within interest income
from trading assets and other noninterest income, respectively,
in the income statement. Net gains from trading activities are
primarily from trading conducted on behalf of or driven by the
needs of our customers (customer accommodation trading) and
also include the results of certain economic hedging and
proprietary trading activity. Net gains (losses) from proprietary
trading were a $14 million net loss in 2011 and a $22 million net
gain in 2010. Proprietary trading results also included interest
and fees reported in their corresponding income statement line
items. Proprietary trading activities are not significant to our
client-focused business model. Our trading activities, customer
accommodation, economic hedging and proprietary trading are
further discussed in the “Asset/Liability Management – Market
Risk – Trading Activities” section in this Report.
Net gains on debt and equity securities totaled $1.5 billion for
2011 and $455 million for 2010, after other-than-temporary
impairment (OTTI) write downs of $711 million for 2011 and
$940 million for 2010. Included in net gains on debt and equity
securities for 2011 was a $271 million gain related to a legacy
Wachovia position, due to redemption of our interest in an
investment fund. Other income in 2011 also included a
$153 million gain on the sale of our H.D. Vest Financial Services
business.
38
Income Tax Expense
The 2011 annual effective tax rate was 31.9% compared with
33.9% in 2010 and 30.3% in 2009. The lower effective tax rate
for 2011 reflected tax benefits from the realization for tax
purposes of a previously written down investment, a decrease in
tax expense associated with leveraged leases, as well as tax
benefits related to charitable donations of appreciated securities.
Noninterest Expense
Table 8: Noninterest Expense
(in millions)
2011
2010
2009
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
Postage, stationery and supplies
Outside data processing
Travel and entertainment
Advertising and promotion
Telecommunications
Insurance
Operating leases
All other
Total
$
14,462
13,869
13,757
8,857
4,348
2,283
3,011
8,692
4,651
2,636
3,030
1,880
2,199
1,266
2,692
1,407
1,354
1,197
2,370
1,642
1,537
1,261
1,258
944
8,021
4,689
2,506
3,127
2,577
1,849
1,982
1,088
1,071
875
933
942
935
821
607
523
515
112
1,046
1,027
783
630
596
464
109
575
572
610
845
227
2,117
2,803
2,689
$
49,393
50,456
49,020
Noninterest expense was $49.4 billion in 2011, down 2% from
$50.5 billion in 2010, driven by lower merger integration costs,
which also contributed to decreases in equipment expense
($2.3 billion, down from $2.6 billion in 2010), lower contract
services expense ($1.4 billion, down from $1.6 billion in 2010)
and lower foreclosed asset expense ($1.4 billion, down from
$1.5 billion in 2010). The increase in 2010 over 2009 was
predominantly due to merger integration costs, Wells Fargo
Financial restructuring costs and a $400 million charitable
donation to the Wells Fargo Foundation.
Personnel-related expenses were up 2% in 2011 compared
with 2010, primarily due to higher revenues generated by
businesses with revenue-based compensation, including the
retail securities brokerage and mortgage businesses, and
severance expense related to our expense initiative.
Outside professional services included increased investments
by our businesses in 2011 in their service delivery systems and
approximately $100 million of higher costs associated with the
mortgage servicing regulatory consent orders.
Merger integration costs totaled $1.7 billion in 2011 and
$1.9 billion in 2010. The integration of Wachovia remained on
track, and with the successful North Carolina conversion in
October 2011, all retail banking store conversions are complete.
Remaining integration activities are expected to be concluded by
first quarter 2012.
We continue to target $11 billion of noninterest expense for
fourth quarter 2012. However, we currently expect first quarter
2012 expenses to remain elevated driven by seasonally higher
personnel expenses and our final quarter of Wachovia
integration expenses, partially offset by continued gains from
efficiency and cost save initiatives.
39
Earnings Performance (continued)
Operating Segment Results
We are organized for management reporting purposes into three
operating segments: Community Banking; Wholesale Banking;
and Wealth, Brokerage and Retirement. These segments are
defined by product type and customer segment and their results
are based on our management accounting process, for which
there is no comprehensive, authoritative financial accounting
guidance equivalent to generally accepted accounting principles
(GAAP). In fourth quarter 2010, we aligned certain lending
businesses into Wholesale Banking from Community Banking to
Table 9: Operating Segment Results – Highlights
reflect our previously announced restructuring of Wells Fargo
Financial. In first quarter 2011, we realigned a private equity
business into Wholesale Banking from Community Banking.
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 24
(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
2011
2010
2011
2010
2011
2010
$
50.7
54.5
9.1
7.0
21.7
7.0
22.4
5.9
12.2
1.3
11.7
1.0
498.1
530.1
249.1
230.5
43.0
43.0
556.2
536.4
202.1
170.0
130.4
121.2
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 $9.1 billion and
revenue of $50.7 billion in 2011. Revenue decreased $3.8 billion,
or 7%, from 2010 due to reduced mortgage banking income,
lower yields on investment securities and expected reductions in
the non-strategic and liquidating loan portfolios, partially offset
by long-term debt run-off and lower deposit costs. Net interest
income decreased $2.3 billion, or 7%, from 2010, mostly due to
lower average loans (down $32.0 billion from 2010) as a result
of planned run-off in the non-strategic and liquidating loan
portfolios (including home equity and Pick-A-Pay), loan
repricing at lower rates, and lower yields on our investment
securities. This decline in interest income was mitigated by long-
term debt run-off and continued low funding costs. Average core
deposits increased $19.8 billion, or 4%, from 2010, as growth in
liquid deposits more than offset maturities of higher yielding
certificates of deposit. The number of consumer checking
accounts grew 3.2% from December 31, 2010. Noninterest
income decreased $1.5 billion, or 7%, from 2010, mainly due to
lower volume-related mortgage banking income and lower
deposit service charges as a result of the third quarter 2010
implementation of Regulation E, partially offset by lower other
than temporary impairments. Noninterest expense decreased
$837 million, or 3%, from 2010, due to reduced expenses across
most categories, as well as a 2010 charitable donation expense of
$400 million. The provision for credit losses decreased
$5.8 billion from 2010 as credit quality in most of our consumer
and business loan portfolios continued to improve. Charge-offs
decreased $4.8 billion from 2010, reflecting improvement
primarily in the home equity, credit card, and small business
lending portfolios. Additionally, we released $2.4 billion of
40
allowance for credit losses in 2011, compared with $1.4 billion
released in 2010.
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
finance, international, insurance, real estate capital markets,
commercial mortgage servicing, corporate trust, equipment
finance, asset backed finance, and asset management.
Wholesale Banking reported net income of $7.0 billion in
2011, up $1.1 billion, or 19%, from $5.9 billion in 2010. Average
loans of $249.1 billion increased $18.6 billion, or 8%, driven by
strong demand from both our domestic and international
customers. Average core deposits of $202.1 billion in 2011
increased $32.1 billion, or 19%, from 2010 reflecting continued
strong customer liquidity.
The year over year increase in net income was the result of a
decrease in the provision for credit losses and noninterest
expenses, which more than offset a decrease in revenue.
Revenue decreased $759 million, or 3%, from 2010, as broad-
based growth among many businesses, including strong loan
and deposit growth, was offset by lower PCI resolutions revenue,
lower sales and trading revenue, and lower crop insurance
revenue.
Total noninterest expense in 2011 decreased $75 million
compared with 2010 as lower operating losses and foreclosed
asset expenses were partially offset by higher personnel expense.
The provision for credit losses declined $2.0 billion from 2010,
and reflected a $1.6 billion improvement in net credit losses
along with a $950 million allowance release (compared with a
$561 million release in 2010).
Wholesale Banking’s 2011 financial results benefited from
loan portfolio acquisitions and strong borrowing demand across
all customers segments, with most lending areas experiencing
double-digit rates of growth in loans outstandings, including in
Asset Backed Finance, Capital Finance, Commercial Banking,
Commercial Real Estate, Government and Institutional Banking,
International, and Real Estate Capital Markets.
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 (which will be rebranded as Abbot Downing, a
Wells Fargo Business, in April 2012) 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
Balance Sheet Analysis
During 2011, our total assets grew 4%, funded by core deposit
growth of 9% and internal capital generation, partially offset by a
reduction in our long-term borrowings. Our total loans and core
deposits at December 31, 2011, were up from the previous year.
At December 31, 2011, core deposits totaled 113% of the loan
portfolio, and we have the capacity to add higher yielding
earning assets to generate future revenue and earnings growth.
The strength of our business model produced record earnings
and high rates of internal capital generation as reflected in our
improved capital ratios. Tier 1 capital increased to 11.33% as a
percentage of total risk-weighted assets, and Tier 1 common
equity to 9.46% at December 31, 2011, up from 11.16% and
Securities Available for Sale
Table 10: Securities Available for Sale – Summary
individuals, and reinsurance services for the life insurance
industry.
Wealth, Brokerage and Retirement reported net income of
$1.3 billion in 2011, up $283 million, or 28%, from 2010.
Revenue increased $458 million, or 4%, from 2010, as net
interest income increased $148 million, or 5%, and noninterest
income increased $310 million, or 3%, from 2010. Net interest
income increased due to higher investment income and the
impact of deposit balance growth. Average core deposits of
$130.4 billion in 2011 increased 8% from 2010. Noninterest
income increased as higher asset-based fees and a gain on the
sale of the H.D. Vest Financial Services business exceeded losses
on deferred compensation plan investments (offset in expense)
and lower brokerage transaction revenue. Noninterest expense
increased $167 million, or 2%, from 2010, primarily due to
growth in personnel cost largely due to higher broker
commissions driven by increased production levels, as well as
increases in other incentive compensation, offset by lower
deferred compensation. The provision for credit losses
decreased $164 million, or 49%, from 2010, due to lower net
charge-offs.
8.30%, respectively, at December 31, 2010. Total capital was
14.76% and Tier 1 leverage was 9.03%, compared with 15.01%
and 9.19%, respectively, at December 2010. For additional
information about our capital requirements, see Note 26
(Regulatory and Agency Capital Requirements) to Financial
Statements in this Report.
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.
(in millions)
Debt securities available for sale
Marketable equity securities
Net
unrealized
Cost
gain
2011
Fair
value
December 31,
Net
unrealized
Cost
gain
2010
Fair
value
$
212,642
6,554
219,196
160,071
7,394 167,465
2,929
488
3,417
4,258
931
5,189
Total securities available for sale
$
215,571
7,042
222,613
164,329
8,325 172,654
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 liquid, high-quality federal
agency debt and privately issued mortgage-backed securities
(MBS). The total net unrealized gains on securities available for
sale were $7.0 billion at December 31, 2011, down from net
unrealized gains of $8.3 billion at December 31, 2010, primarily
due to gains realized from sales partially offset by slight
widening of credit spreads in some asset classes.
We analyze securities for OTTI quarterly, or more often if a
potential loss-triggering event occurs. Of the $711 million OTTI
write-downs recognized in 2011, $423 million related to debt
securities. There were $118 million in OTTI write-downs for
41
Balance Sheet Analysis (continued)
marketable equity securities and $170 million in OTTI write-
downs related to nonmarketable 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, 2011, debt securities available for sale
included $32.6 billion of municipal bonds, of which 78% 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 guaranteed
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. Our
municipal bond holdings continue to be monitored as part of our
ongoing impairment analysis of our securities available for sale.
The weighted-average expected maturity of debt securities
available for sale was 4.9 years at December 31, 2011. Because
61% 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
Expected
remaining
Net
Fair
unrealized maturity
value
gain (loss)
(in years)
$
132.7
5.6
3.8
(in billions)
At December 31, 2011
Actual
Assuming a 200 basis point:
Increase in interest rates
Decrease in interest rates
122.6
137.4
(4.5)
10.3
5.2
3.1
See Note 5 (Securities Available for Sale) to Financial
Statements in this Report for securities available for sale by
security type.
42
Loan Portfolio
Total loans were $769.6 billion at December 31, 2011, up
$12.4 billion from December 31, 2010. Table 12 provides a
summarized breakdown by loan portfolio. Increased balances in
many commercial loan portfolios more than offset the continued
reduction in the non-strategic and liquidating loan portfolios,
which have declined $21.0 billion since December 31, 2010, as
well as the soft demand in consumer loans in response to
economic conditions. Additional information on the non-
strategic and liquidating loan portfolios is included in Table 17 in
the “Credit Risk Management” section of this Report.
Many loan portfolios had double-digit year-over-year loan
growth in average balances, including government and
institutional banking, asset-backed finance, capital finance,
commercial banking, commercial real estate, international and
real estate capital markets. Included in the growth of loans from
year end 2010 were loan purchases in 2011 with a period end
balance of $3.6 billion of U.S.-based commercial real estate.
Consumer loans include the consolidation of $5.6 billion of
reverse mortgage loans previously sold.
Table 12: Loan Portfolios
(in millions)
Commercial
Consumer
Total loans
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.
Table 13: Maturities for Selected Loan Categories
December 31,
2011
2010
2009
2008
2007
$
345,450
322,058
336,465
389,964
160,282
424,181
435,209
446,305
474,866
221,913
$
769,631
757,267
782,770
864,830
382,195
Table 13 shows contractual loan maturities for selected loan
categories and sensitivities of those loans to changes in interest
rates.
Within
one
year
After
one year
through
five years
After
five
years
2011
Total
December 31,
2010
After
Within
one year
one
through
year
five years
After
five
years
Total
(in millions)
Selected loan maturities:
Commercial and industrial
$
44,258
101,273
21,685
167,216
39,576
90,497
21,211
151,284
Real estate mortgage
Real estate construction
Foreign
22,537
10,059
35,258
54,201
8,178
29,237
1,145
105,975
19,382
3,142
1,360
39,760
27,544
15,009
25,087
44,627
9,189
27,264
1,135
99,435
25,333
5,508
2,317
32,912
Total selected loans
$
112,112
166,794
53,427
332,333
107,216
149,821
51,927
308,964
Distribution of loans due
after one year to
changes in interest rates:
Loans at fixed
interest rates
Loans at floating/variable
interest rates
Total selected loans
$
166,794
53,427
147,475
39,715
$
19,319
13,712
29,886
14,543
119,935
37,384
149,821
51,927
43
Balance Sheet Analysis (continued)
Deposits
Deposits totaled $920.1 billion at December 31, 2011,
compared with $847.9 billion at December 31, 2010. 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
Report. Total core deposits were $872.6 billion at
December 31, 2011, up $74.4 billion from $798.2 billion at
December 31, 2010. We continued to gain new deposit
customers and deepen our relationships with existing
customers in 2011.
Table 14: Deposits
(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.
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.
December 31,
% of
total
% of
total
%
2011
deposits
2010
deposits
Change
$
243,961
26 %
$
191,231
37,027
485,534
63,617
42,490
872,629
20,745
26,696
4
53
7
5
95
2
3
63,440
431,883
77,292
34,346
798,192
19,412
30,338
23 %
7
51
9
4
94
2
4
$
920,070
100 %
$
847,942
100 %
28
(42)
12
(18)
24
9
7
(12)
9
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) to Financial
Statements in this Report.
44
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 15: Contractual Obligations
Table 15 summarizes these contractual obligations as of
December 31, 2011, 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 20 (Employee Benefits
and Other Expenses) to Financial Statements in this Report.
(in millions)
Contractual payments by period:
Deposits
Long-term debt (2)
Operating leases
Unrecognized income tax obligations
Commitments to purchase debt securities
Purchase and other 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
21
$
98,309
18,605
26,945
25,080
14,502
26,689
3,427
54,980
1,319
2,291
1,589
3,239
10
17
454
-
1,010
311
-
-
125
-
-
6
776,887 (1)
-
-
2,219
-
-
Total
920,070
125,354
8,438
2,229
1,027
896
Total contractual obligations
$
118,714
55,637
42,905
61,652
779,106
1,058,014
(1) Includes interest-bearing and noninterest-bearing checking, and market rate and other savings accounts.
(2) Includes obligations under capital leases of $116 million.
(3) Includes agreements to purchase goods or services and an annual minimum property tax obligation.
Transactions with Related Parties
The Related Party Disclosures topic of the Financial
Accounting Standards Board (FASB) Accounting Standards
Codification (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 material related-
party transactions required to be reported for the years ended
December 31, 2011, 2010 and 2009.
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 estimate the amount payable in the next 12
months based on the status of our tax examinations and
settlement discussions. See Note 21 (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 16
(Derivatives) to Financial Statements in this Report for more
information.
45
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. The discussion that follows provides information
on how we manage these risks.
Credit Risk Management
Table 16: Total Loans Outstanding by Portfolio Segment and
Class of Financing Receivable
(in millions)
Commercial:
December 31,
2011
2010
Commercial and industrial
$
167,216
151,284
Real estate mortgage
Real estate construction
Lease financing
Foreign (1)
105,975
19,382
13,117
39,760
99,435
25,333
13,094
32,912
Total commercial
345,450
322,058
Consumer:
Real estate 1-4 family first mortgage
228,894
230,235
Real estate 1-4 family
junior lien mortgage
Credit card
Other revolving credit
and installment
85,991
22,836
96,149
22,260
86,460
86,565
Total consumer
424,181
435,209
Total loans
$
769,631
757,267
(1) Substantially all of our foreign loan portfolio is commercial. Loans are classified as
foreign if the borrower’s primary address is outside of the United States.
We employ various credit risk management and monitoring
activities to mitigate risks associated with multiple risk factors
affecting loans we hold, could acquire or originate including:
Loan concentrations and related credit quality
Counterparty credit risk
Economic and market conditions
Legislative or regulatory mandates
Changes in interest rates
Merger and acquisition activities
Reputation risk
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, disciplined credit underwriting,
frequent and detailed risk measurement and modeling,
extensive credit training programs, and a continual loan review
and audit process. The Credit Committee of our Board of
Directors (Board) receives reports from management,
including our Chief Risk Officer and Chief Credit Officer, and
its responsibilities include oversight of the administration and
effectiveness of, and compliance with, our credit policies and
the adequacy of the allowance for credit losses.
A key to our credit risk management is adherence 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.
46
Non-Strategic and Liquidating Loan Portfolios We
continually evaluate and modify our credit policies to address
appropriate levels of risk. We may designate certain portfolios
and loan products as non-strategic or liquidating to 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. They consist primarily of the Pick-a-Pay mortgage
portfolio and other PCI loans acquired from Wachovia as well
as some portfolios from legacy Wells Fargo Home Equity and
Table 17: Non-Strategic and Liquidating Loan Portfolios
(in millions)
Commercial:
Legacy Wachovia commercial and industrial, CRE and foreign PCI loans (1)
Total commercial
Consumer:
Pick-a-Pay mortgage (1)
Liquidating home equity
Legacy Wells Fargo Financial indirect auto
Legacy Wells Fargo Financial debt consolidation
Education Finance - government guaranteed (2)
Legacy Wachovia other PCI loans (1)
Total consumer
Wells Fargo Financial. Effective first quarter 2011, we added
our education finance government guaranteed loan portfolio to
the non-strategic and liquidating loan portfolios as there is no
longer a U.S. Government guaranteed student loan program
available to private financial institutions pursuant to legislation
in 2010. The outstanding balances on non-strategic and
liquidating loan portfolios have decreased 41% since the
merger with Wachovia at December 31, 2008, and decreased
16% from the end of 2010.
Outstanding balance
December 31,
2011
2010
2009
2008
$
5,695
7,935
12,988
18,704
5,695
7,935
12,988
18,704
65,652
74,815
85,238
95,315
5,710
6,904
8,429
10,309
2,455
16,542
6,002
19,020
11,253
22,364
18,221
25,299
15,376
17,510
21,150
20,465
896
1,118
1,688
2,478
106,631
125,369
150,122
172,087
Total non-strategic and liquidating loan portfolios
$
112,326
133,304
163,110
190,791
(1) Net of purchase accounting adjustments related to PCI loans.
(2) Effective first quarter 2011, we included our education finance government guaranteed loan portfolio as there is no longer a U.S. Government guaranteed student loan
program available to private financial institutions, pursuant to legislation in 2010. Prior periods have been adjusted to reflect this change.
The Wells Fargo Financial debt consolidation portfolio
included $1.1 billion of loans at December 31, 2011, that were
considered prime based on secondary market standards,
compared with $1.2 billion at December 31, 2010. The rest is
non-prime but was originated with underwriting standards to
reduce credit risk. Wells Fargo Financial ceased originating
loans and leases through its indirect auto business channel by
the end of 2008.
The home equity liquidating portfolio was designated in
fourth quarter 2007 from loans generated through third party
channels. This portfolio is discussed in more detail in the
“Credit Risk Management – Home Equity Portfolios” section of
this Report.
Information about the liquidating PCI and Pick-a-Pay loan
portfolios is provided in the discussion of loan portfolios that
follows.
47
Risk Management — Credit Risk Management (continued)
PURCHASED CREDIT-IMPAIRED (PCI) LOANS Loans acquired
with evidence of credit deterioration since their origination and
where it is probable that we will not collect all contractually
required principal and interest payments are accounted for using
the measurement provisions for PCI loans. PCI loans are
recorded at fair value at the date of acquisition, and the
historical allowance for credit losses related to these loans is not
carried over. Such loans are considered to be accruing due to the
existence of the accretable yield and not based on consideration
given to contractual interest payments. Substantially all of our
PCI loans were acquired in the Wachovia acquisition on
December 31, 2008.
A nonaccretable difference is established for PCI loans to
absorb losses expected on those loans at the date of acquisition.
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 to third parties,
receipt of payments in settlement with the borrower, or
foreclosure of the collateral. Our policy is to remove an
individual PCI loan from a pool based on comparing the amount
Table 18: Changes in Nonaccretable Difference for PCI Loans
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 accretable yield percentage is
unaffected by the resolution and any changes in the effective
yield for the remaining loans in the pool are 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 TDRs, and removed
from PCI accounting, if there has been a concession granted in
excess of the original nonaccretable difference. We include these
TDRs in our impaired loans.
During 2011, we recognized in income $239 million released
from the nonaccretable difference related to commercial PCI
loans due to payoffs and other resolutions. We also transferred
$373 million from the nonaccretable difference to the accretable
yield for PCI loans with improving credit-related cash flows and
absorbed $2.3 billion of losses in the nonaccretable difference
from loan resolutions and write-downs. Table 18 provides an
analysis of changes in the nonaccretable difference.
(in millions)
Balance, 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 credit-related cash flows (3)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)
Balance, December 31, 2009
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Other
Commercial Pick-a-Pay 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)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
(726)
(2,356)
(317)
(3,399)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)
Balance, December 31, 2010
Addition of nonaccretable difference due to acquisitions
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
(1,698)
(2,959)
(391)
(5,048)
1,590
188
10,925
-
914
-
13,429
188
(198)
(41)
-
-
-
-
-
(198)
(41)
(21)
(373)
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
(352)
Use of nonaccretable difference due to:
Losses from loan resolutions and write-downs (4)
Balance, December 31, 2011
(258)
(1,799)
(241)
(2,298)
$
929
9,126
652
10,707
(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 for settlements with borrowers 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.
48
Since December 31, 2008, we have released $5.9 billion in
nonaccretable difference, including $4.2 billion transferred from
the nonaccretable difference to the accretable yield and
$1.7 billion released to income through loan resolutions. We
have provided $1.8 billion in the allowance for credit losses for
certain PCI loans or pools of PCI loans that have had credit-
related decreases to cash flows expected to be collected. The net
result is a $4.2 billion reduction from December 31, 2008,
through December 31, 2011, in our initial projected losses on all
PCI loans.
At December 31, 2011, the allowance for credit losses on
certain PCI loans was $231 million. The allowance is necessary
to absorb credit-related decreases since acquisition in cash flows
expected to be collected and primarily relates to individual PCI
loans. Table 19 analyzes the actual and projected loss results on
PCI loans since acquisition through December 31, 2011.
For additional information 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.
Table 19: Actual and Projected Loss Results on PCI Loans
(in millions)
Release of nonaccretable difference due to:
Loans resolved by settlement with borrower (1)
Loans resolved by sales to third parties (2)
Commercial Pick-a-Pay
consumer
Total
Other
$
1,345
299
-
-
-
85
1,345
384
Reclassification to accretable yield for loans with improving credit-related cash flows (3)
1,216
2,383
614
4,213
Total releases of nonaccretable difference due to better than expected losses
Provision for losses due to credit deterioration (4)
2,860
(1,668)
2,383
-
699
(116)
5,942
(1,784)
Actual and projected losses on PCI loans less than originally expected
$
1,192
2,383
583
4,158
(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 for settlements with borrowers 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 may not
support full realization of the carrying value.
Significant Portfolio Reviews 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
appropriate 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.
COMMERCIAL REAL ESTATE (CRE) The CRE portfolio,
consisting of both CRE mortgage loans and CRE construction
loans, totaled $125.4 billion, or 16% of total loans, at
December 31, 2011. CRE construction loans totaled $19.4 billion
at December 31, 2011, and CRE mortgage loans totaled
$106.0 billion, of which 33% was to owner-occupants. Table 20
summarizes CRE loans by state and property type with the
related nonaccrual totals. CRE nonaccrual loans totaled 5% of
the non-PCI CRE outstanding balance at December 31, 2011, a
decline of 24% from December 31, 2010. The portfolio is
diversified both geographically and by property type. The largest
geographic concentrations of combined CRE loans are in
California and Florida, which represented 25% and 9% of the
total CRE portfolio, respectively. By property type, the largest
concentrations are office buildings at 26% and
industrial/warehouse at 11% of the portfolio. We subject
commercial loans to individual risk assessment using our
internal borrower and collateral quality ratings. Our ratings are
aligned to pass and criticized categories with our criticized
categories aligned to special mention, substandard and doubtful
categories as defined by bank regulatory agencies. At December
31, 2011, we had $22.5 billion of criticized non-PCI CRE
mortgage loans, a decrease of 13% from December 31, 2010, and
$6.8 billion of criticized non-PCI construction loans, a decrease
of 39% from December 31, 2010. Total criticized non-PCI CRE
loans remained relatively high as a result of the continued
challenging conditions in the real estate market. See Note 6
(Loans and Allowance for Credit Losses) to Financial Statements
in this Report for further detail on criticized loans.
The underwriting of CRE loans primarily focuses on cash
flows inherent in the creditworthiness of the customer, in
addition to collateral valuations. To identify and manage newly
emerging problem CRE loans, we employ a high level of
monitoring and regular customer interaction to understand and
manage the risks associated with these loans, including regular
loan reviews and appraisal updates. Management is engaged to
identify issues and dedicated workout groups are in place to
manage problem loans. At December 31, 2011, the recorded
investment in PCI CRE loans totaled $5.0 billion, down from
$12.3 billion at December 31, 2008, reflecting the reduction
resulting from principal payments, loan resolutions and write-
downs.
49
Risk Management — Credit Risk Management (continued)
Table 20: CRE Loans by State and Property Type
(in millions)
By state:
PCI loans (1):
New York
California
Florida
North Carolina
Texas
Other
Total PCI loans
All other loans:
California
Florida
Texas
New York
North Carolina
Virginia
Arizona
Georgia
Washington
Colorado
Other
Total all other loans
Total
By property:
PCI loans (1):
Office buildings
Apartments
1-4 family land
Shopping center
Retail (excluding shopping center)
Other
Total PCI loans
All other loans:
Office buildings
Industrial/warehouse
Retail (excluding shopping center)
Apartments
Real estate - other
Shopping center
Hotel/motel
Land (excluding 1-4 family)
Institutional
Agriculture
Other
Total all other loans
Total
Real estate mortgage Real estate construction
Total
% of
Nonaccrual Outstanding Nonaccrual Outstanding
loans balance (1)
loans balance (1)
Nonaccrual Outstanding
loans balance (1)
total
loans
December 31, 2011
$
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
709
533
326
64
193
1,445
3,270
1,042
28,012
645
307
33
277
90
190
228
54
93
9,130
7,188
5,010
4,331
3,485
3,966
3,536
3,130
2,953
-
-
-
-
-
-
-
323
242
61
5
205
31
49
239
7
34
186
104
230
242
103
880
1,745
3,073
1,609
1,572
899
1,058
1,294
607
676
445
460
-
-
-
-
-
-
-
895
637
556
306
296
2,325 (2)
*%
*
*
*
*
*
5,015
*%
1,365
31,085
887
368
38
482
121
239
467
61
127
10,739
8,760
5,909
5,389
4,779
4,573
4,212
3,575
3,413
4 %
1
1
*
*
*
*
*
*
*
1,126
31,964
694
5,944
1,820
37,908 (3)
5
4,085
102,705
1,890
17,637
5,975
120,342
4,085
105,975
1,890
19,382
5,975
125,357
-
-
-
-
-
-
-
960
547
598
256
357
306
264
48
107
165
477
1,512
672
81
261
257
487
3,270
29,200
12,892
11,675
9,809
9,690
8,811
7,366
261
3,015
2,714
7,272
-
-
-
-
-
-
-
99
32
45
105
62
123
35
544
-
-
126
335
341
102
87
754
1,745
-
-
-
-
-
-
-
1,638
1,007
422
363
344
1,241
5,015
495
484
2,127
335
1,196
809
6,382
266
18
579
643
361
419
429
299
592
107
165
13,387
12,159
11,936
10,025
10,007
8,175
6,643
3,281
2,732
845
3,768
1,322
11,040
4,085
102,705
1,890
17,637
5,975
120,342
4,085
105,975 (4)
1,890
19,382
5,975
125,357
1,757
1,059
30,957
4 %
16 %
16 %
*%
*
*
*
*
*
*%
2
2
2
1
1
1
*
*
*
1
16 %
16 %
Less than 1%.
*
(1) For PCI loans, amounts represent carrying value. 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.
(2) Includes 33 states; no state had loans in excess of $284 million.
(3) Includes 40 states; no state had loans in excess of $3.0 billion.
(4) Includes $34.9 billion of loans to owner-occupants where 51% or more of the property is used in the conduct of their business.
50
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 21 summarizes commercial and industrial loans and
lease financing by industry with the related nonaccrual totals.
Across our non-PCI commercial loans and leases, the
commercial and industrial loans and lease financing portfolio
generally experienced better credit improvement than our CRE
portfolios in 2011. Of the total commercial and industrial loans
and lease financing non-PCI portfolio, 0.09% was 90 days or
more past due and still accruing, 1.22% was nonaccruing and
12.5% was criticized. In comparison, of the total non-PCI CRE
portfolio, 0.29% was 90 days or more past due and still accruing,
4.97% was nonaccruing and 24.3% was criticized. Also, the net
charge-off rate for both portfolios declined in 2011 from 2010.
We believe the commercial and industrial loans and lease
financing portfolio is well underwritten and is diverse in its risk
with relatively level concentrations across several industries. Our
credit risk management process for this portfolio primarily
focuses on a customer’s ability to repay the loan through their
cash flow.
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.
Generally, the collateral securing this portfolio represents a
secondary source of repayment. See Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report for more analysis and credit metric information.
Table 21: Commercial and Industrial Loans and Lease
Financing by Industry
December 31, 2011
(in millions)
PCI loans (1):
Technology
Investors
Healthcare
Insurance
Aerospace and defense
Residential construction
Other
Total PCI loans
All other loans:
Financial institutions
Cyclical retailers
Oil and gas
Food and beverage
Healthcare
Investors
Industrial equipment
Technology
Business services
Transportation
Real estate lessor
Utilities
Other
Nonaccrual Outstanding
loans balance (1)
$
$
$
-
-
-
-
-
-
-
-
65
49
39
38
36
26
146 (2)
399
146
13,597
41
89
36
78
2
97
66
42
17
44
1
1,536
10,364
10,198
10,150
8,419
8,407
7,365
6,404
6,377
6,260
6,067
5,357
80,969 (3)
Total all other loans
Total
$
$
2,195
179,934
2,195
180,333
% of
total
loans
* %
*
*
*
*
*
*
* %
2 %
1
1
1
1
1
*
*
*
*
*
*
11
23 %
23 %
Less than 1%.
*
(1) For PCI loans, amounts represent carrying value. 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.
(2) No other single category had loans in excess of $24 million.
(3) No other single category had loans in excess of $4.9 billion.
51
Risk Management — Credit Risk Management (continued)
During the current credit cycle, we have experienced an
increase in loans requiring risk mitigation activities including
the restructuring of loan terms and requests for extensions of
commercial and industrial and CRE loans. All actions are based
on a re-underwriting of the loan and our assessment of the
borrower’s ability to perform under the agreed-upon 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, 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.
Our ability to seek performance under a 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 and accruing status are important factors in our allowance
methodology for commercial and industrial and CRE loans.
In considering the accrual status of the loan, we evaluate the
collateral and future cash flows as well as the anticipated support
of any repayment guarantor. In many cases the strength of the
guarantor provides sufficient assurance that full repayment of
the loan is expected. When full and timely collection of the loan
becomes uncertain, including the performance of the guarantor,
we place the loan on nonaccrual status and we charge-off all or a
portion of the loan based on the fair value of the collateral
securing the loan, if any.
At the time of restructuring, we evaluate whether the loan
should be classified as a TDR, and account for it accordingly. For
more information on TDRs, see “Troubled Debt Restructurings”
later in this section and Note 6 (Loans and Allowance for Credit
Losses) to Financial Statements in this Report.
FOREIGN LOANS AND EUROPEAN EXPOSURE Our foreign
country risk monitoring process incorporates frequent dialogue
with our foreign financial institution customers, counterparties
and regulatory agencies, enhanced by centralized monitoring of
macroeconomic and capital markets conditions. We establish
exposure limits for each country via a centralized oversight
process based on the needs of our customers, and in
consideration of relevant economic, political, social, legal, and
transfer risks. We monitor exposures closely and adjust our
limits in response to changing conditions. We conduct periodic
stress tests of our significant country risk exposures, analyzing
the potential direct and indirect impacts of various
macroeconomic and capital market scenarios.
At December 31, 2011, foreign loans represented
approximately 5% of our total consolidated loans outstanding
and approximately 3% of our total assets. Our largest foreign
country exposure on an ultimate risk basis was the United
Kingdom, which amounted to approximately $11.0 billion, or
0.84%, of our consolidated assets, and included $1.7 billion of
sovereign claims. Our United Kingdom sovereign claims arise
primarily from deposits we have placed with the Bank of
England pursuant to regulatory requirements in support of our
London branch.
Several European countries have been experiencing
significant fiscal and economic deterioration in recent months.
In January 2012, Standard & Poor’s Ratings Service (S&P)
downgraded the long-term sovereign debt ratings of France,
Italy, Spain, Cyprus, Portugal, Austria, Malta, Slovakia and
Slovenia, as well as the rating of the European Financial Stability
Facility. In addition, in February 2012, Moody’s Investors
Service lowered the sovereign debt ratings of Italy, Malta,
Portugal, Slovakia, Slovenia, and Spain, and Fitch Ratings and
S&P downgraded Greece to the lowest rating above a default. At
December 31, 2011, our exposure to these downgraded countries,
including cross-border claims on an ultimate risk basis, and
foreign exchange and derivative products, aggregated
approximately $3.4 billion, including $182.3 million of sovereign
claims.
Based on our most recent stress testing activities conducted
in fourth quarter 2011, in the event of a rapid deterioration in
financial and economic conditions in Europe we believe it is
unlikely we would experience a material impact to our financial
condition, results of operations, liquidity, or capital resources as
a result of our European exposures due to the relatively small
magnitude of our exposures as well as its diversity by country,
type, and counterparty.
Table 22 provides information regarding our exposures to
European sovereign entities and institutions located within such
countries, including cross-border claims on an ultimate risk
basis, and foreign exchange and derivative products.
52
Table 22: European Exposure
(in millions)
December 31, 2011
Eurozone:
Germany
Netherlands
Spain
Luxembourg
France
Ireland
Italy
Austria
Other (6)
Total Eurozone exposure
United Kingdom
Other European countries
Lending (1)(2)
Securities (3)
Derivatives and other (4)
Total exposure
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign
Non-
sovereign
Sovereign sovereign (5)
Total
Non-
$
57
-
-
-
87
100
-
95
21
360
2,547
2,107
1,109
1,010
517
772
465
222
531
9,280
1,707
3,996
-
4,996
-
-
-
-
-
-
-
-
4
4
-
3
7
240
111
97
123
302
53
124
19
185
1,254
4,983
268
6,505
-
-
-
-
-
-
-
-
-
-
-
8
8
185
72
30
2
165
23
1
1
27
506
331
955
57
-
-
-
87
100
-
95
25
364
2,972
2,290
1,236
1,135
984
848
590
242
743
3,029
2,290
1,236
1,135
1,071
948
590
337
768
11,040
11,404
1,707
11
9,310
6,219
11,017
6,230
1,792
2,082
26,569
28,651
Total European exposure
$
2,067
18,272
(1) Lending exposure includes funded loans and unfunded commitments, leveraged leases, and money market placements presented on a gross basis prior to the deduction of
impairment allowance and collateral received under the terms of the credit agreements.
(2) Includes $1.6 billion in PCI loans, predominantly to customers in Germany and United Kingdom territories, and $3.1 billion in defeased leases secured predominantly by U.S.
Treasury and government agency securities, or government guaranteed.
(3) Represents issuer exposure on cross-border debt and equity securities, held in trading or available-for-sale portfolio, at fair value.
(4) Represents counterparty exposure on foreign exchange and derivative contracts, and securities resale and lending agreements. This exposure is presented net of
counterparty netting adjustments and reduced by the amount of cash collateral. It includes credit default swaps (CDS) predominantly used to manage our U.S. and London-
based cash credit trading businesses, which sometimes results in selling and purchasing protection on the identical reference entity. Generally, we do not use market
instruments such as CDS to hedge the credit risk of our investment or loan positions, although we do use them to manage risk in our trading businesses. At
December 31, 2011, the gross notional amount of our CDS sold on reference assets domiciled in Europe was substantially offset by the notional of CDS purchased from
investment-grade counterparties. Additionally, at December 31, 2011, we did not have any net exposure on sovereign CDS associated with European countries.
(5) Total non-sovereign exposure is comprised of $12.3 billion exposure to financial institutions and $14.3 billion to non-financial corporations at December 31, 2011.
(6) Includes non-sovereign exposure to Greece and Portugal in the amount of $9.5 million and $ 49.1 million, respectively. We had no sovereign debt exposure to these
countries at December 31, 2011.
REAL ESTATE 1-4 FAMILY MORTGAGE LOANS Our real estate 1-
4 family mortgage loans primarily include loans we have made to
customers and retained as part of our asset liability management
strategy. These loans also include the Pick-a-Pay portfolio
acquired from Wachovia and the home equity portfolio, which
are discussed later in this Report. In addition, these loans
include other purchased loans and loans included on our balance
sheet due to the adoption of consolidation accounting guidance
related to VIEs.
Our underwriting and periodic review of loans collateralized
by residential real property includes appraisals or estimates
from 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 using 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. AVMs are generally used in underwriting to
support property values on loan originations only where the loan
amount is under $250,000. We generally require property
visitation appraisals by a qualified independent appraiser for
larger residential property loans.
Some of our real estate 1-4 family first and junior lien
mortgage loans include an interest-only feature as part of the
loan terms. These interest-only loans were approximately 21% of
total loans at December 31, 2011, and 25% at December 31, 2010.
Substantially all of these interest-only loans at origination were
considered to be prime or near prime.
We believe we have manageable adjustable-rate mortgage
(ARM) reset risk across our owned mortgage loan portfolios. We
do not offer option 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. Our liquidating option ARM
portfolio was acquired from Wachovia.
We continue to modify real estate 1-4 family mortgage loans
to assist homeowners and other borrowers in the current
difficult economic cycle. Loans are underwritten at the time of
the modification in accordance with underwriting guidelines
established for governmental and proprietary loan modification
programs. As a participant in the U.S. Treasury’s Making Home
Affordable (MHA) programs, we are focused on helping
customers stay in their homes. The MHA programs create a
standardization of modification terms including incentives paid
to borrowers, servicers, and investors. MHA includes the Home
Affordable Modification Program (HAMP) for first lien loans and
the Second Lien Modification Program (2MP) for junior lien
loans. Under both our proprietary programs and the MHA
programs, we may provide concessions such as interest rate
reductions, forbearance of principal, and in some cases,
principal forgiveness. These programs generally include trial
payment periods of three to four months, and after successful
completion and compliance with terms during this period, the
loan is permanently modified. During both the trial payment
period and/or permanent modification period, the loan is
accounted for as a TDR loan. See Table 32 for discussion on trial
modifications, including balances. See Note 6 (Loans and
Allowance for Credit Losses) to Financial Statements in this
Report for discussion on how we determine the allowance
attributable to our modified residential real estate portfolios.
The concentrations of real estate 1-4 family first and junior
lien mortgage loans by state are presented in Table 23. Our real
estate 1-4 family mortgage loans to borrowers in California
represented approximately 13% of total loans (3% of this amount
53
Risk Management — Credit Risk Management (continued)
Table 23: Real Estate 1-4 Family Mortgage Loans by State
December 31, 2011
Real estate Real estate
Total real
1-4 family 1-4 family estate 1-4 % of
(in millions)
PCI loans:
California
Florida
New Jersey
Other (1)
family
mortgage mortgage mortgage
junior lien
first
total
loans
$
19,336
2,700
1,285
6,425
42
38
25
101
19,378
3 %
2,738
1,310
6,526
*
*
*
Total PCI loans
$
29,746
206
29,952
4 %
All other loans:
California
Florida
New Jersey
New York
Virginia
Pennsylvania
North Carolina
Georgia
Texas
Other (2)
Government insured/
guaranteed loans (3)
Total all
other loans
Total
$
$
$
54,312
23,934
78,246
10 %
16,001
9,007
9,045
5,874
5,978
5,642
4,583
6,444
7,664
6,240
3,597
4,431
3,929
3,582
3,369
1,335
23,665
15,247
12,642
10,305
9,907
9,224
7,952
7,779
3
2
2
1
1
1
1
1
55,707
27,704
83,411
12
26,555
-
26,555
3
199,148
85,785
284,933
37 %
228,894
85,991
314,885
41 %
Less than 1%.
*
(1) Consists of 45 states; no state had loans in excess of $729 million.
(2) Consists of 41 states; no state had loans in excess of $6.6 billion.
(3) Represents loans whose repayments are insured by the FHA or guaranteed by
the VA. In 2011, we consolidated $5.6 billion of previously sold FHA insured real
estate 1-4 family reverse mortgages.
PICK-A-PAY PORTFOLIO The Pick-a-Pay portfolio was one of the
consumer residential first mortgage portfolios we acquired from
Wachovia and a majority of the portfolio was identified as PCI
loans. The Pick-a-Pay portfolio is a liquidating portfolio, as
Wachovia ceased originating new Pick-a-Pay loans in 2008.
The Pick-a-Pay portfolio includes loans that offer payment
options (Pick-a-Pay option payment loans), and also includes
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 throughout this Report. Real estate
1-4 family junior lien mortgages and lines of credit associated
with Pick-a-Pay loans are reported in the home equity portfolio.
Table 24 provides balances over time related to the types of
loans included in the portfolio since acquisition.
were PCI loans from Wachovia) at December 31, 2011, mostly
within the larger metropolitan areas, with no single California
metropolitan area consisting of more than 3% of total loans. We
continuously monitor changes in real estate values and
underlying economic or market conditions for all geographic
areas of our real estate 1-4 family mortgage portfolio as part of
our credit risk management process.
Part of our credit monitoring includes tracking delinquency,
FICO scores and collateral values (LTV/CLTV) on the entire real
estate 1-4 family mortgage loan portfolio. These metrics
experienced improvement throughout 2011, on the non-PCI
mortgage portfolio, with the majority of the improvement
occurring in the first half of 2011. Loans 30 days or more
delinquent at December 31, 2011, totaled $18.4 billion, or 6%, of
total non-PCI mortgages, compared with $20.3 billion, or 7%, at
December 31, 2010. Loans with FICO scores lower than 640
totaled $44.1 billion at December 31, 2011, or 15% of all non-PCI
mortgages, compared with $50.7 billion, or 17%, at
December 31, 2010. Mortgages with a LTV/CLTV greater than
100% totaled $74.2 billion at December 31, 2011, or 26% of total
non-PCI mortgages, compared with $84.9 billion, or 29%, at
December 31, 2010. Information regarding credit risk trends can
be found in Note 6 (Loans and Allowance for Credit Losses) to
Financial Statements in this Report.
54
Table 24: Pick-a-Pay Portfolio - Comparison to Acquisition Date
(in millions)
Option payment loans
Non-option payment adjustable-rate
and fixed-rate loans
Full-term loan modifications
Total adjusted unpaid principal balance
Total carrying value
2011
2008
December 31,
Adjusted
unpaid
principal
balance (1)
% of
total
Adjusted
unpaid
principal
balance (1)
% of
total
$
39,164
53 %
$
99,937
86 %
9,986
24,207
14
33
73,357
100 %
65,652
15,763
-
14
-
115,700
100 %
95,315
$
$
$
$
(1) Adjusted 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 adjusted unpaid
principal balance of $36.9 billion and a carrying value of
$29.1 billion at December 31, 2011. The carrying value of the PCI
loans is net of remaining purchase accounting write-downs,
which reflected their fair value at acquisition. At acquisition, we
recorded a $22.4 billion write-down in purchase accounting on
Pick-a-Pay loans that were impaired.
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 $2.0 billion at December 31, 2011, was down
from $2.7 billion at December 31, 2010, due to loan modification
efforts as well as interest rates remaining low, resulting in the
minimum payment option covering the interest and some
principal on many loans. Approximately 83% of the Pick-a-Pay
customers making a minimum payment in December 2011 did
not defer interest, compared with 75% in December 2010.
Deferral of interest on a Pick-a-Pay loan may continue as
long as the loan balance remains below a pre-defined principal
cap, which is based on the percentage that the current loan
balance represents to the original loan balance. Loans with an
original loan-to-value (LTV) ratio equal to or below 85% have a
cap of 125% of the original loan balance, and these loans
represent substantially all the Pick-a-Pay portfolio. Loans with
an original LTV ratio above 85% have a cap of 110% of the
original loan balance. Most of the Pick-a-Pay loans on which
there is a deferred interest balance re-amortize (the monthly
payment amount is reset or “recast”) on the earlier of the date
when the loan balance reaches its principal cap, or the 10-year
anniversary of the loan. 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 rest of the
original loan term.
Due to the terms of the Pick-a-Pay portfolio, there is little
recast risk in the near term. Based on assumptions of a flat rate
environment, if all eligible customers elect the minimum
payment option 100% of the time and no balances prepay, we
would expect the following balances of loans to recast based on
reaching the principal cap: $7 million in 2012, $22 million in
2013 and $81 million in 2014. In 2011, $3 million was recast
based on reaching the principal cap. In addition, in a flat rate
environment, we would expect the following balances of loans to
start fully 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: $47 million in 2012, $100 million in
2013 and $373 million in 2014. In 2011, the amount of loans
reaching their recast anniversary date and also having a payment
change over the annual 7.5% reset was $7 million.
Table 25 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
ratio based on the adjusted unpaid principal balance. For
informational purposes, we have included both ratios for PCI
loans in the following table.
55
Risk Management — Credit Risk Management (continued)
Table 25: Pick-a-Pay Portfolio (1)
Adjusted
unpaid
principal
Current
LTV
Carrying
December 31, 2011
PCI loans
All other loans
Ratio of
carrying
value to
current
Ratio of
carrying
value to
current
Carrying
balance (2)
ratio (3)
value (4)
value (5)
value (4)
value (5)
$
25,036
121 % $
19,269
93 % $
17,870
3,325
1,336
757
340
122
92
95
78
2,562
1,224
685
312
6,111
110
5,004
89
84
84
72
89
3,760
2,321
1,013
1,487
10,145
86 %
100
79
82
64
87
(in millions)
California
Florida
New Jersey
New York
Texas
Other states
Total Pick-a-Pay loans
$
36,905
$
29,056
$
36,596
(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 2011.
(2) Adjusted 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 adjusted 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.
(5) The ratio of carrying value to current value is calculated as the carrying value divided by the collateral value.
Due to better than expected performance observed on the
Pick-a-Pay portfolio compared with the original acquisition
estimates, we have reclassified $2.4 billion from the
nonaccretable difference to the accretable yield since acquisition.
This performance is primarily attributable to significant
modification efforts as well as the portfolio’s delinquency
stabilization. The resulting increase in the accretable yield will
be realized over the remaining life of the portfolio, which is
estimated to have a weighted-average life of approximately
11 years at December 31, 2011. The accretable yield percentage at
the end of 2011 was 4.45%, down from 4.54% at the end of 2010.
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, which will be affected by the
pace and degree of improvements in the U.S. economy and
housing markets and projected lifetime performance resulting
from loan modification activity. 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.
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 financial 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
forgiveness.
In 2011, we completed more than 19,000 proprietary and
HAMP Pick-a-Pay loan modifications and have completed more
than 99,000 modifications since the Wachovia acquisition,
resulting in $4.0 billion of principal forgiveness to our Pick-a-
Pay customers as well as an additional $516 million of
conditional forgiveness that can be earned by borrowers through
performance over the next three years. As announced in
October 2010, we entered into agreements with certain state
attorneys general whereby we agreed to offer loan modifications
to eligible Pick-a-Pay customers through June 2013. These
agreements cover the majority of our option payment loan
portfolio and require that we offer modifications (both HAMP
and proprietary) to eligible customers with the option payment
loan product. In response to these agreements, we developed an
enhanced proprietary modification product that allows for
various means of principal forgiveness along with changes to
other loan terms. Given that these agreements cover all
modification efforts to eligible customers for the applicable
states, our modifications (both HAMP and proprietary) for our
Pick-a-Pay loan portfolio performed in 2011 were primarily
consistent with these agreements.
56
HOME EQUITY PORTFOLIOS Our home equity portfolios consist
of real estate 1-4 family junior lien mortgages and first and
junior lines of credit secured by real estate. Our first lien lines of
credit represent 20% of our home equity portfolio and are
included in real estate 1-4 family first mortgages. The majority of
our junior lien loan products are amortizing payment loans with
fixed interest rates and repayment periods between 5 to 30
years. Junior lien loans with balloon payments at the end of the
repayment term represent a small portion of our junior lien
loans.
Our first and junior lien lines of credit products generally
have a draw period of 10 years with variable interest rates and
payment options during the draw period of (1) interest only or
(2) 1.5% of total outstanding balance. During the draw period,
the borrower has the option of converting all or a portion of the
line from a variable interest rate to a fixed rate with terms
including interest-only payments for a fixed period between
three to seven years or a fully amortizing payment with a fixed
period between five to 30 years. At the end of the draw period, a
line of credit generally converts to an amortizing payment loan
with repayment terms of up to 30 years based on the balance at
time of conversion. The draw periods for a majority of our lines
of credit end after 2015.
We continuously monitor the credit performance of our
junior lien mortgage portfolio for trends and factors that
influence the frequency and severity of loss. We have observed
that the severity of loss for junior lien mortgages is high and
generally not affected by whether we or a third party own or
service the related first mortgage, but that the frequency of loss
is lower when we own or service the first mortgage. In general,
we have limited information available on the delinquency status
of the third party owned or serviced senior lien where we also
have a junior lien. To capture this inherent loss content, we use
the experience of our junior lien mortgages behind delinquent
first liens that are owned or serviced by us adjusted for observed
higher delinquency rates associated with junior lien mortgages
behind third party first mortgages. We incorporate this inherent
loss content into our allowance for loan losses. During 2011 we
refined our allowance process for junior liens to ensure
appropriate consideration of the relative difference in loss
experience for junior liens behind first lien mortgage loans we
own or service, compared with those behind first lien mortgage
loans owned or serviced by third parties. In addition, we refined
our allowance process for junior liens that are current, but are in
their revolving period, to more appropriately reflect the inherent
loss where the borrower is delinquent on the corresponding first
lien mortgage loans. The impact of these revisions was not
significant to our allowance. Table 26 summarizes delinquency
and loss rates by the holder of the lien.
Table 26: Home Equity Portfolios Performance by Holder of 1st Lien (1)(2)
Outstanding balance
% of loans
two payments
or more past due
Loss rate
(annualized)
quarter ended
Dec. 31, Sept. 30,
June 30,
Dec. 31, Sept. 30, June 30,
Dec. 31, Sept. 30, June 30,
2011
2011
2011
2011
2011
2011
2011
2011
2011
$
20,786
21,011
20,941
3.10 %
3.00
2.85
0.95
0.91
0.82
(in millions)
First lien lines
Junior lien mortgages and lines behind:
Wells Fargo owned or serviced
first lien
Third party first lien
42,810
42,996
44,403
43,668
44,963
44,779
2.91
3.59
2.83
3.58
2.78
3.53
3.48
3.83
3.43
4.11
3.76
4.32
Total
$
106,592 109,082 110,683
3.22
3.16
3.09
3.13
3.22
3.43
(1) Excludes PCI loans and real estate 1-4 family first lien line reverse mortgages added to the consumer portfolio in fourth quarter 2011 as a result of consolidating reverse
mortgage loans previously sold. These reverse mortgage loans are insured by the FHA.
(2) Includes $1.5 billion, $1.5 billion and $1.6 billion at December 31, September 30 and June 30, 2011, respectively, associated with the Pick-a-Pay portfolio.
57
Risk Management — Credit Risk Management (continued)
We also monitor the number of borrowers paying the
minimum amount due on a monthly basis. In December 2011,
approximately 94% of our borrowers with home equity
outstanding balances paid at least the minimum amount due,
which included 46% of our borrowers paying only the minimum
amount due.
The home equity liquidating portfolio includes home equity
loans generated through third party channels, including
correspondent loans. This liquidating portfolio represents less
than 1% of our total loans outstanding at December 31, 2011, and
contains some of the highest risk in our home equity portfolio,
with a loss rate of 9.36% compared with 3.02% for the core (non-
liquidating) home equity portfolio. Table 27 shows the credit
attributes of the core and liquidating home equity portfolios and
lists the top five states by outstanding balance. California loans
represent the largest state concentration in each of these
portfolios. The decrease in outstanding balances primarily
reflects loan paydowns and charge-offs. As of December 31, 2011,
36% of the outstanding balance of the core home equity portfolio
was associated with loans that had a combined loan to value
(CLTV) ratio in excess of 100%. CLTV means the ratio of the
total loan balance of first mortgages and junior lien mortgages
(including unused line amounts for credit line products) to
property collateral value. The unsecured portion of the
outstanding balances of these loans (the outstanding amount
that was in excess of the most recent property collateral value)
totaled 17% of the core home equity portfolio at
December 31, 2011.
Table 27: 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,
2011
2010
2011
2010
2011
2010
$
25,555
27,850
10,870
12,036
7,973
5,248
5,071
8,629
5,667
5,432
46,165
50,976
3.03 %
4.99
3.73
2.15
2.82
2.79
3.30
5.46
3.44
2.33
2.48
2.83
3.61
4.99
2.31
1.68
1.40
2.66
4.92
6.13
1.95
1.86
1.24
3.04
100,882
110,590
3.13
3.24
3.02
3.62
2,024
2,555
265
116
97
75
3,133
330
149
125
91
3,654
5.50
7.02
6.64
0.93
2.83
4.13
6.66
8.85
6.91
2.02
5.39
4.53
12.64
11.56
15.19
13.72
17.51
20.89
2.89
7.67
6.88
2.81
9.57
7.48
5,710
6,904
4.73
5.54
9.36
10.90
Total core and liquidating portfolios
$
106,592
117,494
3.22
3.37
3.37
4.08
(1) Consists predominantly of real estate 1-4 family junior lien mortgages and first and junior lines of credit secured by real estate, but excludes PCI loans because
their losses are generally covered by PCI accounting adjustment at the date of acquisition, and excludes real estate 1-4 family first lien open-ended line reverse
mortgages because they do not have scheduled payments. These reverse mortgage loans are insured by the FHA.
(2) Includes $1.5 billion and $1.7 billion at December 31, 2011 and 2010, respectively, associated with the Pick-a-Pay portfolio.
CREDIT CARDS Our credit card portfolio totaled $22.8 billion at
December 31, 2011, which represented 3% of our total
outstanding loans. Net charge-offs were 5.58% of average loans
for 2011, down from 9.74% in 2010.
OTHER REVOLVING CREDIT AND INSTALLMENT Other
revolving credit and installment loans totaled $86.5 billion at
December 31, 2011, and predominantly include automobile,
student and security-based margin loans. The loss rate for other
revolving credit and installment loans was 1.22% of average
loans for 2011 compared with 1.94% for 2010. Excluding
government guaranteed student loans, the loss rates were 1.46%
and 2.43% of average loans for 2011 and 2010, respectively.
58
NONACCRUAL LOANS AND FORECLOSED ASSETS (NPAs) Table
28 shows the five-year trend for NPAs and Table 29 summarizes
NPAs for each of the four quarters of 2011. We generally place
loans on nonaccrual status when:
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.
the full and timely collection of interest or principal
becomes uncertain (generally based on an assessment of the
borrower’s financial condition and the adequacy of
collateral, if any);
they are 90 days (120 days with respect to real estate 1-4
family first and junior lien mortgages) past due for interest
Note 1 (Summary of Significant Accounting Policies – Loans)
to Financial Statements in this Report describes our accounting
policy for nonaccrual and impaired loans.
Table 28: Nonperforming Assets (Nonaccrual Loans and Foreclosed 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
2011
2010
2009
2008
2007
December 31,
$
2,142
4,085
1,890
53
47
3,213
5,227
2,676
108
127
4,397
3,696
3,313
171
146
1,253
594
989
92
57
8,217
11,351
11,723
2,985
432
128
293
45
45
943
10,913
12,289
10,100
2,648
1,272
1,975
2,302
2,263
199
300
332
894
273
280
184
Total consumer
13,087
14,891
12,695
3,815
1,736
Total nonaccrual loans (3)(4)(5)
As a percentage of total loans
Foreclosed assets:
Government insured/guaranteed (6)
Non-government insured/guaranteed
Total foreclosed assets
21,304
26,242
24,418
6,800
2,679
2.77 %
3.47
3.12
0.79
0.70
$
1,319
3,342
1,479
4,530
960
667
2,199
1,526
535
649
4,661
6,009
3,159
2,193
1,184
Total nonperforming assets
$
25,965
32,251
27,577
8,993
3,863
As a percentage of total loans
3.37 %
4.26
3.52
1.04
1.01
(1) Includes LHFS of $25 million, $3 million and $27 million at December 31, 2011, 2010 and 2009, respectively.
(2) Includes MHFS of $301 million, $426 million, $339 million, $193 million and $222 million at December 31, 2011, 2010, 2009, 2008 and 2007, respectively.
(3) Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.
(4) Real estate 1-4 family mortgage loans insured by the FHA or guaranteed by the VA and student loans predominantly guaranteed by agencies on behalf of the U.S.
Department of Education under the Federal Family Education Loan Program are not placed on nonaccrual status because they are insured or guaranteed.
(5) See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.
(6) Consistent with regulatory reporting requirements, foreclosed real estate securing government insured/guaranteed loans is classified as nonperforming. Both principal and
interest for government insured/guaranteed loans secured by the foreclosed real estate are collectible because the loans are insured by the FHA or guaranteed by the VA.
59
Risk Management — Credit Risk Management (continued)
Table 29: Nonperforming Assets During 2011
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
% of
total
% of
total
% of
total
% of
total
Balances
loans
Balances
loans
Balances
loans
Balances
loans
($ in millions)
Nonaccrual loans:
Commercial:
Commercial and industrial
$
Real estate mortgage
Real estate construction
Lease financing
Foreign
2,142
4,085
1,890
53
47
1.28 % $
3.85
9.75
0.40
0.12
2,128
4,429
1,915
71
68
1.29 % $
4.24
9.71
0.55
0.18
2,393
4,691
2,043
79
59
1.52 % $
4.62
9.56
0.61
0.16
2,653
5,239
2,239
95
86
1.76 %
5.18
9.79
0.73
0.24
Total commercial
8,217
2.38
8,611
2.53
9,265
2.80
10,312
3.19
Consumer:
Real estate 1-4 family
first mortgage
10,913
4.77
11,024
4.93
11,427
5.13
12,143
5.36
Real estate 1-4 family
junior lien mortgage
1,975
2.30
2,035
2.31
2,098
2.33
2,235
2.40
Other revolving credit
and installment
199
0.23
230
0.27
255
0.29
275
0.31
Total consumer
13,087
3.09
13,289
3.16
13,780
3.27
14,653
3.42
Total nonaccrual loans
21,304
2.77
21,900
2.88
23,045
3.06
24,965
3.32
Foreclosed assets:
Government insured/guaranteed
Non-government
insured/guaranteed
Total foreclosed assets
Total nonperforming
1,319
3,342
4,661
1,336
3,608
4,944
1,320
3,541
4,861
1,457
4,055
5,512
assets
$
25,965
3.37 % $
26,844
3.53 % $
27,906
3.71 % $
30,477
4.06 %
Reduction in NPAs from prior quarter $
(879)
(1,062)
(2,571)
(1,774)
60
Total NPAs were $26.0 billion (3.37% of total loans) at
December 31, 2011, and included $21.3 billion of nonaccrual
loans and $4.7 billion of foreclosed assets. Nonaccrual loans
Table 30: Analysis of Changes in Nonaccrual Loans
declined throughout 2011. Table 30 provides an analysis of the
changes in nonaccrual loans.
(in millions)
Commercial nonaccrual loans
Balance, beginning of quarter
Inflows
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other (1)
Total outflows
Balance, end of quarter
Consumer nonaccrual loans
Balance, beginning of quarter
Inflows
Outflows:
Returned to accruing
Foreclosures
Charge-offs
Payments, sales and other (1)
Total outflows
Balance, end of quarter
Total nonaccrual loans
Quarter ended
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
2011
2011
2011
2011
$
8,611
1,329
9,265
1,148
10,312
1,622
11,351
1,881
(185)
(161)
(382)
(995)
(275)
(156)
(397)
(974)
(501)
(174)
(399)
(496)
(192)
(522)
(1,595)
(1,710)
(1,723)
(1,802)
(2,669)
(2,920)
8,217
8,611
9,265
10,312
13,289
3,465
13,780
3,544
14,653
3,443
14,891
3,955
(1,277)
(1,411)
(1,562)
(1,670)
(209)
(1,404)
(286)
(1,385)
(221)
(1,494)
(269)
(1,545)
(777)
(953)
(1,039)
(709)
(3,667)
(4,035)
(4,316)
(4,193)
13,087
13,289
13,780
14,653
21,304
21,900
23,045
24,965
(1) Other outflows include the effects of VIE deconsolidations and adjustments for loans carried at fair value.
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 as a result of continued performance and an
improvement in the borrower’s financial condition and loan
repayment capabilities.
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 96% of commercial nonaccrual
loans are secured. Of the $13.1 billion of consumer nonaccrual
loans at December 31, 2011, 99% are secured by real estate and
36% have a combined LTV (CLTV) ratio of 80% or below.
Second, losses have already been recognized on 51% of the
remaining balance of consumer nonaccruals and commercial
nonaccruals have been written down by $2.1 billion. Generally,
when a consumer real estate loan is 120 days past due, we
transfer 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 (fair value of collateral less estimated costs
to sell), except for modifications in their trial period that are
not written down as long as trial payments are made on time.
Thereafter, we revalue each loan regularly and recognize
additional write-downs if needed. Third, as of
December 31, 2011, 58% of commercial nonaccrual loans were
current on interest. Fourth, the risk of loss for all nonaccruals
has been considered and we believe is appropriately covered by
the allowance for loan losses.
Under both our proprietary modification programs and the
MHA programs, customers may be required to provide
updated documentation, and some programs require
completion of trial payment periods to demonstrate sustained
performance, before the loan can be removed from nonaccrual
status. In addition, for loans in foreclosure, many states,
including California, Florida and New Jersey, 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.
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 $1.1 billion of
interest would have been recorded as income on these loans,
compared with $344 million actually recorded as interest
income in 2011 versus $1.3 billion and $362 million,
respectively, in 2010.
Table 31 provides a summary of foreclosed assets and an
analysis of the changes.
61
Risk Management — Credit Risk Management (continued)
Table 31: Foreclosed Assets
(in millions)
Dec. 31, Sept. 30,
June 30, Mar. 31, Dec. 31,
2011
2011
2011
2011
2010
Government insured/guaranteed (1)
$
1,319
1,336
1,320
1,457
1,479
PCI loans:
Commercial
Consumer
Total PCI loans
All other loans:
Commercial
Consumer
Total all other loans
Total foreclosed assets
Analysis of changes in foreclosed assets
Balance, beginning of quarter
Net change in government insured/guaranteed (2)
Additions to foreclosed assets
Reductions:
Sales
Write-downs and loss on sales
Total reductions
Balance, end of quarter
840
465
1,079
530
993
469
1,005
967
741
1,068
1,305
1,609
1,462
1,746
2,035
1,379
1,322
1,409
1,408
658
677
670
901
1,412
1,083
2,037
1,999
2,079
2,309
2,495
4,661
4,944
4,861
5,512
6,009
4,944
4,861
5,512
(137)
6,009
6,127
(22)
(13)
16
1,440
880
1,361
2,099
(17)
934
$
$
(1,123)
(1,260)
(1,294)
(1,656)
(1,790)
(77)
(113)
(100)
(180)
(414)
(1,200)
(1,373)
(1,394)
(1,836)
(2,204)
$
4,661
4,944
4,861
5,512
6,009
(1) Consistent with regulatory reporting requirements, foreclosed real estate securing government insured/guaranteed loans is classified as nonperforming. Both principal and
interest for government insured/guaranteed loans secured by the foreclosed real estate are collectible because the loans are insured by the FHA or guaranteed by the VA.
(2) Foreclosed government insured/guaranteed loans are temporarily transferred to and held by us as servicer, until reimbursement is received from FHA or VA. The net change
in government insured/guaranteed foreclosed assets is made up of inflows from MHFI and MHFS, and outflows when we are reimbursed by FHA/VA.
NPAs at December 31, 2011, included $1.3 billion of
foreclosed real estate that is FHA insured or VA guaranteed
and expected to have little to no loss content, and $3.3 billion
of foreclosed assets, which have been written down to
estimated net realizable value. Foreclosed assets decreased
$1.3 billion, or 22%, in 2011 from December 31, 2010. Of this
decrease, $730 million were foreclosed loans from the PCI
portfolio. At December 31, 2011, 74% of our foreclosed assets of
$4.7 billion have been in the foreclosed assets portfolio one
year or less. Given our real estate-secured loan concentrations
and current economic conditions, we anticipate we will
continue to hold a high level of NPAs on our balance sheet.
We process foreclosures on a regular basis for the loans we
service for others as well as those we hold in our loan portfolio.
We use foreclosure, however, only as a last resort for dealing
with borrowers experiencing financial hardships. We employ
extensive contact and restructuring procedures to attempt to
find other solutions for our borrowers. We maintain
appropriate staffing in our workout and collection teams to
ensure troubled borrowers receive appropriate attention and
assistance.
62
TROUBLED DEBT RESTRUCTURINGS (TDRs)
Table 32: Troubled Debt Restructurings (TDRs) (1)
(in millions)
Commercial TDRs
Commercial and industrial
Real estate mortgage
Real estate construction
Leasing
Foreign
Total commercial TDRs
Consumer TDRs
Real estate 1-4 family first mortgage
Real estate 1-4 family junior lien mortgage
Other revolving credit and installment
Trial modifications (2)
Total consumer TDRs
Total TDRs
TDRs on nonaccrual status
TDRs on accrual status
Total TDRs
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
2011
2011
2011
2011
2,026
2,262
1,008
33
20
2,192
1,752
795
51
9
1,821
1,444
694
84
10
1,251
1,152
711
25
6
5,349
4,799
4,053
3,145
13,799
1,986
13,512
1,975
12,938
1,910
12,261
1,824
872
651
875
668
838
942
859
944
17,308
17,030
16,628
15,888
22,657
21,829
20,681
19,033
6,811
6,758
6,568
6,129
15,846
15,071
14,113
12,904
$
$
$
$
22,657
21,829
20,681
19,033
(1) Amounts reported for June 30 and March 31, 2011, have been revised to reflect the retrospective adoption from the beginning of 2011 during third quarter 2011 of
ASU 2011-02, which provides guidance under what circumstances a restructured loan should be classified as a TDR. The impact of adopting ASU 2011-02 increased total
commercial TDRs by $1.5 billion and $793 million at June 30 and March 31, 2011, respectively.
(2) Based on clarifying guidance from the Securities and Exchange Commission (SEC) received in December 2011, we classify trial modifications as TDRs at the beginning of the
trial period. For many of our consumer real estate modification programs, we may require a borrower to make trial payments generally for a period of three to four months.
Prior to the SEC clarification, we classified trial modifications as TDRs once a borrower successfully completed the trial period in accordance with the terms.
Table 32 provides information regarding the recorded
investment of loans modified in TDRs. It reflects the
retrospective adoption from the beginning of 2011 of
ASU 2011-2, which provided additional guidance for classifying
modifications as TDRs. This new guidance specifically clarifies,
among other things, the definition of a concession, including
how to evaluate modified loan terms against terms that would be
commensurate for loans with similar credit risk. For our
commercial loan modifications, we do not typically modify
principal through forgiveness or forbearance or reduce the
contractual interest rate. In fact, in many cases, we obtain higher
rates of interest, additional collateral or guarantor support, or
other improvements to the terms. Certain commercial loan
modifications are now classified as TDRs under the clarified
guidance. The allowance for loan losses for TDRs was
$5.2 billion and $3.9 billion at December 31, 2011 and 2010,
respectively. See Note 6 (Loans and Allowance for Credit Losses)
to Financial Statements in this Report for more information.
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 to the
extent not done so prior to the modification. We sometimes
delay the timing on the repayment of a portion of principal
(principal forbearance) and charge off the amount of
forbearance if that amount is not considered fully collectible.
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. 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. For an accruing loan that
has been modified, 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 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.
63
Risk Management — Credit Risk Management (continued)
Table 33 provides an analysis of the changes in TDRs.
Table 33: Analysis of Changes in TDRs
(in millions)
Commercial TDRs
Balance, beginning of quarter
Inflows
Outflows
Charge-offs
Foreclosures
Payments, sales and other (1)
Balance, end of quarter
Consumer TDRs
Balance, beginning of quarter
Inflows
Outflows
Charge-offs
Foreclosures
Payments, sales and other (1)
Net change in trial modifications (2)
Balance, end of quarter
Total TDRs
Quarter ended
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
2011
2011
2011
2011
$
4,799
1,271
4,053
1,321
3,145
1,275
1,751
1,512
(84)
(16)
(621)
(68)
(23)
(484)
(36)
(21)
(310)
(64)
(4)
(50)
5,349
4,799
4,053
3,145
17,030
16,628
15,888
14,929
904
1,455
1,574
1,740
(261)
(33)
(315)
(17)
(290)
(39)
(450)
(274)
(289)
(33)
(510)
(2)
(251)
(39)
(513)
22
17,308
17,030
16,628
15,888
$
22,657
21,829
20,681
19,033
(1) Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held-for-sale.
(2) Net change in trial modifications is made up of inflows of new TDRs entering trial payment period, and outflows of modifications that successfully perform and enter into a
permanent modification or do not perform according to the terms of the trial period plan, and as a result are charged-off or moved to foreclosure. Our recent experience is
that most of the mortgages that enter a trial payment period program are successful in completing the program requirements.
64
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Loans 90 days or more past due as to interest or principal are
still accruing if 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 $8.7 billion, $11.6 billion and $16.1 billion
at December 31, 2011, 2010 and 2009, respectively, 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.
Excluding insured/guaranteed loans, loans 90 days or more
past due and still accruing at December 31, 2011, were down
$601 million, or 23%, from December 31, 2010. The decline was
due to loss mitigation activities including modifications and
Table 34: Loans 90 Days or More Past Due and Still Accruing
increased collection capacity/process improvements, charge-
offs, lower early stage delinquency levels and credit stabilization.
Loans 90 days or more past due and still accruing whose
repayments are insured by the Federal Housing Administration
(FHA) or predominantly guaranteed by the Department of
Veterans Affairs (VA) for mortgages and the U.S. Department of
Education for student loans under the Federal Family Education
Loan Program were $20.5 billion at December 31, 2011, up from
$15.8 billion at December 31, 2010, due primarily to growth in
the FHA/VA portfolio over the past two years and the
subsequent seasoning of those loans.
Table 34 reflects non-PCI loans 90 days or more past due and
still accruing by class for loans not government
insured/guaranteed. For additional information on
delinquencies by loan class, see Note 6 (Loans and Allowance for
Credit Losses) to Financial Statements in this Report.
(in millions)
2011
2010
2009
2008
2007
December 31,
Loans 90 days or more past due and still accruing:
Total (excluding PCI)
Less: FHA Insured/VA guaranteed (1)
Less: Student loans guaranteed under the FFELP (2)
$
22,569
18,488
22,188
11,831
6,393
19,240
1,281
14,733
1,106
15,336
994
8,185
765
4,834
333
Total, not government insured/guaranteed
$
2,048
2,649
5,858
2,881
1,226
By segment and class, not government insured/guaranteed:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
Real estate 1-4 family first mortgage (3)
Real estate 1-4 family junior lien mortgage (3)
Credit card
Other revolving credit and installment
Total consumer
$
153
256
89
6
308
104
193
22
590
1,014
909
73
218
70
250
34
32
10
24
52
504
627
2,586
572
118
781
279
346
138
941
366
516
199
1,623
515
795
339
883
457
687
282
286
201
402
219
1,544
2,022
3,272
2,309
1,108
Total, not government insured/guaranteed
$
2,048
2,649
5,858
2,881
1,226
(1) Represents loans whose repayments are insured by the FHA or guaranteed by the VA.
(2) Represents loans whose repayments are predominantly guaranteed by agencies on behalf of the U.S. Department of Education under the Federal Family Education Loan
Program (FFELP).
(3) Includes mortgages held for sale 90 days or more past due and still accruing.
65
Risk Management — Credit Risk Management (continued)
NET CHARGE-OFFS
Table 35: Net Charge-offs
($ in millions)
2011
Commercial:
Commercial and
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 % of Net loan % of Net loan % of
avg.
charge-
avg.
charge-
charge-
avg.
avg.
offs
loans
offs loans (1)
offs loans (1)
offs loans (1)
offs loans (1)
industrial
$
1,179 0.75 % $
Real estate mortgage
Real estate construction
Lease financing
Foreign
493 0.48
205 0.95
14 0.11
128 0.35
310
117
0.74 % $
0.44
261
96
0.65 % $
0.37
254
128
0.66 % $
0.50
354
152
(5)
(0.09)
55
1.06
4
45
0.13
0.45
3
8
0.11
0.08
72
1
47
1.32
0.01
0.52
83
6
28
0.96 %
0.62
1.38
0.18
0.34
Total commercial
2,019 0.61
471
0.54
423
0.50
502
0.62
623
0.79
Consumer:
Real estate 1-4 family
first mortgage
3,478 1.53
844
1.46
821
1.46
909
1.62
904
1.60
Real estate 1-4 family
junior lien mortgage
3,545 3.91
Credit card
1,198 5.58
800
256
3.64
842
3.75
4.63
266
4.90
909
294
3.97
5.63
994
382
4.25
7.21
Other revolving credit
and installment
1,059 1.22
269
1.24
259
1.19
224
1.03
307
1.42
Total consumer
9,280 2.18
2,169
2.02
2,188
2.06
2,336
2.21
2,587
2.42
Total
$ 11,299 1.49 % $
2,640
1.36 % $
2,611
1.37 % $ 2,838
1.52 % $ 3,210
1.73 %
2010
Commercial:
Commercial and industrial $
Real estate mortgage
2,348
1,083
1.57 % $
1.10
Real estate construction
Lease financing
Foreign
1,079
100
3.45
0.74
145
0.49
500
234
171
21
28
1.34 % $
0.94
2.51
0.61
0.36
509
218
276
23
1.38 % $
0.87
3.72
0.71
39
0.52
689
360
238
27
42
1.87 % $
1.47
2.90
0.78
0.57
650
271
394
29
36
1.68 %
1.12
4.45
0.85
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 %
(1) Quarterly net charge-offs as a percentage of average loans are annualized.
66
Table 35 presents net charge-offs for the four quarters and
full year of 2011 and 2010. Net charge-offs in 2011 were
$11.3 billion (1.49% of average total loans outstanding)
compared with $17.8 billion (2.30%) in 2010. Total net charge-
offs decreased in 2011 due in part to modestly improving
economic conditions, aggressive loss mitigation activities aimed
at working with our customers through their financial
challenges, and a runoff of the pool of the most challenged
vintages/relationships in the portfolio. Total net charge-offs
decreased in each of the first three quarters of the year and were
essentially flat in fourth quarter 2011.
Net charge-offs in the 1-4 family first mortgage portfolio
totaled $3.5 billion in 2011, compared with $4.4 billion a year
ago.
Net charge-offs in the real estate 1-4 family junior lien
portfolio decreased $1.2 billion to $3.5 billion in 2011. 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 27 in this Report and the related
discussion.
Credit card charge-offs decreased $980 million to
$1.2 billion in 2011. Delinquency levels stabilized and loss levels
continued to improve in 2011 as the economy showed signs of
stabilization.
Commercial net charge-offs were $2.0 billion in 2011
compared with $4.8 billion in 2010, as market liquidity and
improving market conditions helped stabilize performance
results.
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. These trends, however, do
not solely determine the appropriate allowance amount as we
use several analytical tools. 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.
We believe the allowance for credit losses of $19.7 billion at
December 31, 2011, was appropriate to cover credit losses
inherent in the loan portfolio, including unfunded credit
commitments, at December 31, 2011. The allowance for credit
losses is subject to change and reflects existing factors as of the
date of determination, 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 business environment, it is possible that we will incur
incremental credit losses not anticipated as of the balance sheet
date. In addition to the allowance for credit losses there was
$10.7 billion and $13.4 billion of nonaccretable difference at
December 31, 2011 and 2010, respectively, to absorb losses for
PCI loans.
As a result of PCI accounting, the book value of high risk
loans was written down at the time of acquisition. Therefore, the
allowance for credit losses is lower than otherwise would have
been required without PCI loan accounting and certain ratios of
the Company may not be directly comparable with periods prior
to the Wachovia merger or with credit-related ratios of other
financial institutions. 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 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, 2011.
67
Risk Management — Credit Risk Management (continued)
The $3.7 billion decline in the allowance for loan losses in
2011 reflected the release of allowance due to lower levels of
inherent credit loss in the portfolio compared with prior year-
end levels. Total provision for credit losses was $7.9 billion in
2011, $15.8 billion in 2010 and $21.7 billion in 2009. The 2011
provision was $3.4 billion less than net charge-offs. Primary
drivers of the 2011 provision reduction were decreased net
charge-offs and continued improvement in the credit quality of
the commercial and consumer portfolios and related loss
estimates as seen in declining delinquency and nonperforming
loan levels. Absent significant deterioration in the economy, we
expect future allowance releases in 2012, although at more
modest levels.
In 2010, the provision of $15.8 billion was $2.0 billion less
than net charge-offs. The reduction in the provision was
primarily due to continued improvement in the consumer
portfolios and related loss estimates and improvement in
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 addition to the allowance due to adoption of
consolidation accounting guidance on January 1, 2010.
In 2009, the provision of $21.7 billion was $3.5 billion
greater than net charge-offs. Primary drivers of the 2009
provision were deterioration in economic conditions that
increased the projected losses in our commercial portfolios,
additional allowance associated with loan modification
programs designed to keep qualifying borrowers in their homes,
and the establishment of additional allowance for PCI loans.
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, including ongoing discussions with regulatory and
government agencies regarding mortgage foreclosure-related
matters.
Table 36 presents an analysis of the allowance for credit
losses by loan segments and classes for the last five years.
68
Table 36: Allocation of the Allowance for Credit Losses (ACL)
(in millions)
ACL
2011
Loans
as %
of total
loans
2010
2009 (1)
2008 (1)
Loans
as %
Loans
as %
Loans
as %
of total
of total
of total
ACL
loans ACL
loans ACL
loans ACL
2007
Loans
as %
of total
loans
December 31,
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Lease financing
Foreign
$
2,649
22 % $ 3,299
20 % $ 4,014
20 % $ 4,129
23 % $ 1,137
24 %
2,550
14
3,072
13 2,398
12
931
11
288
893
82
185
2
2
5
1,387
4 1,242
5 1,103
5
156
173
237
2
4
181
306
2
4
135
265
2
4
51
144
9
5
2
2
Total commercial
6,358
45
8,169
43 8,141
43 6,563
45 1,776
42
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family
6,934
30
7,603
30 6,449
29 4,938
28
415
19
junior lien mortgage
3,897
11
4,557
13 5,430
13 4,496
13 1,329
20
Credit card
1,294
3
1,945
3 2,745
3 2,463
3
834
5
Other revolving credit and installment
1,185
11
1,189
11 2,266
12 3,251
11 1,164
14
Total consumer
13,310
55
15,294
57
16,890
57
15,148
55 3,742
58
Total
$ 19,668
100 % $
23,463
100 % $
25,031
100 % $
21,711
100 % $ 5,518
100 %
Components:
Allowance for loan losses
Allowance for unfunded
credit commitments
Allowance for credit losses
Allowance for loan losses as a percentage
$
$
2011
2010
2009
2008
2007
December 31,
19,372
23,022
24,516
21,013
5,307
296
441
515
698
211
19,668
23,463
25,031
21,711
5,518
of total loans
2.52 %
3.04
3.13
2.43
1.39
Allowance for loan losses as a percentage
of total net charge-offs
Allowance for credit losses as a percentage
of total loans
Allowance for credit losses as a percentage
of total nonaccrual loans
171
130
135
268
150
2.56
3.10
3.20
2.51
1.44
92
89
103
319
206
(1) Certain amounts have been revised from previous presentation to conform with the allocation methodology used in 2011 and to recognize a reclassification of loans from
commercial real estate to commercial construction that occurred on a retrospective basis in 2010.
69
Risk Management — Credit Risk Management (continued)
LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES We
sell residential mortgage loans to various parties, including (1)
government-sponsored entities 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 contractual
representations or warranties that is not remedied within a
period (usually 90 days or less) after we receive notice of the
breach.
We have established a mortgage repurchase liability related
to various representations and warranties that reflect
management’s estimate of losses for loans for which we have a
repurchase obligation, whether or not we currently service those
loans, based on a combination of factors. Our mortgage
repurchase liability estimation process also incorporates a
forecast for repurchase demands associated with mortgage
insurance rescission activity. Currently, repurchase demands
primarily relate to 2006 through 2008 vintages and to GSE-
guaranteed MBS.
During 2011, we continued to experience elevated levels of
repurchase activity measured by the number of investor
repurchase demands and our level of repurchases. We
repurchased or reimbursed investors for incurred losses on
mortgage loans with original balances of $2.8 billion in 2011,
compared with $2.6 billion in 2010. Additionally, we negotiated
settlements on pools of mortgage loans with original sold
balances of $341 million in 2011, compared with $675 million in
2010, to eliminate the risk of repurchase on these loans. We
incurred net losses on repurchased loans, investor
reimbursements and loan pool global settlements totaling
$1.2 billion in 2011, compared with $1.4 billion in 2010.
Table 37 provides the number of unresolved repurchase
demands and mortgage insurance rescissions. We do not
typically receive repurchase requests from GNMA, FHA/HUD or
VA. As an originator of an FHA insured or VA guaranteed loan,
we are responsible for obtaining the insurance with FHA or the
guarantee with the VA. To the extent we are not able to obtain
the insurance or the guarantee we must request to repurchase
the loan from the GNMA pool. Such repurchases from GNMA
pools typically represent a self-initiated process upon discovery
of the uninsurable loan (usually within 180 days from funding of
the loan). Alternatively, in lieu of repurchasing loans from
GNMA pools, we may be asked by the FHA/HUD or the VA to
indemnify them (as applicable) for defects found in the Post
Endorsement Technical Review process or audits performed by
FHA/HUD or the VA. Our liability for mortgage loan repurchase
losses incorporates probable losses associated with such
indemnification.
Table 37: Unresolved Repurchase Demands and Mortgage Insurance Rescissions
Government
sponsored entities (1)
Private
rescissions with no demand (2)
Total
Mortgage insurance
Number of
loans
Original loan
balance (3)
Number of
loans
Original loan
balance (3)
Number of
loans
Original loan
balance (3)
Number of
loans
Original loan
balance (3)
7,066 $
6,577
6,876
6,210
6,501
9,887
12,536
10,804
1,575
1,500
1,565
1,395
1,467
2,212
2,840
2,499
470 $
582
695
1,973
2,899
3,605
3,160
2,320
167
208
230
424
680
882
707
519
1,178 $
1,508
2,019
2,885
3,248
3,035
2,979
2,843
268
314
444
674
801
748
760
737
8,714 $
8,667
9,590
11,068
12,648
16,527
18,675
15,967
2,010
2,022
2,239
2,493
2,948
3,842
4,307
3,755
($ in millions)
2011
December 31,
September 30,
June 30,
March 31,
2010
December 31,
September 30,
June 30,
March 31,
(1) Includes repurchase demands of 861 and $161 million, 878 and $173 million, 892 and $179 million, 685 and $132 million, 1,495 and $291 million, 2,263 and $437 million,
2,141 and $417 million, and 1,824 and $372 million for December 31, September 30, June 30 and March 31, 2011 and 2010, respectively, received from investors on
mortgage servicing rights acquired from other originators. We generally have the right of recourse against the seller and may be able to recover losses related to such
repurchase demands subject to counterparty risk associated with the seller.
(2) As part of our representations and warranties in our loan sales contracts, we typically represent to GSEs and private investors that certain loans have mortgage insurance to
the extent there are loans that have loan to value ratios in excess of 80% that require mortgage insurance. To the extent the mortgage insurance is rescinded by the
mortgage insurer due to a claim of breach of a contractual representation or warranty, the lack of insurance may result in a repurchase demand from an investor. Similar to
repurchase demands, we evaluate mortgage insurance rescission notices for validity and appeal for reinstatement if the rescission was not based on a contractual breach.
When investor demands are received due to lack of mortgage insurance, they are reported as unresolved repurchase demands based on the applicable investor category for
the loan (GSE or private). Over the last year, approximately 20% of our repurchase demands from GSEs had mortgage insurance rescission as one of the reasons for the
repurchase demand. Of all the mortgage insurance rescissions notices received in 2010, approximately 70% have resulted in repurchase demands through December 2011.
Not all mortgage insurance rescissions received in 2010 have been completed through the appeals process with the mortgage insurer and upon successful appeal, we work
with the investor to rescind the repurchase demand.
(3) While the original loan balances related to these demands are presented above, the establishment of the repurchase liability 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.
70
The level of repurchase demands outstanding at
We believe we have a high quality residential mortgage loan
December 31, 2011, 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 from
whom we have purchased loans with respect to representations
and warranties. Of total repurchase demands and mortgage
insurance recissions outstanding as of December 31, 2011,
presented in Table 37, 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 at both December 31, 2011 and 2010. In 2011
$1.3 billion of additions to the liability were recorded, which
reduced net gains on mortgage loan origination/sales activities,
compared with $1.6 billion in 2010. Our additions to the
repurchase liability in 2011 and 2010 predominately reflect
updated assumptions about probable future demands on prior
vintages. This increase in our estimate for probable future
demands in 2011 was primarily due to an increase in repurchase
demands from the GSEs on the 2006-2008 vintages with a
higher than anticipated increase from the Federal National
Mortgage Association (FNMA) in the latter half of 2011.
servicing portfolio. Of the $1.8 trillion in the residential
mortgage loan servicing portfolio at December 31, 2011, 92% was
current, less than 2% was subprime at origination, and less than
1% was home equity securitizations. Our combined delinquency
and foreclosure rate on this portfolio was 7.96% at
December 31, 2011, compared with 8.02% at December 31, 2010.
In this portfolio 5% are private label securitizations where we
originated the loan and therefore have some repurchase risk. We
believe the risk of repurchase in our private label securitizations
is substantially reduced, relative to other private label
securitizations, because approximately half of this portfolio of
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. For this 5% private label securitization segment of
our residential mortgage loan servicing portfolio, 58% are loans
from 2005 vintages or earlier (weighted average age of
75 months); 79% were prime at origination; and approximately
66% are jumbo loans. The weighted-average LTV as of
December 31, 2011, for this private securitization segment was
78%. We believe the highest risk segment of these private label
securitizations is 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 9% of the 5% private label securitization portion of
the residential mortgage servicing portfolio. We had only
$110 million of repurchases related to private label
securitizations in 2011. Of the servicing portfolio, 4% is non-
agency acquired servicing and 2% 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. For the private
whole loan segment, while we do have repurchase risk on these
prior loan sales, less than 2% were subprime at origination and
loans that were sold and subsequently securitized are included in
the private label securitization segment discussed above.
Table 38 summarizes the changes in our mortgage
repurchase liability.
71
Risk Management — Credit Risk Management (continued)
Table 38: Changes in Mortgage Repurchase Liability
(in millions)
Balance, beginning of period
Provision for repurchase losses:
Loan sales
Change in estimate (1)
Total additions
Losses
Balance, end of period
Quarter ended
Dec. 31, Sept. 30,
June 30, Mar. 31,
Year ended Dec. 31,
2011
2011
2011
2011
2011
2010
$
1,194
1,188
1,207
1,289
1,289
1,033
27
377
19
371
20
222
35
214
101
144
1,184
1,474
404
390
242
249
1,285
1,618
(272)
(384)
(261)
(331)
(1,248)
(1,362)
$
1,326
1,194
1,188
1,207
1,326
1,289
(1) Results from such factors as credit deterioration, changes in investor demand and mortgage insurer practices, and changes in the financial stability of correspondent lenders.
The mortgage repurchase liability of $1.3 billion at
December 31, 2011, 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
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.
Because of the uncertainty in the various estimates underlying
the mortgage repurchase liability, there is a range of losses in
excess of the recorded mortgage repurchase liability that are
reasonably possible. The estimate of the range of possible loss
for representations and warranties does not represent a probable
loss, and is based on currently available information, significant
judgment, and a number of assumptions that are subject to
change. The high end of this range of reasonably possible losses
in excess of our recorded liability was $2.1 billion at
December 31, 2011, and was determined based upon modifying
the assumptions utilized in our best estimate of probable loss to
reflect what we believe to be the high end of reasonably possible
adverse assumptions. 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 predominantly 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, 2011, are
presented in Table 39. For additional information about the
range of loss that is reasonably possible in excess of the recorded
mortgage repurchase liability, see Note 9 (Mortgage Banking
Activities) to Financial Statements in this Report.
72
Table 39: Mortgage Repurchase Liability –
Sensitivity/Assumptions
(in millions)
Balance at December 31, 2011
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
$
1,326
40.0 %
133
333
0.3 %
122
304
$
$
(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 improve 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.
In October 2011, the Arizona Department of Insurance
assumed full and exclusive power of management and control of
PMI Mortgage Insurance Co. (PMI) and announced that PMI
will pay 50% of claim amounts in cash, with the rest deferred. In
November 2011, PMI’s parent company, PMI Group Inc., filed
for Chapter 11 bankruptcy. Wells Fargo has previously utilized
PMI to provide mortgage insurance on certain loans originated
and held in our portfolio. Additionally, PMI has provided
mortgage insurance on loans originated and sold to third-party
investors. For loans sold to third-party investors, there is no
additional risk of repurchase loss to Wells Fargo associated with
the deferred insurance claim amounts from PMI since this credit
risk is owned by the investor in the loan. We also hold a small
amount of residential mortgage-backed securities, which are
backed by mortgages with a limited amount of insurance
provided by PMI. Because the loans and securities held in our
portfolios with PMI insurance support are limited in amount, we
do not anticipate the deferred claim payments will result in a
material adverse effect on our consolidated financial statements.
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, FHA/VA/GNMA-
guaranteed mortgage securitizations and private label mortgage
securitizations, as well as for unsecuritized loans owned by
institutional investors. The following discussion summarizes the
primary duties and requirements of servicing and related recent
industry developments.
General Servicing Duties and Requirements
The loans we service were originated by us or by other mortgage
loan originators. As servicer, our primary duties are typically to
(1) collect payments 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, (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, and (6) for loans sold
into private label securitizations, manage the foreclosed property
through liquidation. 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 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 against
any of our acts or omissions that involve wilful 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.
Foreclosure and Securitization Matters
During fourth quarter 2010, we identified practices where the
final steps relating to the execution of foreclosure affidavits, as
well as some aspects of the notarization process were not
adhered to. 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.
When we securitize mortgage loans we have an obligation to
deliver mortgage notes, assignments and other critical
documents. Although we continue to 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 materially defective, we would be obligated to cure
the defect or to repurchase the loan.
To facilitate securitizations it is a common industry practice
to record mortgages in the name of Mortgage Electronic
Registration Systems, Inc. (MERS). Attorneys general of most
states have alleged that this common industry practice 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 nominee for the owner of the related mortgage
note. When mortgages are assigned, such as between an
originator and a securitization trust, the change is recorded
electronically on a register maintained by MERS. 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
73
Risk Management — Credit Risk Management (continued)
alleged by attorneys general 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. 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. Our practice is to
obtain assignments of mortgages from MERS prior to
commencing the foreclosure process.
Consent Orders and Settlement in Principle
In April 2011, the Board of Governors of the Federal Reserve
System (FRB) and the Office of the Comptroller of the Currency
(OCC) issued Consent Orders that require us to correct
deficiencies in our residential mortgage loan servicing and
foreclosure practices that were identified by federal banking
regulators in their fourth quarter 2010 review. The Consent
Orders also require that we improve our servicing and
foreclosure practices. We have already implemented many of the
operational changes that will result from the expanded servicing
responsibilities outlined in the Consent Orders.
On February 9, 2012, the OCC and FRB announced the
imposition of civil money penalties of $83 million and
$85 million, respectively, pursuant to the Consent Orders. These
penalties will be satisfied through payments made under a
separate simultaneous federal/state settlement in principle,
announced on the same day, among the Department of Justice,
Department of Housing and Urban Development (HUD), the
Department of the Treasury, the Department of Veterans Affairs,
the Federal Trade Commission (FTC), the Executive Office of the
U.S. Trustee, the Consumer Financial Protection Bureau, a task
force of Attorneys General representing 49 states, Wells Fargo,
and four other servicers related to investigations of mortgage
industry servicing and foreclosure practices. While Oklahoma is
not participating in the larger settlement, it is settling separately
with the five servicers with a simplified agreement. Under the
settlement in principle, the terms of which do not become final
until approval of the settlement agreement by the U.S. District
Court and execution of a consent order, which will be in effect
for three and one-half years (subject to a trailing review period),
we have agreed to the following programmatic commitments,
consisting of three components totalling $5.3 billion:
Consumer Relief Program For qualified borrowers with
financial hardship and a loan owned and serviced by Wells
Fargo, a commitment to provide $3.4 billion in aggregate
consumer relief and assistance programs, including
expanded first and second mortgage modifications that
broaden the use of principal reduction to help customers
achieve affordability, an expanded short sale program that
includes waivers of deficiency balances, forgiveness of
arrearages for unemployed borrowers, cash-for-keys
74
payments to borrowers who voluntarily vacate properties,
and “anti-blight” provisions designed to reduce the impact on
communities of vacant properties. As of December 31, 2011,
the expected impact of the Consumer Relief Program was
covered in our allowance for credit losses and in the
nonaccretable difference relating to our purchased credit-
impaired residential mortgage portfolio.
Refinance Program For qualified borrowers with little or
negative equity in their home and a loan owned and serviced
by Wells Fargo, an expanded first-lien refinance program
commitment estimated to provide $900 million of aggregate
payment relief over the life of the refinanced loans. The
Refinance Program will not result in any current-period
charge as its impact will be recognized over a period of years
in the form of lower interest income as qualified borrowers
benefit from reduced interest rates on loans refinanced under
the program.
Foreclosure Assistance Payment $1 billion paid directly
to the federal government and the participating states for
their use to address the impact of foreclosure challenges as
they see fit and which may include direct payments to
consumers. As of December 31, 2011, we had fully accrued for
the Foreclosure Assistance Payment.
California (under a separate California Agreement) and
Florida (under a separate Florida Agreement) will receive state-
specific sub-commitments totaling $1.95 billion and $1.0 billion,
respectively, regarding the amount of Consumer Relief and
Refinance Program benefits for these two states as a part of, and
not in addition to, the overall commitment to all states for these
two programs.
The amount of credit we will receive toward fulfilling our
commitments under the Consumer Relief and Refinance
Programs will be determined based upon the nature of the
modification or other relief to the borrower, the characteristics
of the loan and the timing of the modification or relief. The
terms of the Consumer Relief and Refinance Programs as well as
other servicing matters are discussed in more detail below.
Consumer Relief Program
The Consumer Relief Program allows for selection from a menu
of various alternatives to meet the $3.4 billion overall
commitment, subject to servicer agreements, agreements with
the U.S. Treasury, investor guidelines, mortgage or bond insurer
requirements, or other applicable requirements, and is intended
to provide assistance to eligible borrowers who are experiencing
financial difficulty. Eligible borrowers include borrowers who
have a pre-modification LTV in excess of 100%. The settlement
provides for various modification and assistance programs with
varying levels of credits, minimums, and maximums that can be
used to satisfy the overall commitment amount for different
activities, primarily including:
first lien principal forgiveness for LTV less than or equal to
175%: 100% credit (must constitute at least 30% of the
Consumer Relief Program credits);
first lien principal forgiveness for LTV greater than 175%:
50% credit for portion forgiven over 175% LTV;
forgiveness of forbearance amounts on existing loan
modifications – 40% credit;
earned forgiveness over no more than a 3 year period:
85% credit for LTV less than or equal to 175%; 45% credit for
forgiveness over 175% LTV;
second lien principal forgiveness: 90% credit for loans
90 days or less delinquent; 50% credit for loans greater than
90 but less than 180 days delinquent; 10% credit for loans
180 days more delinquent. Subject to a number of
requirements, servicers participating in the settlement will be
obligated to implement second lien principal forgiveness on
second mortgages it owns when another participating
servicer reduces principal on a first mortgage via its
proprietary non-HAMP modification programs (must
constitute at least 60% of the Consumer Relief Program
credits when combined with the first lien principal
forgiveness credits);
deficiency balance waivers on first and second lien loans:
10% credit;
short sale deficiency balance waivers on first and second lien
loans: 20% to 100% credit depending on whether the
servicer, servicer/lien holder or investor incurs the loss;
payment arrearages forgiveness for unemployed borrowers:
100% credit;
transitional funds paid to homeowners in connection with a
short sale or deed-in-lieu of foreclosure for payments in
excess of $1,500: 45% credit if a non-GSE investor bears the
cost or 100% if the servicer bears the cost;
anti-blight – forgiveness of principal associated with
properties where foreclosure is not pursued: 50% credit;
anti-blight – cash costs paid by servicer for property
demolition – 100% credit; and
anti-blight – donation of real estate owned properties to
qualifying recipients such as non-profit organizations:
100% credit.
Additionally, the Consumer Relief Program limits the total
amount of credits that may be applied toward the $3.4 billion
commitment from certain activities such as:
credits from deficiency balance waivers are limited to 10% of
credits under the Consumer Relief Program;
credits for forgiveness of forbearance are limited to 12.5% of
credits under the Consumer Relief Program; and
anti-blight provisions are limited to 12% of credits under the
Consumer Relief Program.
amount equal to 140% of the unmet commitment amount. If we
meet the two-year commitment target, but do not meet the
entire commitment amount within the three years, we are
required to pay an amount equal to 125% of the unmet
commitment amount. We expect that we will be able to meet our
commitment (and state-level sub-commitments) on the
Consumer Relief Program within the required timeframes.
We expect to be able to meet our Consumer Relief Program
commitment primarily through our first and second lien
modification and short sale and other deficiency balance waiver
programs. We have evaluated our commitment along with the
menu of credits and believe that fulfilling our commitment
under the Consumer Relief Program has been appropriately
considered in our estimation for the allowance for loan losses as
well as our cash flow projections to evaluate the nonaccretable
difference for our PCI portfolios at December 31, 2011.
Refinance Program
The Refinance Program is intended for borrowers in good
standing who are not experiencing financial difficulty, but are
not able to take advantage of refinancing at lower rates to lower
their payments because they have little or negative equity in
their home. The terms of the pending settlement for the
Refinance Program require that we provide notification to
eligible borrowers indicating that they may refinance under the
program. The minimum eligibility criteria for the program are as
follows:
must be Wells Fargo owned first lien mortgage loan on
property that is occupied;
loan must be current with no delinquencies in the last
12 months;
must be fixed rate, adjustable rate, or interest-only
mortgages with an initial period of five years or more;
current LTV is greater than 100%;
loans originated prior to January 1, 2009;
loans must have a current interest rate of at least 5.25% or
100 basis points above the Freddie Mac current primary
mortgage market survey rate, whichever is greater;
the minimum difference between the current interest rate
and the offered interest rate under the Refinance Program
must be at least 25 basis points or there must be at least a
$100 reduction in monthly payment; and
the maximum unpaid principal balance must be below the
GSE lending limit applicable to the respective state where the
property is located.
We will begin to receive credit towards satisfaction of the
requirements of the Consumer Relief Program for any activities
taken on or after March 1, 2012. We can also receive an
additional 25% credit for any first or second lien principal
reduction taken within one year from March 1, 2012. Because we
will not receive dollar-for-dollar credit for the relief provided in
some circumstances, the actual relief we provide to borrowers
will likely exceed our commitment. The terms also require that
we satisfy 75% of the commitments under the Consumer Relief
Program within two years from March 1, 2012. If we do not meet
this two-year requirement and also do not meet the entire
commitment within three years, we are required to pay an
Additionally, there are defined exclusions from the eligibility
criteria such as FHA/VA loans, properties outside the 50 states,
the District of Columbia and Puerto Rico, and loans for
borrowers who have been in bankruptcy or foreclosure anytime
in the prior 24 months. We are also permitted to extend the
Refinance Program to borrowers beyond the minimum eligible
population detailed above provided they have an LTV over 80%
and would not have qualified for a refinance under our other
offered refinance programs in existence as of
September 30, 2011. The structure of the refinanced loans can
vary to include interest rate reductions for the entire life of the
loan or, depending on current interest rates, a minimum of
75
Risk Management — Credit Risk Management (continued)
5 years. Additionally, the original term of the loan can be
changed and the rate reduction can be executed via a
modification of the existing loan terms or a refinance into a new
loan. The new loan or modified loan must be a fully amortizing
product and the new interest rate will be capped at 100 basis
points over the Freddie Mac current primary mortgage market
survey rate or 5.25%, whichever is greater, during the initial rate
reduction period.
The credit we receive for each refinanced loan towards
satisfying the $900 million financial commitment for the
Refinance Program is calculated as the difference between the
pre-existing interest rate and the new interest rate multiplied by
the unpaid principal balance multiplied by a defined multiplier.
The defined multiplier is 5 if the rate reduction only applies for
5 years or if the remaining term is less than 10 years, 6 if the
remaining term is between 10 and 15 years, and 8 if the
remaining term is greater than 15 years. In addition, the terms of
the settlement allow for additional dollars spent on the
Refinance Program to be credited towards satisfying the
requirements of the Consumer Relief Program (25% for the first
lien principal reduction obligations and 75% for the second lien
principal reduction obligations) subject to certain caps. We will
receive credit under the Refinance Program for activities taken
on or after March 1, 2012. The Refinance Program allows for an
additional 25% credit (additional credit) for all refinance credits
earned in the first 12 months of the program. We expect that we
will be able to complete the number of refinances necessary to
satisfy the entire credit in the first 12 months of offering the
Refinance Program. If successful in this regard, the estimated
lifetime amount of interest income reduction to the portfolio will
be approximately $720 million and the additional credit earned
will be $180 million.
We expect that we will refinance approximately 20,000
borrowers with an unpaid principal balance of approximately
$4.0 billion in order to meet the commitment amount under the
Refinance Program. Based on the mix of loans we anticipate will
be refinanced, we estimate their weighted average note rate will
be reduced by approximately 260 annual basis points and that
their weighted average estimated remaining life will be
approximately 7 years. These estimates will be impacted by the
actual number of eligible borrowers that accept a refinance offer,
their existing and new note rates and the remaining term of the
actual loans refinanced. The impact of fulfilling our commitment
under the Refinance Program will be recognized over a period of
years in the form of lower interest income as qualified borrowers
benefit from reduced interest rates on loans refinanced under
the Refinance Program. Based on our expectation that we will
fulfill the credit needs for the Refinance Program within the first
12 months, we expect the future reduction in interest income to
be approximately $100 million annually. As a result of
refinancings under the Refinance Program we will be foregoing
interest that we may not otherwise have agreed to forego. No loss
was recognized in our financial statements for this estimated
foregone interest income as the impact will be recognized over a
period of years in the form of lower interest income as qualified
borrowers benefit from reduced interest rates on loans
refinanced under the Refinance Program. This impact to
foregone interest income will be increased if we do not meet our
76
expectation for fulfilling the total commitment for the Refinance
Program in the first twelve months. The impact of this foregone
interest income on our future net interest margin is anticipated
to be modestly adverse and will be influenced by the overall
mortgage interest rate environment, which products are
accepted by the eligible borrowers, and the pace of the execution
of the program. The Refinance Program will also impact our fair
value for these loans. The estimated reduction to the fair value of
our loans for the Refinance Program is approximately
$700 million and will be impacted by our actual execution of the
program and borrower acceptance rates.
Given that this component of the settlement relates to
borrowers in good standing as to their payment history who are
not experiencing financial difficulty, we will evaluate each
borrower to confirm their ability to repay their mortgage
obligation. This evaluation will include reviewing key credit and
underwriting policy metrics to validate that these borrowers are
not experiencing financial difficulty and therefore, actions taken
under the Refinance Program would not be considered a
troubled debt restructuring. To the extent we determine that an
eligible borrower is experiencing financial difficulty, we will
consider alternative modification programs which may result in
loans being classified and accounted for as troubled debt
restructurings.
We expect that we will be able to meet the obligations of our
commitment for the Refinance Program (and any state-level
sub-commitments) and will not be required to pay for not
meeting our commitment.
Comprehensive National Servicing Standards
The settlement also establishes comprehensive national
servicing standards that will govern loan default and foreclosure
activities. These standards reflect a new set of best practices for
mortgage servicing and not the identification of existing flaws or
errors in current servicing practices. The national servicing
standards include:
rules governing the preparation of documentation submitted
in connection with judicial foreclosures, including
foreclosure affidavits, declarations, and sworn statements;
rules governing the preparation of evidence submitted to
support non-judicial and quasi-judicial foreclosures;
requirements for ensuring the accuracy of borrower’s account
information;
documentation of the foreclosing entity’s enforceable interest
in the note, holder status, and chain of assignment;
rules governing bankruptcy documentation and process
including proofs of claim and motions for relief from stay;
rules governing the oversight of third-party providers
including foreclosure law firms, foreclosure trustees,
subservicers, and other third parties retained to provide
foreclosure, bankruptcy, or mortgage servicing activities;
requirements for loss mitigation programs, including:
o notification to borrowers of loss mitigation options and
enhanced communication of status of loss mitigation
review;
o restriction of “dual track” progression of foreclosure
during consideration for loan modification;
o establishment of a borrower “single point of contact”;
A number of subject areas are carved out from the releases:
criminal law violations, claims by natural persons, unpaid taxes,
fair lending claims (the state release applies this exception only
to loan origination conduct, while the federal release extends the
exception to origination and servicing conduct), securitization
claims (includes claims that the government could bring as an
investor in mortgage-related securities and for the benefit of
investors or for conduct directed at investors), claims against
MERS or MERSCORP, Inc., although we are released from
claims relating to our use of MERS (but still retain an obligation
as a MERS shareholder to indemnify MERS against third-party
claims), claims of county recorders, and certain existing
litigation and other obligations. Under the sub-commitment
agreement with California, there is a limited expansion of its
ability to pursue certain origination claims involving individual
claims for actual fraud against consumers for origination
conduct occurring on or after July 1, 2009. There are also side
agreements with New York, Delaware and Massachusetts
whereby these states retain the right to pursue their existing
MERS litigation, subject to certain limitations.
Other aspects of the federal release include a carve out under
federal consumer credit laws for violations of RESPA related to
private mortgage insurance and the retention of all rights by
FHFA, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Home
Loan Bank, the SEC, the CFPB (after July 21, 2011) and the
federal banking agencies.
Additional information on risks and litigation relating to
servicing activities is included in Note 15 (Legal Actions) to
Financial Statements in this Report.
o development of electronic loan portals for status of first
lien loan modifications; and
o establishment of loan modification decision review
process
enhanced protections for service members;
restrictions on certain default, foreclosure, and bankruptcy-
related service fees; and
restrictions on the imposition of force-placed insurance
Monitoring and Other Settlement Matters
The settlement will be overseen by a third party monitor who
will receive quarterly reports from servicers capturing progress
towards implementing the servicing standards and satisfaction
of the commitments of the Consumer Relief Program and the
Refinance Program. These reports will be based on an agreed
upon set of metrics and other information relevant to our
compliance obligations. The enforcement provisions of the
settlement include the parties’ right to seek penalties for non-
compliance, the monitor’s right to seek additional measurement
metrics, and the right to enforce the Consent Order in federal
court.
As part of the settlement, servicers will be released by the
participating states and federal agencies from a number of
servicing and origination claims. The releases given by the states
and the federal agencies generally apply to “covered servicing
conduct” and “covered origination conduct.” The state release
and the federal release extend to “covered servicing conduct”
prior to the effective date of the settlement. The federal release
for “covered origination conduct” depends on which agency and
which law is involved. The Department of Justice and the
Treasury are releasing claims under federal consumer credit laws
governing loan origination. The FTC is releasing claims relating
to origination conduct. HUD’s release of claims relating to
origination conduct is limited to claims based exclusively on
false annual certifications of compliance that are submitted to
HUD, and retains the right to pursue individual loan-level
violations of the Federal Housing Administration origination
rules and regulations. The Department of Justice’s release from
claims under the Financial Institutions Reform, Recovery, and
Enforcement Act (claims involving harm to financial institutions
or federal agencies based on intentional fraud or
misrepresentation by a bank or its affiliates) is also limited.
77
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, 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.
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, 2011, our most recent simulation indicated
estimated earnings at risk of less than 1% of our most likely
earnings plan over the next 12 months under a range of both
lower and higher interest rates, including a scenario in which
the federal funds rate remains unchanged and the 10-year
Constant Maturity Treasury bond yield averages below 2.00%,
and a scenario in which the federal funds rate rises to 3.75%
and the 10-year Constant Maturity Treasury bond yield
increases 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
78
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, 2011 and 2010, are presented in Note 16
(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 economically 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 2011.
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. 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 2011 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 2011 and 2010, we 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. Gains or losses
associated with these economic hedges are included in
mortgage banking noninterest income. Consistent with our
longstanding approach to hedging interest rate risk in the
mortgage business, the size of the hedge and the particular
combination of 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 2011, 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 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
79
Risk Management – Asset/Liability Management (continued)
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 ARM 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,
hedge-carry income on our economic hedges for the MSRs
may not continue if the spread between short-term 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 $14.0 billion and $15.9 billion at December 31, 2011
and 2010, respectively. The weighted-average note rate on our
portfolio of loans serviced for others was 5.14% and 5.39% at
December 31, 2011 and 2010, respectively. Our total MSRs
represented 0.76% of mortgage loans serviced for others at
80
December 31, 2011, compared with 0.86% at
December 31, 2010.
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 Market and
Institutional Risk Committee, which provides governance and
oversight over market risk-taking activities across the
Company, establishes and monitors counterparty risk limits.
The credit risk amount and estimated net fair value of all
customer accommodation derivatives at December 31, 2011
and 2010 are included in Note 16 (Derivatives) to Financial
Statements in this Report. Open, “at risk” positions for all
trading businesses are monitored by Corporate ALCO.
Table 40 presents net gains (losses) from trading activities
attributable to the following types of activity:
Table 40: Trading Activities
Year ended December 31,
(in millions)
2011
2010
2009
Customer accommodation
Economic hedging
Proprietary
Total net trading
gains (losses)
$
1,029
(1)
(14)
1,448
178
22
1,854
278
542
$
1,014
1,648
2,674
The amounts reflected in the table above capture only gains
(losses) due to changes in fair value of our trading positions
and are reported within net gains (losses) on trading activities
within noninterest income line item of the income statement.
These amounts do not include interest income and other fees
earned from related activities, which are reported within
interest income from trading assets and other fees within
noninterest income line items of the income statement.
Categorization of net gains (losses) from trading activities in
the table above is based on our own definition of those
categories, as further described below, because no uniform
industry definitions currently exist.
Customer accommodation trading consists of security or
derivative transactions conducted in an effort to help
customers manage their market price risks and are done on
their behalf or driven by their investment needs. For the
majority of our customer accommodation trading we serve as
intermediary between buyer and seller. For example, we may
enter into financial instruments with customers that use the
instruments for risk management purposes and offset our
exposure on such contracts by entering into separate
instruments. Customer accommodation trading also includes
net gains related to market-making activities in which we take
positions to facilitate expected customer order flow.
Economic hedges consist primarily of cash or derivative
positions used to facilitate certain of our balance sheet risk
management activities that did not qualify for hedge
accounting or were not designated in a hedge accounting
relationship. Economic hedges may also include securities that
we elected to carry at fair value with changes in fair value
recorded to earnings in order to mitigate accounting
measurement mismatches or avoid embedded derivative
accounting complexities.
Proprietary trading consists of security or derivative
positions executed for our own account based on market
expectations or to benefit from price differences between
financial instruments and markets. Proprietary trading activity
is expected to be restricted by the Dodd-Frank Act prohibitions
known as the “Volcker Rule,” which has not yet been finalized.
On October 11, 2011, federal banking agencies and the SEC
issued for public comment proposed regulations to implement
the Volcker Rule. We believe our definition of proprietary
trading is consistent with the proposed regulations. However,
given that final rule-making is required by various
governmental regulatory agencies to define proprietary trading
within the context of the final “Volcker Rule,” our definition of
proprietary trading may change. We have reduced or exited
certain business activities in anticipation of the final “Volcker
Rule.” As discussed within the noninterest income section of
our financial results, proprietary trading activity is not
significant to our financial results.
The fair value of our trading derivatives is reported in
Notes 16 (Derivatives) and 17 (Fair Values of Assets and
Liabilities) to Financial Statements in this Report. The fair
value of our trading securities is reported in Note 17 (Fair
Values of Assets and Liabilities) to Financial Statements in this
Report.
The standardized approach for monitoring and reporting
market risk for the trading activities consists of value-at-risk
(VaR) metrics complemented with sensitivity 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 previous
250 trading days. The analysis captures all financial
instruments that are considered trading positions. The average
one-day VaR throughout 2011 was $29 million, with a lower
bound of $19 million and an upper bound of $42 million. The
average one-day VaR for fourth quarter 2011 was $32 million,
with a lower bound of $22 million and an upper bound of
$42 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
81
Risk Management – Asset/Liability Management (continued)
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 41 provides information regarding our marketable
and nonmarketable equity investments.
Table 41: Nonmarketable and Marketable Equity Investments
(in millions)
Nonmarketable equity investments:
Private equity investments:
Cost method
LIHTC investments - equity method (1)
$
All other equity method
Federal bank stock
Principal investments
Total nonmarketable
December 31,
2011
2010
3,444
4,077
4,434
4,617
3,240
3,611
4,013
5,254
236
305
equity investments (2)
$
16,808
16,423
Marketable equity securities:
Cost
Net unrealized gains
Total marketable
$
2,929
4,258
488
931
equity securities (3)
$
(1) Represents low income housing tax credit investments
(2) 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.
3,417
5,189
(3) Included in securities available for sale. See Note 5 (Securities Available for Sale)
to Financial Statements in this Report for additional information.
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 4.9 years at December 31, 2011. Of the
$212.6 billion (cost basis) of debt securities in this portfolio at
December 31, 2011, $38.5 billion (18%) is expected to mature
or be prepaid in 2012 and an additional $34.8 billion (16%) in
82
2013. 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 2011, we sold or
securitized mortgage loans of $353 billion. The amount of
mortgage loans and other consumer loans available to be sold,
securitized or pledged was approximately $222 billion at
December 31, 2011.
Core customer deposits have historically provided a sizeable
source of relatively stable and low-cost funds. At December
31, 2011, core deposits funded 113% of total loans compared
with 105% a year ago. Additional funding is provided by long-
term debt (including trust preferred securities), other foreign
deposits, and short-term borrowings. Long-term debt averaged
$141.1 billion in 2011 and $185.4 billion in 2010. Short-term
borrowings averaged $51.8 billion in 2011 and $46.8 billion in
2010.
We anticipate making capital expenditures of
approximately $930 million in 2012 for our stores, relocation
and remodeling of our facilities, and routine replacement of
furniture, equipment and servers. We fund expenditures from
various sources, including funds from operations and
borrowings.
In mid-2009, we froze the Wells Fargo & Company Cash
Balance Plan. As a result, pension funding is not a material
consideration in our liquidity management. See Note 20
(Employee Benefits and Other Expenses) to Financial
Statements in this Report for additional information on
pension and postretirement plans.
We access domestic and international 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 credit rating would
not cause us to violate any of our debt covenants.
In September 2011, Moody’s Investors Service, Inc.
(Moody’s) downgraded the long-term senior debt ratings of the
Parent and Wells Fargo Bank, N.A., the Parent’s significant
banking subsidiary, one notch to A2 and Aa3, respectively,
based on its determination that, as a result of the Dodd-Frank
Act, the U.S. government is less likely to support systemically
important financial institutions, if needed, in the future.
Moody’s outlook on the Parent’s and Wells Fargo Bank, N.A.’s
long-term senior debt ratings is negative based on the
possibility that Moody’s may further reduce its assumptions
about the likelihood of government support for systemically
important financial institutions. In November 2011, S&P
lowered the long-term senior debt ratings of the Parent and
Wells Fargo Bank, N.A. one notch to A+ and AA-, respectively,
following changes in S&P’s ratings criteria for the global
banking industry. S&P also reduced the Parent’s short-term
debt ratings one notch to A-1, affirmed Wells Fargo Bank,
N.A.’s short-term debt rating at A-1+ and maintained a
negative outlook on the Parent’s and Wells Fargo Bank, N.A.’s
long-term debt, reflecting the outlook on the U.S. sovereign
rating in light of the amount of U.S. government support
incorporated into our ratings. In July 2011, Fitch Ratings
affirmed both the Parent’s and Wells Fargo Bank, N.A.’s long-
term senior and short-term debt ratings and maintained a
stable watch on those ratings. In March 2011, Dominion Bond
Rating Service (DBRS) confirmed both the Parent’s and Wells
Fargo Bank, N.A.’s long-term senior and short-term debt
ratings, including the stable trend. The Moody’s and S&P’s
Table 42: Credit Ratings
Moody's
S&P
Fitch Ratings
DBRS
* middle ** high
ratings downgrades have not adversely affected our ability to
access the capital markets and we do not believe there has been
any meaningful change in our borrowing costs specifically
relating to the ratings downgrades. See the “Risk Factors”
section of this Report for additional information regarding our
credit ratings and the impact of a credit ratings downgrade on
our liquidity and operations, as well as Note 16 (Derivatives) to
Financial Statements in this Report for information regarding
additional collateral and funding obligations required for
certain derivative instruments in the event our credit ratings
were to fall below investment grade.
The credit ratings of the Parent and Wells Fargo Bank, N.A.
as of December 31, 2011, are presented in Table 42.
Wells Fargo & Company
Wells Fargo Bank, N.A.
Senior debt
Short-term
borrowings
Long-term
deposits
Short-term
borrowings
A2
A+
AA-
AA
P-1
A-1
F1+
R-1*
Aa3
AA-
AA
AA**
P-1
A-1+
F1+
R-1**
On December 20, 2011, the FRB proposed enhanced liquidity
Parent’s proceeds from securities issued in 2011 and in first
planning rules that would be applicable to us. The proposed
rules, among other things, require periodic stress testing, the
preparation of contingent funding plans, and the establishment
of corporate governance procedures for managing liquidity risk.
These rules, however, are not yet final. We will continue to
analyze the proposed rules and other regulatory proposals that
may impact liquidity management, including Basel III, to
determine the level of operational or compliance impact to Wells
Fargo. For additional information see the “Capital Management”
and “Regulatory Reform” sections in this Report.
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. 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 2011, the Parent issued $9.3 billion in
registered senior notes. In February 2011, the Parent remarketed
$2.5 billion of junior subordinated notes owned by an
unconsolidated, wholly owned trust. The purchasers of the
junior subordinated notes exchanged them with the Parent for
newly issued senior notes, which are included in the Parent
issuances described above. Proceeds of the remarketed junior
subordinated notes were used by the trust to purchase
$2.5 billion of Class A, Series I Preferred Stock issued by the
Parent. In February 2012, the Parent issued $3.3 billion in
registered senior notes.
quarter 2012 were used for general corporate purposes, and,
unless otherwise specified in the applicable prospectus or
prospectus supplement, we expect the proceeds from securities
issued in the future will be used for the same purposes.
Depending on market conditions, we may purchase our
outstanding debt securities from time to time in privately
negotiated or open market transactions, by tender offer, or
otherwise.
Table 43 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 or bearing interest at a fixed or floating rate.
Table 43: Medium-Term Note (MTN) Programs
(in billions)
MTN program:
Series I & J (1)
Series K (1)
European (2)
Australian (2)(3)
December 31, 2011
Debt
issuance
authority
Available
for
issuance
Date
established
August 2009
April 2010
December 2009
$
June 2005 AUD
25.0
25.0
25.0
10.0
15.8
24.0
24.7
6.8
(1) SEC registered.
(2) Not registered with the SEC. May not be offered in the United States without
applicable exemptions from registration.
(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.
83
Risk Management – Asset/Liability Management (continued)
At December 31, 2011, Wells Fargo Bank, N.A. had available
$100 billion in short-term debt issuance authority and
$103.7 billion in long-term debt issuance authority.
Wells Fargo Canada Corporation In January 2012,
Wells Fargo Canada Corporation (WFCC, formerly known as
Wells Fargo Financial Canada Corporation), an indirect wholly
owned Canadian subsidiary of the Parent, qualified with the
Canadian provincial securities commissions a base shelf
prospectus for the distribution from time to time in Canada of up
to CAD$7.0 billion in medium-term notes. During 2011, WFCC
issued CAD$500 million in medium-term notes using its prior
base shelf prospectus. In February 2012, WFCC issued
CAD$1.5 billion in medium-term notes. All medium-term notes
issued by WFCC are unconditionally guaranteed by the Parent.
Capital Management
We have an active program for managing stockholders’ equity
and regulatory capital and maintain a comprehensive process for
assessing the Company’s overall capital adequacy. We generate
capital primarily through the retention of earnings net of
dividends. Our objective is to maintain capital at an amount
commensurate with our risk profile and risk tolerance
objectives, and to meet both regulatory and market expectations.
Our potential sources of stockholders’ equity include retained
earnings and issuances of common and preferred stock.
Retained earnings increased $12.5 billion from
December 31, 2010, predominantly from Wells Fargo net income
of $15.9 billion, less common and preferred stock dividends of
$3.4 billion. During 2011, we issued approximately 86 million
shares of common stock, substantially all of which related to
employee benefit plans. We also repurchased approximately
86 million shares of common stock at a net cost of $2.4 billion
during 2011.
Regulatory Capital Guidelines
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, 2011, the Company and each of our subsidiary
banks were “well-capitalized” under applicable regulatory capital
adequacy guidelines. See Note 26 (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 facing a financial
services company. 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 stressed economic conditions, as well as regulatory
expectations and guidance, rating agency viewpoints and the
view of capital markets participants.
In 2007, U.S. bank regulators approved a final rule adopting
international guidelines for determining regulatory capital
84
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.
known as “Basel II.” Basel II incorporates three pillars that
address (a) capital adequacy, (b) supervisory review, which
relates to the computation of capital and internal assessment
processes, and (c) market discipline, through increased
disclosure requirements. We are well underway toward Basel II
implementation and currently anticipate entering the “parallel
run phase” of Basel II in 2012. During the “parallel run phase,”
banks must successfully complete at least a four quarter
evaluation period under supervision from regulatory agencies in
order to be compliant with the Basel II final rule. Our delayed
entry into the “parallel run phase” was approved by the FRB in
2010 as a result of our acquisition of Wachovia.
In December 2010, the Basel Committee on Bank
Supervision (BCBS) finalized a set of international guidelines for
determining regulatory capital known as “Basel III.” These
guidelines were developed in response to the financial crisis of
2008 and 2009 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 guidelines, among other
things, increase minimum capital requirements and when fully
phased in require bank holding companies to maintain a
minimum ratio of Tier 1 common equity to risk-weighted assets
of at least 7.0%. The U.S. regulatory bodies are reviewing the
final international standards and final U.S. rulemaking is
expected to be completed in 2012.
The BCBS also proposed additional Tier 1 common equity
surcharge requirements for global systemically important banks
(G-SIBs). The surcharge ranges from 1.0% to 3.5% depending on
the bank’s systemic importance to be determined under an
indicator-based approach that would consider five broad
categories: cross-jurisdictional activity, size, inter-
connectedness, substitutability/financial institution
infrastructure and complexity. These additional capital
requirements, which would be phased in beginning in
January 2016 and become fully effective on January 1, 2019,
would be in addition to the Basel III 7.0% Tier 1 common equity
requirement finalized in December 2010. The Financial Stability
Board has determined that the Company is one of the initial
29 G-SIBs that would be subject to the surcharge, but has not yet
determined the surcharge amount for us and the other banks.
The FRB also recently proposed rules required under the
Dodd-Frank Act that will impose enhanced prudential standards
on large bank holding companies (BHCs) such as Wells Fargo,
including enhanced capital, stress testing and liquidity
requirements. We are reviewing the proposed rules to determine
their potential effect on our business.
Although uncertainty exists regarding final capital rules,
including the FRB’s approach to capital requirements, we
evaluate the impact of Basel III on our capital ratios based on
our interpretation of the proposed capital requirements and we
estimate that our Tier 1 common equity ratio under the Basel III
proposal exceeded the fully phased-in minimum of 7.0% by
50 basis points at the end of 2011. This estimate is subject to
change depending on final promulgation of Basel III capital
rulemaking and interpretations thereof by regulatory
authorities.
Table 44 and Table 45, which appear at the end of this
Capital Management section, provide information regarding our
Tier 1 common equity calculation under Basel I and as estimated
under Basel III, respectively.
Capital Planning
In connection with its increased focus on the adequacy of
regulatory capital and risk management for large financial firms,
the FRB required large banks to submit a capital plan in early
2011 as part of its Comprehensive Capital Analysis and Review
(CCAR). Following submission of our capital plan on
January 7, 2011, the FRB notified us on March 18, 2011, that it
did not object to our 2011 capital plan. Since that notification,
the Company took several capital actions, including increasing
the quarterly common stock dividend to $0.12 a share,
repurchasing $2.4 billion of our common stock, and redeeming
$9.2 billion of trust preferred securities that will no longer count
as Tier 1 capital under the Dodd-Frank Act and the proposed
Basel III capital standards.
In late 2011, the FRB finalized rules to require large BHCs to
submit capital plans annually and to obtain regulatory approval
before making capital distributions. The rule requires updates to
capital plans in the event of material changes in a BHC’s risk
profile, including as a result of any significant acquisitions.
Under the FRB’s new capital plan rule, the 2012 CCAR will
include a comprehensive capital plan supported by an
assessment of expected uses and sources of capital over a given
planning horizon under a range of expected and stress scenarios,
similar to the process the FRB relied upon to conduct the 2011
CCAR. As part of the 2012 CCAR, the FRB will also generate a
supervisory stress test driven by a sharp decline in the economy
and significant decline in asset pricing using the information
provided by the Company to estimate performance. The FRB has
indicated it will publish its estimates of performance under this
scenario on a BHC-specific basis. We submitted our board-
approved 2012 capital plan to the FRB on January 6, 2012. We
expect the FRB’s response to our submission in March 2012.
Securities Repurchases
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.
Future stock repurchases may be private or open-market
repurchases, including block transactions, accelerated or
delayed block transactions, forward transactions, and similar
transactions. Additionally, we may enter into plans to purchase
stock that satisfy the conditions of Rule 10b5-1 of the Securities
Exchange Act of 1934. Various factors determine the amount
and timing of our share repurchases, including our capital
requirements, the number of shares we expect to issue for
employee benefit plans and acquisitions, market conditions
(including the trading price of our stock), and regulatory and
legal considerations, including the FRB’s response to our capital
plan.
In 2008, the Board authorized the repurchase of up to
25 million additional shares of our outstanding common stock.
In first quarter 2011, the Board authorized the repurchase of an
additional 200 million shares. During 2011, we repurchased
80 million shares of our common stock in the open market and
from our employee benefit plans and an additional 6 million
shares through a private forward repurchase transaction that
settled in fourth quarter 2011. During fourth quarter 2011, we
entered into a second forward repurchase transaction that
settled in first quarter 2012 for approximately 6 million shares of
common stock. At December 31, 2011, we had utilized all
previously remaining common stock repurchase authority from
the 2008 authorization and had remaining authority from the
2011 authorization to purchase approximately 117 million
shares. For more information about share repurchases during
2011, see Part II, Item 5 of our 2011 Form 10-K and for
additional information about our forward repurchase programs
see Note 1 (Summary of Significant Accounting Policies) to
Financial Statements in this Report.
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
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 Troubled Asset
Relief Program (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. The Board
authorized the repurchase by the Company of up to $1 billion of
the warrants. On May 26, 2010, in an auction by the U.S.
Treasury, we purchased 70,165,963 of the warrants at a price of
85
Capital Management (continued)
$7.70 per warrant. We have purchased an additional
916,216 warrants since the U.S. Treasury auction. At
December 31, 2011, there were 39,179,509 warrants outstanding
and exercisable and $453 million of unused warrant repurchase
authority. Depending on market conditions, we may purchase
from time to time additional warrants in privately negotiated or
open market transactions, by tender offer or otherwise.
Securities Issuances
In March 2011, the Company issued 25,010 shares of Class A,
Series I Preferred Stock, with a par value of $2.5 billion to
Table 44: Tier 1 Common Equity Under Basel I (1)
(in billions)
Total equity
Noncontrolling interests
Total Wells Fargo stockholders' equity
Adjustments:
Preferred equity (2)
Goodwill and intangible assets (other than MSRs)
Applicable deferred taxes
MSRs over specified limitations
Cumulative other comprehensive income
Other
Tier 1 common equity
Total risk-weighted assets (3)
Tier 1 common equity to total risk-weighted assets
Wachovia Capital Trust III (Trust), an unconsolidated wholly
owned trust. The Trust used the proceeds from the remarketing
of certain junior subordinated notes issued in connection with
Wachovia’s 2006 issuance of 5.80% fixed-to-floating rate trust
preferred securities to purchase the Series I Preferred Stock. The
action completed the Company’s and the Trust’s obligations
under an agreement dated February 1, 2006, as amended,
between the Trust and the Company (as successor to Wachovia
Corporation).
December 31,
2011
2010
$
141.7
(1.5)
127.9
(1.5)
140.2
126.4
(10.6)
(34.0)
3.8
(0.8)
(3.1)
(0.4)
(8.1)
(35.5)
4.3
(0.9)
(4.6)
(0.3)
(A)
(B)
$
$
95.1
81.3
1,005.6
980.0
(A)/(B)
9.46 %
8.30
(1) Tier 1 common equity is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services
companies. 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) In March 2011, we issued $2.5 billion of Series I Preferred Stock to an unconsolidated wholly-owned trust.
(3) 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.
Table 45: Tier 1 Common Equity Under Basel III (Estimated) (1)
(in billions)
Tier 1 common equity under Basel I
Adjustments from Basel I to Basel III:
Cumulative other comprehensive income (2)
Threshold deductions defined under Basel III (2) (3)
Other
Tier 1 common equity under Basel III
Total risk-weighted assets anticipated under Basel III (4)
December 31,
2011
$
95.1
3.1
(0.1)
(0.2)
97.9
1,304.7
(C)
(D)
$
$
Tier 1 common equity to total risk-weighted assets anticipated under Basel III
(C)/(D)
7.50 %
(1) Tier 1 common equity is a non-GAAP financial measure that is used by investors, analysts and bank regulatory agencies to assess the capital position of financial services
companies. 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) Volatility in interest rates can have a significant impact on the valuation of cumulative other comprehensive income and MSRs and therefore, impact adjustments under
Basel III in future reporting periods.
(3) Threshold deductions under Basel III include individual and aggregate limitations, as a percentage of Tier 1 common equity (as defined under Basel III), with respect to
MSRs, deferred tax assets and investments in unconsolidated financial companies.
(4) Under current Basel proposals, risk-weighted assets incorporate different classifications of assets, with certain risk weights based on a borrower's credit rating or Wells
Fargo's own risk models, along with adjustments to address a combination of credit/counterparty, operational and market risks, and other Basel III elements. The
amount of risk-weighted assets anticipated under Basel III is preliminary and subject to change depending on final promulgation of Basel III capital rulemaking and
interpretations thereof by regulatory authorities.
86
Regulatory Reform
The past two years have witnessed a significant increase in
regulation and regulatory oversight initiatives that may
substantially change how most U.S. financial services companies
conduct business. The following highlights the more significant
regulations and regulatory oversight initiatives that have
affected or may affect our business. For additional information
about the regulatory reform matters discussed below and other
regulations and regulatory oversight matters, see Part I, Item 1
“Regulation and Supervision” of our 2011 Form 10-K, and the
“Capital Management,” “Forward-Looking Statements” and
“Risk Factors” sections and Note 26 (Regulatory and Agency
Capital Requirements) to Financial Statements in this Report.
Dodd-Frank Act
The Dodd-Frank Act is the most significant financial reform
legislation since the 1930s and is driving much of the current
U.S. regulatory reform. The Dodd-Frank Act and many of its
provisions became effective in July 2010 and July 2011.
However, a number of its provisions still require extensive
rulemaking, guidance, and interpretation by regulatory
authorities and many of the rules that have been proposed to
implement its requirements remain open for public comment
and have not been finalized. Where possible, the Company may,
from time to time, estimate the impact to the Company’s
financial results or business operations as a result of particular
Dodd-Frank Act regulations. However, due to the uncertainty of
pending regulations, the Company may be unable to make any
such estimates. Accordingly, in many respects the ultimate
impact of the Dodd-Frank Act and its effects on the U.S.
financial system and the Company still remain uncertain. The
following provides additional information on the Dodd-Frank
Act, including the current status of certain of its rulemaking
initiatives.
Regulation of interchange fees (the Durbin Amendment). On
October 1, 2011, FRB rules limiting debit card interchange
fees to those "reasonable" and "proportional" to the
transactions became effective. The rule generally established
that the maximum permissible interchange fee that an issuer
may receive for an electronic debit transaction will be the
sum of 21 cents per transaction and 5 basis points multiplied
by the value of the transaction. An additional charge of up to
1 cent may be added if the issuer develops and implements
fraud prevention policies and procedures that meet
regulation standards. As a result of the FRB’s new rules, our
fourth quarter 2011 debit card interchange fees were reduced
by $365 million (pre-tax).
Interest on business checking (Regulation Q repeal).
Effective July 21, 2011, banks are permitted to pay interest on
business checking accounts. We made changes to our
affected products in anticipation of the repeal of Regulation
Q. To date, our product changes and the repeal of Regulation
Q have had a minimal impact on our business because of the
low interest rate environment.
Asset-based deposit assessment base; other FDIC
assessment changes. In 2011, the FDIC finalized regulations
to implement the provision of the Dodd-Frank Act requiring
a shift from deposits to assets as the basis for determining
FDIC assessments. In addition, the FDIC approved changes
to its assessment rates to implement a new minimum
designated reserve ratio and impose separate risk-based
assessments on large banks. The FDIC has broad
discretionary authority to increase assessments on large
financial institutions such as Wells Fargo on a case by case
basis.
Regulation of swaps and other derivatives activities. The
Dodd-Frank Act establishes a comprehensive framework for
regulating over-the-counter derivatives. Included in this
framework are certain “push-out” provisions affecting U.S.
banks acting as dealers in commodity swaps, equity swaps
and certain credit default swaps, which will require that these
activities be conducted through an affiliate. It also authorizes
the Commodity Futures Trading Commission (CFTC) and the
SEC to regulate swaps and security-based swaps respectively.
During 2011, the CFTC and SEC proposed rules to implement
derivatives regulation, including clearing and trading
requirements, data retention and reporting requirements,
registration requirements, capital and margin requirements,
business conduct standards, and customer eligibility
requirements. At this time, the Company cannot predict the
financial impact of the rules to our swaps and securities-
based swaps activities or estimate the costs of complying
with the rules.
Volcker Rule. The Volcker Rule will prohibit banking entities
from engaging in proprietary trading or owning any interest
in or sponsoring a hedge fund or a private equity fund. In
October 2011, federal banking agencies and the SEC issued
for public comment proposed regulations to implement the
Volcker Rule. The comment period ended on
February 13, 2012, and the Volcker Rule will become effective
on July 21, 2012, regardless of the status of the rulemaking
process. The proposed rules requested comments on over
1,300 questions and it is difficult to predict the content of the
final rules. Although proprietary trading is not significant to
our financial results, and we have reduced or exited certain
businesses in anticipation of the final rules, at this time the
Company cannot predict the ultimate impact of the Volcker
Rule on our trading and investment activities or financial
results.
Changes to asset-backed securities markets. The Dodd-
Frank Act will generally require sponsors of asset-backed
securities (ABS) to hold at least a 5% ownership stake in the
ABS. Exemptions from the requirement include qualified
residential mortgages and FHA/VA loans. Federal regulatory
authorities have proposed joint rules to implement this credit
risk retention requirement, which rules include an
exemption for the GSE’s mortgage-backed securities. The
proposed rules have been subject to extensive public
comment. At this time, the Company cannot predict the
financial impact of the credit risk retention requirement on
our business.
87
Regulatory Capital Guidelines and Capital Plans
In December 2010, the BCBS finalized Basel III for determining
regulatory capital. When fully phased in by 2019, the Basel III
standards will require BHCs to maintain a minimum ratio of
Tier 1 common equity to risk-weighted assets of at least 7.0%. In
November 2011, the BCBS released its final rule for a common
equity surcharge on certain designated G-SIBs. We have been
named as one of the G-SIBs that will be subject to a surcharge,
although the amount of the surcharge, ranging from 1.0% to
3.5%, has not been determined. The FRB has indicated it expects
to adopt regulations implementing the G-SIB surcharge in 2014
and that the surcharge would be imposed on a phased-in basis
from 2016-2019. In late 2011, the FRB finalized rules to require
BHCs with $50 billion or more of consolidated assets to submit
capital plans annually and to obtain regulatory approval before
making capital distributions. The rule also requires a capital
adequacy assessment under a range of expected and stress
scenarios. For additional information, see the “Capital
Management” section of this Report.
“Living Will” Requirements
In late 2011 the FRB and the FDIC approved final resolution-
plan regulations as mandated by the Dodd-Frank Act. These
regulations will require large financial institutions, including
Wells Fargo, to prepare and periodically revise plans that would
facilitate their resolution in the event of material distress or
failure. As contemplated by the Dodd-Frank Act, resolution
plans are to provide for a rapid and orderly resolution –
liquidation or orderly restructuring – under Bankruptcy Code
and other insolvency statutes applicable to particular types of
regulated entities (such as securities broker-dealers or insurance
companies).
Regulatory Reform (continued)
The Collins Amendment. This provision of the Dodd-Frank
Act will phase out the benefit of issuing trust preferred
securities by eliminating them from Tier 1 capital over three
years beginning January 2013. We redeemed $9.2 billion of
our trust preferred securities in 2011 as discussed in the
“Capital Management” section of this Report.
Enhanced supervision and regulation of systemically
significant firms. The Dodd-Frank Act grants broad
authority to banking regulators to establish enhanced
supervisory and regulatory requirements for systemically
important firms. In December 2011, the FRB published
proposed rules that would establish enhanced risk-based
capital requirements and leverage limits, liquidity
requirements, counterparty credit exposure limits, risk
management requirements, stress testing requirements,
debt-to-equity limits, and early remediation requirements for
large BHCs like Wells Fargo. The Dodd-Frank Act also
establishes the Financial Services Oversight Council and the
Office of Financial Research, which may recommend new
systemic risk management requirements and require new
reporting of systemic risks.
Establishment of the Consumer Financial Protection Bureau
(CFPB).The Dodd-Frank Act established the CFPB, which
became operational on July 21, 2011. The role of the CFPB is
to ensure consumers get clear, accurate information to
effectively evaluate mortgages, credit cards and other
financial products and protect them from hidden fees,
abusive terms and deceptive practices. The CFPB has broad
rulemaking powers and supervisory and enforcement
authority over consumer financial products and services. The
CFPB has begun exercising its supervisory authority over the
banks under its jurisdiction, including Wells Fargo, and is
preparing for supervision of certain non-bank entities. The
CFPB has indicated it will concentrate much of its
rulemaking effort in 2012 on the variety of mortgage-related
topics required under the Dodd-Frank Act, including the
steering of consumers to certain products, discrimination,
abusive or unfair lending practices, predatory lending,
origination disclosures, minimum mortgage underwriting
standards, and servicing practices. The CFPB has published
proposed regulations on several of these topics, including
minimum mortgage underwriting standards (ability to
repay). At this time, the Company cannot predict the content
of final CFPB regulations and impacts on our business
practices or financial results.
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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;
PCI loans;
the valuation of residential 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 and unfunded credit commitments. 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 ratings 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.
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 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 and ongoing
discussions with regulatory and government agencies regarding
mortgage foreclosure-related matters.
Impaired loans, which predominantly include nonaccrual
commercial loans and any loans that have been modified in a
TDR, have an estimated allowance calculated as the difference, if
any, between the impaired value of the loan and the recorded
investment in the loan. The impaired value of the loan is
generally calculated as the present value of expected future cash
flows from principal and interest, which incorporates expected
lifetime losses, discounted at the loan’s effective interest rate.
The allowance for an unimpaired loan is based solely on
principal losses without consideration for timing of those losses.
The allowance for an impaired loan that was modified in a TDR
may be lower than the previously established allowance for that
loan due to benefits received through modification, such as lower
probability of default and/or severity of loss, and the impact of
prior charge-offs or charge-offs at the time of the modification
that may reduce or eliminate the need for an allowance.
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).
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Critical Accounting Policies (continued)
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 more pessimistic economic
outlook for modeled losses on our consumer portfolio segment
and incremental deterioration in our PCI portfolio could imply
an additional allowance requirement of approximately
$11.0 billion.
Assuming a one risk rating upgrade throughout our
commercial portfolio segment and a more optimistic economic
outlook for modeled losses on our consumer portfolio segment
could imply a reduced allowance requirement of approximately
$3.1 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 acquired with evidence of credit deterioration since their
origination and where it is probable that we will not collect all
contractually required principal and interest payments are
accounted for using the measurement provision for PCI loans.
PCI loans are recorded at fair value at the date of acquisition, and
the historical allowance for credit losses related to these loans is
not carried over. Such loans are considered to be accruing due to
the existence of the accretable yield and not based on
consideration given to contractual interest payments.
Substantially all of our PCI loans were acquired in the Wachovia
acquisition on December 31, 2008.
Management evaluated whether there was evidence of credit
quality deterioration as of the purchase date using indicators
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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. We include these TDRs in our
impaired loans.
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.”
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
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 rates, default rates,
cost to service (including delinquency and foreclosure costs),
escrow account earnings, contractual servicing fee income,
ancillary income and late fees.
Net servicing income, a component of mortgage banking
noninterest income, includes the changes from period to period
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 over time.
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. Additionally, in recent years,
we have made significant adjustments to the assumptions for
servicing and foreclosure costs as a result of an increase in the
number of defaulted loans as well as changes in servicing
processes associated with default and foreclosure management.
While our current valuation reflects our best estimate of these
costs, future regulatory changes in servicing standards may have
an impact on these assumptions and our MSR valuation in future
periods.
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 17 (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) 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.
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Critical Accounting Policies (continued)
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. Our loan sale contracts to private investors (non-
GSE) typically contain an additional provision where we would
only be required to repurchase loans if any such breach is
deemed to have a material and adverse effect on the value of the
mortgage loan or to the interests of the investors or interests of
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. In addition, as part of our
representations and warranties in our loan sales contracts, we
typically represent to GSEs and private investors that certain
loans have mortgage insurance to the extent there are loans that
have loan to value ratios in excess of 80% that require mortgage
insurance. To the extent the mortgage insurance is rescinded by
the mortgage insurer due to a claim of breach of a contractual
representation or warranty, the lack of insurance may result in a
repurchase demand from an investor. Upon receipt of a
repurchase request or a mortgage insurance rescission, 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 a 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 a repurchase obligation, whether or not we currently service
those loans, based on a combination of factors. Such factors
include default expectations, expected investor repurchase
demands (influenced by current and expected mortgage loan file
requests and mortgage insurance rescission notices, as well as
estimated demand to default and file request relationships) 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
92
liability at the time loans are sold and continually update our
liability estimate during the remaining life of such loans.
Although investors may demand repurchase at any time and
there is often a lag from the date of default to the time we receive
a repurchase demand, the majority of repurchase demands occur
on loans that default 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.
To date, repurchase demands from private label MBS have
been more limited than GSE-guaranteed securities; however, 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. 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, 2011,
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 and Note 9
(Mortgage Banking Activities) to Financial Statements 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,
certain loans held for investment, 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 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
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
(collectively, “pricing vendors”) to obtain fair values (“vendor
prices”) which are used to either record the price of an
instrument or to corroborate internally developed prices. For
certain securities, we may use internal traders to price
instruments. Where vendor prices are utilized for recording the
price of an instrument, we determine the most appropriate and
relevant pricing vendor for each security class and obtain a price
from that particular pricing vendor for each security.
Determination of the fair value of financial instruments using
either vendor prices or internally developed prices are both
subject to our internal price validation procedures, which
include, but are not limited to, one or a combination of the
following procedures:
comparison to pricing vendors (for internally developed
prices) or to other pricing vendors (for vendor developed
prices);
variance analysis of prices;
corroboration of pricing by reference to other independent
market data such as secondary broker quotes and relevant
benchmark indices;
review of pricing by Company personnel familiar with
market liquidity and other market-related conditions; and
investigation of prices on a specific instrument-by-
instrument basis.
For instruments where we utilize vendor prices to record the
price of an instrument, we perform additional procedures. We
evaluate pricing vendors by comparing prices from one vendor to
prices of other vendors for identical or similar instruments and
evaluate the consistency of prices to known market transactions
when determining the level of reliance to be placed on a
particular pricing vendor. Methodologies employed and inputs
used by independent pricing vendors are subject to additional
review when such services are provided. This review may consist
of, in part, obtaining and evaluating control reports issued and
pricing methodology materials distributed.
Significant judgment is 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
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Critical Accounting Policies (continued)
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. For additional information on how we
value MSRs refer to the discussion earlier in this section.
Table 46 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 46: Fair Value Level 3 Summary
December 31,
2011
2010
($ in billions)
balance Level 3 (1)
balance Level 3 (1)
Total
Total
Assets carried
at fair value
As a percentage
$
373.0
53.3
293.1
47.9
of total assets
28 %
4
23
4
Liabilities carried
at fair value
As a percentage of
$
26.4
4.6
21.2
6.4
total liabilities
2 %
*
2
1
* Less than 1%
(1) Before derivative netting adjustments.
See Note 17 (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 the 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 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.” 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 21 (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.
94
ASU 2011-04 modifies accounting guidance and expands
existing disclosure requirements for fair value measurements.
This Update clarifies how fair values should be measured for
instruments classified in stockholders’ equity and under what
circumstances premiums and discounts should be applied in fair
value measurements. This Update also permits entities to
measure fair value on a net basis for financial instruments that
are managed based on net exposure to market risks and/or
counterparty credit risk. ASU 2011-04 requires new disclosures
for financial instruments classified as Level 3, including: 1)
quantitative information about unobservable inputs used in
measuring fair value, 2) qualitative discussion of the sensitivity
of fair value measurements to changes in unobservable inputs,
and 3) a description of valuation processes used. This Update
also requires disclosure of fair value levels for financial
instruments that are not recorded at fair value but for which fair
value is required to be disclosed. This guidance is effective for us
in first quarter 2012 with prospective application. Early adoption
is not permitted. We will expand our fair value disclosures upon
adoption of this Update, but we do not expect the measurement
clarifications will have a material effect on our consolidated
financial statements.
ASU 2011-03 amends the criteria companies use to determine if
repurchase and similar agreements should be accounted for as
sales or financings. Specifically, this Update removes the
criterion for transferors to have the ability to meet contractual
obligations through collateral maintenance provisions, even if
transferees fail to return transferred assets pursuant to the
agreements. This Update is effective for us in first quarter 2012
with prospective application to new transactions and existing
transactions modified on or after January 1, 2012. Early adoption
is not permitted. We do not expect this Update will have a
material effect on our consolidated financial statements.
Current Accounting Developments
The following accounting pronouncements have been issued by
the FASB but are not yet effective:
Accounting Standards Update (ASU or Update) 2011-11,
Disclosures about Offsetting Assets and Liabilities;
ASU 2011-05, Presentation of Comprehensive Income;
ASU 2011-12, Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05;
ASU 2011-04, Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs; and
ASU 2011-03, Reconsideration of Effective Control for
Repurchase Agreements.
ASU 2011-11 expands the disclosure requirements for financial
instruments and derivatives that may be offset in accordance
with enforceable master netting agreements or similar
arrangements. The disclosures are required regardless of
whether the instruments have been offset (or netted) in the
statement of financial position. Under ASU 2011-11, companies
must describe the nature of offsetting arrangements and provide
quantitative information about those agreements, including the
gross and net amounts of financial instruments that are
recognized in the statement of financial position. These changes
are effective for us in first quarter 2013 with retrospective
application. This Update will not affect our consolidated
financial results since it amends only the disclosure
requirements for offsetting financial instruments.
ASU 2011-05 eliminates the option for companies to include
the components of other comprehensive income in the statement
of changes in stockholders’ equity. This Update requires entities
to present the components of comprehensive income in either a
single statement or in two separate statements, with the
statement of other comprehensive income (OCI) immediately
following the statement of income. This Update also requires
companies to present amounts reclassified out of OCI and into
net income on the face of the statement of income. In December
2011, the FASB issued ASU 2011-12, which defers indefinitely
the requirement to present reclassification adjustments on the
statement of income. The remaining provisions are effective for
us in first quarter 2012 with retrospective application. Early
adoption is permitted. This Update will not affect our
consolidated financial results as it amends only the presentation
of comprehensive income.
95
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,” “target,” “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, including the potential effect of
recent strong loan and deposit growth on future financial
performance; (ii) our 2012 noninterest expense, including our
targeted noninterest expense for fourth quarter 2012 as part of
our expense management initiatives; (iii) future credit quality
and expectations regarding future loan losses in our loan
portfolios and life-of-loan estimates; our foreign loan exposure;
the level and loss content of NPAs and nonaccrual loans; the
adequacy of the allowance for credit losses, including our current
expectation of future allowance releases in 2012; and the
reduction or mitigation of risk in our loan portfolios and the
effects of loan modification programs; (iv) our expectations
regarding the completion of the remaining Wachovia integration
activities; (v) future capital levels and our estimate regarding our
Tier 1 common equity ratio under proposed Basel III capital
standards as of December 31, 2011; (vi) the quality of our
residential mortgage loan servicing portfolio, our mortgage
repurchase exposure and exposure relating to our mortgage
foreclosure practices; (vii) our expectations regarding the
satisfaction of our obligations under our settlement in principle
with the Department of Justice and other federal and state
government entities related to our mortgage servicing and
foreclosure practices, including our estimates of the impact of
the settlement on our future financial results; (viii) the expected
outcome and impact of legal, regulatory and legislative
developments, including the Dodd-Frank Act and FRB
restrictions on debit card interchange fees, including earnings
expectations regarding mitigation efforts; and (ix) the Company’s
plans, objectives and strategies, including our belief that we have
more opportunity to increase cross-sell of our products.
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:
current and future economic and market conditions,
including the effects of further declines in housing prices
and high unemployment rates, U. S. fiscal debt and budget
matters, and the sovereign debt crisis in Europe;
96
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, as well as the extent of our ability to
offset the loss of revenue and income from financial services
reform and other legislation and regulation;
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 our mortgage servicing and
foreclosure practices, including our ability to meet our
obligations under the settlement in principle with the
Department of Justice and other federal and state
government entities, as well as changes in our procedures or
practices and/or industry standards or practices, regulatory
or judicial requirements, penalties or fines, increased
servicing and other costs or obligations, including loan
modification requirements, or delays or moratoriums on
foreclosures;
our ability to realize our noninterest expense target as part
of our expense management initiatives when and in the
amount targeted, including as a result of business and
economic cyclicality, seasonality, changes in our business
composition and operating environment, growth in our
businesses and/or acquisitions, and unexpected expenses
relating to, among other things, litigation and regulatory
matters;
our ability to successfully complete the remaining Wachovia
integration activities, as well as realize all of the expected
benefits of the Wachovia merger;
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 a 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 money market funds;
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;
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, protests, fines,
penalties and other negative consequences from regulatory
violations and legal actions;
a failure in or breach of our operational or security systems
or infrastructure, or those of our third party vendors and
other service providers, including as a result of cyber
attacks;
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.
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, including under “Forward-Looking
Statements” and in our 2011 Form 10-K, 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. There may be other
factors not discussed below or elsewhere in this Report or in our
2011 Form 10-K that could adversely affect our financial results
and condition.
RISKS RELATED TO THE ECONOMY, FINANCIAL MARKETS, INTEREST
RATES AND LIQUIDITY
As one of the largest lenders in the U.S. and a provider
of financial products and services to consumers and
businesses across the U.S. and internationally, our
financial results have been, and will continue to be,
materially affected by general economic conditions,
particularly unemployment levels and home prices in
the U.S., and a deterioration in economic conditions or
in the financial markets may materially adversely affect
our lending and other businesses and our financial
results and condition. We generate revenue from the interest
and fees we charge on the loans and other products and services
we sell, and a substantial amount of our revenue and earnings
comes from the net interest income and fee income that we earn
from our consumer and commercial lending and banking
businesses, including our mortgage banking business where we
currently are the largest mortgage originator in the U.S. These
businesses have been, and will continue to be, materially affected
by the state of the U.S. economy, particularly unemployment
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 housing prices decline
and unemployment worsens. 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.
levels and home prices. Although the U.S. economy has
continued to gradually improve from the levels of 2008 and early
2009, economic growth has been slow and uneven and the
housing market remains weak. In addition, the negative effects
and continued uncertainty stemming from the sovereign debt
crisis and economic difficulties in Europe and U. S. fiscal and
political matters, including concerns about deficit reduction and
U.S. debt ratings, have impacted and may continue to impact the
continuing global economic recovery. A prolonged period of slow
growth in the global economy, particularly in the U.S., or any
deterioration in general economic conditions and/or the
financial markets resulting from the above matters or any other
events or factors that may disrupt or dampen the global
economic recovery, could materially adversely affect our
financial results and condition.
The high unemployment rate in the U.S., together with high
levels of unsold housing inventory and distressed property sales
and the significant decline in home prices across the U.S.,
including in many of our large banking markets such as
California and Florida, has resulted in elevated credit costs and
nonperforming asset levels, which have adversely affected our
credit performance and our financial results and condition. If
unemployment levels worsen or if home prices continue to fall
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
for those business borrowers that rely on the health of industries
that may experience deteriorating economic conditions. The
ability of these and other borrowers to repay their loans may be
hurt, causing us, as one of the largest commercial lenders and the
largest CRE lender in the U.S., to incur significantly higher credit
losses. In addition, weak or deteriorating economic conditions
make it more challenging for us to increase our consumer and
97
Risk Factors (continued)
commercial loan portfolios by making loans to creditworthy
borrowers at attractive yields. Although we have significant
capacity to add loans to our balance sheet and there have been
some early signs of increased borrower activity, loan demand,
especially consumer loan demand, has been soft resulting in our
retaining a much higher amount of lower yielding liquid assets
on our balance sheet. If economic conditions do not continue to
improve or if the economy worsens and unemployment rises,
which also would likely result in a decrease in consumer and
business confidence and spending, the demand for our credit
products, including our mortgages, may fall, reducing our
interest and fee income and our earnings.
A deterioration in business and economic conditions, which
may erode consumer and investor confidence levels, and/or
increased volatility of financial markets, also could adversely
affect financial results for our fee-based businesses, including
our investment advisory, mutual fund, securities brokerage,
wealth management, and investment banking businesses. As a
result of the Wachovia merger, a greater percentage of our
revenue depends on our fee income from these businesses. We
earn fee income from managing assets for others and providing
brokerage and other investment advisory and wealth
management 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. Poor economic conditions and volatile or
unstable financial markets also can negatively affect our debt and
equity underwriting and advisory businesses, as well as our
trading and venture capital businesses. Extreme market volatility
also could cause us to elect to provide capital support to our
money market funds, which would reduce our earnings. Our
acquisition of Wachovia expanded our international businesses,
particularly our global financial institution and correspondent
banking services, and any deterioration in global financial
markets and economies, including as a result of Europe’s
sovereign debt crisis or any international political unrest or
disturbances, may adversely affect the revenues and earnings of
these and other businesses.
For more information, refer to the “Risk Management –
Asset/Liability Management” and “– Credit Risk Management”
sections in this Report.
Changes in interest rates and financial market values
could reduce our net interest income and earnings,
including as a result of recognizing losses or OTTI on
the securities that we hold in our portfolio or trade for
our customers. 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 or mix
of earning assets we hold could affect our net interest income
and our earnings. Changes in interest rates can affect our net
98
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 asset yield increases.
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. As noted
above, if the economy remains weak or worsens we may see
lower demand for loans by creditworthy customers, reducing our
net interest income and yield. In addition, our net interest
income and net interest margin can be negatively affected by a
prolonged low interest rate environment, which as noted below is
currently being experienced as a result of economic conditions
and FRB monetary policies, as it may result in us holding lower
yielding loans and securities on our balance sheet, particularly if
we are unable to replace the maturing higher yielding assets on
our balance sheet, including the loans in our non-strategic and
liquidating loan portfolio, with similar higher yielding assets.
Increases in interest rates, however, may negatively affect loan
demand and could result in higher credit losses as borrowers
may have more difficulty making higher interest payments. As
described below, changes in interest rates also affect our
mortgage business, including the value of our MSRs.
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, as is the case in the
current interest rate environment, 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 may 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.
We hold securities in our available-for-sale portfolio,
including U.S. Treasury and federal agency securities and federal
agency MBS, securities of U.S. states and political subdivisions,
residential and commercial MBS, corporate debt securities, and
marketable equity securities, including securities relating to our
venture capital activities. We analyze securities held in our
available-for-sale portfolio for OTTI on at least 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,
as well as credit ratings, affecting issuers and the performance of
the underlying collateral, we may be required to recognize OTTI
in future periods, thus reducing earnings. Our net income also is
exposed to changes in interest rates, credit spreads, foreign
exchange rates, equity and commodity prices in connection with
our trading activities, which are conducted primarily to
accommodate our customers in the management of their market
price risk, as well as when we take positions based on market
expectations or to benefit from differences between financial
instruments and markets. The securities held in these activities
are carried at fair value with realized and unrealized gains and
losses recorded in noninterest income. As part of our business to
support our customers, we trade public securities and these
securities also are subject to market fluctuations with gains and
losses recognized in net income when realized and periodically
include OTTI charges. Although we have processes in place to
measure and monitor the risks associated with our trading
activities, including stress testing and hedging strategies, there
can be no assurance that our processes and strategies will be
effective in avoiding losses that could have a material adverse
effect on our results of operations.
Our venture capital business also is subject to market risk and
can 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 and market 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 the carrying value of these investments has increased
because of higher market prices.
For more information, refer to the “Risk Management –
Asset/Liability Management – Interest Rate Risk”, “– Market
Risk – Equity Markets”, and “– Market Risk – Trading
Activities” and the “Balance Sheet Analysis – Securities Available
for Sale” sections in this Report and Note 5 (Securities Available
for Sale) to Financial Statements in this Report.
Effective liquidity management, which ensures that we
can meet customer loan requests, customer deposit
maturities/withdrawals and other cash commitments
efficiently under both normal operating conditions and
other unpredictable circumstances of industry or
financial market stress, is essential for the operation of
our business, and our financial results and condition
could be materially adversely affected if we do not
effectively manage our liquidity. Our liquidity is essential
for the operation of our business. We primarily rely on bank
deposits to be a low cost and stable source of funding for the
loans we make and the operation of our business. Core customer
deposits, which include noninterest-bearing deposits, interest-
bearing checking, savings certificates, certain market rate and
other savings, and certain foreign deposits, have historically
provided us with a sizeable source of relatively stable and low-
cost funds. In addition to customer deposits, our sources of
liquidity include investments in our securities portfolio, our
ability to sell or securitize loans in secondary markets and to
pledge loans to access secured borrowing facilities through the
FHLB and the FRB, and our ability to raise funds in domestic
and international money and capital markets.
Our liquidity and our ability to fund and run our business
could be materially adversely affected by a variety of conditions
and factors, including financial and credit market disruption and
volatility or a lack of market or customer confidence in financial
markets in general similar to what occurred during the financial
crisis in 2008 and early 2009, which may result in a loss of
customer deposits or outflows of cash or collateral and/or our
inability to access capital markets on favorable terms. Market
disruption and volatility could impact our credit spreads, which
are the amount in excess of the interest rate of U.S. Treasury
securities, or other benchmark securities, of the same maturity
that we need to pay to our funding providers. Increases in
interest rates and our credit spreads could significantly increase
our funding costs. Other conditions and factors that could
materially adversely affect our liquidity and funding include a
lack of market or customer confidence in the Company or
negative news about the Company or the financial services
industry generally which also may result in a loss of deposits
and/or negatively affect our ability to access the capital markets;
our inability to sell or securitize loans or other assets, and, as
described below, reductions in one or more of our credit ratings.
Many of the above conditions and factors may be caused by
99
Risk Factors (continued)
events over which we have little or no control. While market
conditions have improved since the financial crisis, there can be
no assurance that significant disruption and volatility in the
financial markets will not occur in the future. For example, in the
summer of 2011 concerns regarding the potential failure to raise
the U.S. government debt limit and the eventual downgrade of
U.S. government debt ratings caused uncertainty and volatility in
financial markets. Although the U.S. debt limit was increased, a
failure to raise the U.S. debt limit in the future and/or additional
downgrades of the sovereign debt ratings of the U.S. government
or the debt ratings of related institutions, agencies or
instrumentalities, as well as other fiscal or political events could,
in addition to causing economic and financial market
disruptions, materially adversely affect the market value of the
U.S. government securities that we hold, the availability of those
securities as collateral for borrowing, and our ability to access
capital markets on favorable terms, as well as have other
material adverse effects on the operation of our business and our
financial results and condition.
As noted above, we rely heavily on bank deposits for our
funding and liquidity. 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. 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 negatively affecting
our liquidity.
If we are unable to continue to fund our assets through
customer bank deposits or access capital markets on favorable
terms or if we suffer an increase in our borrowing costs or
otherwise fail to manage our liquidity effectively, our liquidity,
net interest margin, financial results and condition may be
materially adversely affected. As we did during the financial
crisis, we may also need to raise additional capital through the
issuance of common stock, which could dilute the ownership of
existing stockholders, or reduce or even eliminate our common
stock dividend to preserve capital or in order to raise additional
capital.
For more information, refer to the “Risk Management –
Asset/Liability Management” section in this Report.
Adverse changes in our credit ratings could have a
material adverse effect on our liquidity, cash flows,
financial results and condition. Our borrowing costs and
ability to obtain funding are influenced by our credit ratings.
Reductions 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 that could adversely affect our ability to raise capital.
Credit ratings and credit ratings agencies’ outlooks are based on
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the ratings agencies’ analysis of many quantitative and
qualitative factors, such as our capital adequacy, the level and
quality of our earnings, rating agency assumptions regarding the
probability and extent of federal financial assistance or support,
and other rating agency specific criteria. In addition to credit
ratings, our borrowing costs are affected by various other
external factors, including market volatility and concerns or
perceptions about the financial services industry generally.
On September 21, 2011, Moody’s downgraded the long-term
senior debt ratings of the Parent and Wells Fargo Bank, N.A. one
notch to A2 and Aa3, respectively, based on its determination
that, as a result of the Dodd-Frank Act, the U.S. government is
less likely to support systemically important financial
institutions, if needed, than during the financial crisis. The short-
term debt ratings of the Parent and Wells Fargo Bank were
affirmed at Prime-1. Moody’s also indicated that its outlook on
the Parent’s and Wells Fargo Bank’s long-term senior debt
ratings is negative based on the possibility that Moody’s may
further reduce its assumptions about the likelihood of systemic
support for systemically important financial institutions. On
November 29, 2011, S&P lowered the long-term senior debt
ratings of the Parent and Wells Fargo Bank one notch to A+ and
AA-, respectively, following changes in S&P’s ratings criteria for
the global banking industry. S&P also reduced the Parent’s short-
term debt rating one notch to A-1, affirmed Wells Fargo Bank’s
short-term debt rating at A-1+, and maintained a negative
outlook on the Parent’s long-term debt reflecting the outlook on
the U.S. sovereign rating in light of the amount of U.S.
government support incorporated into our ratings. On July 15,
2011, Fitch Ratings affirmed both the Parent’s and Wells Fargo
Bank’s long-term senior debt ratings and short-term debt ratings
at AA- and F1+, respectively, and maintained a stable watch on
those ratings. On March 29, 2011, DBRS confirmed both the
Parent’s and Wells Fargo Bank’s long-term senior and short-
term debt ratings, including the stable trend. There can be no
assurance that we will maintain our current credit ratings.
Although the availability and cost of funding are influenced
by credit ratings, to date the Moody’s and S&P ratings
downgrades described above have not adversely affected our
ability to access the capital markets or fund our operations.
While to date we do not believe there has been any meaningful
change in our borrowing costs specifically relating to the ratings
downgrades described above, there can be no assurance that
more severe credit ratings downgrades in the future would not
materially affect our ability to borrow funds and borrowing costs.
Downgrades in our credit ratings also may trigger additional
collateral or funding obligations which could negatively affect
our liquidity, including as a result of credit-related contingent
features in certain of our derivative contracts. The Moody’s and
S&P ratings downgrades described above have not triggered, and
additional one and two notch downgrades in those credit ratings
would not be expected to trigger, a material increase in our
collateral or funding obligations. However, in the event of a more
severe credit rating downgrade of our long-term and short-term
credit ratings, the increase in our collateral or funding
obligations and the effect on our liquidity could be material. For
information regarding additional collateral and funding
obligations required of certain derivative instruments in the
event our credit ratings were to fall below investment grade, see
Note 16 (Derivatives) to Financial Statements in this Report.
We rely on dividends from our subsidiaries for
liquidity, 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 funding and
liquidity from dividends and other distributions from its
subsidiaries. We generally use these dividends and distributions,
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 and distributions
that our bank and some of our nonbank subsidiaries, including
our broker-dealer subsidiaries, may pay to our parent holding
company. 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 2011 Form 10-K and to Note 3 (Cash,
Loan and Dividend Restrictions) and Note 26 (Regulatory and
Agency Capital Requirements) to Financial Statements in this
Report.
RISKS RELATED TO FINANCIAL REGULATORY
REFORM AND OTHER LEGISLATION AND
REGULATIONS
Enacted legislation and regulation, including the Dodd-
Frank Act, as well as future legislation and/or
regulation, could require us to change certain of our
business practices, reduce our revenue and earnings,
impose additional costs on us or otherwise adversely
affect our business operations and/or competitive
position. Our parent company, our subsidiary banks and many
of our nonbank subsidiaries such as those related to our retail
brokerage and mutual fund businesses, are subject to significant
regulation under state and federal laws in the U.S., as well as the
applicable laws of the various jurisdictions outside of the U.S.
where we conduct business. These regulations protect
depositors, federal deposit insurance funds, consumers,
investors and the banking and financial system as a whole, not
necessarily our stockholders. Economic, market and political
conditions during the past few years have led to a significant
amount of new legislation and regulation in the U.S. and abroad.
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 affected revenue in 2011 and will
continue to affect our businesses and financial results, including
FRB amendments to Regulation E, which affect the way we may
charge overdraft fees, and the enactment of the Credit Card
Accountability Responsibility and Disclosure Act of 2009 (the
Card Act), which affects our ability to change interest rates and
assess certain fees on card accounts. We also implemented policy
changes to help customers limit overdraft and returned item
fees. The continuing impact of these laws and regulations on our
future revenue 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, the most significant
financial reform legislation since the 1930s, became law. The
Dodd-Frank Act, among other things, (i) established the
Financial Stability Oversight Council to monitor systemic risk
posed by financial firms and imposes additional and enhanced
FRB regulations, including capital and liquidity requirements, on
certain large, interconnected bank holding companies such as
Wells Fargo 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) established the
Consumer Financial Protection Bureau (CFPB) within the FRB,
which has 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)
revised 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) phases out over
three years beginning January 2013 the Tier 1 capital treatment
of trust preferred securities; (x) permitted banks to pay interest
on business checking accounts beginning on July 1, 2011; (xi)
authorized the FRB under the Durbin Amendment to adopt
regulations that limit debit card interchange fees received by
debit card issuers; and (xii) includes several corporate
governance and executive compensation provisions and
requirements, including mandating an advisory stockholder vote
on executive compensation.
The Dodd-Frank Act and many of its provisions became
effective in July 2010 and July 2011. However, a number of its
provisions still require extensive rulemaking, guidance, and
interpretation by regulatory authorities. Accordingly, in many
respects the ultimate impact of the Dodd-Frank Act and its
effects on the U.S. financial system and the Company still remain
uncertain. Nevertheless, the Dodd-Frank Act, including current
and future rules implementing its provisions and the
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Risk Factors (continued)
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. For example,
as a result of the FRB’s new rules limiting debit card interchange
fees, our fourth quarter 2011 debit card interchange fees were
reduced by $365 million (pre-tax). Although we expect to
recapture a portion of our lost income over time through volume
and product changes, there can be no assurance that we will be
successful in our efforts to mitigate the negative impact to our
financial results from the Durbin Amendment.
In addition, our consumer businesses, including our
mortgage, credit card and other consumer lending and non-
lending businesses, may be negatively affected by the activities of
the CFPB, which has broad rulemaking powers and supervisory
authority over consumer financial products and services.
Although the full impact of the CFPB on our businesses is
uncertain, the CFPB’s activities may increase our compliance
costs and require changes in our business practices as a result of
new regulations and requirements which could limit or
negatively affect the products and services that we currently offer
our customers. As a result of greater regulatory scrutiny of our
consumer businesses, we also may become subject to more or
expanded regulatory examinations and/or investigations, which
also could result in increased costs and harm to our reputation in
the event of a failure to comply with the increased regulatory
requirements.
The Dodd-Frank Act’s proposed prohibitions or limitations
on proprietary trading and private fund investment activities,
known as the “Volcker Rule,” also may reduce our revenue and
earnings, although proprietary trading has not been significant
to our financial results. The Volcker Rule is subject to final
rulemaking and interpretation, and the ultimate impact of the
Volcker Rule on our investment activities, including our venture
capital business, is uncertain.
Other future regulatory initiatives that could significantly
affect our business include proposals to reform the housing
finance market in the United States. These proposals, among
other things, consider winding down the GSEs and reducing or
eliminating over time the role of the GSEs in guaranteeing
mortgages and providing funding for mortgage loans, as well as
the implementation of 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. As recently
proposed by the Obama administration, Congress also may
consider the adoption of legislation to reform the mortgage
financing market in an effort to assist borrowers experiencing
difficulty in making mortgage payments or refinancing their
mortgages. The extent and timing of any regulatory reform or the
adoption of any legislation regarding the GSEs and/or the home
mortgage market, as well as any effect on the Company’s
business and financial results, are uncertain.
102
Any other future legislation and/or regulation, if adopted, also
could significantly change our regulatory environment and
increase our cost of doing business, limit the activities we may
pursue or affect the competitive balance among banks, savings
associations, credit unions, and other financial services
companies, and have a material adverse effect on our financial
results and condition.
For more information, refer to the “Regulatory Reform”
section in this Report and the “Regulation and Supervision”
section in our 2011 Form 10-K.
Bank regulations, including Basel capital standards and
FRB guidelines and rules, may require higher capital
and liquidity levels, limiting our ability to pay common
stock dividends, repurchase our common stock, invest
in our business or provide loans to our customers.
Federal banking regulators continually monitor the capital
position of banks and bank holding companies. In December
2010, the Basel Committee on Bank Supervision finalized a set of
international guidelines for determining regulatory capital
known as Basel III. These guidelines are designed to address
many of the weaknesses identified in the banking sector as
contributing to the financial crisis of 2008 and 2009 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. When fully
phased in, the Basel III guidelines require bank holding
companies to maintain a minimum ratio of Tier 1 common equity
to risk-weighted assets of at least 7.0%. The Basel Committee
also proposed certain liquidity coverage and funding ratios. In
June 2011, the Basel Committee proposed additional Tier 1
common equity surcharge requirements for global systemically
important banks ranging from 1.0% to 3.5% depending on the
bank’s systemic importance to be determined based on certain
factors. This new capital surcharge, which would be phased in
beginning in January 2016 and become fully effective on January
1, 2019, would be in addition to the Basel III 7.0% Tier 1 common
equity requirement proposed in December 2010. The Company
has been identified as one of the initial 29 global systemically
important banks that would be subject to the surcharge, but the
surcharge amount has not yet been determined. The U.S.
regulatory bodies are reviewing the final international standards,
and the ultimate impact of the Basel III standards on our capital
and liquidity will depend on such final rulemaking and
regulatory interpretations of the rules as we, along with our
regulatory authorities, apply the final rules during the
implementation process.
As part of its obligation to impose enhanced capital and risk-
management standards on large financial firms pursuant to the
Dodd-Frank Act, the FRB issued a final capital plan rule that
became effective December 30, 2011. The final capital plan rule
requires top-tier U.S. bank holding companies, including the
Company, to submit annual capital plans for review and to
obtain regulatory approval before making capital distributions.
There can be no assurance that the FRB would respond favorably
to the Company’s future capital plans. The FRB also recently
proposed rules under the Dodd-Frank Act that will impose
enhanced prudential standards on large bank holding companies
such as the Company, including enhanced capital, stress testing,
and liquidity requirements.
The Basel standards and FRB regulatory capital and liquidity
requirements may limit or otherwise restrict how we utilize our
capital, including common stock dividends and stock
repurchases, and may require us to increase our capital and/or
liquidity. Any requirement that we increase our regulatory
capital, regulatory capital ratios or liquidity could require us to
liquidate assets or otherwise change our business and/or
investment plans, which may negatively affect our financial
results. Although not currently anticipated, the proposed Basel
capital requirements and/or our regulators may require us to
raise additional capital in the future. Issuing additional common
stock may dilute the ownership of existing stockholders.
For more information, refer to the “Capital Management” and
“Regulatory Reform” sections in this Report and the “Regulation
and Supervision” section of our 2011 Form 10-K.
FRB policies, including policies on interest rates, can
significantly affect business and economic conditions
and our financial results and condition. The FRB regulates
the supply of money 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 income and net interest margin. The FRB’s
interest rate policies also can materially affect the value of
financial instruments we hold, such as debt securities and MSRs.
In addition, its policies 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. As a result of the FRB’s concerns regarding, among
other things, continued slow economic growth and a weak
housing market, the FRB recently indicated that it intends to
keep the target range for the federal funds rate near zero at least
through late 2014. The FRB also may increase its purchases of
U.S. government and mortgage-backed securities or take other
actions in an effort to reduce or maintain low long-term interest
rates. As noted above, a declining or low interest rate
environment and a flattening yield curve which may result from
the FRB’s actions could negatively affect our net interest income
and net interest margin as it may result in us holding lower
yielding loans and investment securities on our balance sheet.
RISKS RELATED TO CREDIT AND OUR MORTGAGE
BUSINESS
As one of the largest lenders in the U.S., increased
credit risk, including as a result of a deterioration in
economic conditions, could require us to increase our
provision for credit losses and allowance for credit
losses and could have a material adverse effect on our
results of operations and financial condition. 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. As one of
the largest lenders in the U.S., the credit performance of our loan
portfolios significantly affects our financial results and condition.
As noted above, if the current economic environment were to
deteriorate, more of our customers may have difficulty in
repaying their loans or other obligations which could result in a
higher level of credit losses and provision for credit losses. 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 increase the
allowance because of changing economic conditions, including
falling home prices and higher unemployment, or other factors.
For example, changes in borrower behavior or the regulatory
environment also could influence recognition of credit losses in
the portfolio and our allowance for credit losses.
Reflecting the continued improved credit performance in our
loan portfolios, our provision expense was $3.4 billion and
$2.0 billion less than net charge-offs in 2011 and 2010,
respectively, which had a positive effect on our earnings. Absent
significant deterioration in the economy, we expect future
allowance releases in 2012, although at more modest levels.
While we believe that our allowance for credit losses was
appropriate at December 31, 2011, there is no assurance that it
will be sufficient to cover future credit losses, especially if
housing and employment conditions worsen. In the event of
significant deterioration in economic conditions, we may be
required to build reserves in future periods, which would reduce
our 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, as well as significant declines in economic activity.
Deterioration in economic conditions, housing conditions and
real estate values in these states and generally across the country
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Risk Factors (continued)
could result in materially higher credit losses, including for our
home equity portfolio.
The Wachovia merger also increased our CRE exposure,
particularly in California and Florida, and we are currently the
largest CRE lender in the U.S. A deterioration in economic
conditions that negatively affects the business performance of
our CRE borrowers, including increases in interest rates and/or
declines in commercial property values, could result in materially
higher credit losses and have a material adverse effect on our
financial results and condition.
The European debt crisis, which has resulted in deteriorating
economic conditions in Europe and ratings agency downgrades
of the sovereign debt ratings of several European countries, has
increased foreign credit risk. Although our foreign loan exposure
represented only approximately 5% of our total consolidated
outstanding loans and 3% of our total assets at
December 31, 2011, continued European economic difficulties
could indirectly have a material adverse effect on our credit
performance and results of operations and financial condition to
the extent it negatively affects the U.S. economy and/or our
borrowers who have foreign operations.
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.
We may incur losses on loans, securities and other
acquired assets of Wachovia that are materially greater
than reflected in our 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. All PCI loans acquired in the merger were
recorded at fair value 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 “Critical Accounting
Policies – Purchased Credit-Impaired (PCI) Loans” and “Risk
Management – Credit Risk Management” sections in this Report.
Our mortgage banking revenue can be volatile from
quarter to quarter, including as a result of changes in
interest rates and the value of our MSRs and MHFS,
and we rely on the GSEs to purchase our conforming
loans to reduce our credit risk and provide liquidity to
fund new mortgage loans. We were the largest mortgage
originator and residential mortgage servicer in the U.S. as of
December 31, 2011, and we earn revenue from fees we receive for
originating mortgage loans and for servicing mortgage loans. As
a result of our mortgage servicing business, we have a sizeable
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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 and carry substantially all our residential
MSRs using the fair value measurement method. Fair value is the
present value of estimated future net servicing 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 also
measure at fair value prime MHFS for which an active secondary
market and readily available market prices exist. In addition, we
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.
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 weak or deteriorating housing
market similar to current market conditions, even if interest
rates were to fall or remain low, 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
periods where we elect not to use derivatives and other
instruments to hedge mortgage banking interest rate risk.
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. During the past few years 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, including because of capital constraints, or
change their criteria for conforming loans (e.g., maximum loan
amount or borrower eligibility). Each of the GSEs is currently in
conservatorship, with its primary regulator, the Federal Housing
Agency acting as conservator. We cannot predict if, when or how
the conservatorship will end, or any associated changes to the
GSEs business structure and operations that could result. As
noted above, there are various proposals to reform the housing
finance market in the U.S., 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, including whether the GSEs will continue to exist in their
current form, as well as any effect on the Company’s business
and financial results, are uncertain.
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.
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. We
establish a mortgage repurchase liability related to the various
representations and warranties that reflect management’s
estimate of losses for loans which we have a repurchase
obligation. Our mortgage purchase liability represents
management’s best estimate of the probable loss that we may
expect to incur for the representations and warranties in the
contractual provisions of our sales of mortgage loans. 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. As a result of the uncertainty in the various estimates
underlying the mortgage repurchase liability, there is a range of
losses in excess of the recorded mortgage repurchase liability
that are reasonably possible. The estimate of the range of
possible loss for representations and warranties does not
represent a probable loss, and is based on currently available
information, significant judgment, and a number of assumptions
that are subject to change. If economic conditions and the
housing market do not improve 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
liability.
For more information, refer to the “Risk Management –
Credit 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, liabilities, fines and other
sanctions 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
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Risk Factors (continued)
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 wilful 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 a
significant reduction to net servicing income within mortgage
banking noninterest income.
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 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. In April 2011, we entered into
consent orders with the OCC and the FRB following a joint
interagency horizontal examination of foreclosure processing at
large mortgage servicers, including the Company. These orders
incorporate remedial requirements for identified deficiencies
and require the Company to, among other things, take certain
actions with respect to our mortgage servicing and foreclosure
operations, including submitting various action plans to ensure
that our mortgage servicing and foreclosure operations comply
with legal requirements, regulatory guidance and the consent
orders. As noted above, any increase in our servicing costs from
changes in our foreclosure and other servicing practices,
including resulting from the consent orders, negatively affects
the fair value of our MSRs.
The consent orders did not provide for civil money
penalties but both government entities reserved the ability to
seek such penalties. On February 9, 2012, the OCC and the FRB
announced that they had also imposed civil money penalties of
$83 million and $85 million, respectively, related to the consent
orders. These penalties will be satisfied through payments made
under a separate simultaneous settlement in principle,
announced on the same day, among the Department of Justice, a
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task force of Attorneys General from 49 states, other government
entities, the Company and four other mortgage servicers related
to mortgage servicing and foreclosure practices. Under the
settlement in principle, which is subject to the execution of a
definitive agreement and court approval, the Company agreed to
certain commitments totaling $5.3 billion involving, among
other things, a commitment to provide $3.4 billion in aggregate
consumer relief and assistance programs for qualified borrowers,
including expanded first and second lien mortgage modifications
that broaden the use of principal reduction to help customers
achieve affordability, an expanded short sale program that
includes waivers of deficiency balances, forgiveness of arrearages
for unemployed borrowers, cash-for-keys payments to borrowers
who voluntarily vacate properties, and “anti-blight” provisions
designed to reduce the impact on communities of vacant
properties, and an expanded first-lien refinance program
commitment estimated to provide $900 million of aggregate
payment relief to qualified borrowers over the life of the
refinanced loans. In addition, the Company will be required to
implement comprehensive servicing standards. As part of the
settlement in principle, the Company was released from claims
and allegations relating to servicing, modification and
foreclosure practices; however, the settlement does not release
the Company from any claims arising out of securitization
activities, including representations made to investors respecting
mortgage-backed securities; criminal claims; repurchase
demands from the GSEs; and inquiries into MERS, among other
items. Government agencies continue investigations of whether
the Company may have violated fair lending or other laws and
regulations relating to mortgage origination practices and
whether the Company’s offering statements included adequate
disclosure of the risks associated with mortgage-backed
securities. These investigations, as well as any investigations or
litigation relating to any of the Company’s mortgage servicing
and foreclosure practices that are not covered or released by the
settlement in principle or definitive agreement, could result in
material fines, penalties, equitable remedies, or other
enforcement actions. The Company’s payment and other
customer relief obligations under the settlement in principle
were accrued for or otherwise considered in our allowance for
credit losses and in the nonaccretable difference relating to our
purchased-credit-impaired residential mortgage portfolio as of
December 31, 2011, and, therefore, are not expected to have a
material adverse effect on our financial results. However, there
can be no assurance that the settlement will not result in
unexpected costs or developments that could materially
adversely affect our mortgage business and/or our financial
results. For example, we may be required to pay additional
amounts under the settlement if we fail to satisfy our
commitment requirements in a timely manner. Furthermore,
there can be no assurance as to when or whether a definitive
agreement regarding the settlement will be reached and finalized
or that it will be on terms consistent with the settlement in
principle.
For more information, refer to the “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 and Note 14 (Guarantees) and Note 15 (Legal Actions) to
Financial Statements in this Report.
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, although we do not have an additional risk
of repurchase loss associated with claim amounts for loans sold
to third-party investors. 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. For example, in October
2011, PMI Mortgage Insurance Co. (PMI), one of our providers of
mortgage insurance, was seized by its regulator. We previously
utilized PMI to provide mortgage insurance on certain loans
originated and held in our portfolio and on loans originated and
sold to third-party investors. We also hold a small amount of
residential MBS, which are backed by mortgages with a limited
amount of insurance provided by PMI. PMI has announced that
it will pay 50% of insurance claim amounts in cash with the rest
deferred. Although we do not expect PMI’s situation to have a
material adverse effect on our financial results because of the
limited amount of loans and securities held in our portfolios with
PMI insurance support, we cannot be certain that any such
future events involving one of our other mortgage insurance
company providers will not materially adversely affect our
mortgage business and/or financial results. 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– Liability for Mortgage
Loan Repurchase Losses” sections in this Report.
OPERATIONAL AND LEGAL RISK
A failure in or breach of our operational or security
systems or infrastructure, or those of our third party
vendors and other service providers, including as a
result of cyber attacks, could disrupt our businesses,
result in the disclosure or misuse of confidential or
proprietary information, damage our reputation,
increase our costs and cause losses. As a large financial
institution that serves over 70 million customers through over
9,000 stores, 12,000 ATMs, the Internet and other distribution
channels across the U.S. and internationally, we depend on our
ability to process, record and monitor a large number of
customer transactions on a continuous basis. As our customer
base and locations have expanded throughout the U.S. and
internationally, and as customer, public and regulatory
expectations regarding operational and information security
have increased, our operational systems and infrastructure must
continue to be safeguarded and monitored for potential failures,
disruptions and breakdowns. Our business, financial,
accounting, data processing systems or other operating systems
and facilities may stop operating properly or become disabled or
damaged as a result of a number of factors including events that
are wholly or partially beyond our control. For example, there
could be sudden increases in customer transaction volume;
electrical or telecommunications outages; natural disasters such
as earthquakes, tornados, and hurricanes; disease pandemics;
events arising from local or larger scale political or social
matters, including terrorist acts; and, as described below, cyber
attacks. Although we have business continuity plans and other
safeguards in place, our business operations may be adversely
affected by significant and widespread disruption to our physical
infrastructure or operating systems that support our businesses
and customers.
Information security risks for large financial institutions such
as Wells Fargo have generally increased in recent years in part
because of the proliferation of new technologies, the use of the
Internet and telecommunications technologies to conduct
financial transactions, and the increased sophistication and
activities of organized crime, hackers, terrorists, activists, and
other external parties. Those parties also may attempt to
fraudulently induce employees, customers, or other users of our
systems to disclose confidential information in order to gain
access to our data or that of our customers. As noted above, our
operations rely on the secure processing, transmission and
storage of confidential information in our computer systems and
networks. Our banking, brokerage, investment advisory, and
capital markets businesses rely on our digital technologies,
computer and email systems, software, and networks to conduct
their operations. In addition, to access our products and services,
our customers may use personal smartphones, tablet PC’s, and
other mobile devices that are beyond our control systems.
Although we believe we have robust information security
procedures and controls, our technologies, systems, networks,
and our customers’ devices may become the target of cyber
attacks or information security breaches that could result in the
unauthorized release, gathering, monitoring, misuse, loss or
destruction of Wells Fargo’s or our customers’ confidential,
proprietary and other information, or otherwise disrupt Wells
Fargo’s or its customers’ or other third parties’ business
operations.
Third parties with which we do business or that facilitate our
business activities, including exchanges, clearing houses,
financial intermediaries or vendors that provide services or
security solutions for our operations, could also be sources of
operational and information security risk to us, including from
breakdowns or failures of their own systems or capacity
constraints.
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Risk Factors (continued)
Although to date we have not experienced any material losses
relating to cyber attacks or other information security breaches,
there can be no assurance that we will not suffer such losses in
the future. Our risk and exposure to these matters remains
heightened because of, among other things, the evolving nature
of these threats, the prominent size and scale of Wells Fargo and
its role in the financial services industry, our plans to continue to
implement our Internet banking and mobile banking channel
strategies and develop additional remote connectivity solutions
to serve our customers when and how they want to be served, our
expanded geographic footprint and international presence, the
outsourcing of some of our business operations, the continued
uncertain global economic environment, and the remaining
system and customer account conversions associated with our
integration of Wachovia expected to be completed in first quarter
2012. As a result, cybersecurity and the continued development
and enhancement of our controls, processes and practices
designed to protect our systems, computers, software, data and
networks from attack, damage or unauthorized access remain a
priority for Wells Fargo. As cyber threats continue to evolve, we
may be required to expend significant additional resources to
continue to modify or enhance our protective measures or to
investigate and remediate any information security
vulnerabilities.
Disruptions or failures in the physical infrastructure or
operating systems that support our businesses and customers, or
cyber attacks or security breaches of the networks, systems or
devices that our customers use to access our products and
services could result in customer attrition, financial losses, the
inability of our customers to transact business with us, violations
of applicable privacy and other laws, regulatory fines, penalties
or intervention, reputational damage, reimbursement or other
compensation costs, and/or additional compliance costs, any of
which could materially adversely affect our results of operations
or financial condition.
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. For example, the recent financial and credit crisis and
resulting regulatory reform highlighted both the importance and
some of the limitations of managing unanticipated risks. If our
risk management framework proves ineffective, we could suffer
unexpected losses which could materially adversely affect our
results of operations or financial condition.
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
108
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 as described below
and could restrict the ability of institutional investment
managers to invest in our securities.
Negative publicity, including as a result of protests,
could damage our reputation and business. Reputation
risk, or the risk to our business, earnings and capital from
negative public opinion, is inherent in our business and
increased substantially because of the financial crisis and the
increase in our size and profile in the financial services industry
following our acquisition of Wachovia. The reputation of the
financial services industry in general has been damaged as a
result of the financial crisis and other matters affecting the
financial services industry, and negative public opinion about the
financial services industry generally or Wells Fargo specifically
could adversely affect our ability to keep and attract customers.
Negative public opinion could result from our actual or alleged
conduct in any number of activities, including mortgage lending
practices, servicing and foreclosure activities, 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 or other 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 and also could negatively affect
our “cross-sell” strategy. The proliferation of social media
websites utilized by Wells Fargo and other third parties, as well
as the personal use of social media by our team members and
others, including personal blogs and social network profiles, also
may increase the risk that negative, inappropriate or
unauthorized information may be posted or released publicly
that could harm our reputation or have other negative
consequences, including as a result of our team members
interacting with our customers in an unauthorized manner in
various social media outlets.
During the past several months, Wells Fargo and other
financial institutions have been the targets of numerous protests
throughout the U.S., such as the “Occupy Wall Street” protests
and other movements designed to cause customers to close their
accounts with large financial institutions. These protests have
included disrupting the operation of our retail banking stores
and have resulted in negative public commentary about financial
institutions, including the fees charged for various products and
services. There can be no assurance that continued protests and
negative publicity for the Company or large financial institutions
generally will not harm our reputation and adversely affect our
business and financial results.
Risks Relating to Legal Proceedings. Wells Fargo and some
of its subsidiaries are involved in judicial, regulatory and
arbitration proceedings or investigations 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 15 (Legal Actions) to
Financial Statements in this Report.
RISKS RELATED TO OUR INDUSTRY’S COMPETITIVE
OPERATING ENVIRONMENT
We face significant and increasing competition in the
rapidly evolving financial services industry. We compete
with other financial institutions in a highly competitive industry
that is undergoing significant changes as a result of financial
regulatory reform and increased public scrutiny stemming from
the recent financial crisis and continued challenging economic
conditions. Wells Fargo generally competes on the basis of the
quality of our customer service, the wide variety of products and
services that we can offer our customers and the ability of those
products and services to satisfy our customers’ needs, the pricing
of our products and services, the extensive distribution channels
available for our customers, our innovation, and our reputation.
Continued and increased competition in any one or all of these
areas may negatively affect our market share and results of
operations and/or cause us to increase our capital investment in
our businesses in order to remain competitive. Given the current
economic, regulatory, and political environment for large
financial institutions such as Wells Fargo, as well as increased
public protest movements and negative publicity, there is
increased competitive pressure to provide products and services
at current or lower prices. Consequently, our ability to reposition
or reprice our products and services from time to time may be
limited and could be influenced significantly by the actions of our
competitors who may or may not charge similar fees for their
products and services. Any changes in the types of products and
services that we offer our customers and/or the pricing for those
products and services could result in a loss of customers and
market share and could materially adversely affect our results of
operations.
Continued technological advances and the growth of e-
commerce have made it possible for non-depository institutions
to offer products and services that traditionally were banking
products, and for financial institutions and other companies to
provide electronic and internet-based financial solutions,
including electronic payment solutions. We may not respond
effectively to these competitive threats from existing and new
competitors and may be forced to increase our investment in our
business to modify or adapt our existing products and services or
develop new products and services to respond to our customers’
needs.
Our “cross-selling” efforts to increase the number of
products our customers buy from us and offer them all
of the financial products that fulfill their needs is a key
part of our growth strategy, and our failure to execute
this strategy effectively could have a material adverse
effect on our revenue growth and financial results.
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 especially during the current
environment of slow economic growth and regulatory reform
initiatives. 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. Our cross-sell strategy also is
dependent on earning more business from our Wachovia
customers, and 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.
Our ability to attract and retain qualified team
members is critical to the success of our business and
failure to do so could adversely affect our business
performance, competitive position and future
prospects. The success of Wells Fargo is heavily dependent on
the talents and efforts of our team members, and in many areas
of our business, including the commercial banking, brokerage,
investment advisory, and capital markets businesses, the
competition for highly qualified personnel is intense. In order to
attract and retain highly qualified team members, we must
provide competitive compensation. As a large financial
institution we may be subject to limitations on compensation by
our regulators that may adversely affect our ability to attract and
retain these qualified team members. Some of our competitors
may not be subject to these same compensation limitations,
which may further negatively affect our ability to attract and
retain highly qualified team members.
RISKS RELATED TO OUR FINANCIAL STATEMENTS
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
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Risk Factors (continued)
understanding our financial results and condition. As described
below, some of these policies require use of estimates and
assumptions that may affect the value of our assets or liabilities
and financial results. Any changes in our accounting policies
could materially affect our financial statements.
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, and our financial
statements depend on our internal controls over
financial reporting. 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 for mortgage repurchases, reserves related to
litigation and the fair value of certain assets and liabilities,
among other items. 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. 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.
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) requires
our management to evaluate the Company’s disclosure controls
110
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 controls. We cannot assure that we
will not identify one or more material weaknesses as of the end of
any given quarter or year, nor can we predict the effect on our
stock price of disclosure of a material weakness. Sarbanes-Oxley
also 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 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.
RISKS RELATED TO ACQUISITIONS
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.
When we do announce an acquisition, our stock price may fall
depending on the size of the acquisition, the type of business to
be acquired, the purchase price, and the potential dilution to
existing stockholders or our earnings per share if we issue
common stock in connection with the acquisition.
We generally must receive federal regulatory approvals before
we can acquire a bank, bank holding company or certain other
financial services businesses depending on the size of the
financial services business to be acquired. In deciding whether to
approve a proposed acquisition, federal bank regulators will
consider, among other factors, the effect of the acquisition on
competition and the risk to the stability of the U.S. banking or
financial system, our 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. As a result of the
Dodd-Frank Act and concerns regarding the large size of
financial institutions such as Wells Fargo, the regulatory process
for approving acquisitions has become more complex and
regulatory approvals may be more difficult to obtain. 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 or assets
or issue additional equity as a condition to receiving regulatory
approval for an acquisition. In addition, federal bank regulations
prohibit FRB regulatory approval of any transaction that would
create an institution holding more than 10% of total U.S. insured
deposits, or of any transaction (whether or not subject to FRB
approval) that would create a financial company with more than
10% of the liabilities of all financial companies in the U.S. We are
approaching the deposit cap, which may limit our bank
acquisition opportunities in the future.
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, loss of key team members, disruption
of our business or the business of the acquired company, or
otherwise harm our ability to retain customers and team
members 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. Many of the foregoing risks may be increased if the
acquired company operates internationally or in a geographic
location where we do not already have significant business
operations and/or team members.
* * *
Any factor described in this Report or in any of our other
SEC filings 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 2012 for
material changes to the above discussion of risk factors. There
are factors not discussed above or elsewhere in this Report that
could adversely affect our financial results and condition.
111
Controls and Procedures
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of December 31, 2011, 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, 2011.
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
2011 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, 2011,
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, 2011, 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.
112
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, 2011, 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, 2011, 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, 2011 and 2010, 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, 2011,
and our report dated February 28, 2012, expressed an unqualified opinion on those consolidated financial statements.
San Francisco, California
February 28, 2012
113
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 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 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,
2011
2010
2009
$
1,440
8,475
1,644
58
37,247
548
49,412
2,275
80
3,978
316
6,649
42,763
7,899
34,864
4,280
11,304
3,653
4,193
7,832
1,960
1,014
54
1,482
524
1,889
38,185
14,462
8,857
4,348
2,283
3,011
1,880
1,266
13,286
49,393
23,656
7,445
16,211
342
$
15,869
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
844
730
15,025
11,632
$
$
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
2.85
2.82
0.48
5,278.1
5,323.4
2.23
2.21
0.20
5,226.8
5,263.1
1.76
1.75
0.49
4,545.2
4,562.7
(1) Total other-than-temporary impairment (OTTI) losses (gains) were $349 million, $500 million and $2,352 million for the year ended December 31, 2011, 2010 and 2009,
respectively. Of total OTTI, $423 million, $672 million and $1,012 million were recognized in earnings, and $(74) million, $(172) million and $1,340 million were recognized
as non-credit related OTTI in other comprehensive income for the year ended December 31, 2011, 2010 and 2009, respectively.
(2) Includes OTTI losses of $288 million, $268 million and $655 million for the year ended December 31, 2011, 2010 and 2009, respectively.
The accompanying notes are an integral part of these statements.
114
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 $44,791 and $47,531 carried at fair value)
Loans held for sale (includes $1,176 and $873 carried at fair value)
Loans (includes $5,916 and $309 carried at fair value)
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 $0 and $306 carried at fair value)
Total liabilities (2)
Equity
Wells Fargo stockholders' equity:
Preferred stock
Common stock – $1-2/3 par value, authorized 9,000,000,000 shares;
issued 5,358,522,061 shares and 5,272,414,622 shares
Additional paid-in capital
Retained earnings
Cumulative other comprehensive income
Treasury stock – 95,910,425 shares and 10,131,394 shares
Unearned ESOP shares
Total Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
December 31,
2011
2010
$
19,440
44,367
77,814
222,613
48,357
1,338
16,044
80,637
51,414
172,654
51,763
1,290
769,631
(19,372)
757,267
(23,022)
750,259
734,245
12,603
14,467
1,408
9,531
25,115
101,022
1,419
9,644
24,770
99,781
$
1,313,867
1,258,128
$
244,003
676,067
191,256
656,686
920,070
847,942
49,091
77,665
125,354
55,401
69,913
156,983
1,172,180
1,130,239
11,431
8,689
8,931
55,957
64,385
3,207
(2,744)
(926)
8,787
53,426
51,918
4,738
(487)
(663)
140,241
126,408
1,446
1,481
141,687
127,889
Total liabilities and equity
$
1,313,867
1,258,128
(1) Our consolidated assets at December 31, 2011 and 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, $321 million and $200 million; Trading assets, $293 million and $143 million; Securities available for sale,
$3.3 billion and $2.2 billion; Mortgages held for sale, $444 million and $634 million; Net loans, $12.0 billion and $16.7 billion; Other assets, $1.9 billion and $2.1 billion; and
Total assets, $18.2 billion and $21.9 billion.
(2) Our consolidated liabilities at December 31, 2011 and at December 31, 2010, include the following VIE liabilities for which the VIE creditors do not have recourse to Wells
Fargo: Short-term borrowings, $24 million and $7 million; Accrued expenses and other liabilities, $175 million and $98 million; Long-term debt, $4.9 billion and $8.3 billion;
and Total liabilities, $5.1 billion and $8.4 billion.
The accompanying notes are an integral part of these statements.
115
Wells Fargo & Company and Subsidiaries
Consolidated Statement of Changes in Equity and Comprehensive Income
Preferred stock
Common stock
Shares
Amount
Shares
Amount
10,111,821 $
31,332
4,228,630,889 $
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)
(22,847)
949,993,704
9,980,940
9,980,940
$
8,485
8,485
5,178,624,593 $
5,178,624,593
1,470
8,743
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
10,185,303
$
8,689
5,262,283,228
$
8,787
(in millions, except shares)
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
Defined benefit plans adjustment
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
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
Defined benefit plans adjustment
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
Balance December 31, 2010
The accompanying notes are an integral part of these statements.
(continued on following pages)
116
Additional
paid-in
capital
36,026
Retained
earnings
36,543
Cumulative
other
comprehensive
income
(6,869)
Treasury
stock
(4,666)
Unearned
ESOP
shares
(555)
Total
Wells Fargo
stockholders'
equity
99,084
Noncontrolling
interests
3,232
Total
equity
102,316
Wells Fargo stockholders' equity
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
(3,716)
32,310
1,440
(79)
19,111
(7)
(54)
18
245
(106)
20,568
52,878
52,878
80
(63)
212
(545)
4
97
436
(48)
548
53,426
73
9,806
(221)
273
9,931
3,009
3,009
45
1,525
89
70
(898)
(2,125)
(4,285)
4,967
41,563
41,563
183
(28)
12,362
2,293
(220)
160
(17)
2,216
(2,450)
(2,450)
113
113
(442)
(442)
1,349
(91)
567
(1,080)
859
375
(376)
(1,049)
(737)
10,355
51,918
1,729
4,738
138
1,963
(487)
(221)
(663)
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
111,786
183
(28)
(7)
5
66
9,811
(221)
273
390
22,596
(4,500)
(265)
(4,375)
2,573
2,573
(3,060)
(344)
21,976
(220)
(25,000)
106
-
(2,125)
(2,026)
18
245
(123)
12,043
114,359
114,359
183
(28)
12,362
301
12,663
45
1,525
89
70
14,091
-
1,375
(91)
-
796
-
(545)
(1,045)
(737)
97
436
90
14,622
126,408
12
13
326
(1,418)
(1,092)
1,481
57
1,538
89
70
14,417
(1,418)
1,375
(91)
-
796
-
(545)
(1,045)
(737)
97
436
90
13,530
127,889
117
(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, 2010
10,185,303
$
8,689
5,262,283,228
$
8,787
Balance January 1, 2011
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Translation adjustments
Net unrealized losses on securities available for sale
Net unrealized losses on derivatives and hedging activities
Defined benefit plans adjustment
Total comprehensive income
Noncontrolling interests
Common stock issued
Common stock repurchased (1)
Preferred stock issued to ESOP
Preferred stock released by ESOP
Preferred stock converted to common shares
Common stock warrants repurchased
Preferred stock issued
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
10,185,303
8,689
5,262,283,228
8,787
1,200,000
1,200
52,906,564
(85,779,031)
88
(959,623)
(959)
33,200,875
56
25,010
2,501
265,387
2,742
328,408
144
Balance December 31, 2011
10,450,690
$
11,431
5,262,611,636
$
8,931
(1) Includes $150 million private forward repurchase contract. See Note 1 (Summary of Significant Accounting Policies) for additional information.
The accompanying notes are an integral part of these statements.
118
Additional
paid-in
capital
Retained
earnings
Cumulative
other
comprehensive
income
Treasury
stock
Unearned
ESOP
shares
Total
Wells Fargo
stockholders'
equity
Noncontrolling
interests
Total
equity
Wells Fargo stockholders' equity
53,426
51,918
4,738
(487)
(663)
126,408
1,481
127,889
53,426
51,918
4,738
(487)
(663)
126,408
1,481
127,889
15,869
15,869
342
16,211
(22)
(653)
(249)
(607)
(2,266)
(1,302)
1,039
9
(37)
1,208
(150)
102
(80)
903
(2)
21
78
529
(41)
(2,558)
(844)
2,531
12,467
(1,531)
(2,257)
(263)
(22)
(653)
(249)
(607)
14,338
(37)
1,296
(2,416)
-
959
-
(2)
2,501
(2,537)
(844)
78
529
(32)
13,833
(2)
(10)
330
(365)
(35)
(24)
(663)
(249)
(607)
14,668
(402)
1,296
(2,416)
-
959
-
(2)
2,501
(2,537)
(844)
78
529
(32)
13,798
55,957
64,385
3,207
(2,744)
(926)
140,241
1,446
141,687
119
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 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 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
Common stock warrants repurchased
Excess tax benefits related to stock option payments
Net change in noncontrolling interests:
Purchase of Prudential's noncontrolling interest
Other
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.
120
2011
Year ended December 31,
2009
2010
$
16,211
12,663
12,667
7,899
(295)
2,208
3,273
959
529
(79)
(345,099)
298,524
(5)
11,833
(11,723)
35,149
3,573
(401)
(362)
(11,529)
3,000
13,665
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
36,270
(39,752)
8,548
23,062
52,618
(121,235)
8,668
47,919
(53,466)
53,038
38,811
(95,285)
(35,686)
15,869
52,240
6,555
(8,878)
9,782
(7,522)
(353)
10,655
(155)
(157)
(35,044)
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
72,128
(6,231)
23,924
11,308
42,473
(69,108)
11,687
(50,555)
3,489
(63,317)
8,396
(66,260)
2,501
-
(844)
1,296
(2,416)
(2,537)
(2)
79
-
(331)
24,775
3,396
16,044
19,440
-
-
(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
7,011
4,875
8,307
1,187
10,978
3,042
$
$
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 diversified financial services
company. We provide banking, insurance, trust and
investments, mortgage banking, investment banking, retail
banking, brokerage, and consumer and commercial 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,” 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 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 17),
liability for mortgage loan repurchase losses (Note 9) and
income taxes (Note 21). Actual results could differ from those
estimates.
Accounting Standards Adopted in 2011
In first quarter 2011, we adopted certain provisions of
Accounting Standards Update (ASU or Update) 2010-6,
Improving Disclosures about Fair Value Measurements.
ASU 2010-06 amends the disclosure requirements for fair
value measurements. Companies are required to disclose
significant transfers in and out of Levels 1 and 2 of the fair value
hierarchy. This Update also clarifies that fair value measurement
disclosures should be presented for each asset and liability class,
which is generally a subset of a line item in the statement of
financial position. 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. 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. In first quarter 2011, we adopted the
requirement for gross presentation in the Level 3 rollforward
with prospective application. The remaining provisions were
effective for us in first quarter 2010. Our adoption of this Update
did not affect our consolidated financial statement results since
it amends only the disclosure requirements for fair value
measurements.
In third quarter 2011, we adopted the following new
accounting guidance:
Certain provisions of ASU 2010-20, Disclosures about the
Credit Quality of Financing Receivables and the Allowance
for Credit Losses; and
ASU 2011-02, A Creditor’s Determination of Whether a
Restructuring is a Troubled Debt Restructuring.
ASU 2010-20 requires enhanced disclosures for the allowance
for credit losses and financing receivables, which include certain
loans and long-term accounts receivables. Companies are
required to disaggregate credit quality information and roll
forward the allowance for credit losses by portfolio segment.
Companies must also provide supplemental information on the
nature and extent of troubled debt restructurings (TDRs) and
their effect on the allowance for credit losses. We adopted the
new disclosure requirements for TDRs in third quarter 2011 with
retrospective application to January 1, 2011. The remaining
provisions were effective for us in fourth quarter 2010. Our
adoption of this Update did not affect our consolidated financial
statement results since it amends only the disclosure
requirements for financing receivables and the allowance for
credit losses.
ASU 2011-02 provides guidance clarifying under what
circumstances a creditor should classify a restructured receivable
as a TDR. A receivable is a TDR if both of the following exist: 1) a
creditor has granted a concession to the debtor, and 2) the
debtor is experiencing financial difficulties. This Update clarifies
that a creditor should consider all aspects of a restructuring
when evaluating whether it has granted a concession, which
include determining whether a debtor can obtain funds from
another source at market rates and assessing the value of
additional collateral and guarantees obtained at the time of
restructuring. This Update also provides factors a creditor
should consider when determining if a debtor is experiencing
financial difficulties, such as probability of payment default and
bankruptcy declarations. This guidance was effective for us in
third quarter 2011 with retrospective application to
January 1, 2011. Our adoption of this Update did not have a
material effect on our consolidated financial statements.
In fourth quarter 2011, we early adopted ASU 2011-08,
Testing Goodwill for Impairment.
121
Note 1: Summary of Significant Accounting Policies (continued)
ASU 2011-08 provides entities with the option to perform a
qualitative assessment of goodwill to test for impairment. If,
based on qualitative reviews, a company concludes that more
likely than not a reporting unit’s fair value is less than its
carrying amount, then the company must complete quantitative
steps to determine if there is goodwill impairment. If a company
concludes otherwise, quantitative tests are not required. Our
adoption of this Update did not affect our consolidated financial
statements.
Accounting Standards with Retrospective Application
The following accounting pronouncements have been issued by
the FASB but are not yet effective:
Accounting Standards Update (ASU or Update) 2011-11,
Disclosures about Offsetting Assets and Liabilities;
ASU 2011-05, Presentation of Comprehensive Income; and
ASU 2011-12, Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05.
ASU 2011-11 expands the disclosure requirements for financial
instruments and derivatives that may be offset in accordance
with enforceable master netting agreements or similar
arrangements. The disclosures are required regardless of
whether the instruments have been offset (or netted) in the
statement of financial position. Under ASU 2011-11, companies
must describe the nature of offsetting arrangements and provide
quantitative information about those agreements, including the
gross and net amounts of financial instruments that are
recognized in the statement of financial position. These changes
are effective for us in first quarter 2013 with retrospective
application. This Update will not affect our consolidated
financial results since it amends only the disclosure
requirements for offsetting financial instruments.
ASU 2011-05 eliminates the option for companies to include
the components of other comprehensive income in the statement
of changes in stockholders’ equity. This Update requires entities
to present the components of comprehensive income in either a
single statement or in two separate statements, with the
statement of other comprehensive income (OCI) immediately
following the statement of income. This Update also requires
companies to present amounts reclassified out of OCI and into
net income on the face of the statement of income. In December
2011, the FASB issued ASU 2011-12, which defers indefinitely
the requirement to present reclassification adjustments on the
statement of income. The remaining provisions are effective for
us in first quarter 2012 with retrospective application. Early
adoption is permitted. This Update will not affect our
consolidated financial results as it amends only the presentation
of comprehensive income.
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.
122
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 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.
Cash and Due From Banks
Cash and cash equivalents include cash on hand, cash items in
transit, and amounts due from the Federal Reserve Bank and
other depository institutions.
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 17 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
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.
OTTI write-downs of PPS are recognized in earnings equal to the
difference between the cost basis and fair value of the security.
Based upon the factors considered in our OTTI evaluation, we
believe our investments in PPS currently rated investment grade
will be fully realized and, accordingly, have not recognized OTTI
on such securities.
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.
123
Note 1: Summary of Significant Accounting Policies (continued)
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
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. In addition, we invest in
certain equity securities held by our subsidiaries that meet the
definition of an investment company (principal investments)
and, therefore, are recorded at fair value with realized and
unrealized gains and losses included in gains and losses from
equity investments in noninterest income.
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 17). 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
124
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. 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.
Our loans are considered past due when contractually
required principal or interest payments have not been made on
the due dates.
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.
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;
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. This evaluation
is generally based on delinquency information, an assessment of
the borrower’s financial condition and the adequacy of collateral,
if any. Our impaired loans predominantly include loans on
nonaccrual status for commercial and industrial, commercial
real estate (CRE), foreign loans and any 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 estimated 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.
125
Note 1: Summary of Significant Accounting Policies (continued)
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
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, including loans in trial
payment periods (trial modifications), are considered impaired
loans.
PURCHASED CREDIT-IMPAIRED (PCI) LOANS Loans acquired
with evidence of credit deterioration since their origination and
where it is probable that we will not collect all contractually
required principal and interest payments are accounted for using
the measurement provision for PCI loans. PCI loans are recorded
at fair value at the date of acquisition, and 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
126
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. We include these TDRs in
our impaired loans.
FORECLOSED ASSETS Foreclosed assets obtained through our
lending activities primarily include real estate. Generally, loans
have been written down to their net realizable value prior to
foreclosure. Any further reduction to their net realizable value is
recorded 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 (allowance), 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. It considers both
unimpaired and impaired loans and is developed and
documented at the loan portfolio segment level – commercial
and consumer.
Unimpaired loans are generally evaluated on a collective
basis by utilizing risk grades for the commercial loan portfolio
segment and loss estimates for pools of loans with similar risk
characteristics for the consumer loan portfolio segment.
Impaired loans are evaluated on an individual loan basis and
predominantly include loans on nonaccrual status for
commercial and industrial, commercial real estate, foreign loans
and any loans modified in a TDR, on both accrual and
nonaccrual status. Commercial and consumer PCI loans may
require an allowance subsequent to their acquisition 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 each portfolio segment includes an
amount for imprecision or uncertainty that may change from
period to period. This imprecision amount represents
management’s judgment of risks inherent in the evaluation
processes and assumptions used in establishing the allowance.
While our methodology attributes portions of the allowance to
the specific portfolio segments, the entire allowance is available
to absorb credit losses inherent in the total loan portfolio and
unfunded credit commitments. No single statistic or
measurement determines the adequacy of the allowance for
credit losses.
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
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 noninterest 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 rates, 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 and our valuation
estimates are periodically benchmarked to independent
appraisals.
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
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 initially perform a
qualitative assessment of goodwill to test for impairment. If,
based on our qualitative review, we conclude that more likely
than not a reporting unit’s fair value is less than its carrying
amount, then we complete quantitative steps as described below
to determine if there is goodwill impairment. If we conclude that
127
Note 1: Summary of Significant Accounting Policies (continued)
a reporting unit fair value is not less than its carrying amount,
quantitative tests are not required. 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 quantitative valuation methodologies when
required 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, an additional 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
estimated useful life, considering the estimated residual value of
the leased asset. The useful life may be adjusted to the term of
the lease depending on our plans for the asset after the lease
term. 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
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. Our loan sale contracts to
128
private investors (non-GSE) typically contain an additional
provision where we would only be required to repurchase
securitized loans if a breach is deemed to have a material and
adverse effect on the value of the mortgage loan or to the
investors or interests of 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 a repurchase obligation, whether or not we currently
service those loans, based on a combination of factors. Such
factors include default expectations, expected investor
repurchase demands (influenced by current and expected
mortgage loan file requests and mortgage insurance rescissions
notices, as well as estimated demand to default and file request
relationships) 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 and
there is often a lag from the date of default to the time we receive
a repurchase demand, the majority of repurchase demands occur
on loans that default 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 20.
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.” 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.
Stock-Based Compensation
We have stock-based employee compensation plans as more
fully discussed in Note 19. 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 elect to discontinue the
designation of a derivative as a hedge.
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.
Private Share Repurchases
In December 2011, we entered into a private forward repurchase
contract with an unrelated third party. This contract settled for
approximately 6 million shares of our common stock in first
quarter 2012. We also entered into a similar contract in
August 2011, which settled in November 2011 for approximately
6 million shares of our common stock. These contracts met
accounting requirements to be treated as permanent equity
transactions. We entered into these contracts to complement our
open-market common stock repurchase strategies, to allow us to
manage our share repurchases in a manner consistent with our
2011 Federal Reserve Board (FRB) Comprehensive Capital
Analysis and Review plan (capital plan), and to provide an
economic benefit to the Company. In connection with each
contract, we paid $150 million to the counterparty, which was
recorded in permanent equity and was not subject to re-
129
Note 1: Summary of Significant Accounting Policies (continued)
measurement. These up-front payments received permanent
equity treatment in the quarter paid and thus assured
appropriate repurchase timing, consistent with our 2011 capital
plan which contemplated a fixed dollar amount available per
quarter for share repurchases pursuant to FRB supervisory
guidance. In return, the counterparty agreed to deliver a variable
number of shares based on a per share discount to the volume-
weighted average stock price over the contract period. The
counterparty had the right to accelerate settlement with delivery
of shares prior to the contractual settlement. There were no
scenarios where the contracts would not either physically settle
in shares or allow us to choose the settlement method.
SUPPLEMENTAL CASH FLOW INFORMATION Noncash activities are presented below, including information on transfers affecting
MHFS, LHFS and MSRs.
Year ended December 31,
2011
2010
2009
$
47
2,822
-
3,476
61,599
19,815
4,089
224
6,305
129
9,315
-
7
(599)
-
-
4,570
262
230
1,313
8,699
155
(7,590)
26,117
212
5,127
(628)
13,613
-
-
-
-
5,483
5,425
(32)
-
440
345
-
-
854
(258)
2,993
6,287
162
144
(111)
7,604
-
-
-
-
-
-
-
2,299
-
-
-
-
(in millions)
Transfers from trading assets to securities available for sale
Transfers from (to) loans to (from) securities available for sale
Trading assets retained from securitization of MHFS
Capitalization of MSRs from sale of MHFS
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
Decrease in noncontrolling interests due to deconsolidation of subsidiaries
Transfer from noncontrolling interests to long-term debt
Consolidation of reverse mortgages previously sold:
Loans
Long-term debt
SUBSEQUENT EVENTS We have evaluated the effects of
subsequent events that have occurred subsequent to period end
December 31, 2011, and there have been no material events that
would require recognition in our 2011 consolidated financial
statements or disclosure in the Notes to the financial statements,
except as discussed in Note 15 (Legal Actions) for the
announcement on February 9, 2012, of an agreement with state
attorneys and federal agencies regarding mortgage servicing,
foreclosures and origination issues.
130
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 contingent consideration related to acquisitions,
which is considered to be a guarantee, see Note 14.
(in millions)
2011
CP Equity, LLC, Denver, Colorado
Certain assets of Foreign Currency Exchange Corp, Orlando, Florida
LaCrosse Holdings, LLC, Minneapolis, Minnesota
Other (1)
2010
Certain assets of GMAC Commercial Finance, LLC, New York, New York
Other (2)
2009
Capital TempFunds, Fort Lauderdale, Florida
Other (3)
(1) Consists of seven acquisitions of insurance brokerage businesses.
(2) Consists of five acquisitions of insurance brokerage businesses.
(3) Consists of eight acquisitions of insurance brokerage businesses.
Business combinations completed in 2011, 2010 and 2009
are presented below. At December 31, 2011, we had two
acquisitions pending, both of which are expected to close during
first quarter 2012 with combined total assets of approximately
$835 million.
Date
Assets
July 1
$
August 1
November 30
Various
389
46
116
37
$
588
April 30
$
Various
$
$
March 2
Various
430
40
470
74
39
$
113
131
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 $7.0 billion in 2011 and $6.0 billion in 2010.
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 26.
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 $0.6 billion at
December 31, 2011, 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, 2011, our nonbank
subsidiaries could have declared additional dividends of
$5.7 billion at December 31, 2011, 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 $0.12 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. In
December 2011, the FRB finalized rules under 12 CFR Part 225,
Regulation Y requiring large bank holding companies (BHCs) to
submit capital plans annually and to obtain regulatory approval
before making capital distributions including share dividend
increases or share repurchases. The rule requires updates to
capital plans in the event of material changes in a BHC’s risk
profile, including as a result of any significant acquisitions. The
Company submitted its board-approved 2012 capital plan to the
FRB on January 6, 2012.
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, and other short-
term investments.
(in millions)
Federal funds sold and securities
December 31,
2011
2010
purchased under resale agreements
$
24,255
Interest-earning deposits
Other short-term investments
18,917
1,195
24,880
53,433
2,324
Total
$
44,367
80,637
We receive collateral from other entities under resale
agreements and securities borrowings. For additional
information, see Note 14.
132
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.
There were no securities classified as held to maturity as of the
periods presented.
(in millions)
December 31, 2011
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
$
6,920
32,307
59
1,169
(11)
(883)
6,968
32,593
Mortgage-backed securities:
Federal agencies
Residential
Commercial
92,279
16,997
17,829
4,485
1,253
1,249
(10)
96,754
(414)
(928)
17,836
18,150
Total mortgage-backed securities
127,105
6,987
(1,352)
132,740
Corporate debt securities
Collateralized debt obligations (1)
Other (2)
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total (3)
December 31, 2010
17,921
8,650
19,739
769
298
378
(286)
(349)
(225)
18,404
8,599
19,892
212,642
9,660
(3,106)
219,196
2,396
533
2,929
185
366
551
(54)
(9)
2,527
890
(63)
3,417
$
215,571
10,211
(3,169)
222,613
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
Total mortgage-backed securities
Corporate debt securities
Collateralized debt obligations (1)
Other (2)
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total (3)
78,578
18,294
12,990
3,555
2,398
1,199
(96)
(489)
(635)
82,037
20,203
13,554
109,862
7,152
(1,220)
115,794
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
4,258
1,021
(89)
(1)
(90)
3,832
1,357
5,189
$
164,329
11,036
(2,711)
172,654
(1) Includes collateralized loan obligations with both a cost basis and fair value of $8.1 billion, at December 31, 2011, and $4.0 billion and $4.2 billion, respectively, at
December 31, 2010.
(2) 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 $6.7 billion each at
December 31, 2011, and $6.2 billion and $6.4 billion, respectively, at December 31, 2010. Also included in the "Other" category are asset-backed securities collateralized by
home equity loans with a cost basis and fair value of $846 million and $932 million, respectively, at December 31, 2011, and $927 million and $1.1 billion, respectively, at
December 31, 2010. The remaining balances primarily include asset-backed securities collateralized by credit cards and student loans.
(3) At December 31, 2011 and 2010, 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.
133
Note 5: Securities Available for Sale (continued)
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 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, 2011
Less than 12 months
12 months or more
Gross
Gross
Gross
unrealized
Fair
unrealized
Fair
unrealized
losses
value
losses
value
losses
Total
Fair
value
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
$
(11)
(229)
5,473
8,501
-
(654)
-
4,348
(11)
(883)
5,473
12,849
Mortgage-backed securities:
Federal agencies
Residential
Commercial
(7)
2,392
(80)
3,780
(157)
3,183
(3)
(334)
(771)
627
3,440
3,964
(10)
(414)
(928)
3,019
7,220
7,147
Total mortgage-backed securities
(244)
9,355
(1,108)
8,031
(1,352)
17,386
Corporate debt securities
Collateralized debt obligations
Other
(205)
(150)
8,107
4,268
(55)
3,002
(81)
(199)
(170)
167
613
841
(286)
(349)
(225)
8,274
4,881
3,843
Total debt securities
(894)
38,706
(2,212)
14,000
(3,106)
52,706
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
Total
December 31, 2010
(13)
(9)
(22)
316
61
377
(41)
-
(41)
530
-
530
(54)
(9)
(63)
846
61
907
$
(916)
39,083
(2,253)
14,530
(3,169)
53,613
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
Total debt securities
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
Total marketable equity securities
(10)
(13)
(13)
477
679
1,985
(27)
(216)
(270)
157
456
757
(37)
(229)
(283)
634
1,135
2,742
(512)
19,494
(2,109)
13,731
(2,621)
33,225
(41)
-
(41)
962
-
962
(48)
(1)
(49)
467
7
474
(89)
(1)
1,429
7
(90)
1,436
Total
$
(553)
20,456
(2,158)
14,205
(2,711)
34,661
134
We do not have the intent to sell any securities included in the
previous table. 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 with gross unrealized losses 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.
Some of these securities are guaranteed by a bond insurer, but
we did not rely on this guarantee in making our 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 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 by estimating the present value of expected cash
flows. The key assumptions for determining expected cash flows
include default rates, loss 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 and the credit
enhancement level of the securities, 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
unsecured debt obligations issued by various corporations. We
evaluate the financial performance of each 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 amortized 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
unrealized losses are primarily driven by changes in projected
collateral losses, credit spreads and interest rates. We assess for
credit impairment by estimating the present value of expected
cash flows. The key assumptions for determining expected cash
flows include default rates, loss 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 and the credit
enhancement level of the securities, 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. The losses are primarily driven by changes in
projected collateral losses, credit spreads and interest rates. We
assess for credit impairment by estimating the present value of
expected cash flows. The key assumptions for determining
expected cash flows include default rates, loss severities and
prepayment rates. Based upon our assessment of the expected
credit losses and the credit enhancement level of the securities,
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.
OTHER SECURITIES AVAILABLE FOR SALE MATTERS 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
135
Note 5: Securities Available for Sale (continued)
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 $207 million and
$6.2 billion, respectively, at December 31, 2011, and $83 million
and $1.3 billion, respectively, at December 31, 2010. 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
$
(11)
5,473
-
(781)
12,093
(102)
Fair
value
-
756
(10)
(39)
3,019
2,503
(429)
6,273
-
(375)
(499)
-
4,717
874
(478)
11,795
(874)
5,591
(165)
(185)
(186)
7,156
4,597
3,458
(121)
(164)
(39)
(1,806)
(53)
44,572
833
(1,300)
(1)
1,118
284
385
8,134
13
$
(1,859)
45,405
(1,301)
8,147
$
(15)
(722)
544
8,423
(96)
(23)
8,163
888
(299)
4,679
(418)
13,730
(22)
(42)
(180)
330
613
2,510
-
(115)
-
(466)
(336)
(802)
(15)
(187)
(103)
-
539
-
4,575
903
5,478
304
522
232
(1,399)
(81)
26,150
1,327
(1,222)
(8)
7,075
102
$
(1,480)
27,477
(1,230)
7,177
(in millions)
December 31, 2011
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, 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
136
Contractual Maturities
The following table shows the remaining contractual 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, 2011
Securities of U.S. Treasury
and federal agencies
$
6,968
0.91 % $
57 0.48 % $
6,659 0.84 % $
194 2.73 % $
58 3.81 %
Securities of U.S. states and
political subdivisions
Mortgage-backed securities:
Federal agencies
Residential
Commercial
Total mortgage-backed
securities
32,593
4.94
520 3.02
11,679 2.90
2,692 5.31
17,702 6.28
96,754
17,836
4.39
4.51
18,150
5.40
1 6.47
-
-
-
-
442 4.02
-
-
-
-
1,399 3.07
640 1.88
94,912 4.42
17,196 4.61
87 3.33
18,063 5.41
132,740
4.55
1 6.47
442 4.02
2,126 2.72
130,171 4.58
Corporate debt securities
18,404
4.64
815 5.57
11,022 3.40
4,691 6.67
1,876 6.38
Collateralized debt
obligations
Other
Total debt securities
8,599
19,892
1.10
1.89
-
-
506 2.29
540 1.61
12,963 1.75
6,813 1.00
3,149 2.04
1,246 1.42
3,274 2.29
at fair value
$ 219,196
4.12 % $ 1,899 3.85 % $ 43,305 2.36 % $ 19,665 3.31 % $ 154,327 4.72 %
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
$
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
13,554
5.01
4.98
5.39
5 6.63
28 6.58
420 5.23
81,584 5.00
-
-
-
-
-
-
1 1.38
341 3.20
215 5.28
19,862 5.01
13,338 5.39
115,794
5.05
5 6.63
29 6.38
976 4.53
114,784 5.05
Corporate debt securities
Collateralized debt obligations
Other
10,279
4,778
16,356
5.94
0.80
2.53
545 7.82
3,853 6.01
4,817 5.62
1,064 6.21
-
-
545 0.88
2,581 0.72
1,652 0.90
1,588 2.89
7,887 3.00
4,367 2.01
2,514 1.72
Total debt securities
at fair value
$
167,465
4.81 % $
2,469 4.12 % $ 16,165 3.72 % $ 15,477 3.63 % $ 133,354 5.10 %
137
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,
2011
2010
2009
$
1,305
(70)
645
(32)
1,601
(160)
(541)
(692) (1,094)
Net realized gains (losses) from
securities available for sale
694
(79)
347
Net realized gains (losses) from principal
and private equity investments
842
534
(289)
Net realized gains from
debt securities and
equity investments
$
1,536
455
58
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
Year ended December 31,
2011
2010
2009
$
2
16
7
-
252
101
3
1
64
267
175
120
10
15
69
-
595
137
69
125
79
423
672
1,012
96
22
118
15
5
20
50
32
82
541
692
1,094
170
248
573
Total OTTI write-downs included in earnings
$
711
940
1,667
(1) For the year ended December 31, 2010, amount represents OTTI recognized on federal agency MBS because we had the intent to sell, of which $252 million related to
securities with a fair value of $14.5 billion that were sold subsequent to December 31, 2010.
138
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 increase (decrease) in non-credit-related impairment (2)
Total OTTI losses recorded on debt securities
Year ended December 31,
2011
2010
2009
422
1
423
(1)
(171)
105
2
4
(13)
(74)
349
400
272
982
30
672
1,012
(4)
(326)
138
(1)
54
(33)
3
1,124
179
(2)
20
16
(172)
1,340
500
2,352
$
$
(1) For the year ended December 31, 2010, 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. Increases represent OTTI write-downs recorded to OCI on debt securities in the periods
non-credit related impairment has occurred. Decreases represent partial recoveries in the fair value of securities due to factors other than credit, where the increase in fair
value was not sufficient to recover the full amount of the unrealized loss on such securities.
The following table presents a rollforward of the credit loss
component of OTTI 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 discounted using the security’s current effective interest
rate 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 and is
classified into one of two components based upon whether the
current period is the first time the debt security was credit-
impaired (initial credit impairment) or if the debt security was
previously 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 due to changes in consolidation status of variable interest entities
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,
2011
2010
2009
$
1,043
1,187
471
87
335
422
(160)
(2)
-
(31)
122
278
400
(263)
(242)
(2)
(37)
625
357
982
(255)
-
(1)
(10)
(193)
(544)
(266)
$
1,272
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.
139
Note 5: Securities Available for Sale (continued)
For asset-backed securities (e.g., residential MBS), we estimate
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 security’s
current effective interest rate 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,
2011
2010
2009
$
$
5
247
252
5
170
24
567
175
591
0-48 %
1-43
0-58
42
18
28
12
12
0-25
4
3-19
11
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 42% of credit
impairment losses recognized in earnings for the year ended December 31, 2011, 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.
140
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
include a total net reduction of $9.3 billion and $11.3 billion at
December 31, 2011 and 2010, respectively, for unearned income,
net deferred loan fees, and unamortized discounts and
premiums. 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.
(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
2011
2010
2009
2008
2007
December 31,
$
167,216
151,284
158,352
202,469
90,468
105,975
99,435
97,527
94,923
36,747
19,382
25,333
36,978
42,861
18,854
13,117
39,760
13,094
32,912
14,210
29,398
15,829
33,882
6,772
7,441
345,450
322,058
336,465
389,964
160,282
228,894
230,235
229,536
247,894
71,415
85,991
22,836
96,149
22,260
103,708
24,003
110,164
23,555
75,565
18,762
86,460
86,565
89,058
93,253
56,171
424,181
435,209
446,305
474,866
221,913
$
769,631
757,267
782,770
864,830
382,195
(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.
Loan concentrations may exist when there are amounts
The following table summarizes the proceeds paid or received
for purchases and sales of loans and transfers from (to)
mortgages/loans held for sale at lower of cost or market. This
loan activity primarily includes purchases or sales of commercial
loan participation interests, whereby we receive or transfer a
portion of a loan after origination. The table excludes PCI loans
and loans recorded at fair value, including loans originated for
sale because their loan activity normally does not impact the
allowance for credit losses.
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, 2011 and 2010, 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 13% of total loans at
December 31, 2011 and 14% at December 31, 2010. For both
periods, 3% of the amount were PCI loans. These loans are
generally diversified among the larger metropolitan areas in
California, with no single area consisting of more than 3% of
total loans. We continuously monitor changes in real estate
values and underlying economic or market conditions for all
geographic areas of our real estate 1-4 family mortgage portfolio
as part of our credit risk management process.
Some of our real estate 1-4 family first and junior lien
mortgage loans include an interest-only feature as part of the
loan terms. These interest-only loans were approximately 21% of
total loans at December 31, 2011 and 25% at December 31, 2010.
Substantially all of these interest-only loans at origination were
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.
141
Note 6: Loans and Allowance for Credit Losses (continued)
(in millions)
Year ended December 31,
Purchases (1)
Sales
Transfers from/(to) MHFS/LHFS (1)
Commercial Consumer
Total
Commercial Consumer
Total
2011
2010
$
7,078
284
7,362
(4,705)
(1,018)
(5,723)
(164)
(75)
(239)
2,135
(5,930)
(1,461)
162
2,297
(553)
(6,483)
(82)
(1,543)
(1) The “Purchases” and “Transfers (from)/to MHFS/LHFS" categories exclude activity in government insured/guaranteed loans where Wells Fargo acts as servicer. On a net
basis, this activity was $10.4 billion and $7.0 billion for the year ended December 31, 2011 and 2010, respectively.
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,
2011
2010
$
201,061
185,947
5,419
7,347
6,083
4,596
5,698
7,775
Total commercial
219,910
204,016
Consumer:
Real estate 1-4 family first mortgage
Real estate 1-4 family
junior lien mortgage
Credit card
37,185
36,562
55,207
65,111
58,618
62,019
Other revolving credit and installment
17,617
18,458
Total consumer
175,120
175,657
Total unfunded
credit commitments
$
395,030
379,673
142
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, losses are
estimated collectively for groups of loans with similar
characteristics, individually or pooled for 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.
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.
CONSUMER PORTFOLIO SEGMENT ACL METHODOLOGY For
consumer loans, not identified as a TDR, we determine the
allowance predominantly 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 and 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 determining the appropriate allowance attributable to our
residential mortgage portfolio, we incorporate the default rates
and high severity of loss for junior lien mortgages behind
delinquent first lien mortgages into our loss forecasting
calculations. In addition, the loss rates we use in determining
our allowance 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. Accordingly, the loss content associated with the effects
of existing and probable loan modifications and junior lien
mortgages behind delinquent first lien mortgages has been
captured in our allowance methodology.
We separately estimate impairment for consumer loans that
have been modified in a TDR (including trial modifications),
whether on accrual or nonaccrual status.
OTHER ACL MATTERS 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 and ongoing
discussions with regulatory and government agencies regarding
mortgage foreclosure-related matters.
Impaired loans, which predominantly include nonaccrual
commercial loans and any loans that have been modified in a
TDR, have an estimated allowance calculated as the difference, if
any, between the impaired value of the loan and the recorded
investment in the loan. The impaired value of the loan is
generally calculated as the present value of expected future cash
flows from principal and interest which incorporates expected
lifetime losses, discounted at the loan’s effective interest rate.
The allowance for a non-impaired loan is based solely on
principal losses without consideration for timing of those losses.
The allowance for an impaired loan that was modified in a TDR
may be lower than the previously established allowance for that
loan due to benefits received through modification, such as lower
probability of default and/or severity of loss, and the impact of
prior charge-offs or charge-offs at the time of the modification
that may reduce or eliminate the need for an allowance.
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).
143
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
2011
2010
2009
2008
2007
Year ended December 31,
$
23,463
25,031
21,711
5,518
7,899
15,753
21,668
15,979
(332)
(266)
-
-
(1,598)
(636)
(351)
(38)
(173)
(2,775)
(1,151)
(1,189)
(120)
(3,365)
(670)
(1,063)
(229)
(198)
(237)
(1,653)
(29)
(178)
(65)
(245)
3,964
4,939
-
(629)
(6)
(14)
(33)
(265)
(2,796)
(5,433)
(5,564)
(2,170)
(947)
(3,883)
(3,763)
(1,449)
(1,724)
(4,900)
(4,934)
(2,396)
(2,437)
(3,318)
(4,812)
(2,708)
(3,423)
(540)
(2,204)
(1,563)
(2,300)
(109)
(648)
(832)
(1,913)
(10,819)
(14,667)
(14,261)
(6,607)
(3,502)
(13,615)
(20,100)
(19,825)
(8,777)
(4,449)
419
143
146
24
45
777
405
218
251
665
427
68
110
20
53
678
522
211
218
718
254
114
119
33
16
20
40
5
3
13
49
8
2
17
65
363
184
211
185
174
180
755
37
89
147
481
754
938
22
53
120
504
699
910
1,539
1,669
1,294
2,316
2,347
1,657
Net loan charge-offs (2)
(11,299)
(17,753)
(18,168)
(7,839)
(3,539)
Allowances related to business combinations/other (3)
(63)
698
(180)
8,053
154
Balance, end of year
Components:
Allowance for loan losses
Allowance for unfunded credit commitments
$
19,668
23,463
25,031
21,711
5,518
$
19,372
23,022
24,516
21,013
5,307
296
441
515
698
211
Allowance for credit losses (4)
$
19,668
23,463
25,031
21,711
5,518
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)
1.49 %
2.52
2.56
2.30
3.04
3.10
2.21
3.13
3.20
1.97
2.43
2.51
1.03
1.39
1.44
(1) 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 for the year ended December 31, 2010, related to the adoption of consolidation accounting guidance on January 1, 2010.
(4) The allowance for credit losses includes $231 million, $298 million and $333 million at December 31, 2011, 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.
144
The following table summarizes the activity in the allowance for credit losses by our commercial and consumer portfolio segments.
(in millions)
Year ended December 31,
Balance, beginning of year
Provision for credit losses
Interest income on certain impaired loans
Commercial Consumer
Total
Commercial
Consumer
Total
2011
2010
$
8,169
15,294
23,463
365
(161)
7,534
(171)
7,899
(332)
8,141
4,913
(139)
16,890
10,840
(127)
25,031
15,753
(266)
Loan charge-offs
Loan recoveries
(2,796)
(10,819)
(13,615)
(5,433)
(14,667)
(20,100)
777
1,539
2,316
678
1,669
2,347
Net loan charge-offs
(2,019)
(9,280)
(11,299)
(4,755)
(12,998)
(17,753)
Allowance related to business combinations/other
4
(67)
(63)
9
689
698
Balance, end of year
$
6,358
13,310
19,668
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)
December 31, 2011
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
December 31, 2010
Collectively evaluated (1)
Individually evaluated (2)
PCI (3)
Total
Allowance for credit losses
Recorded investment in loans
Commercial
Consumer
Total
Commercial
Consumer
Total
$
4,060
2,133
165
8,699
4,545
12,759
6,678
328,117
10,566
376,785 704,902
28,010
17,444
66
231
6,767
29,952
36,719
$
6,358
13,310
19,668
345,450
424,181 769,631
$
5,424
2,479
266
11,539
16,963
302,392
387,707 690,099
3,723
6,202
11,731
14,007
25,738
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.
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. See the “Purchased Credit-Impaired Loans” section of
this Note for credit quality information on our PCI portfolio.
The majority of credit quality indicators are based on
December 31, 2011 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, 2011.
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 bank regulatory agencies.
The following table provides a breakdown of outstanding
commercial 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 $29.3 billion
in criticized CRE loans, $6.0 billion has been placed on
nonaccrual status and written down to net realizable value. CRE
loans have a high level of monitoring in place to manage these
assets and mitigate any loss exposure.
145
Note 6: Loans and Allowance for Credit Losses (continued)
(in millions)
December 31, 2011
By risk category:
Pass
Criticized
Commercial
and
Real
estate
Real
estate
Lease
industrial mortgage
construction
financing
Foreign
Total
$
144,980
21,837
80,215
22,490
10,865
6,772
12,455
662
36,567
1,840
285,082
53,601
Total commercial loans (excluding PCI)
Total commercial PCI loans (carrying value)
166,817
399
102,705
3,270
17,637
1,745
13,117
-
38,407
1,353
338,683
6,767
Total commercial loans
$
167,216
105,975
19,382
13,117
39,760
345,450
December 31, 2010
By risk category:
Pass
Criticized
$
126,058
24,508
70,597
25,983
11,256
11,128
12,411
683
30,341
1,158
250,663
63,460
Total commercial loans (excluding PCI)
150,566
96,580
22,384
13,094
31,499
314,123
Total commercial PCI loans (carrying value)
Total commercial loans
718
2,855
2,949
-
1,413
7,935
$
151,284
99,435
25,333
13,094
32,912
322,058
The following table provides past due information for
commercial loans, which we monitor as part of our credit risk
management practices.
Commercial
Real
Real
(in millions)
December 31, 2011
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
and
estate
industrial mortgage construction
estate
Lease
financing
Foreign
Total
$
163,583
939
97,410
954
15,471
187
12,934
130
38,122
232
327,520
2,442
153
256
89
2,142
4,085
1,890
-
53
6
47
504
8,217
Total commercial loans (excluding PCI)
166,817
102,705
17,637
13,117
38,407
338,683
Total commercial PCI loans (carrying value)
399
3,270
1,745
-
1,353
6,767
Total commercial loans
$
167,216
105,975
19,382
13,117
39,760
345,450
December 31, 2010
By delinquency status:
Current-29 DPD and still accruing
$
146,135
90,233
19,005
12,927
31,350
299,650
30-89 DPD and still accruing
90+ DPD and still accruing
Nonaccrual loans
910
308
1,016
104
510
193
59
-
-
22
2,495
627
3,213
5,227
2,676
108
127
11,351
Total commercial loans (excluding PCI)
150,566
96,580
22,384
13,094
31,499
314,123
Total commercial PCI loans (carrying value)
718
2,855
2,949
-
1,413
7,935
Total commercial loans
$
151,284
99,435
25,333
13,094
32,912
322,058
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
146
delinquency roll rate models. Therefore, delinquency is an
important indicator of credit quality and the establishment of
our allowance for credit losses.
The following table provides the outstanding balances of our consumer portfolio by delinquency status.
(in millions)
December 31, 2011
By delinquency status:
Current-29 DPD
30-59 DPD
60-89 DPD
90-119 DPD
120-179 DPD
180+ DPD
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
Real estate Real estate
1-4 family 1-4 family
Other
revolving
junior lien
mortgage mortgage
first
Credit
credit and
card installment
Total
$
156,985
83,033
22,125
69,712
331,855
4,075
2,012
1,152
1,704
6,665
26,555
786
501
382
537
546
-
211
154
135
211
-
-
963
275
127
33
4
6,035
2,942
1,796
2,485
7,215
15,346
41,901
199,148
85,785
22,836
86,460
394,229
29,746
206
-
-
29,952
Total consumer loans
$
228,894
85,991
22,836
86,460
424,181
December 31, 2010 (2)
By delinquency status:
Current-29 DPD
30-59 DPD
60-89 DPD
90-119 DPD
120-179 DPD
180+ DPD
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
Total consumer loans
$
164,558
92,512
21,276
67,129
345,475
4,516
2,173
1,399
2,080
6,750
15,514
917
608
476
764
622
-
262
207
190
324
1
-
1,261
6,956
376
171
3,364
2,236
58
3,226
117
7,490
17,453
32,967
196,990
95,899
22,260
86,565
401,714
33,245
250
-
-
33,495
$
230,235
96,149
22,260
86,565
435,209
(1) Represents loans whose repayments are insured by the FHA or guaranteed by the VA and student loans whose repayments are predominantly guaranteed by agencies on
behalf of the U.S. Department of Education under the Federal Family Education Loan Program (FFELP). In 2011, we consolidated $5.6 billion of previously sold FHA insured
real estate 1-4 family reverse mortgages.
(2) Amounts at December 31, 2010, have been revised to conform to the current separate presentation of government insured/guaranteed loans.
Of the $11.5 billion of loans that are 90 days or more past due
at December 31, 2011, $1.5 billion was accruing, compared with
$13.0 billion past due and $2.0 billion accruing at
December 31, 2010.
Real estate 1-4 family first mortgage loans 180 days or more
past due totaled $6.7 billion, or 3.3%, of total first mortgages
(excluding PCI), at December 31, 2011, compared with
$6.8 billion, or 3.4%, at December 31, 2010. 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, as loans continue to age until these processes are
complete.
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. In addition, FICO may not be
obtained if we deem it unnecessary due to strong collateral and
other borrower attributes, primarily securities-based margin
loans of $5.0 billion and $4.1 billion at December 31, 2011 and
2010, respectively. The majority of our portfolio is underwritten
with a FICO score of 680 and above.
147
Note 6: Loans and Allowance for Credit Losses (continued)
(in millions)
December 31, 2011
By updated FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Real estate Real estate
1-4 family 1-4 family
Other
revolving
first
junior lien
Credit
credit and
mortgage mortgage
card installment
Total
$
21,604
10,978
15,563
23,622
27,417
7,428
4,086
7,187
12,497
17,574
2,323
1,787
3,383
4,697
4,760
8,921
40,276
6,222
23,073
9,350
35,483
10,465
9,936
51,281
59,687
47,337
24,979
3,517
11,163
86,996
21,381
10,247
1,969
5,674
39,271
4,691
-
1,787
-
400
-
4,393
4,990
11,271
4,990
Government insured/guaranteed loans (1)
26,555
-
-
15,346
41,901
Total consumer loans (excluding PCI)
199,148
85,785
22,836
86,460
394,229
Total consumer PCI loans (carrying value)
29,746
206
-
-
29,952
Total consumer loans
$
228,894
85,991
22,836
86,460
424,181
December 31, 2010 (2)
By updated FICO:
< 600
600-639
640-679
680-719
720-759
760-799
800+
No FICO available
FICO not required
Government insured/guaranteed loans (1)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
$
26,013
9,126
2,872
10,806
48,817
11,105
4,457
1,826
5,965
23,353
16,202
7,678
3,305
8,344
35,529
25,549
13,759
4,522
9,480
53,310
29,443
20,334
4,441
8,808
63,026
47,250
27,222
3,215
9,357
87,044
19,719
10,607
1,794
4,692
36,812
6,195
2,716
285
7,528
16,724
-
15,514
-
-
-
-
4,132
4,132
17,453
32,967
196,990
95,899
22,260
86,565
401,714
33,245
250
-
-
33,495
Total consumer loans
$
230,235
96,149
22,260
86,565
435,209
(1) Represents loans whose repayments are insured by the FHA or guaranteed by the VA and student loans whose repayments are predominantly guaranteed by agencies on
behalf of the U.S. Department of Education under FFELP. In 2011, we consolidated $5.6 billion of previously sold FHA insured real estate 1-4 family reverse mortgages.
(2) Amounts at December 31, 2010, have been revised to conform to the current separate presentation of government insured/guaranteed loans.
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.
LTV refers to the ratio comparing the loan’s balance to the
property’s collateral value. CLTV refers to the combination of
first mortgage and junior lien mortgage (including unused line
amounts for credit line products) 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. In recent years, the residential real
estate markets have experienced significant declines in property
values and several markets, particularly California and Florida
148
(in millions)
By LTV/CLTV:
0-60%
60.01-80%
80.01-100%
100.01-120% (2)
> 120% (2)
No LTV/CLTV available
Government insured/guaranteed loans (3)
Total consumer loans (excluding PCI)
Total consumer PCI loans (carrying value)
December 31, 2011
December 31, 2010 (1)
Real estate Real estate
1-4 family 1-4 family
first
junior lien
Real estate Real estate
1-4 family 1-4 family
first
junior lien
mortgage mortgage
mortgage mortgage
by LTV
by CLTV
Total
by LTV
by CLTV
Total
$
46,476
46,831
12,694
15,722
59,170
62,553
47,808
42,542
14,814
17,744
62,622
60,286
36,764
20,290
57,054
39,497
24,255
63,752
21,116
15,829
36,945
24,147
17,887
42,034
18,608
2,798
26,555
18,626
2,624
37,234
5,422
-
26,555
24,243
3,239
15,514
18,628
2,571
42,871
5,810
-
15,514
199,148
29,746
85,785
206
284,933
29,952
196,990
33,245
95,899
250
292,889
33,495
Total consumer loans
$
228,894
85,991
314,885
230,235
96,149
326,384
(1) Amounts at December 31, 2010, have been revised to conform to the current separate presentation of government insured/guaranteed loans.
(2) 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.
(3) Represents loans whose repayments are insured by the FHA or guaranteed by the VA. In 2011, we consolidated $5.6 billion of previously sold FHA insured real estate 1-4
family reverse mortgages.
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:
December 31,
2011
2010
Commercial and industrial
$
2,142
3,213
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
Total consumer
Total nonaccrual loans
4,085
5,227
1,890
53
2,676
108
47
127
8,217 11,351
10,913 12,289
2,302
1,975
199
300
13,087 14,891
(excluding PCI)
$
21,304 26,242
(1) Includes LHFS of $25 million and $3 million at December 31, 2011 and 2010,
respectively.
(2) Includes MHFS of $301 million and $426 million at December 31, 2011 and
2010, respectively.
149
Note 6: Loans and Allowance for Credit Losses (continued)
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 $8.7 billion at December 31, 2011, and
$11.6 billion at December 31, 2010, 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. Loans 90
days or more past due and still accruing whose repayments are
insured by the Federal Housing Administration (FHA) or
predominantly guaranteed by the Department of Veterans
Affairs (VA) for mortgages and the U.S. Department of
Education for student loans under the Federal Family Education
Loan Program were $20.5 billion at December 31, 2011, up from
$15.8 billion at December 31, 2010, due primarily to growth in
the FHA/VA portfolio over the past two years and the
subsequent seasoning of those loans.
The following table shows non-PCI loans 90 days or more
past due and still accruing by class for loans not government
insured/guaranteed.
(in millions)
Loan 90 days or more past due and still accruing:
December 31,
2011
2010
Total (excluding PCI):
Less: FHA insured/VA guaranteed (1)
$
22,569
19,240
18,488
14,733
Less: Student loans guaranteed
under the FFELP (2)
1,281
1,106
Total, not government
insured/guaranteed
$
2,048
2,649
By segment and class, not government
insured/guaranteed:
Commercial:
Commercial and industrial
Real estate mortgage
Real estate construction
Foreign
Total commercial
Consumer:
$
153
256
89
6
308
104
193
22
504
627
Real estate 1-4 family first mortgage (3)
Real estate 1-4 family junior lien mortgage (3)
Credit card
Other revolving credit and installment
Total consumer
Total, not government
insured/guaranteed
781
279
346
138
941
366
516
199
1,544
2,022
$
2,048
2,649
(1) Represents loans whose repayments are insured by the FHA or guaranteed by the
VA.
(2) Represents loans whose repayments are predominantly guaranteed by agencies
on behalf of the U.S. Department of Education under the FFELP.
(3) Includes mortgage held for sale 90 days or more past due and still accruing.
150
IMPAIRED LOANS The table below summarizes key information
for impaired loans. Our impaired loans predominately 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 loss which is
included in the allowance for credit losses. Impaired loans
exclude PCI loans. Upon our adoption of ASU No. 2011-02 in
third quarter 2011, we identified commercial loans that were not
previously included as impaired loans, which totaled
$685 million with an associated allowance for credit losses of
$54 million. The allowance for credit losses associated with these
loans would have been measured under a collectively evaluated
basis prior to adoption, but is now estimated on an individually
evaluated basis. Our consumer loans were not impacted by the
adoption of ASU No. 2011-02. Additionally, based on clarifying
guidance from the Securities and Exchange Commission (SEC)
received in December 2011, we now classify trial modifications
as TDRs at the beginning of the trial period. The table below
includes trial modifications that totaled $651 million at
December 31, 2011. See the “Loans” section in Note 1 for our
policies on impaired loans and PCI loans.
(in millions)
December 31, 2011
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
December 31, 2010
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 impaired loans (excluding PCI)
$
39,332
28,010
26,890
Total impaired loans (excluding PCI)
$
36,041
25,738
25,338
Recorded investment
Impaired loans
Unpaid
principal
balance
Impaired
with related
allowance for
Related
allowance for
loans
credit losses
credit losses
$
7,191
7,490
4,733
127
185
3,072
5,114
2,281
68
31
3,018
4,637
2,281
68
31
501
1,133
470
21
8
19,726
10,566
10,035
2,133
16,494
14,486
13,909
3,380
2,232
593
287
2,079
593
286
2,079
593
274
19,606
17,444
16,855
$
8,190
7,439
4,676
149
215
3,600
5,239
2,786
91
15
3,276
5,163
2,786
91
15
20,669
11,731
11,331
2,479
12,834
11,603
1,759
1,626
548
231
548
230
11,603
1,626
548
230
15,372
14,007
14,007
784
339
42
4,545
6,678
607
1,282
548
34
8
2,754
578
333
58
3,723
6,202
151
Note 6: Loans and Allowance for Credit Losses (continued)
Commitments to lend additional funds on loans whose terms
have been modified in a TDR amounted to $3.8 billion and
$1.2 billion at December 31, 2011 and 2010, respectively. A
significant portion of these commitments relate to commercial
and industrial loans, which, at the time of modification, had an
amount of availability to the borrower that continues under the
modified terms of the TDR. These TDRs totaled $1.8 billion and
$345 million at December 31, 2011 and 2010, respectively.
The following table provides the average recorded investment
in impaired loans and the amount of interest income recognized
for the full year 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
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 impaired loans
Year ended December 31,
2011
2010
Average
recorded
Recognized
interest
Average Recognized
interest
recorded
investment
income
investment
income
$
3,282
5,308
2,481
80
29
105
80
70
-
-
4,098
4,598
3,203
166
47
64
41
28
-
-
11,180
255
12,112
133
13,592
1,962
594
270
700
76
21
27
9,221
1,443
360
132
16,418
824
11,156
$
27,598
1,079
23,268
494
55
13
3
565
698
The following table presents the average recorded investment in impaired loans and interest income recognized on impaired loans
after impairment.
(in millions)
Average recorded investment in impaired loans
Interest income:
Cash basis of accounting
Other (1)
Total interest income
Year ended December 31,
2011
2010
2009
27,598
23,268
10,557
180
899
1,079
250
448
698
130
102
232
$
$
$
(1) Includes interest recognized on accruing TDRs, interest recognized related to certain impaired loans which have an allowance calculated using discounting, 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.
152
TROUBLED DEBT RESTRUCTURINGS (TDRs) When, 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 a borrower that we would not otherwise
consider, the related loan is classified as a TDR. We do not
consider any loans modified through a loan resolution such as
foreclosure or short sale to be a TDR. The following table
summarizes how our loans were modified as TDRs in 2011,
including the financial effects of the modifications.
(in millions)
Principal (2)
Primary modification type (1)
Financial effects of modifications
Interest
rate
reduction
Other
interest
rate
concessions (3)
Total
Charge-
offs (4)
Weighted
average
interest
rate
reduction
Recorded
investment
related to
interest rate
reduction
Year ended December 31, 2011
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
Trial modifications (5)
Total consumer
Total
$
$
166
113
29
-
-
308
1,629
98
-
74
-
1,801
2,109
64
146
114
-
-
324
1,908
559
336
119
-
2,922
3,246
2,412
1,894
421
57
22
4,806
934
197
-
7
651
1,789
6,595
2,642
2,153
564
57
22
5,438
4,471
854
336
200
651
6,512
11,950
84
24
26
-
-
3.13 % $
1.46
0.81
-
-
134
1.55
293
28
2
24
-
347
481
3.27
4.34
10.77
6.36
-
4.00
3.82 % $
69
160
125
-
-
354
3,322
654
260
181
-
4,417
4,771
(1) Amounts represent the recorded investment in loans after recognizing the effects of the TDR, if any. TDRs with multiple types of concessions are presented only once in the
table in the first category type based on the order presented.
(2) Principal modifications include principal forgiveness at the time of the modification, contingent principal forgiveness granted over the life of the loan based on borrower
performance, and principal that has been legally separated and deferred to the end of the loan, with a zero percent contractual interest rate.
(3) Other interest rate concessions include loans modified to an interest rate that is not commensurate with the credit risk, even though the rate may have been increased.
These modifications would include renewals, term extensions, and other interest adjustments, but exclude modifications that also forgive principal and/or reduce the interest
rate.
(4) Charge-offs include write-downs of the investment in the loan in the period of modification. In some cases, the amount of charge-offs will differ from the modification terms
if the loan has already been charged down based on our policies. Modifications resulted in forgiving principal (actual, contingent or deferred) of $577 million in 2011.
(5) Trial modifications are granted a delay in payments due under the original terms during the trial payment period. However, these loans continue to advance through
delinquency status and accrue interest according to their original terms. Any subsequent permanent modification generally includes interest rate related concessions;
however, the exact concession type and resulting financial effect are usually not known until the loan is permanently modified.
153
Note 6: Loans and Allowance for Credit Losses (continued)
The previous table presents information on all loan
modifications classified as TDRs. We may require some
borrowers experiencing financial difficulty to make trial
payments generally for a period of three to four months,
according to terms of a planned permanent modification, to
determine if they can perform according to those terms. Based
on clarifying guidance from the SEC in December 2011, these
arrangements represent trial modifications, which we classify
and account for as TDRs. The trial period terms are developed in
accordance with our proprietary programs or the U.S. Treasury’s
Making Homes Affordable programs for real estate 1-4 family
first lien (i.e. Home Affordable Modification Program – HAMP)
and junior lien (i.e. Second Lien Modification Program – 2MP)
mortgage loans. At December 31, 2011, we had $421 million,
$46 million, and $184 million of loans in a trial modification
period under HAMP, 2MP, and proprietary programs,
respectively. While loans are in trial payment programs their
original terms are not considered modified and they continue to
advance through delinquency status and accrue interest
according to their original terms. The planned modifications for
these arrangements predominantly involve interest rate
reductions or other interest rate concessions. At
December 31, 2011, trial modifications with a recorded
investment of $310 million were accruing loans and $341 million
were nonaccruing loans. Our recent experience is that most of
the mortgages that enter a trial payment period program are
successful in completing the program requirements and are then
permanently modified at the end of the trial period. As
previously discussed, our allowance process considers the
impact of those modifications that are probable to occur
including the associated credit cost and related re-default risk.
The table below summarizes permanent modification TDRs
that have defaulted in the current period within 12 months of
their permanent modification date. We are reporting these
defaulted TDRs based on a payment default definition of 90 days
past due for the commercial portfolio segment and 60 days past
due for the consumer portfolio segment.
Year ended
December 31, 2011
Recorded
investment
of defaults
$
$
216
331
69
1
1
618
1,110
137
156
113
1,516
2,134
(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
154
Purchased Credit-Impaired Loans
Substantially all of our PCI loans were acquired from Wachovia
on December 31, 2008. 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)
2011
2010
2009
2008
December 31,
399
3,270
1,745
1,353
718
1,911
2,855
4,137
2,949
1,413
5,207
1,733
4,580
5,803
6,462
1,859
6,767
7,935
12,988
18,704
29,746
33,245
38,386
39,214
206
-
250
-
331
-
728
151
29,952
33,495
38,717
40,093
36,719
41,430
51,705
58,797
55,312
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
Addition of accretable yield due to acquisitions
Accretion into interest income (1)
Accretion into noninterest income due to sales (2)
Reclassification from nonaccretable difference for loans with improving credit-related cash flows
Changes in expected cash flows that do not affect nonaccretable difference (3)
Total, end of year
Year ended December 31,
2011
2010
2009
$
16,714
128
14,559
-
10,447
-
(2,206)
(2,392)
(2,601)
(189)
373
1,141
(43)
3,399
1,191
(5)
441
6,277
$
15,961
16,714
14,559
(1) Includes accretable yield released as a result of settlements with borrowers, which is included in interest income.
(2) Includes accretable yield released as a result of sales to third parties, which is included in noninterest income.
(3) Represents changes in cash flows expected to be collected due to changes in interest rates on variable rate PCI loans, changes in prepayment assumptions and the impact of
modifications.
155
Note 6: Loans and Allowance for Credit Losses (continued)
PCI ALLOWANCE Based on our regular evaluation of estimates
of cash flows expected to be collected, we may establish an
allowance for a PCI loan or pool of loans, with a charge to
income through the provision for losses. 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
Balance, December 31, 2010
Provision for losses due to credit deterioration
Charge-offs
Commercial Pick-a-Pay
Other
consumer
$
-
850
(520)
330
712
(776)
266
106
(207)
Total
-
853
(520)
333
771
(806)
298
160
(227)
-
3
-
3
59
(30)
32
54
(20)
-
-
-
-
-
-
-
-
-
-
Balance, December 31, 2011
$
165
66
231
COMMERCIAL PCI CREDIT QUALITY INDICATORS The following table provides a breakdown of commercial PCI loans by risk category.
(in millions)
December 31, 2011
By risk category:
Pass
Criticized
Total commercial PCI loans
December 31, 2010
By risk category:
Pass
Criticized
Total commercial PCI loans
Commercial
and
Real
estate
Real
estate
industrial
mortgage
construction
Foreign
Total
$
$
$
$
191
208
399
214
504
718
640
2,630
321
1,424
-
1,353
1,152
5,615
3,270
1,745
1,353
6,767
352
2,503
2,855
128
2,821
210
1,203
904
7,031
2,949
1,413
7,935
156
The following table provides past due information for commercial PCI loans.
(in millions)
December 31, 2011
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
Commercial
and
Real
estate
Real
estate
industrial
mortgage
construction
Foreign
Total
$
359
2,867
1,206
1,178
5,610
22
18
178
225
72
467
-
175
272
885
Total commercial PCI loans
$
399
3,270
1,745
1,353
6,767
December 31, 2010
By delinquency status:
Current-29 DPD and still accruing
30-89 DPD and still accruing
90+ DPD and still accruing
Total commercial PCI loans
$
$
612
22
84
718
2,295
113
447
1,395
178
1,376
1,209
-
204
5,511
313
2,111
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 unpaid principal balance (adjusted for write-
downs) of 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-29 DPD
30-59 DPD
60-89 DPD
90-119 DPD
120-179 DPD
180+ DPD
December 31, 2011
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
junior lien
first
Real estate Real estate
1-4 family 1-4 family
junior lien
first
mortgage mortgage
Total mortgage mortgage
Total
$
25,693
268
25,961
29,297
436
29,733
3,272
1,433
791
1,169
5,921
20
9
8
10
3,292
1,442
799
1,179
150
6,071
3,586
1,364
881
1,346
7,214
30
17
13
19
220
3,616
1,381
894
1,365
7,434
Total consumer PCI loans (adjusted unpaid principal balance) $
38,279
465
38,744
43,688
735
44,423
Total consumer PCI loans (carrying value)
$
29,746
206
29,952
33,245
250
33,495
157
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
December 31, 2011
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
first
junior lien
Real estate Real estate
1-4 family 1-4 family
first
junior lien
mortgage mortgage
Total
mortgage mortgage
Total
$
17,169
210
17,379
22,334
363
22,697
7,489
6,646
3,698
1,875
903
215
284
83
89
47
14
6
2
14
7,572
6,735
3,745
1,889
909
217
298
7,563
6,185
3,949
2,057
1,087
232
281
109
96
60
17
7
2
7,672
6,281
4,009
2,074
1,094
234
81
362
Total consumer PCI loans (adjusted unpaid principal balance) $
38,279
465
38,744
43,688
735
44,423
Total consumer PCI loans (carrying value)
$
29,746
206
29,952
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% (1)
> 120% (1)
No LTV/CLTV available
December 31, 2011
December 31, 2010
Real estate Real estate
1-4 family 1-4 family
first
junior lien
Real estate Real estate
1-4 family 1-4 family
first
junior lien
mortgage mortgage
by CLTV
by LTV
mortgage mortgage
by CLTV
by LTV
Total
Total
$
1,243
3,806
9,341
9,471
14,318
100
25
49
63
79
1,268
3,855
9,404
9,550
246
14,564
3
103
1,653
5,513
11,861
9,525
15,047
43
42
89
116
1,696
5,555
11,950
9,641
314
15,361
89
131
220
Total consumer PCI loans (adjusted unpaid principal balance) $
38,279
465
38,744
43,688
735
44,423
Total consumer PCI loans (carrying value)
$
29,746
206
29,952
33,245
250
33,495
(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.
158
Note 7: Premises, Equipment, Lease Commitments and Other Assets
Operating lease rental expense (predominantly for premises),
net of rental income, was $1.2 billion, $1.3 billion and
$1.4 billion in 2011, 2010 and 2009, respectively.
The components of other assets were:
(in millions)
Land
Buildings
Furniture and equipment
Leasehold improvements
Premises and equipment leased
under capital leases
December 31,
2011
2010
$
1,825
1,825
7,441
7,195
7,440
6,689
1,725
1,683
147
148
Total premises and equipment
18,333
17,785
Cost method:
Less: Accumulated depreciation
and amortization
Net book value,
8,802
8,141
Federal bank stock
Private equity investments
$
Total cost method
premises and equipment
$
9,531
9,644
LIHTC investments - equity method (1)
(in millions)
Nonmarketable equity investments:
December 31,
2011
2010
3,444
4,617
8,061
4,077
4,434
236
3,240
5,254
8,494
3,611
4,013
305
Depreciation and amortization expense for premises and
equipment was $1.4 billion, $1.5 billion and $1.3 billion in 2011,
2010 and 2009, respectively.
Dispositions of premises and equipment, included in
noninterest expense, resulted in net losses of $17 million,
$115 million and $22 million in 2011, 2010 and 2009,
respectively.
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
94 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, 2011.
(in millions)
Year ended December 31,
2012
2013
2014
2015
2016
Thereafter
Operating
Capital
leases
leases
$
1,319
1,216
1,075
872
717
3,239
54
55
3
3
3
17
Total minimum lease payments
$
8,438
135
All other equity method
Principal investments (2)
Total nonmarketable
equity investments
16,808
16,423
Corporate/bank-owned life insurance
Accounts receivable
Interest receivable
Core deposit intangibles
Customer relationship and
other amortized intangibles
Foreclosed assets:
GNMA (3)
Other
Operating lease assets
Due from customers on acceptances
Other
20,146
25,939
5,296
7,311
19,845
23,763
4,895
8,904
1,639
1,847
1,319
3,342
1,825
1,479
4,530
1,873
225
17,172
229
15,993
Total other assets
$
101,022
99,781
(1) Represents low income housing tax credit investments.
(2) 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.
(3) 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:
Year ended December 31,
(in millions)
2011
2010
2009
Net gains (losses) from:
Private equity investments
Principal investments
$
813
29
492
42
(368)
79
Executory costs
Amounts representing interest
Present value of net minimum
lease payments
$
(9)
(10)
All other nonmarketable
equity investments
Total
$
116
(298)
(188)
$
544
346
(234)
(523)
159
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.
•
•
•
•
•
•
160
The classifications of assets and liabilities in our balance sheet associated with our transactions with VIEs follow:
(in millions)
December 31, 2011
Cash
Trading assets
Securities available for sale (1)
Mortgages held for sale
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, 2010
Cash
Trading assets
Securities available for sale (1)
Mortgages held for sale (2)
Loans
Mortgage servicing rights
Other assets (2)
Total assets
Short-term borrowings
Accrued expenses and other liabilities (2)
Long-term debt
Total liabilities
Noncontrolling interests (2)
Net assets
VIEs that we
VIEs
we account
do not
that we
for as secured
Transfers that
consolidate
consolidate
borrowings
Total
$
-
3,723
21,708
-
11,404
12,080
4,494
321
293
3,332
444
11
30
11,671
-
11,967
7,181
-
1,858
-
137
332
4,046
36,711
444
30,552
12,080
6,489
53,409
18,215
19,030
90,654
-
3,350
3,450 (3)
1,138 (3)
10,682
121
-
4,932 (3)
6,686
14,132
4,609
11,618
3,350
9,520
17,489
30,359
-
61
-
61
$
50,059
8,634
1,541
60,234
$
-
5,351
24,001
-
12,401
13,261
3,783
200
143
2,159
634
16,708
-
2,071
398
32
7,834
-
1,613
-
90
598
5,526
33,994
634
30,722
13,261
5,944
58,797
21,915
9,967
90,679
-
3,514
-
3,636 (3)
743 (3)
8,377 (3)
7,773
14
1,700
11,409
4,271
10,077
3,514
12,756
9,487
25,757
-
94
-
94
$
55,283
9,065
480
64,828
(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) “VIEs that we consolidate” has been revised to correct previously reported amounts.
(3) Includes the following VIE liabilities at December 31, 2011, and December 31, 2010, respectively, with recourse to the general credit of Wells Fargo: Short-term borrowings,
$3.4 billion and $3.6 billion; Accrued expenses and other liabilities, $963 million and $645 million; and Long-term debt, $30 million and $53 million.
Transactions with Unconsolidated VIEs
Our transactions with VIEs include securitizations of residential
mortgage loans, CRE loans, student loans and auto loans and
leases; investment and financing activities involving CDOs
backed by asset-backed and CRE securities, collateralized loan
obligations (CLOs) backed by corporate loans, 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. Involvements with these
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
we are not the primary beneficiary. We do not consider our
continuing involvement in an unconsolidated VIE to be
significant when it relates to third-party sponsored VIEs for
which we were not the transferor or if 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
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
161
Note 8: Securitizations and Variable Interest Entities (continued)
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
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
Debt and
Other
commitments
VIE
equity
Servicing
and
Net
assets
interests (1)
assets Derivatives
guarantees
assets
Carrying value - asset (liability)
11,070
353
-
1
(975)
(48)
623
349
$
1,135,629
61,461
179,007
11,240
9,757
9,606
19,257
12,191
6,318
4,682
2,460
7,063
1,107
9,511
6,942
4,119
2,019
-
-
-
-
-
-
-
18,717
1,896
34
$
1,463,183
39,799
12,080
$
4,682
2,460
7,063
1,107
9,511
6,942
4,119
2,019
-
11,070
353
623
-
-
-
-
-
-
14,777
2,766
8,035
1,300
9,511
6,812
2,680
2,059
-
-
-
-
-
(1,439)
-
-
(1)
2,119
(2,463)
50,059
Maximum exposure to loss
3,657
19,409
295
-
3,109
8,224
-
-
1,504
-
523
41
150
1,981
9,511
8,576
4,119
2,583
41
2,983
193
-
(130)
-
40
-
190
643
-
1
538
874
-
130
-
41
-
1,896
34
903
$
39,799
12,080
2,487
6,170
60,536
(in millions)
December 31, 2011
Residential mortgage loan
securitizations:
Conforming
Other/nonconforming
Commercial mortgage loan 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 loan 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)
162
(continued from previous page)
(in millions)
December 31, 2010
Residential mortgage loan securitizations:
Conforming
Other/nonconforming
Commercial mortgage loan 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 loan securitizations
Collateralized debt obligations:
Debt securities
Loans (2)
Asset-based finance structures
Tax credit structures
Collateralized loan obligations
Investment funds
Other (3)
Total
Total
Debt and
Other
commitments
VIE
equity
Servicing
and
Net
assets interests (1)
assets Derivatives
guarantees
assets
$ 1,068,737
5,527
12,115
76,304
190,377
2,997
5,506
495
608
20,046
9,970
12,055
20,981
13,196
10,522
20,031
1,436
9,689
6,556
3,614
2,804
1,416
3,221
-
-
-
-
-
-
43
Carrying value - asset (liability)
-
6
261
844
-
(118)
-
56
-
377
(928)
(107)
-
-
-
-
(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
$
5,527
12,115
2,997
5,506
1,436
9,689
6,556
3,614
2,804
1,416
3,221
495
608
-
-
-
-
-
-
Maximum exposure to loss
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
-
6
488
2,850
-
118
-
56
-
43
916
$
42,766
13,261
4,434
7,432
67,893
(1) Includes total equity interests of $460 million and $316 million at December 31, 2011, and December 31, 2010, respectively. Also includes debt interests in the form of both
loans and securities. 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 88% were rated as investment grade by the primary rating agencies at December 31, 2011. 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 structured financing, student loan securitizations, auto loan and lease 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.
163
Note 8: Securitizations and Variable Interest Entities (continued)
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 may hold variable interests issued by the
VIEs, primarily in the form of senior securities. We do not
consolidate the nonconforming residential mortgage loan
securitizations included in the table because we either do not
hold any variable interests, hold variable interests that we do not
consider potentially significant or are not the primary servicer
for a majority of the VIE assets.
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
164
determining stressed case regulatory capital needs and is
considered to be a remote scenario.
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 2011, we incurred a $377 million loss on trading
derivatives related to certain CDOs. The loss was associated with
the resolution of a legacy Wachovia position that settled during
the year.
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 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.
During 2011, we redeemed a $1.4 billion interest in an
unconsolidated investment fund managed by one of our majority
owned subsidiaries. Upon redemption we placed the assets
received into new investment fund VIEs. We consolidated these
new VIEs because we have discretion over the management of
the assets and are the sole investor in these funds. At
December 31, 2010, we had investments of $1.4 billion and
lending arrangements of $14 million with this fund.
OTHER TRANSACTIONS WITH VIEs In 2008, legacy 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. We purchased all outstanding ARS
that were issued by VIEs and subject to the agreement. At
December 31, 2011, we held in our securities available-for-sale
portfolio $643 million of ARS issued by VIEs redeemed pursuant
to this agreement, compared with $1.6 billion at
December 31, 2010.
In 2009, we reached agreements to purchase additional ARS
from eligible investors who bought ARS through one of our
broker-dealer subsidiaries. We purchased all outstanding ARS
that were issued by VIEs and subject to the agreement. As of
December 31, 2011, we held in our securities available-for-sale
portfolio $624 million of ARS issued by VIEs redeemed pursuant
to this agreement, compared with $901 million at
December 31, 2010.
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, through the
issuance of trust preferred securities we had junior subordinated
debt financing with a carrying value of $7.6 billion at
December 31, 2011, and $19.3 billion at December 31, 2010, and
$2.5 billion of preferred stock at December 31, 2011. In these
transactions, VIEs that we wholly own issue debt securities or
preferred equity to third party investors. All of the proceeds of
the issuance are invested in debt securities or preferred equity
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 issued to
the VIEs as long-term junior subordinated debt and the
preferred equity securities issued to the VIEs as preferred stock
in our consolidated balance sheet.
In 2011, we redeemed $9.2 billion of trust preferred securities
that will no longer count as Tier 1 capital under the Dodd-Frank
Act and the Basel Committee guidelines known as the Basel III
standards.
165
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 and auto loans.
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.
In 2011, 2010, and 2009, we recognized net gains of
$112 million, $27 million, and $1 million, respectively, from
transfers accounted for as sales of financial assets in
securitizations. Additionally, we had the following cash flows
with our securitization trusts that were involved in transfers
accounted for as sales.
2011
Other
financial
Mortgage
Mortgage
Year ended December 31,
2010
Other
financial
2009
Other
financial
Mortgage
(in millions)
loans
assets
loans
assets
loans
assets
Sales proceeds from securitizations (1)
$
337,357
Servicing fees
Other interests held
Purchases of delinquent assets
Net servicing advances
4,401
1,779
9
29
-
11
263
-
-
374,488
4,316
1,786
25
49
-
34
442
-
-
394,632
4,283
3,757
45
257
-
42
310
-
-
(1) Represents cash flow data for all loans securitized in the period presented.
Sales with continuing involvement during 2011 and 2010
predominantly related to conforming residential mortgage
securitizations. During 2011 and 2010, we transferred
$329.1 billion and $379.0 billion, respectively, 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 2011 we recorded a
$4.0 billion servicing asset, measured at fair value using a Level
3 measurement technique, and a $101 million liability for
probable repurchase losses. In 2010, we recorded a $4.5 billion
servicing asset, with $4.1 billion recorded at fair value as Level 3
and the remaining $400 million recorded as amortized mortgage
servicing rights. We also recorded a $144 million repurchase
liability in 2010.
We used the following key weighted-average 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
2011
12.8 %
5.9
7.7 %
2010
13.5
5.4
8.0
166
Key economic assumptions and the sensitivity of the current
fair value to immediate adverse changes in those assumptions at
December 31, 2011, for residential and commercial mortgage
servicing rights, and other interests held related primarily to
residential mortgage loan securitizations are presented in the
following table. “Other interests held” exclude residential
mortgage-backed securities retained in securitizations issued
through GSEs, such as FNMA, FHLMC and GNMA, because
these securities have a remote risk of credit loss due to the GSE
guarantee. These securities also have economic characteristics
similar to GSE mortgage-backed securities that we purchase,
which are not included 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, 2011
Expected weighted-average life (in years)
Other interests held
Mortgage
servicing
Interest-
only
rights
strips
$
14,359
5.0
230
4.6
Subordinated
bonds
45
6.1
Senior
bonds
321
5.6
Prepayment speed assumption (annual CPR)
13.7 %
10.7
6.9
13.9
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
$
913
2,151
6
15
-
1
2
4
6.9 %
15.6
11.9
7.1
$
613
1,171
6
12
2
4
12
24
0.5 %
4.5
$
-
-
1
2
Fair value of interests held at December 31, 2010
Expected weighted-average life (in years)
$
16,279
5.2
226
5.2
47
8.3
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
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.
$
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
167
Note 8: Securitizations and Variable Interest Entities (continued)
The following table presents information about the principal
balances of off-balance sheet securitized loans, including
residential mortgages sold to FNMA, FHLMC, 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.
In securitizations where servicing is our only form of continuing
involvement, we would only experience a loss if required to
repurchase a delinquent loan due to a breach in representations
and warranties associated with our loan sale or servicing
contracts. Net charge-offs exclude loans sold to FNMA, FHLMC
and GNMA as we do not service or manage the underlying real
estate upon foreclosure and, as such, do not have access to net
charge-off information.
(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,
2011
2010
2011
2010
2011
2010
Net charge-offs
$
-
1
-
-
-
-
137,121
144,655 (1)
11,142
9,174 (1)
569
738 (1)
137,121
144,656
11,142
9,174
569
738
1,171,666 1,090,755
1
2
24,235
-
25,067 (2)
-
1,506
16
1,408
-
2,271
2,454
131
102
-
-
Total consumer
1,173,939 1,093,210
24,366
25,169
1,522
1,408
Total off-balance sheet securitized loans
$
1,311,060 1,237,866
35,508
34,343
2,091
2,146
(1) Balances have been revised to correct previously reported amounts.
(2) Balances have been revised to conform with current period presentation of including loans sold to FNMA, GNMA, and FHLMC.
168
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.” For VIEs that
obtain exposure synthetically through derivative instruments,
the remaining notional amount of the derivative is included in
“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, 2011
Total
VIE
Consolidated
Third
party
Noncontrolling
assets
assets
liabilities
interests
Secured borrowings:
Municipal tender option bond securitizations
Auto loan securitizations
Commercial real estate loans
Residential mortgage securitizations (1)
$
14,168
11,748
(10,689)
-
1,168
5,705
-
1,168
6,114
-
(1,041)
(5,759)
Total secured borrowings
21,041
19,030
(17,489)
Consolidated VIEs:
Nonconforming residential
mortgage loan securitizations
Multi-seller commercial paper conduit
Auto loan securitizations
Structured asset finance
Investment funds
Other
11,375
10,244
2,860
163
124
2,012
3,432
2,860
163
124
2,012
2,812
(4,514)
(2,935)
(143)
(16)
(22)
(1,890)
Total consolidated VIEs
19,966
18,215
(9,520)
-
-
-
-
-
-
-
-
-
-
(61)
(61)
Carrying value
Net
assets
1,059
-
127
355
1,541
5,730
(75)
20
108
1,990
861
8,634
Total secured borrowings and consolidated VIEs
$
41,007
37,245
(27,009)
(61)
10,175
December 31, 2010
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 (2)
14,518
13,529
3,197
1,010
146
1,197
2,938
3,197
1,010
146
1,197
2,836
(6,723)
(3,279)
(955)
(21)
(54)
(1,724)
Total consolidated VIEs
23,006
21,915
(12,756)
Total secured borrowings and consolidated VIEs
$
35,868
31,882
(22,243)
(1) Includes $5.6 billion of reverse mortgage loans that were previously accounted for as a sale to a GNMA securitization program.
(2) Revised to correct previously reported amounts.
-
-
-
-
-
-
-
-
(11)
(14)
(69)
(94)
(94)
95
154
49
182
480
6,806
(82)
55
114
1,129
1,043
9,065
9,545
In addition to the transactions included in the table above, at
December 31, 2011, 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, 2011, we had pledged
approximately $6.2 billion in loans (principal and interest
eligible to be capitalized), $316 million in securities available for
sale and $154 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
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
169
Note 8: Securitizations and Variable Interest Entities (continued)
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 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.
INVESTMENT FUNDS We have consolidated certain of our
investment funds where we manage the assets of the fund and
our interests absorb a majority of the funds’ variability. In 2011,
we redeemed our interest in an unconsolidated investment fund
and placed the assets received upon redemption into new VIEs.
We consolidate these VIEs because we have discretion over the
management of the assets and are the sole investor in these
funds.
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. The beneficial interests issued by the VIE that we hold
include either subordinate or senior securities held in an amount
that we consider potentially significant.
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.
170
Note 9: Mortgage Banking Activities
Mortgage banking activities, included in the Community
Banking and Wholesale Banking operating segments, consist of
residential and commercial mortgage loan origination, sale
activity and servicing.
We apply fair value method to substantially all of our
residential MSRs and apply the amortization method to all
commercial and some 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
Acquired from Wachovia (1)
Servicing from securitizations or asset transfers
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,
2011
2010
2009
$
14,467
16,004
14,714
-
-
(118)
-
-
34
3,957
4,092
6,226
3,957
3,974
6,260
(3,680)
(2,957)
(1,534)
(2,141)
(2,554)
(3,436)
(5,821)
(5,511)
(4,970)
$
12,603
14,467
16,004
(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,
2011
2010
2009
$
1,422
1,119
1,446
-
155
-
132
(5)
58
-
478
(264)
(228)
-
11
(135)
61
(264)
1,445
1,422
1,119
(3)
(34)
(37)
-
(3)
(3)
-
-
-
$
1,408
1,419
1,119
$
1,812
1,756
1,261
1,812
1,555
1,261
(1) The 2009 amount reflects refinements to initial December 31, 2008, Wachovia purchase accounting adjustments.
(2) Includes $350 million and $400 million in residential amortized MSRs at December 31, 2011 and 2010, respectively. The 2009 balance is all commercial amortized MSRs. For
the years ended December 31, 2011 and 2010, the residential MSR amortization was $(50) million and $(5) million, respectively. Effective January 1, 2012, the amortized
residential MSR portfolio will be transferred to MSRs carried at fair value.
(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 $37 million and $3 million was recorded on the
residential amortized MSRs for the years ended December 31, 2011 and 2010, respectively.
(4) Includes fair value of $316 million and $441 million in residential amortized MSRs and $1,440 million and $1,371 million in commercial amortized MSRs at
December 31, 2011 and 2010, respectively.
171
Note 9: Mortgage Banking Activities (continued)
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:
Contractually specified servicing fees
Late charges
Ancillary fees
Unreimbursed direct servicing costs (1)
Net servicing fees
Changes in fair value of MSRs carried at fair value:
Due to changes in valuation model inputs or assumptions (2)
Other changes in fair value (3)
Total changes in fair value of MSRs carried at fair value
Amortization
Provision for MSRs in excess of fair value
Net derivative gains from economic hedges (4)
Total servicing income, net
Net gains on mortgage loan origination/sales activities
Total mortgage banking noninterest income
Market-related valuation changes to MSRs, net of hedge results (2) + (4)
December 31,
2011
2010
$
1,456
1,429
358
8
371
9
1,822
1,809
398
106
14
518
408
99
13
520
$
$
2,340
2,329
1,854
0.76 %
1,837
0.86
Year ended December 31,
2011
2010
2009
$
4,611
4,566
4,473
298
354
360
434
330
287
(1,119)
(763)
(914)
4,144
4,597
4,176
(3,680)
(2,957)
(1,534)
(2,141)
(2,554)
(3,436)
(5,821)
(264)
(5,511)
(228)
(4,970)
(264)
(34)
(3)
-
5,241
4,485
6,849
3,266
4,566
3,340
6,397
5,791
6,237
7,832
9,737
12,028
1,561
1,528
5,315
$
$
(1) Primarily associated with foreclosure expenses and other interest costs.
(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.
(4) Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 16 – Free-Standing Derivatives for
additional discussion and detail.
172
The following table 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. 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. Because of the uncertainty in
the various estimates underlying the mortgage repurchase
liability, there is a range of losses in excess of the recorded
mortgage repurchase liability that are reasonably possible. The
estimate of the range of possible loss for representations and
warranties does not represent a probable loss, and is based on
currently available information, significant judgment, and a
number of assumptions that are subject to change. The high end
of this range of reasonably possible losses in excess of our
recorded liability was $2.1 billion at December 31, 2011, and was
determined based upon modifying the assumptions utilized in
our best estimate of probable loss to reflect what we believe to be
the high end of reasonably possible adverse assumptions.
(in millions)
Year ended December 31,
2011
2010
2009
Balance, beginning of year
$
1,289
1,033
589
Wachovia acquisition (1)
-
-
31
Provision for repurchase losses:
Loan sales
Change in estimate (2)
Total additions
Losses
101
144
1,184
1,474
302
625
1,285
1,618
958
(1,248) (1,362)
(514)
Balance, end of year
$
1,326
1,289
1,033
(1) The 2009 amount is refinement to initial December 31, 2008, Wachovia
purchase accounting adjustments.
(2) Results from such factors as credit deterioration, changes in investor demand
and mortgage insurer practices, and changes in the financial stability of
correspondent lenders.
173
Note 10: Intangible Assets
The gross carrying value of intangible assets and accumulated amortization was:
Gross
2011
Net
Gross
December 31,
2010
Net
carrying Accumulated carrying
carrying
Accumulated
carrying
value amortization
value
value
amortization
value
(in millions)
Amortized intangible assets (1):
MSRs (2)
Core deposit intangibles
Customer relationship and other intangibles
3,158
(1,519)
1,639
$
2,383
15,079
(975)
(7,768)
1,408
7,311
2,131
15,133
3,077
(712)
(6,229)
(1,230)
1,419
8,904
1,847
Total amortized intangible assets
$
20,620
(10,262)
10,358
20,341
(8,171)
12,170
Unamortized intangible assets:
MSRs (carried at fair value) (2)
Goodwill
Trademark
(1) Excludes fully amortized intangible assets.
(2) See Note 9 for additional information on MSRs.
$
12,603
25,115
14
14,467
24,770
14
We based our projections of amortization expense shown
below on existing asset balances at December 31, 2011, with the
exception of a portfolio of MSRs with a net carrying value of
$313 million. Effective January 1, 2012, this portfolio of MSRs
will be transferring to MSRs carried at fair value. Future
amortization expense may vary from these projections.
The following table provides the current year and estimated
future amortization expense for amortized intangible assets.
Amortized
Core
deposit
Customer
relationship
and other
$
$
MSRs
intangibles
intangibles
Total
264
1,594
294
2,152
226
194
165
149
110
1,396
1,241
1,113
1,022
919
283
260
245
221
209
1,905
1,695
1,523
1,392
1,238
(in millions)
Year ended December 31, 2011 (actual)
Estimate for year ended December 31,
2012
2013
2014
2015
2016
174
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 24 for further
information on management reporting.
The following table shows the allocation of goodwill to our
operating segments for purposes of goodwill impairment testing.
The reduction in 2010 was predominately due to reversals of
excess exit reserves.
(in millions)
December 31, 2009
Goodwill from business combinations, net
December 31, 2010
Reduction in goodwill related to divested businesses
Goodwill from business combinations
Wealth,
Community
Banking
Wholesale Brokerage and
Retirement
Banking
Consolidated
Company
$
17,974
6,465
(52)
10
373
-
24,812
(42)
17,922
6,475
373
24,770
-
2
(9)
354
(2)
-
(11)
356
December 31, 2011
$
17,924
6,820
371
25,115
Note 11: Deposits
Time certificates of deposit (CDs) and other time deposits issued
by domestic offices totaled $76.5 billion and $90.6 billion at
December 31, 2011 and 2010, 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 $25.1 billion and
$33.9 billion at December 31, 2011 and 2010, respectively. The
contractual maturities of these deposits follow.
(in millions)
December 31, 2011
(in millions)
2012
2013
2014
2015
2016
Thereafter
Total
December 31, 2011
Three months or less
After three months through six months
After six months through twelve months
After twelve months
Total
$
3,427
2,828
3,034
15,804
$
25,093
$
31,675
21,479
5,447
8,538
5,964
3,427
$
76,530
Time CDs and other time deposits issued by foreign offices
with a denomination of $100,000 or more were $13.6 billion and
$16.7 billion at December 31, 2011 and 2010, respectively.
Demand deposit overdrafts of $649 million and $557 million
were included as loan balances at December 31, 2011 and 2010,
respectively.
175
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,
2011
2010
2009
Amount
Rate
Amount
Rate
Amount
Rate
Commercial paper and other short-term borrowings
$
18,053
0.19 % $
17,454
0.26 % $
12,950
0.39 %
Federal funds purchased and securities sold
under agreements to repurchase
31,038
0.05
37,947
0.15
26,016
0.08
Total
$
49,091
0.10 $
55,401
0.19 $
38,966
0.18
Year ended December 31,
Average daily balance
Commercial paper and other short-term borrowings
Federal funds purchased and securities sold
under agreements to repurchase
$
17,393
0.33 $
16,330
0.31 $
27,793
0.43
34,388
0.11
30,494
0.18
24,179
0.46
Total
$
51,781
0.18 $
46,824
0.22 $
51,972
0.44
Maximum month-end balance
Commercial paper and other short-term borrowings (1)
Federal funds purchased and securities sold
$
18,234
N/A $
17,646
N/A $
62,871
N/A
under agreements to repurchase (2)
37,509
N/A
37,947
N/A
30,608
N/A
N/A- Not Applicable
(1) Highest month-end balance in each of the last three years was April 2011, March 2010 and February 2009.
(2) Highest month-end balance in each of the last three years was March 2011, December 2010 and February 2009.
176
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 16 for further
information on qualifying hedge contracts.
Following is a summary of our long-term debt, 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 (1)
Floating-rate notes (1)
Market-linked notes and other (2)
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
Total junior subordinated debt - Parent (3)
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 and other (2)
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 (3)
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,
2011
2010
2012-2035
2012-2048
2012-2041
2.125-6.75% $
38,002
Varies
Varies
17,872
1,359
40,630
26,750
545
57,233
67,925
2012-2035
2015-2016
4.375-7.574%
12,041
Varies
1,141
12,370
1,118
2029-2068
2027
5.625-7.95%
Varies
13,182
13,488
6,951
247
-
11,257
289
6,786
7,198
18,332
77,613
99,745
2013
2038-2040
2012-2031
2012-2013
2012-2016
2012-2025
6.00%
Varies
2.30 - 8.45%
Varies
Varies
Varies
1,326
72
500
2,101
238
116
2,185
4,186
812
7,103
229
26
4,353
14,541
2013-2038
2014-2017
4.75-7.74%
Varies
15,882
1,976
16,520
1,945
17,858
18,465
2027
Varies
-
286
286
2014-2038
2014-2050
2012-2056
0.00-7.00%
2,103
Varies
Varies
2,748
14,854
317
278
595
3,751
4,053
8,639
42,202
50,044
177
Note 13: Long-Term Debt (continued)
(continued from previous page)
(in millions)
Other consolidated subsidiaries
Senior
Fixed-rate notes
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 (3)
Long-term debt issued by VIE - Fixed rate
Long-term debt issued by VIE - Floating rate
Mortgage notes and other debt of subsidiaries
December 31,
2011
2010
Maturity
date(s)
Stated
interest rate(s)
2012-2016
3.70-6.125%
5,154
2020
6.795% through 2015, varies
20
2027
0.928%
2012-2020
5.16-6.88%
2013-2018
Varies
5,174
-
155
-
155
81
-
129
6,147
20
6,167
10
239
78
327
84
489
127
Total long-term debt - Other consolidated subsidiaries
Total long-term debt
5,539
7,194
$
125,354
156,983
(1) 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 (TLGP) and are backed by the
full faith and credit of the United States.
(2) Primarily 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 16 – Free-standing derivatives.
(3) 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.
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, 2011, are presented in the following table.
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, 2011, we were in compliance with all the
covenants.
$
Parent
Company
15,443
10,023
7,791
3,753
18,605
14,290
10,790
8,949
13,302
17,740
27,301
54,980
$
77,613
125,354
(in millions)
2012
2013
2014
2015
2016
Thereafter
Total
178
Note 14: Guarantees, Pledged Assets and Collateral
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 (1)
$
Liquidity agreements (2)
Written put options (2)(3)
Loans and MHFS sold with recourse
Residual value guarantees
Contingent consideration
Other guarantees
Total guarantees
2011
December 31,
2010
Maximum
Non-
Maximum
Non-
Carrying
value
exposure investment
grade
to loss
Carrying
value
exposure investment
grade
to loss
85
-
-
1,469
102
8
31
6
41,171
669
2
8,224
5,784
197
98
552
22,259
62
2
2,466
3,850
-
97
4
142
45
-
747
119
8
23
-
42,159
13,645
19,596
3,993
49
8,134
5,474
197
118
73
1
2,615
3,564
-
116
-
$
1,701
56,697
28,740
1,084
69,849
29,885
(1) We commenced divestiture of our securities lending business in the latter half of 2011.
(2) Certain of these agreements included in this table are related to off-balance sheet entities and, accordingly, are also disclosed in Note 8.
(3) Written put options, which are in the form of derivatives, are also included in the derivative disclosures in Note 16.
“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 further
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 for derivative related products or the
allowance for lending related commitments, 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.
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 $687 million at December 31, 2011, and
$14.0 billion at December 31, 2010, in collateral supporting
loaned securities with values of $669 million and $13.6 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, we are
unable to determine our potential future liability under these
agreements. 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 9
for additional information on the liability for mortgage loan
repurchase losses.
179
Note 14: Guarantees, Pledged Assets, and Collateral (continued)
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. 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 16 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 indemnify the buyer for any loss on the loan up
to par value plus accrued interest. We provide recourse,
predominantly to the GSEs, on loans sold under various
programs and arrangements. Primarily all of these programs and
arrangements require that we share in the loans’ credit exposure
for their remaining life by providing recourse to the GSE, up to
33.33% of actual losses incurred on a pro-rata basis, in the event
of borrower default. Under the remaining recourse programs
and arrangements, if certain events occur within a specified
period of time from transfer date, we have to provide limited
recourse to the buyer to indemnify them for losses incurred for
the remaining life of the loans. The maximum exposure to loss
reported in the accompanying table 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. However, we believe the likelihood of
loss of the entire balance due to these recourse agreements is
remote and amounts paid can be recovered in whole or in part
from the sale of collateral. In 2011, we repurchased $38 million
of loans associated with these agreements. We also provide
representation and warranty guarantees on loans sold under the
various recourse programs and arrangements. Our loss exposure
relative to these guarantees is separately considered and
provided for, as necessary, in determination of our liability for
loan repurchases due to breaches of representation and
warranties. See Note 9 for additional information on the liability
for mortgage loan repurchase losses.
RESIDUAL VALUE GUARANTEES We have provided residual
value guarantees as part of certain leasing transactions of
180
corporate assets. At December 31, 2011, 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.
Pledged Assets and Collateral
As part of our liquidity management strategy, we pledge assets to
secure trust and public deposits, borrowings from the FHLB and
FRB and for other purposes as required or permitted by law. The
following table provides pledged loans and securities available
for sale where the secured party does not have the right to sell or
repledge the collateral. At December 31, 2011 and 2010, we did
not pledge any loans or securities available for sale where the
secured party has the right to sell or repledge the collateral. The
table excludes pledged assets related to VIEs, which can only be
used to settle the liabilities of those entities. See Note 8 for
additional information on consolidated VIE assets.
(in millions)
Dec. 31,
Dec. 31,
2011
2010
Securities available for sale
Loans
$
80,540
317,742
94,212
312,602
Total
$
398,282
406,814
We also 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, government-sponsored entities
(GSEs), and domestic and foreign companies. We pledged
$20.8 billion at December 31, 2011, and $27.3 billion at
December 31, 2010, under agreements that permit the secured
parties to sell or repledge the collateral. Pledged collateral where
the secured party cannot sell or repledge was $2.8 billion and
$5.9 billion at the same period ends, respectively.
We receive collateral from other entities under resale
agreements and securities borrowings. We received $17.8 billion
at December 31, 2011, and $22.5 billion at December 31, 2010,
for which we have the right to sell or repledge the collateral.
These amounts include securities we have sold or repledged to
others with a fair value of $16.7 billion at December 31, 2011,
and $14.6 billion at December 31, 2010.
Note 15: 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.
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 26, 2011, the Illinois Court
issued an order granting, in part, and denying, in part, Wells
Fargo’s motion to dismiss. The Court dismissed Wells Fargo &
Company as a party and dismissed Count III of the complaint,
which alleged violations of the Illinois Fair Lending Act. The
Court denied the remainder of the motion to dismiss.
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.
MEDICAL CAPITAL CORPORATION LITIGATION Wells Fargo
Bank, N.A. served as indenture trustee for debt issued by
affiliates of Medical Capital Corporation, which was placed in
receivership at the request of the Securities and Exchange
Commission (SEC) in August 2009. Since September 2009,
Wells Fargo has been named as a defendant in various class and
mass actions brought by holders of Medical Capital
Corporation’s debt, alleging that Wells Fargo breached
contractual and other legal obligations owed to them and seeking
unspecified damages. The actions have been consolidated in the
United States District Court for the Central District of California.
On July 26, 2011, the District Court certified a class consisting of
holders of notes issued by affiliates of Medical Capital
Corporation and, on October 18, 2011, the Ninth Circuit Court of
Appeals denied a petition seeking to appeal the class certification
order.
MORTGAGE-BACKED CERTIFICATES LITIGATION Several
securities law based putative class actions were consolidated in
the U.S. District Court for the Northern District of California on
July 16, 2009, under the caption In re Wells Fargo Mortgage-
Backed Certificates Litigation. The case asserted claims 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 alleged 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
parties agreed to settle the case on May 27, 2011, for
$125 million. Final approval of the settlement was entered on
November 14, 2011. Some class members opted out of the
settlement, with the most significant being the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan
Mortgage Corporation (Freddie Mac) and American
International Group, Inc.
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
181
Note 15: Legal Actions (continued)
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.
On April 20, 2011, a case captioned Federal Home Loan of
Boston v. Ally Financial, Inc., et al., was filed in the Superior
Court of the Commonwealth of Massachusetts for the County of
Suffolk. The case names, among a large number of parties,
Wells Fargo & Company, Wells Fargo Asset Securitization
Corporation and Wells Fargo Bank, N.A. as parties and contains
allegations substantially similar to the cases filed by the other
Federal Home Loan Banks.
On April 28, 2011, a case captioned The Union Central Life
Insurance Company, et al. v. Credit Suisse First Boston
Securities Corp., et al., was filed in the U.S. District Court for the
Southern District of New York. Among other defendants, it
names Wells Fargo Asset Securitization Corporation and
Wells Fargo Bank, N.A. The case asserts various state law fraud
claims and claims for violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 on behalf of three insurance
companies, relating to offerings of mortgage-backed securities
from 2005 through 2007.
In addition, there are other mortgage-related threatened or
asserted claims by entities or investors where Wells Fargo may
have indemnity or repurchase obligations, or as to which it has
entered into agreements to toll the relevant statutes of
limitations.
MORTGAGE FORECLOSURE DOCUMENT LITIGATION Eight
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 or corporate trustee of mortgage trusts. The
cases have been brought in state and federal courts. Five of the
class actions have been dismissed or otherwise resolved. Of the
182
individual borrower cases, the majority are filed in state courts
in California and Ohio. 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 or fraud and seek relief ranging from cancellation of
notes and mortgages to money damages.
MORTGAGE RELATED REGULATORY INVESTIGATIONS On
April 13, 2011, Wells Fargo Bank, N.A. entered into a Consent
Order with the OCC and Wells Fargo & Company entered into a
Consent Order with the Board of Governors of the Federal
Reserve System in connection with Wells Fargo’s mortgage
foreclosure practices. The Consent Orders require Wells Fargo to
develop and implement certain compliance programs and to take
other remedial steps, which Wells Fargo is doing. On
February 9, 2012, the OCC and Federal Reserve announced that
they had also imposed civil money penalties of $83 million and
$85 million, respectively, related to the Consent Orders. These
penalties will be satisfied through payments made under a
separate simultaneous settlement in principle, announced on the
same day, among the Department of Justice (DOJ), a task force
of Attorneys General from 49 states, other government entities,
Wells Fargo and four other mortgage servicers related to
mortgage servicing and foreclosure practices. Under the
settlement in principle, Wells Fargo agreed to the following
commitments, comprised of three components totaling
$5.3 billion:
Consumer Relief Program For qualified borrowers with
financial hardship and a loan owned and serviced by Wells
Fargo, a commitment to provide $3.4 billion in aggregate
consumer relief and assistance programs, including
expanded first and second mortgage modifications that
broaden the use of principal reduction to help customers
achieve affordability, an expanded short sale program that
includes waivers of deficiency balances, forgiveness of
arrearages for unemployed borrowers, cash-for-keys
payments to borrowers who voluntarily vacate properties,
and “anti-blight” provisions designed to reduce the impact
on communities of vacant properties. As of
December 31, 2011, the expected impact of the Consumer
Relief Program was covered in our allowance for credit
losses and in the nonaccretable difference relating to our
purchased credit-impaired residential mortgage portfolio.
Refinance Program For qualified borrowers with little or
negative equity in their home and a loan owned and serviced
by Wells Fargo, an expanded first-lien refinance program
commitment estimated to provide $900 million of aggregate
payment relief over the life of the refinanced loans. The
Refinance Program will not result in any current-period
charge as its impact will be recognized over a period of years
in the form of lower interest income as qualified borrowers
benefit from reduced interest rates on loans refinanced
under the program.
Foreclosure Assistance Payment $1 billion paid
directly to the federal government and the participating
states for their use to address the impact of foreclosure
challenges as they see fit and which may include direct
payments to consumers. As of December 31, 2011, we had
fully accrued for the Foreclosure Assistance Payment.
Government agencies continue investigations or examinations of
other mortgage related practices of Wells Fargo. 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 properly disclosed in offering documents for its residential
mortgage-backed securities the facts and risks associated with
those securities. Wells Fargo has received a Wells notice from
SEC staff relating to Wells Fargo’s disclosures in mortgage-
backed securities offering documents. Wells Fargo continues to
provide information requested by the various agencies in
connection with certain investigations.
MUNICIPAL DERIVATIVES BID PRACTICES INVESTIGATION
The DOJ and the SEC, beginning in November 2006, requested
information from a number of financial institutions, including
Wachovia Bank, N.A.’s municipal derivatives group, with regard
to competitive bid practices in the municipal derivative markets.
Other state and federal agencies subsequently also began
investigations of the same practices. On December 8, 2011, a
global resolution of the Wachovia Bank investigations was
announced by DOJ, the Internal Revenue Service, the SEC, the
OCC and a group of State Attorneys General. The investigations
were settled with Wachovia Bank agreeing to pay a total of
approximately $148 million in penalties and remediation to the
various agencies.
Wachovia Bank, along with a number of other banks and
financial services companies, was named as a defendant in a
number of substantially identical purported class actions and
individual 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 were either consolidated under the caption In re
Municipal Derivatives Antitrust Litigation or administered
jointly with that action in the U.S. District Court for the
Southern District of New York. The plaintiffs and Wells Fargo
agreed to settle the In re Municipal Derivatives Antitrust
Litigation on October 21, 2011. The settlement is subject to court
approval and, if finally approved, will result in Wells Fargo
paying the amount of $37 million. The settlement was
preliminarily approved on December 27, 2011.
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 several such
cases pending against Wells Fargo Bank (including the Wachovia
Bank cases to which Wells Fargo succeeded), most of which have
been consolidated in multi-district litigation proceedings in the
U.S. District Court for the Southern District of Florida. The bank
defendants moved to compel these cases to arbitration under
recent Supreme Court authority. On November 22, 2011, the
Judge denied the motion. The Banks have appealed the decision
to the U.S. Court of Appeals for the Eleventh Circuit.
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., a case that was 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 of
approximately $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
securities class action, now captioned In re Wachovia Equity
Securities Litigation, has been pending under various names
since July 7, 2008, in the U.S. District Court for the Southern
District of New York alleging violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. 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. 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. On March 31, 2011, the U.S. District Court for the Southern
District of New York entered a Decision and Order granting
Wachovia’s motions to dismiss the In re Wachovia Equity
Securities Litigation and the Stichting Pensioenfonds ABP, FC
Holdings AB, Deka Investment GmbH and Forsta AP-Fonden
cases. Plaintiffs and Wells Fargo have agreed to settle the Equity
Securities Litigation for $75 million and on January 27, 2012,
the Court entered an order preliminarily approving the
settlement. A fairness hearing on final approval of the settlement
is scheduled for June 1, 2012.
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
was captioned In Re Wachovia Preferred Securities and
Bond/Notes Litigation. On March 31, 2011, by the same Decision
and Order referenced above, the court also granted in part and
denied in part Wachovia’s motion to dismiss the In re Wachovia
Preferred Securities and Bond/Notes Litigation, allowing that
case to go forward after limiting the number of offerings at issue.
183
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 reasonably possible potential
litigation losses in excess of the Company’s liability for probable
and estimable losses was $1.2 billion as of December 31, 2011.
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.
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 accounted for separately from
their host contracts.
The following table presents the total notional or contractual
amounts and fair values for 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 that 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.
Note 15: Legal Actions (continued)
Wells Fargo and the plaintiffs agreed to settle the In re
Wachovia Preferred Securities and Bond/Notes Litigation for
$590 million. The proposed settlement was preliminarily
approved by the Court on August 9, 2011. The hearing on final
approval was held on November 14, 2011, and a judgment
approving class action settlements was filed on January 3, 2012.
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. On December 22, 2011, the dismissal of the Rivers v.
Wachovia Corporation, et al. case, one of the two South
Carolina actions, was affirmed by the U.S. Court of Appeals for
the Fourth Circuit.
OUTLOOK When establishing a liability for contingent litigation
losses, the Company determines a range of potential losses for
Note 16: 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 significantly
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.
184
(in millions)
Derivatives designated as hedging instruments
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:
Interest rate contracts
Commodity contracts
Equity contracts
Foreign exchange contracts
Credit contracts - protection sold
Credit contracts - protection purchased
Other derivatives
December 31, 2011
December 31, 2010
Notional or
Fair value
Notional or
Fair value
contractual
Asset
Liability
contractual
Asset
Liability
amount
derivatives derivatives
amount derivatives derivatives
$
87,537
22,269
8,423
1,523
2,769
110,314
572
25,904
7,126
1,527
1,614
727
9,946
3,341
8,653
2,341
377,497
-
5,833
125
2,367
2,318
-
250
3
-
2,011
-
3
-
117
408,563
176
2,898
-
2,625
46
5,528
396
2,538
23
80
-
53
-
35
2,571
2,131
3,001
2,759
2,425,144
81,336
83,834
2,809,387
58,225
59,329
77,985
68,778
140,704
38,403
36,156
-
4,351
3,768
3,151
319
3,254
-
4,234
3,661
2,803
5,178
276
-
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
-
Subtotal
96,179
99,986
73,704
75,793
Total derivatives not designated as hedging instruments
98,750
102,117
76,705
78,552
Total derivatives before netting
108,696
105,458
85,358
80,893
Netting (3)
Total
(81,143)
(89,990)
(63,469)
(70,009)
$
27,553
15,468
21,889
10,884
(1) Notional amounts presented exclude $15.5 billion at December 31, 2011, and $20.9 billion at December 31, 2010, 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, and other interests held.
(3) 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 $6.6 billion and $15.4 billion, respectively, at December 31, 2011, and $5.5 billion and $12.1 billion,
respectively, at December 31, 2010.
185
Note 16: 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. 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. We also
use interest rate swaps to hedge against changes in fair value for
certain mortgages held for sale. 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 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, 2011
Interest rate
Foreign exchange Total net
contracts hedging:
contracts hedging:
gains
Securities Mortgages
Securities
(losses)
on fair
available
held for Long-term
available Long-term
value
for sale
sale
debt
for sale
debt
hedges
Gains (losses) recorded in net interest income
$
(451)
-
1,659
(11)
376
1,573
Gains (losses) recorded in noninterest income
Recognized on derivatives
Recognized on hedged item
(1,298)
(21)
2,796
168
512
2,157
1,232
17
(2,616)
(186)
(445)
(1,998)
Recognized on fair value hedges (ineffective portion) (1)
$
(66)
(4)
180
(18)
67
159
Year ended December 31, 2010
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)
469
Recognized on fair value hedges (ineffective portion) (1)
$
37
-
-
-
1,565
(1,469)
269
(1,030)
372
(270)
1,007
(263)
96
(1)
(23)
109
(1) Included $53 million and $3 million, respectively, for year ended December 31, 2011 and 2010, of gains (losses) on forward derivatives hedging foreign currency securities
available for sale and long-term debt, representing the portion of derivatives gains (losses) excluded from the assessment of hedge effectiveness (time value).
186
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
OCI to interest income and interest expense in the current
period 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
$440 million (pre-tax) of deferred net gains on derivatives in
OCI at December 31, 2011, will be reclassified into interest
income and interest expense during the next twelve months.
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 6 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 (losses) (pre tax) recognized in noninterest income on derivatives (1)
(1) None of the change in value of the derivatives was excluded from the assessment of hedge effectiveness.
Year ended
December 31,
2011
2010
105
571
(5)
468
613
6
$
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, constant maturity
mortgages, forwards, Eurodollar and Treasury futures and
options contracts, resulted in net derivative gains of $5.2 billion
in 2011 and net derivative gains of $4.5 billion in of 2010, which
are included in mortgage banking noninterest income. The
aggregate fair value of these derivatives was a net asset of
$1.4 billion at December 31, 2011, and a net liability of
$943 million at December 31, 2010. 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
swaps, 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
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 asset of $478 million at
December 31, 2011, and a net liability of $271 million at
December 31, 2010, 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 other noninterest income.
Free-standing derivatives also include embedded derivatives
that are required to be accounted for separately 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
187
Note 16: Derivatives (continued)
of the cash flows or the value of the note in a manner similar to a
derivative instrument and therefore are considered to contain an
“embedded” derivative instrument. The indices on which the
performance of the hybrid instrument is calculated are not
clearly and closely related to the host debt instrument. 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)
Net gains (losses) recognized on free-standing derivatives (economic hedges):
Interest rate contracts
Recognized in noninterest income:
Mortgage banking (1)
Other (2)
Foreign exchange contracts (2)
Equity contracts (2)
Credit contracts (2)
Subtotal
Net gains (losses) recognized on customer accommodation, trading and other free-standing derivatives:
Interest rate contracts
Recognized in noninterest income:
Mortgage banking (3)
Other (4)
Commodity contracts (4)
Equity contracts (4)
Foreign exchange contracts (4)
Credit contracts (4)
Other (4)
Subtotal
Net gains recognized related to derivatives not designated as hedging instruments
Year ended
December 31,
2011
2010
$
246
1,611
(157)
70
(5)
(22)
103
-
(18)
(174)
136
1,518
3,594
3,305
298
124
769
698
(200)
(5)
224
65
441
565
(710)
10
5,278
3,900
$
5,414
5,418
(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 included in other noninterest income.
(3) Predominantly mortgage banking noninterest income including gains (losses) on interest rate lock commitments.
(4) Predominantly included in net gains from trading activities in noninterest income.
Credit Derivatives
We use credit derivatives primarily to assist customers with their
risk management objectives. We may also use credit derivatives
in structured product transactions or 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.
188
The following table provides details of sold and purchased credit derivatives.
Notional amount
Protection
sold -
non-
Protection
purchased
Net
with protection
Other
(in millions)
December 31, 2011
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
Fair value
liability
Protection investment
identical
grade underlyings (B)
sold protection
Range of
(A) - (B) purchased maturities
sold (A)
$
1,002
24,634
14,043
13,329
11,305
9,404 2012-2021
3,308
4,691
4,300
2,194
2,497
1,335 2016-2056
68
3,006
843
2,341
665
912 2012-2017
713
1,357
83
460
458
83
453
4,172
3,637
76
2
9
19
1,338
1,403 2049-2052
8
355
126
75
105
116 2037-2046
251 2012-2016
4,046
4,422 2012-2056
Total credit derivatives
$
5,178
38,403
23,817
18,372
20,031
17,843
December 31, 2010
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
$
810
4,145
30,445
5,825
16,360
5,246
17,978
4,948
12,467
877
9,440
2,482
2011-2020
2016-2056
12
717
128
2
12
2,700
1,977
144
481
6,127
909
612
144
456
5,348
2,167
533
1,106
2011-2017
924
46
391
41
1,053
779
2049-2052
98
142
2037-2046
90
6,086
261
2,745
2011-2014
2011-2056
Total credit derivatives
$
5,826
47,699
29,075
26,495
21,204
16,955
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.
189
Note 16: 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
$17.1 billion and $12.6 billion at December 31, 2011 and 2010,
respectively, for which we had posted $15.0 billion and
$12.0 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, 2011 or 2010, we would have been required to post additional
collateral of $2.1 billion, or $1.0 billion, respectively, 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.
Note 17: 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, certain loans held for investment, fair value
MSRs, principal investments and securities sold but not yet
purchased (short sale liabilities) are recorded at fair value on a
recurring basis. We generally do not record our issued debt at
fair value. 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 consider the market to be less
orderly include primarily non-agency residential MBS. The
methodology used to adjust the quotes involved weighting the
190
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 we assigned
to price quotes. The less active and orderly markets were
determined to be, the less weighting we 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.
recurring or nonrecurring basis and for estimating fair value for
financial instruments not recorded at fair value.
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 immediate settlement of the asset or liability.
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
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 internal 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 we evaluate the
appropriateness of an internal trader price compared with
vendor prices, our considerations include the range and quality
of vendor prices. Vendor prices are used to ensure the
reasonableness of a trader price; however valuing financial
instruments involves judgments acquired from knowledge of a
particular market and is not perfunctory. If a trader asserts that
a vendor price is not reflective of market value, justification for
using the trader price, including recent sales activity where
possible, must be provided to and approved by the appropriate
levels of management.
Similarly, while securities available for sale traded in
secondary markets are typically valued using unadjusted vendor
prices or vendor prices adjusted by weighting them with internal
discounted cash flow techniques, these prices are reviewed and,
if deemed inappropriate by a trader who has the most knowledge
of a particular market, can be adjusted. Securities measured with
these internal valuation techniques are generally classified as
Level 2 of the hierarchy and often involve using quoted market
prices for similar securities, pricing models, 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,
191
Note 17: Fair Values of Assets and Liabilities (continued)
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 a 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. 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. Although most loans are not recorded at fair value on a
recurring basis, reverse mortgages, which were previously sold
under a GNMA securitization program and were consolidated
during fourth quarter 2011, are held at fair value on a recurring
basis. In addition, 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.
192
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.
The carrying value of credit card loans, which is adjusted for
estimates of credit losses inherent in the portfolio at the balance
sheet date, is reported as a reasonable estimate of fair value.
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 and our valuation
estimates are periodically benchmarked to independent
appraisals. 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 estimated costs
to sell. Fair value is generally based upon independent market
prices or appraised values of the collateral and, accordingly, we
classify foreclosed assets as Level 2.
NONMARKETABLE EQUITY INVESTMENTS Nonmarketable
equity investments are generally 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. We
estimate the fair value of investments in non-public securities
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.
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 obtainable 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.
193
Note 17: Fair Values of Assets and Liabilities (continued)
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, 2011
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
$
-
-
-
-
-
-
-
-
-
-
-
-
446
7
1,086
1,564
-
16
2,342
-
-
43
1,091
8,163
868
5,748
-
-
-
21,014
118,107
26,222
3,449
-
8,206
-
868
33
171,091
665
-
-
-
186
145
331
3
3,449
8,206
901
171,756
334
17
-
11
22
44
-
43
-
-
-
-
6
834
1
850
249
-
-
-
-
$
-
1,211
6
21
2,123
-
-
-
-
-
-
-
-
-
-
-
-
-
15
3
201
219
-
-
-
50
4,133
4,183
-
936
263
-
-
-
936
201
14,055
102,206
14,376
130,900
727
219
4,183
1,137
131,627
15
-
-
20
44
-
46
-
-
-
-
-
740
1
841
393
-
-
169
606
775
16
791
8
-
-
-
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, 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
194
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.
Level 1
Level 2
Level 3
Netting
Total
(in millions)
December 31, 2011
Trading assets (excluding derivatives)
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Collateralized debt obligations(1)
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(2)
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 (3)
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 (5)
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
$
$
$
3,342
-
-
-
-
-
1,682
5,024
1,847
6,871
869
-
-
-
-
-
317
-
-
-
-
-
-
3,638
2,438
-
6,479
34,959
1,093
172
48,779
68
48,847
6,099
21,077
96,754
17,775
17,918
132,447
17,792
-
86
650
8,326
9,062
1,044
-
53
1,582
97
108
190
4
2,034
115
2,149
-
11,516
-
61
232
293
295
8,599
6,641
282
2,863
9,786
-
1,186
187,521
30,489
552
814
1,366
631
53
684
2,552
188,205
-
-
-
-
-
-
471
35
-
-
-
41,381
1,176
5,893
-
91,022
4,351
2,737
4,873
2,219
-
1,344
23
1,367
31,856
3,410
-
23
12,603
1,055
-
560
16
1,357
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,980
2,491
1,582
6,576
35,067
1,283
1,858
55,837
2,030
57,867
6,968
32,593
96,754
17,836
18,150
132,740
18,404
8,599
6,727
932
11,189
18,848
1,044
219,196
2,527
890
3,417
222,613
44,791
1,176
5,916
12,603
92,077
4,351
3,768
4,924
3,576
-
-
-
(81,143) (4)
(81,143)
506
105,202
2,988
(81,143)
88
135
244
-
27,553
467
10,017
390,839
53,273
(81,143)
372,986
(4)
-
(229)
(31)
-
-
-
(88,164)
(4,234)
(2,797)
(3,324)
(2,099)
-
(446)
-
(635)
(23)
(3,355)
(117)
-
-
-
-
-
-
(88,614)
(4,234)
(3,661)
(3,378)
(5,454)
(117)
-
-
89,990 (4)
89,990
Total derivative liabilities (6)
(264)
(100,618)
(4,576)
89,990
(15,468)
Short sale liabilities:
Securities of U.S. Treasury and federal agencies
Securities of U.S. states and political subdivisions
Corporate debt securities
Equity securities
Other securities
Total short sale liabilities
Other liabilities
(3,820)
-
-
(944)
-
(919)
(2)
(4,112)
(298)
(737)
(4,764)
(6,068)
-
-
-
-
-
-
-
(98)
(44)
-
-
-
-
-
-
-
(4,739)
(2)
(4,112)
(1,242)
(737)
(10,832)
(142)
Total liabilities recorded at fair value
$
(5,028)
(106,784)
(4,620)
89,990
(26,442)
(1) Includes collateralized loan obligations of $583 million that are classified as trading assets.
(2) Includes collateralized loan obligations of $8.1 billion that are classified as securities available for sale.
(3) Perpetual preferred securities include ARS and corporate preferred securities. See Note 8 for additional information.
(4) 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.
(5) Derivative assets include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets.
(6) Derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading liabilities.
(continued on following page)
195
Note 17: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
(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 (1)
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 (2)
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 (3)
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 (5)
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
4,299
938
-
-
-
-
-
-
-
-
-
-
-
-
3,335
1,893
-
10,164
9,137
1,811
625
26,965
987
27,952
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) (4)
(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 (4)
70,009
Total derivative liabilities (6)
(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)
-
(4,528)
(1,129)
(3,798)
(178)
(347)
(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) Includes collateralized loan obligations of $671 million that are classified as trading assets.
(2) Includes collateralized loan obligations of $4.2 billion that are classified as securities available for sale.
(3) Perpetual preferred securities include ARS and corporate preferred securities. See Note 8 for additional information.
(4) 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.
(5) Derivative assets include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets.
(6) Derivative liabilities include contracts qualifying for hedge accounting, economic hedges and derivatives included in trading liabilities.
196
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
Purchases,
sales,
issuances
Other
compre-
hensive settlements,
net
income
and Transfers Transfers
out of
into
Level 3
Level 3
Net unrealized
gains (losses)
included in net
Balance,
end of
year
income related
to assets and
liabilities held
at period end (1)
(in millions)
Year ended December 31, 2011
Trading assets
(excluding derivatives):
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
Balance,
beginning
of year
Net
income
$
5
1,915
166
117
366
34
2,603
136
3
(24)
1
6
75
(3)
58
(21)
(excluding derivatives)
2,739
37
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
4,564
10
20
217
237
433
4,778
6,133
112
3,150
9,395
85
(9)
(44)
(53)
150
290
4
(3)
10
11
-
-
-
-
-
-
-
-
-
-
52
(1)
59
58
(112)
(202)
(27)
(18)
13
(32)
-
12
(297)
(70)
(36)
(122)
(28)
(541)
2
51
-
-
31
-
1
83
-
(18)
(12)
-
(10)
(129)
-
(169)
53
1,582
97
108
190
4
2,034
(2)
115
-
1
(80)
(4)
(2)
72
(13)
14
(539)
83
(171)
2,149
1 (2)
6,923
-
(33)
11,516
(6)
2
121
2
(4)
123
(185)
3,725
531
40
181
752
(85)
41
8
-
221
107
328
-
(64)
(4)
(68)
(32)
-
-
(70)
(598)
(668)
-
61
232
293
295
8,599
6,641
282
2,863
9,786
-
9
(8)
(56)
(64)
(3)
-
-
(25)
(7)
(32)
-
2
-
2
502
492
-
-
(1)
(3)
(6)
1
-
-
(9)
-
-
-
(2)
-
1,344
23
(53)
-
(2)
1,367
(53)(4)
(803)
31,856
(327)
-
-
(104)
11
2
(3)
(2)
-
3,410
23
12,603
609
-
(75)
(7)
(1,998)
(117)
(143)
43 (5)
- (5)
(3,680)(5)
309
1
55
(19)
50
-
(96)
(1,588)
396 (6)
-
-
-
244
-
(44)
3 (2)
- (2)
- (5)
9,873
(104)
(299)
3,957
(3,414)
(9)
28
(6)
(123)
-
(3,524)
(82)
-
308
-
-
-
-
-
-
-
-
-
-
-
-
-
Total debt securities
19,492
408
(236)
11,126
500
(801)
30,489
(90)(3)
Marketable equity securities:
Perpetual preferred securities
Other marketable equity securities
2,434
32
160
-
(7)
1
(1,243)
(10)
2,466
160
(6)
(1,253)
568
(242)
Total marketable
equity securities
Total securities
available for sale
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
21,958
3,305
309
14,467
77
(1)
(225)
9
(1,017)
(35)
44
13
(5,821)
4,051
2
126
(8)
(856)
(82)
Total derivative contracts
(1,192)
3,233
Other assets
Short sale liabilities
Other liabilities (excluding derivatives)
314
-
(344)
12
-
(8)
(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 trading activities and 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 and other noninterest income in the income statement.
(6) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)
197
Note 17: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities
measured at fair value on a recurring basis for the year ended December 31, 2011.
Purchases
Sales
Issuances
Settlements
Net
$
313
1,054
80
759
516
6
2,728
-
(199)
(1,310)
(150)
(790)
(585)
(22)
(3,056)
-
2,728
(3,056)
-
-
-
-
-
-
-
2
2
(102)
(41)
-
(5)
(53)
(12)
(213)
-
12
(297)
(70)
(36)
(122)
(28)
(541)
2
(213)
(539)
4,280
(4)
4,723
(2,076)
6,923
3
21
24
94
4,805
5,918
44
1,428
7,390
-
16,593
1
3
4
16,597
576
23
-
6
7
123
4
6
-
146
10
(125)
(10)
-
-
-
(208)
(36)
-
-
(456)
(456)
(85)
(789)
(13)
(12)
(25)
(814)
(21)
(309)
-
(1)
(17)
(255)
(4)
(3)
-
(280)
(1)
124
1
-
-
-
1
-
333
-
1,395
1,728
-
(9)
(19)
(28)
(72)
(1,044)
(5,720)
(4)
(2,186)
(7,910)
-
(6)
2
(4)
(185)
3,725
531
40
181
752
(85)
6,452
(11,130)
11,126
-
-
-
6,452
-
-
4,011
-
-
-
-
-
-
-
-
-
-
(1,231)
(1)
(1,243)
(10)
(1,232)
(1,253)
(12,362)
(659)
(13)
(54)
(3,419)
1
160
(6)
(126)
-
(3,390)
(91)
1
317
9,873
(104)
(299)
3,957
(3,414)
(9)
28
(6)
(123)
-
(3,524)
(82)
-
308
(in millions)
Year ended December 31, 2011
Trading assets
(excluding derivatives):
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 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
available for sale
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
Other liabilities (excluding derivatives)
198
Total net gains
(losses) included in
Purchases,
sales,
Balance,
beginning
of year
Net
income
Other
compre-
hensive
income
issuances
and
settlements,
net
Transfers
into
Level 3
Transfers
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)
$
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)
Total trading assets
(excluding derivatives)
2,311
468
2,833
2,378
(6,741)
19,492
(40)(3)
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)
(58)
(113)
959
274
227
(1,276)
(2,175)
20
217
501
(3,451)
259
-
(155)
(212)
(2,403)
48
903
256
113
1,057
-
(1,767)
(1,150)
(1,452)
1,426
(2,917)
12
-
-
237
433
4,778
6,133
112
3,150
9,395
85
6
(21)
80
14
(26)
(54)
2,434
32
2,393
100
(26)
(15)
94
(80)
2,466
22,773
3,523
-
16,004
(114)
-
(344)
(1)
(330)
(43)
(832)
1,373
(26)
(10)
346
370
2,818
2,472
(6,821)
21,958
43
55
(5,511)
3,514
(1)
(104)
21
(675)
4
2,759
29
(2)
(55)
-
-
-
-
-
-
-
-
-
-
-
-
-
(253)
(112)
4,092
(3,482)
-
169
(11)
(18)
4
(3,338)
(103)
380
1,035
-
(388)
(669)
(118)
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)
(in millions)
Year ended December 31, 2010
Trading assets
(excluding derivatives):
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
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
available for sale
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)
(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 trading activities and 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 and other noninterest income in the income statement.
(6) Included in mortgage banking, trading activities and other noninterest income in the income statement.
(continued on following page)
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)
- (2)
(58)(5)
199
Note 17: Fair Values of Assets and Liabilities (continued)
(continued from previous page)
(in millions)
Year ended December 31, 2009
Trading assets (excluding derivatives)
Securities available for sale:
Total net gains
(losses) included in
Purchases,
sales,
Net
Net unrealized
gains (losses)
included in net
Balance,
beginning
of year
Net
income
issuances
Other
compre-
and
hensive settlements,
net
income
transfers
into and/ Balance,
end
or out of
Level 3
income related
to assets and
liabilities held
of year at period end (1)
$
3,495
202
(1,749)
361
2,311
276 (2)
2
-
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
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)
282
2,083
12,799
19,867
2,775
50
2,825
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)
104
-
104
144
(2)
142
(723)
63
(660)
5
(23)
2,305
88
(18)
2,393
(1)
-
(1) (4)
$
$
22,692
97
4,134
(153)
(3,997)
22,773
(526)
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)
(109) (5)
(1,534) (5)
(799) (6)
12 (2)
14 (5)
(8)
-
(227)
(112)
(339)
-
(84)
(94)
(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 trading activities and 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 and other noninterest income in the income statement.
(6) Included in mortgage banking, trading activities and other noninterest income in the income statement.
200
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, 2011, we transferred
$709 million of other trading assets from Level 2 to Level 1 due
to use of more observable market data. We transferred
$801 million of debt securities available for sale from Level 3 to
Level 2 due to an increase in the volume of trading activity for
certain securities, which resulted in increased occurrences of
observable market prices. We also transferred $502 million of
securities available for sale from Level 2 to Level 3 primarily due
to a decrease in liquidity for certain asset-backed securities.
Significant changes to Level 3 assets for the year ended
December 31, 2010 are described as follows:
We adopted new consolidation accounting guidance which
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 2011 and 2010 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, 2011
Mortgages held for sale (1)
Loans held for sale
Loans:
Commercial
Consumer
Total loans (2)
Mortgage servicing rights (amortized)
Other assets (3)
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)
$
$
Carrying value at year end
Level 1
Level 2
Level 3
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,019
1,166
2,185
86
-
86
1,501
4,163
13
1,514
4
4,167
5,664
17
5,681
-
537
293
67
293
604
2,000
352
2,480
5,870
8,350
-
765
891
2,891
-
352
67
18
2,547
5,888
85
8,435
104
82
104
847
(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.
201
Note 17: Fair Values of Assets and Liabilities (continued)
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, 2011
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, 2010
Mortgages held for sale
Loans held for sale
Loans:
Commercial
Consumer
Total loans (1)
Mortgage servicing rights (amortized)
Other assets (2)
Total
$
29
22
(1,043)
(4,905)
(5,948)
(34)
(256)
$
(6,187)
$
(20)
(1)
(1,306)
(6,881)
(8,187)
(3)
(301)
$
(8,512)
(1) Represents write-downs of loans based on the appraised value of the collateral.
(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.
202
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.
(in millions)
December 31, 2011
Offshore funds
Funds of funds
Hedge funds
Private equity funds
Venture capital funds
Total
December 31, 2010
Offshore funds
Funds of funds
Hedge funds
Private equity funds
Venture capital funds
Total
N/A - Not applicable
Offshore funds primarily invest in investment grade
European fixed-income securities. Redemption restrictions are
in place for investments with a fair value of $200 million and
$74 million at December 31, 2011 and 2010, respectively, due to
lock-up provisions that will remain in effect until October 2015.
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 nine years.
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 six years.
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
recognized 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.
Fair
Unfunded
value commitments
Redemption
frequency
Redemption
notice
period
$
352
1
22
976
83
-
-
-
240
28
Daily - Annually
1 - 180 days
Quarterly
Daily - Annually
N/A
N/A
90 days
5 - 95 days
N/A
N/A
$
1,434
268
$
1,665
63
23
1,830
88
-
-
-
669
36
Daily - Annually
Monthly - Quarterly
Monthly - Annually
N/A
N/A
1 - 180 days
10 - 90 days
30 - 120 days
N/A
N/A
$
3,669
705
Upon the acquisition of Wachovia, we elected to measure at
fair value certain portfolios of LHFS 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. Upon clarifying guidance from the SEC
during fourth quarter 2011, we consolidated reverse mortgage
loans previously sold under a GNMA securitization program. We
had initially elected fair value option on these loans prior to sale,
and, as such, they were consolidated under fair value option.
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.
203
Note 17: Fair Values of Assets and Liabilities (continued)
December 31, 2011
December 31, 2010
Fair value
carrying
amount
less
Fair value
carrying
amount
less
Fair value Aggregate aggregate
unpaid
carrying
unpaid
Fair value Aggregate aggregate
unpaid
carrying
unpaid
(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
amount
principal
principal
amount
principal
principal
$
44,791
43,687
1,104 (1)
47,531
47,818
(287) (1)
265
44
584
56
(319)
(12)
1,176
1,216
25
39
(40)
(14)
5,916
32
5,441
32
-
-
-
-
475
-
-
-
325
38
873
1
309
13
2
306
662
47
897
7
348
16
2
353
(337)
(9)
(24)
(6)
(39)
(3)
-
(47)
(1) The difference between fair value carrying amount and aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on
the related loan commitment prior to funding, and premiums on acquired loans.
The assets accounted for under 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.
2011
2010
Net gains
Mortgage
banking
(losses)
from
Net gains
Mortgage
banking
(losses)
from
Net gains
Mortgage
banking
(losses)
from
Other
Other
2009
Other
(in millions)
noninterest
income activities
trading noninterest
income
noninterest
income
trading noninterest
income
activities
noninterest
income
trading noninterest
income
activities
Year ended December 31,
Mortgages held for sale
$
6,084
Loans held for sale
Loans
Long-term debt
Other interests held
-
13
(11)
-
-
-
-
-
(25)
-
32
80
-
-
6,512
-
55
(48)
-
-
-
-
-
(13)
-
24
-
-
-
4,891
-
-
-
-
-
-
-
-
117
-
99
-
-
-
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.
the relevant risk-free benchmark interest rate. In recent years
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.
(in millions)
Gains (losses) attributable to
instrument-specific credit risk:
Mortgages held for sale
Loans held for sale
Year ended Dec. 31,
2011
2010
2009
$
(144)
32
(28)
24
(277)
63
Total
$
(112)
(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
204
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 (4)
2011
December 31,
2010
Carrying Estimated
Carrying Estimated
amount
fair value
amount
fair value
$
3,566
3,566
4,232
4,234
162
176
417
441
731,308
723,867
721,016
710,147
8,061
8,490
8,494
8,814
920,070
921,803
847,942
849,642
125,238
126,484
156,651
159,996 (3)
(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) Loans exclude balances for which the fair value option was elected. At December 31, 2010, long-term debt excludes balances for which the fair value option was elected.
Loans exclude lease financing with a carrying amount of $13.1 billion at both December 31, 2011 and 2010, respectively.
(4) The carrying amount and fair value exclude obligations under capital leases of $116 million and $26 million at December 31, 2011 and 2010, 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 $495 million and $673 million at
December 31, 2011 and 2010, respectively.
205
Note 18: 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 Preferred (DEP)
shares and Series I, J, K and L, which are presented in the
following two tables, and Employee Stock Ownership Plan
(ESOP) Cumulative Convertible Preferred Stock, which is
presented in the table on the following page.
2011
Liquidation
Shares
preference
authorized
Liquidation
preference
December 31,
2010
Shares
authorized
per share and designated
per share
and designated
DEP Shares
Dividend Equalization Preferred Shares
$
10
97,000
$
10
97,000
Series A
Non-Cumulative Perpetual Preferred Stock
Series B
Non-Cumulative Perpetual Preferred Stock
Series G
7.25% Class A Preferred Stock
Series H
Floating Class A Preferred Stock
Series I
5.80% Fixed to Floating Class A Preferred Stock
Series J
-
-
-
-
100,000
25,001
100,000
17,501
15,000
50,000
15,000
50,000
20,000
50,000
20,000
50,000
100,000
25,010
100,000
25,010
8.00% Non-Cumulative Perpetual Class A Preferred Stock
1,000
2,300,000
1,000
2,300,000
Series K
7.98% Fixed-to-Floating Non-Cumulative Perpetual Class A Preferred Stock
1,000
3,500,000
1,000
3,500,000
Series L
7.50% Non-Cumulative Perpetual Convertible Class A Preferred Stock
Total
1,000
4,025,000
1,000
4,025,000
10,047,010
10,089,512
December 31, 2011
December 31, 2010
(in millions, except shares)
outstanding Par value
value Discount
DEP Shares
Shares
issued and
Carrying
Shares
issued and
outstanding
Carrying
Par value
value Discount
Dividend Equalization Preferred Shares
96,546 $
-
-
-
96,546 $
-
-
-
Series I (1)
5.80% Fixed to Floating Class A Preferred Stock
25,010
2,501 2,501
-
-
-
-
-
Series J (1)
8.00% Non-Cumulative Perpetual Class A
Preferred Stock
2,150,375
2,150 1,995
155
2,150,375
2,150
1,995
155
Series K (1)
7.98% Fixed-to-Floating Non-Cumulative
Perpetual Class A Preferred Stock
3,352,000
3,352 2,876
476
3,352,000
3,352
2,876
476
Series L (1)
7.50% Non-Cumulative Perpetual
Convertible Class A Preferred Stock
3,968,000
3,968 3,200
768
3,968,000
3,968
3,200
768
Total
9,591,931 $ 11,971 10,572
1,399
9,566,921 $
9,470
8,071
1,399
(1) Preferred shares qualify as Tier 1 capital.
206
In March 2011, the Company issued Series I preferred stock
(25,010 shares with a par value of $2.5 billion) to an
unconsolidated wholly-owned trust. We have the option to
redeem this Series I Preferred Stock at any time, in whole or in
part, at a redemption price equal to $100,000 per share.
In 2011, we redeemed $9.2 billion of trust preferred
securities of which $5.8 billion settled in October 2011. Prior to
the October 2011 redemption, we had a commitment to issue
Series A preferred stock ($2.5 billion) and Series B preferred
stock ($1.8 billion) to unconsolidated wholly-owned trusts.
Effective with the redemption, the commitment has been
eliminated. See Note 8 for additional information on our trust
preferred securities. We do not have a commitment to issue
Series G or H preferred stock.
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)
2011
2010
2011
2010
Minimum
Maximum
Shares issued and outstanding
December 31,
Carrying value
December 31,
Adjustable
dividend rate
ESOP Preferred Stock
$1,000 liquidation preference per share
2011
2010
2008
2007
2006
2005
2004
2003
2002
370,280
231,361
89,154
68,414
46,112
30,092
17,115
6,231
-
-
$
287,161
104,854
82,994
58,632
40,892
26,815
13,591
3,443
370
232
89
69
46
30
17
6
-
-
287
105
83
59
41
27
13
3
9.00 %
9.50
10.50
10.75
10.75
9.75
8.50
8.50
10.00
10.50
11.50
11.75
11.75
10.75
9.50
9.50
10.50
11.50
Total ESOP Preferred Stock (1)
Unearned ESOP shares (2)
858,759
618,382
$
859
618
$
(926)
(663)
(1) At December 31, 2011 and December 31, 2010, additional paid-in capital included $67 million and $45 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.
207
Note 19: Common Stock and Stock Plans
Common Stock
The following table presents our reserved, issued and authorized
shares of common stock at December 31, 2011.
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
6,916,421
921,682
746,119,381
105,014,977
858,972,461
5,358,522,061
2,782,505,478
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, 2011, we have warrants outstanding and
exercisable to purchase 39,179,509 shares of our common stock
with an exercise price of $34.01 per share, expiring on
October 28, 2018. In 2011 we purchased 264,972 of these
warrants. 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 under the terms of the plan.
Employee Stock Plans
We offer stock based employee compensation plans as 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 2011 and 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 additional RSRs (dividend equivalents) or cash payments
208
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.
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.
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,
2011
2010
2009
$
338
128
63
252
66
118
3
21
221
Total stock incentive compensation
expense
Related recognized tax benefit
$
$
529
436
245
200
165
92
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 after 2009 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 March 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, 2011, was 157 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 Awards
Under the LTICP, 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 to directors can
be exercised after twelve months through the tenth anniversary
of the grant date. Options granted prior to 2005 may include the
right to acquire a “reload” stock option.
Restricted Share Rights
A summary of the status of our RSRs and restricted share awards
at December 31, 2011, and changes during 2011 is in the
following table:
Number
Nonvested at January 1, 2011
23,036,722
$
Granted
Vested
Canceled or forfeited
18,836,636
(1,426,158)
(1,167,071)
Nonvested at December 31, 2011
39,280,129
Weighted-
average
grant date
fair value
26.98
31.02
28.55
28.52
28.81
The weighted-average grant date fair value of RSRs granted
during 2010 and 2009 was $27.29 and $19.04, respectively.
At December 31, 2011, there was $561 million of total
unrecognized compensation cost related to nonvested RSRs. The
cost is expected to be recognized over a weighted-average period
of 3.6 years. The total fair value of RSRs that vested during 2011,
2010 and 2009 was $41 million, $15 million and $2 million,
respectively.
Performance Share Awards
Holders of performance share awards are entitled to the related
shares of common stock at no cost subject to the Company's
achievement of specified performance criteria over a three-year
period ending December 31, 2013, June 30, 2013, and
December 31, 2012. Performance share awards are granted at a
target number; based on the Company's performance, the
number of awards that vest can be adjusted downward to zero
and upward to a maximum of either 125% or 150% of target.
A summary of the status of our performance awards at
December 31, 2011, and changes during 2011 is in the following
table, based on the target amount of awards:
Nonvested at January 1, 2011
Granted
Canceled or forfeited
Number
2,564,584
3,853,274
(12,893)
$
Nonvested at December 31, 2011
6,404,965
Weighted-
average
grant date
fair value
27.32
31.26
31.33
29.68
The weighted-average grant date fair value of performance
awards granted during 2010 and 2009 was $27.46 and $27.09,
respectively.
At December 31, 2011, there was $45 million of total
unrecognized compensation cost related to nonvested
performance awards. The cost is expected to be recognized over
a weighted-average period of 2 years. As of December 31, 2011,
no performance shares were vested.
209
Note 19: Common Stock and Stock Plans (continued)
Stock Options
The table below summarizes stock option activity and related
information for the stock plans. 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 Awards if
originally issued under a director plan.
Weighted-
Weighted-
average
average
remaining
exercise
contractual
Aggregate
intrinsic
value
Number
price term (in yrs.)
(in millions)
Incentive compensation plans
Options outstanding as of December 31, 2010
Granted
Canceled or forfeited
Exercised
306,770,791
$
953,308
(11,457,278)
(24,968,218)
38.11
30.62
73.47
21.28
Options outstanding as of December 31, 2011
271,298,603
38.14
4.3
$
890
As of December 31, 2011:
Options exercisable and expected to be exercisable
Options exercisable
PartnerShares Plan
Options outstanding as of December 31, 2010
Canceled or forfeited
Exercised
271,298,603
245,592,111
38.14
40.70
4.3
4.1
890
529
8,474,545
(137,253)
(859,820)
25.21
24.94
24.85
Options outstanding as of December 31, 2011
7,477,472
25.25
0.2
As of December 31, 2011:
Options exercisable
Director awards
Options outstanding as of December 31, 2010
Granted
Canceled or forfeited
Exercised
Options outstanding as of December 31, 2011
As of December 31, 2011:
Options exercisable
As of December 31, 2011, there was $8 million of
unrecognized compensation cost related to stock options. That
cost is expected to be recognized over a weighted-average period
of 0.3 years. The total intrinsic value of options exercised during
2011, 2010 and 2009 was $246 million, $298 million and
$50 million, respectively.
Cash received from the exercise of stock options for 2011,
2010 and 2009 was $554 million, $687 million and $153 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.
210
7,477,472
25.25
0.2
797,864
21,940
(32,412)
(65,960)
721,432
29.10
28.68
29.12
23.90
29.56
3.6
721,432
29.56
3.6
17
17
1
1
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 behavior 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. Beginning in 2009, the expected dividend is
based on a fixed dividend amount. 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
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 for additional information.
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 2011 and 2010 resulted from the reload
feature.
Year ended December 31,
2011
2010
2009
Per share fair value of options granted $
3.78
6.11
3.29
Expected volatility
Expected dividends
Expected term (in years)
Risk-free interest rate
32.7 %
44.3
53.9
$
0.32
1.0
0.20
1.3
0.33
4.5
0.2 %
0.6
1.8
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 2011, with the exception of
2009, 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,
2011
2010
2009
131,046,406 118,901,327 110,157,999
858,759
618,382
414,019
$
$
-
859
-
-
203,755
618
-
414
5
Dividends paid
Year ended December 31,
2011
2010
2009
60
95
23
76
45
51
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.
211
Note 20: Employee Benefits and Other Expenses
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. Benefits accrued 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. 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
2011. We do not expect that we will be required to make a
contribution to the Cash Balance Plan in 2012; however, this is
dependent on the finalization of the actuarial valuation. Our
decision of whether to make a contribution in 2012 will be based
on various factors including the actual investment performance
of plan assets during 2012. Given these uncertainties, we cannot
estimate at this time the amount, if any, that we will contribute
in 2012 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.
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
Actuarial loss (gain)
Benefits paid
Curtailment
Amendments
Liability transfer
Foreign exchange impact
2011
December 31,
2010
Pension benefits
Pension benefits
Non-
Qualified qualified
Other
benefits
Non-
Qualified qualified
Other
benefits
$
10,337
693
1,398
10,038
681
1,401
6
520
-
501
(726)
(3)
-
-
(1)
1
34
-
33
(70)
-
-
-
-
13
71
88
(105)
(161)
-
-
-
-
5
554
-
386
(652)
-
2
-
4
-
37
-
46
(71)
-
-
-
-
13
78
74
(5)
(147)
-
-
(17)
1
Benefit obligation at end of year
10,634
691
1,304
10,337
693
1,398
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
Fair value of plan assets at end of year
9,639
139
10
-
-
-
70
-
697
10
6
88
9,112
1,163
12
-
-
-
71
-
376
33
361
74
(726)
(70)
(161)
(652)
(71)
(147)
(1)
9,061
-
-
-
4
640
9,639
-
-
-
697
Funded status at end of year
$
(1,573)
(691)
(664)
(698)
(693)
(701)
Amounts recognized in the balance sheet at end of year:
Liabilities
$
(1,573)
(691)
(664)
(698)
(693)
(701)
212
The accumulated benefit obligation for the defined benefit
pension plans was $11.3 billion and $11.0 billion at
December 31, 2011 and 2010, 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,
2011
2010
$
11,325
11,030
11,321
11,019
9,061
9,639
The components of net periodic benefit cost were:
2011
2010
2009
Year ended December 31,
Pension benefits
Pension benefits
Pension benefits
Non-
Qualified qualified
Other
benefits
Non-
Qualified qualified
Other
benefits
Qualified
Non-
qualified
Other
benefits
(in millions)
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service cost
Settlement Loss
Curtailment loss (gain)
$
6
520
(759)
86
-
4
-
1
34
-
6
-
3
-
13
71
(41)
-
(3)
-
-
5
554
(717)
105
-
-
3
-
37
-
3
-
-
-
Net periodic benefit cost
(143)
44
40
(50)
40
Other changes in plan assets
and benefit obligations
recognized in other
comprehensive income:
Net actuarial loss (gain)
Amortization of net actuarial loss
1,120
(86)
Prior service cost
Amortization of prior service cost
Settlement
Curtailment
Net gain on amendment
Translation adjustments
Total recognized in other
-
-
(4)
(3)
-
(1)
33
(6)
-
-
(3)
-
-
-
(74)
-
(59)
(105)
-
3
-
-
-
-
2
-
-
(3)
-
-
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
comprehensive income
1,026
24
(71)
(165)
43
(2)
(505)
57
47
Total recognized in net periodic
benefit cost and other
comprehensive income
$
883
68
(31)
(215)
83
53
(181)
76
114
213
Note 20: 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 estimated average remaining participation period.
The net actuarial loss for the defined benefit pension plans and
other post retirement plans that will be amortized from
accumulated OCI into net periodic benefit cost in 2012 is
$141 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 2012 is $2 million.
2011
December 31,
2010
Pension benefits
Pension benefits
Qualified qualified
benefits
Qualified qualified
benefits
Non-
Other
Non-
Other
$
2,699
137
-
-
-
-
-
-
61
(27)
1
-
1,672
113
-
-
1
-
-
-
135
(30)
1
-
$
2,699
137
35
1,673
113
106
Plan Assumptions
For the years ended December 31, 2011 and 2010, the weighted-
average discount rate used to determine the projected benefit
obligation for pension benefits (qualified and nonqualified) was
5.00% and 5.25%, respectively, and for other postretirement
benefits was 4.75% and 5.25%, 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 bonds consisting of
approximately 250-275 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
December 31,
2011
2010
Pension
benefits (1)
Other
benefits
Pension
benefits (1)
Other
benefits
Pension
benefits (1)
5.25 %
8.25
-
5.25
6.00
-
5.75
8.25
-
5.75
8.25
-
7.42
8.75
4.0
2009
Other
benefits
6.75
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
or the earliest period for which historical data was readily
available for the asset classes included. Using long term
historical data 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 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
and Medicare cost shifting. In determining the end of year
benefit obligation we assume average annual increases of
approximately 7.75% for health care costs in 2012. 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 2011 periodic
214
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,
2012
$
2013
2014
2015
2016
788
768
749
746
742
73
70
67
63
63
2017-2021
3,455
286
102
105
107
110
111
548
14
14
15
10
10
49
benefit cost was determined using initial annual trend rates of
8.0%. These rates were assumed to decrease 0.25% per year
until they reached ultimate rates of 5.0% in 2023. Increasing the
assumed health care trend by one percentage point in each year
would increase the benefit obligation as of December 31, 2011, by
$63 million and the total of the interest cost and service cost
components of the net periodic benefit cost for 2011 by
$3 million. Decreasing the assumed health care trend by one
percentage point in each year would decrease the benefit
obligation as of December 31, 2011, by $56 million and the total
of the interest cost and service cost components of the net
periodic benefit cost for 2011 by $3 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 35-55% equities, 35-55%
fixed income, and approximately 10% in real estate, venture
capital, private equity and other investments. 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.
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 20-40%
equities and 60-80% 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.
215
Note 20: 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 17 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, 2011
Cash and cash equivalents
Long duration fixed income(1)
Intermediate (core) fixed income (2)
High-yield fixed income
International fixed income
Domestic large-cap stocks (3)
Domestic mid-cap stocks
Domestic small-cap stocks (4)
International stocks (5)
Emerging market stocks
Real estate/timber (6)
Multi-strategy hedge funds (7)
Private equity
Other
$
-
432
376
2,229
88
10
147
1,163
364
281
570
-
102
-
-
-
380
366
184
600
183
10
349
574
-
-
-
29
-
1
6
1
-
2
-
-
1
-
355
251
129
46
432
2,606
474
377
331
1,765
547
291
920
574
457
251
129
75
180
13
4
-
5
39
12
9
19
-
3
-
-
1
33
74
60
12
6
31
21
17
40
19
-
-
-
1
Total plan investments
$
3,101
5,336
792
9,229
285
314
Payable upon return of securities loaned
Net receivables (payables)
Total plan assets
December 31, 2010
Cash and cash equivalents
Intermediate (core) fixed income (2)
High-yield fixed income
International fixed income
Specialty fixed income
Domestic large-cap stocks (3)
Domestic mid-cap stocks
Domestic small-cap stocks (4)
International stocks (5)
Emerging market stocks
Real estate/timber (6)
Multi-strategy hedge funds (7)
Private equity
Other
$
47
488
297
1,964
1
-
-
1,323
263
851
948
-
105
-
-
-
406
263
95
867
129
37
403
700
-
-
-
31
(145)
(23)
$
9,061
-
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
220
10
34
109
-
-
-
43
9
28
31
-
3
-
-
1
14
8
3
40
20
20
46
23
-
-
-
1
Total plan investments
$
3,835
5,383
847
10,065
345
318
Payable upon return of securities loaned
Net receivables (payables)
Total plan assets
(145)
(281)
$
9,639
-
-
-
-
-
-
-
-
-
-
12
8
4
23
47
-
-
-
-
-
-
-
-
-
-
12
10
4
22
48
213
87
64
12
11
70
33
26
59
19
15
8
4
25
646
(5)
(1)
640
254
119
14
8
3
83
29
48
77
23
15
10
4
24
711
(5)
(9)
697
(1) This category includes a diversified mix of assets which are being managed in accordance with a duration target of approximately 10 years and an emphasis on corporate
credit bonds combined with investments in U.S. Treasury securities and other U.S. agency and non-agency bonds. Investments in this category were made beginning in
2011.
(2) 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.
(3) 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 nine unique investment strategies. For December 31, 2011 and 2010, respectively, approximately 34% and
33% 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.
(4) This category consists of a highly diversified combination of four 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.
(5) This category includes assets diversified across eight 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.
(6) 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).
(7) 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.
216
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, 2011
Pension plan assets
Long duration fixed income
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, 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
$
$
$
$
$
$
$
$
-
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
-
-
-
-
-
10
5
1
4
20
-
-
-
-
-
-
-
-
-
(6)
6
1
9
10
(7)
(1)
-
(1)
(9)
-
1
-
(1)
(1)
22
(3)
16
-
34
-
-
-
-
-
2
-
1
2
8
12
10
(1)
34
10
(3)
1
-
8
1
(5)
-
(1)
(4)
(37)
(64)
-
1
(109)
-
(2)
-
1
(1)
(3)
1
(2)
3
5
(44)
18
(13)
(35)
5
9
1
2
17
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2
-
-
-
-
-
-
-
2
-
-
-
-
-
1
6
1
2
1
355
251
129
46
792
12
8
4
23
47
10
1
4
6
360
313
112
41
847
12
10
4
22
48
(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. Investments in registered investment companies are
valued at the NAV of shares held at year end.
Long Duration, 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 or combination of multiple valuation
techniques. Also includes investments in registered investment
companies, 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. Also includes investments in registered
investment companies and collective investment funds described
above.
Real Estate and Timber – the fair value of real estate and timber
is estimated based primarily on appraisals prepared by third-
217
Note 20: 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 2011, 2010
and 2009 earnings, we committed to make a contribution in
shares of common stock to eligible employees’ 401(k) Plan
accounts equaling 2% of certified compensation for 2011 and
2010, and 1% of certified compensation for 2009, respectively,
which resulted in recognizing $311 million, $316 million and
$150 million of defined contribution retirement plan expense
recorded in 2011, 2010 and 2009, respectively. Total defined
contribution retirement plan expenses were $1,104 million,
$1,092 million and $862 million in 2011, 2010 and 2009,
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)
Year ended December 31,
2011
2010
2009
Outside professional services
$
2,692 2,370 1,982
Contract services
Foreclosed assets
Operating losses
Outside data processing
Postage, stationery and supplies
Insurance
1,407 1,642 1,088
1,354 1,537 1,071
875
1,261 1,258
935 1,046 1,027
942
944
933
515
464
845
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
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 acquired December 31, 2008, and
merged with the 401(k) Plan effective December 31, 2009. We
also sponsored a frozen defined contribution plan, the A.G.
Edwards, Inc. Retirement & Profit Sharing Plan (“AGE Plan”),
which resulted from a company acquired by Wachovia. The AGE
Plan merged with the 401(k) Plan on July 1, 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
dollar for dollar up to 6% of an employee's certified
compensation. Effective January 1, 2010, previous and future
matching contributions are 100% vested for active participants.
218
Note 21: Income Taxes
The components of income tax expense were:
(in millions)
Current:
Federal
State and local
Foreign
Year ended December 31,
2011
2010
2009
$
3,352
468
1,425
548
(3,952)
(334)
52
78
164
Total current
3,872
2,051
(4,122)
Deferred:
Federal
State and local
Foreign
3,088
4,060
8,709
471
14
211
16
794
(50)
Total deferred
3,573
4,287
9,453
Total
$
7,445
6,338
5,331
The tax effects of our 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
PCI loans
Basis difference in investments
Net operating loss and tax
credit carry forwards
Other
December 31,
2011
2010
$
6,955
8,157
4,115
3,473
1,598
1,989
3,851
4,933
2,104
2,598
1,701
402
1,514
1,891
Total deferred tax assets
20,726
24,555
Deferred tax assets valuation allowance
(918)
(711)
Deferred tax liabilities
Mortgage servicing rights
Leasing
Mark to market, net
Intangible assets
Net unrealized gains on
securities available for sale
Other
(7,388)
(8,020)
(4,344)
(4,027)
(3,703)
(5,161)
(2,608)
(3,322)
(2,619)
(3,736)
(3,243)
(2,875)
Total deferred tax liabilities
(24,722) (26,324)
Net deferred tax
asset (liability)
$
(4,914)
(2,480)
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 23).
These associated adjustments increased OCI by $1.1 billion in
2011.
We have determined that a valuation allowance is required
for 2011 in the amount of $918 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, 2011, we had net operating loss and credit
carry forwards with related deferred tax assets of $1.6 billion and
$81 million, respectively. If these carry forwards are not utilized,
they will expire in varying amounts through 2031.
At December 31, 2011, we had undistributed foreign earnings
of $1.2 billion related to foreign subsidiaries. We intend to
reinvest these earnings indefinitely outside the U.S. and
accordingly have not provided $339 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.
219
Note 21: Income Taxes (continued)
(in millions)
Amount
Rate
Amount
Rate
Amount
Rate
Statutory federal income tax expense and rate
$
8,160
35.0 %
$
6,545
35.0 %
$
6,162
35.0 %
2011
2010
2009
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
Tax credits
Life insurance
Leveraged lease tax expense
Other (1)
730
3.1
(334)
(1.4)
(247)
(735)
(222)
272
(1.1)
(3.2)
(1.0)
1.2
586
3.1
(283)
(1.5)
(258)
(577)
(223)
461
(1.3)
(3.1)
(1.2)
2.5
468
2.7
(260)
(1.5)
(253)
(533)
(257)
400
(1.4)
(3.0)
(1.5)
2.3
(179)
(0.7)
87
0.4
(396)
(2.3)
Effective income tax expense and rate
$
7,445
31.9 %
$
6,338
33.9 %
$
5,331
30.3 %
(1) Includes other deductible dividends of $(57) million for 2011, $(33) million for 2010, and $(29) million for 2009.
We are routinely examined by tax authorities in various
jurisdictions. The IRS is currently examining the 2007 through
2010 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 1999 and 2003 through 2006. For Wachovia’s 2003
through 2008 tax years, we are appealing various issues related
to their IRS examinations. We have paid the IRS the contested
income tax associated with these issues and refund claims have
been filed for the respective 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.
During 2010, we filed a Notice of Appeal to the U.S. Court of
Appeals for the Federal Circuit in connection with the adverse
judgment of the U.S. Court of Federal Claims related to certain
leveraged lease transactions that we entered into between 1997
and 2002. On April 15, 2011, the Federal Circuit affirmed the
decision of the Court of Federal Claims. There was no adverse
financial statement impact resulting from the Federal Circuit’s
decision.
On September 30, 2011, we received an adverse decision from
the U.S. District Court for the District of Minnesota in WFC
Holdings Corp. v. United States, a case involving a lease
restructuring transaction. There was no adverse financial
statement impact from the decision. On December 1, 2011, we
filed a Notice of Appeal to the U.S. Court of Appeals for the
Eighth Circuit.
We estimate that our unrecognized tax benefits will not
change significantly during the next 12 months.
The effective tax rate for 2011 decreased primarily due to tax
benefits from the realization for tax purposes of a previously
written down investment, a decrease in tax expense associated
with leveraged leases, as well as tax benefits related to charitable
donations of appreciated securities.
The change in unrecognized tax benefits follows:
(in millions)
Year ended
December 31,
2011
2010
Balance at beginning of year
$
5,500 4,921
Additions:
For tax positions related to the current year
For tax positions related to prior years
Reductions:
For tax positions related to prior years
Lapse of statute of limitations
Settlements with tax authorities
279
579
255
301
(358)
(111)
(75)
(148)
(596)
(42)
Balance at end of year
$
5,005 5,500
Of the $5.0 billion of unrecognized tax benefits at
December 31, 2011, approximately $3.3 billion would, if
recognized, affect the effective tax rate. The remaining
$1.7 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. As of December 31, 2011 and 2010, we have
accrued approximately $871 million and $870 million for the
payment of interest and penalties, respectively. We recognized in
income tax expense in 2011 and 2010, interest and penalties of
$32 million and $45 million, respectively.
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, state, local and foreign income tax examinations for
taxable years prior to 2007; and Wachovia Corporation and its
subsidiaries are not subject to federal, state, local and foreign
income tax examinations for taxable years prior to 2006.
220
Note 22: 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 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,
2011
2010
2009
$
15,869
12,362
12,275
844
730
4,285
$
15,025
11,632
7,990
5,278.1
5,226.8
4,545.2
$
2.85
2.23
1.76
5,278.1
5,226.8
4,545.2
24.2
21.1
28.3
8.0
17.2
0.3
5,323.4
5,263.1
4,562.7
$
2.82
2.21
1.75
(1) Includes Series J, K and L preferred stock dividends of $844 million, $737 million and $804 million for the year ended 2011, 2010 and 2009, respectively. Also includes
$3.5 billion in 2009, 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.
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,
2011
2010
2009
198.8
212.1
247.2
39.4
66.9
110.3
221
Note 23: Other Comprehensive Income
The components of other comprehensive income (OCI) and the related tax effects were:
2011
2010
2009
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
$
(35)
13
(22)
71
(26)
45
118
(45)
73
Securities available for sale:
Net unrealized gains (losses)
arising during the year
Reclassification of (gains) losses
(578)
359
(219)
2,611
(1,134)
1,477
15,998
(5,972) 10,026
included in net income
(696)
262
(434)
77
(29)
48
(349)
129
(220)
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
(1,274)
621
(653)
2,688
(1,163)
1,525
15,649
(5,843)
9,806
190
(85)
105
750
(282)
468
193
(86)
107
hedges included in net income
(571)
217
(354)
(613)
234
(379)
(531)
203
(328)
Net unrealized gains (losses)
arising during the year
Defined benefit pension plans:
Net actuarial gains (losses)
Amortization of net actuarial loss and prior
(381)
132
(249)
137
(48)
89
(338)
117
(221)
(1,079)
411
(668)
20
(9)
11
222
(73)
149
service cost included in net income
99
(38)
61
104
(45)
59
184
(60)
124
Net gains (losses) arising during the year
(980)
373
(607)
124
(54)
70
406
(133)
273
Other comprehensive income
$
(2,670)
1,139 (1,531)
3,020
(1,291)
1,729
15,835
(5,904)
9,931
Cumulative OCI balances were:
(in millions)
Translation
adjustments
Securities
available
for sale
Derivatives
and
hedging
activities
Defined
benefit
pension
plans
Cumulative
other
compre-
hensive
income
Balance, December 31, 2008
$
(6)
(6,212)
871
(1,522)
(6,869)
Cumulative effect from change in accounting for
other-than-temporary impairment on debt securities
Net change
Balance, December 31, 2009
Net change
Balance, December 31, 2010
Net change
-
73
67
45
112
(22)
(53)
9,806
3,541
1,525
5,066
(653)
-
(221)
650
89
739
(249)
-
273
(1,249)
70
(1,179)
(607)
(53)
9,931
3,009
1,729
4,738
(1,531)
Balance, December 31, 2011
$
90
4,413
490
(1,786)
3,207
222
Note 24: 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. In first quarter 2011, we
realigned a private equity business into Wholesale Banking from
Community Banking. The 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 retail installment contracts
from auto dealers in the United States and Puerto Rico.
Consumer and business deposit products include checking
accounts, savings deposits, market rate accounts, Individual
Retirement Accounts, time deposits, global remittance 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 (to be rebranded as Abbot Downing, a Wells
Fargo Business, in April 2012) 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.
223
Note 24: Operating Segments (continued)
(income/expense in millions, average balances in billions)
Banking
Banking Retirement Other (1)
Company
Community Wholesale
and
Consolidated
Wealth,
Brokerage
2011
Net interest income (2)
Provision (reversal of 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
Net interest income (2)
Provision for credit losses
Noninterest income
Noninterest expense
$
29,580
11,714
2,855
(1,386)
42,763
8,001
21,124
(109)
9,952
29,234
11,194
170
9,333
9,935
(163)
(2,224)
7,899
38,185
(970)
49,393
13,469
4,072
10,581
3,525
2,083
789
(2,477)
(941)
23,656
7,445
9,397
7,056
1,294
(1,536)
16,211
317
19
6
-
342
$
9,080
7,037
1,288
(1,536)
15,869
$
31,885
13,807
22,604
30,071
11,474
1,920
10,951
11,269
2,707
334
9,023
9,768
(1,309)
(308)
(2,125)
(652)
44,757
15,753
40,453
50,456
Income (loss) before income tax expense (benefit)
10,611
9,236
1,628
(2,474)
19,001
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
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)
2011
Average loans
Average assets
Average core deposits
2010
Average loans
Average assets
Average core deposits
3,347
7,264
274
3,315
5,921
20
616
(940)
6,338
1,012
(1,534)
12,663
7
-
301
$
6,990
5,901
1,005
(1,534)
12,362
$
34,795
10,222
2,407
(1,100)
46,324
17,866
25,651
29,928
12,652
3,443
3,648
10,411
10,799
6,186
2,217
460
(306)
21,668
8,358
9,426
(2,058)
(1,133)
42,362
49,020
879
324
(1,719)
17,998
(653)
5,331
9,209
3,969
555
(1,066)
12,667
331
35
26
-
392
$
8,878
3,934
529
(1,066)
12,275
$
$
498.1
755.7
556.2
249.1
428.1
202.1
43.0
(33.1)
757.1
152.2
130.4
(65.7)
1,270.3
(62.0)
826.7
530.1
772.4
536.4
230.5
373.8
170.0
43.0
139.3
121.2
(33.0)
770.6
(58.6)
1,226.9
(55.6)
772.0
(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.
224
Note 25: 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 Canada
Corporation (WFCC), WFFI’s wholly owned Canadian
subsidiary. WFCC 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, 2011
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
$
11,546
140
-
914
242
-
-
2,157
-
109
-
-
35,367
-
11,814
(11,546)
(140)
(277)
(914)
-
-
-
37,247
-
12,165
12,842
2,266
47,181
(12,877)
49,412
-
209
2,469
8
2,686
-
62
552
-
614
2,275
487
1,470
308
-
(678)
(513)
-
2,275
80
3,978
316
4,540
(1,191)
6,649
10,156
-
1,652
1,181
42,641
6,718
(11,686)
-
42,763
7,899
Net interest income after provision for credit losses
10,156
471
35,923
(11,686)
34,864
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
-
460
460
(60)
137
77
10,539
(584)
4,746
15,869
-
Parent, WFFI, Other and Wells Fargo net income (loss)
$
15,869
110
187
297
95
652
747
21
28
-
(7)
-
(7)
23,320
14,739
-
(631)
23,430
14,755
38,059
(631)
38,185
27,632
21,568
-
(631)
27,667
21,726
49,200
(631)
49,393
24,782
8,001
-
(11,686)
-
(4,746)
16,781
342
(16,432)
-
23,656
7,445
-
16,211
342
16,439
(16,432)
15,869
225
Note 25: Condensed Consolidating Financial Statements (continued)
Condensed Consolidating Statements 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)
-
3,189
1,009
5,548
(1,707)
2,832
92
4,888
227
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
363
143
1,192
1,335
10,435
(749)
1,178
12,362
-
Parent, WFFI, Other and Wells Fargo net income (loss)
$
12,362
107
145
252
150
632
782
187
62
-
125
-
125
23,385
17,111
-
(658)
23,492
16,961
40,496
(658)
40,453
26,919
22,078
-
(658)
27,212
23,244
48,997
(658)
50,456
21,296
7,025
-
14,271
301
(12,917)
-
(1,178)
(14,095)
-
19,001
6,338
-
12,663
301
13,970
(14,095)
12,362
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
$
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
226
Condensed Consolidating Balance Sheets
(in millions)
December 31, 2011
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
$
19,312
30
7,427
-
211
355
1,670
-
-
63,422
213,516
49,695
(19,523)
-
-
-
-
63,807
222,613
49,695
6
26,735
759,794
(16,904)
769,631
3,885
46,987
-
-
-
(1,775)
-
-
(17,597)
(3,885)
(46,987)
-
-
-
(19,372)
50,878
24,960
742,197
(67,776)
750,259
135,155
17,294
7,573
-
-
1,255
-
-
219,945
(135,155)
(17,294)
(1,280)
-
-
227,493
$
237,669
28,451 1,288,775
(241,028) 1,313,867
$
-
759
7,052
77,613
12,004
-
15,503
1,603
9,746
-
939,593
79,682
70,290
46,914
-
(19,523)
(46,853)
(1,280)
(8,919)
(12,004)
920,070
49,091
77,665
125,354
-
97,428
26,852 1,136,479
(88,579) 1,172,180
Parent, WFFI, Other and Wells Fargo stockholders' equity
Noncontrolling interests
140,241
-
1,599
-
150,850
1,446
(152,449)
-
140,241
1,446
Total equity
140,241
1,599
152,296
(152,449)
141,687
Total liabilities and equity
$
237,669
28,451 1,288,775
(241,028) 1,313,867
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
Parent, WFFI, Other and Wells Fargo stockholders' equity
Noncontrolling interests
Total equity
$
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
126,408
-
1,618
11
147,153
1,470
(148,771)
-
126,408
1,481
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
227
Note 25: Condensed Consolidating Financial Statements (continued)
Condensed Consolidating Statements of Cash Flows
(in millions)
Parent
WFFI
2011
Year ended December 31,
2010
Other
consolidating
subsidiaries/ Consolidated
Company
eliminations
Other
consolidating
subsidiaries/ Consolidated
Company
WFFI eliminations
Parent
$
15,049
1,563
(2,947)
13,665
14,180
1,774
2,818
18,772
11,459
-
(16,487)
1,946
294
(1,086)
9,657
52,324
(103,662)
23,062
52,618
(121,235)
2,441
-
(119)
796
229
(1,037)
5,431
47,690
(52,310)
8,668
47,919
(53,466)
-
(596)
(35,090)
(35,686)
-
(206)
16,075
15,869
-
-
-
-
-
-
6,555
6,555
(8,878)
(8,878)
9,984
(7,520)
(202)
(2)
9,782
(7,522)
-
-
-
-
-
6,517
6,517
-
(2,297)
(2,297)
10,829
(6,336)
4,731
(4,500)
15,560
(10,836)
1,318
(81)
(1,237)
-
(5,485)
(842)
6,327
(1,340)
5,779
(610)
-
230
-
-
-
-
210
1,340
-
-
-
-
(5,779)
-
11,282
-
(11,282)
610
(353)
46,173
-
(353)
46,613
1,198
-
15
-
-
64
(1,198)
(36)
(31,652)
-
(36)
(31,573)
-
-
-
349
3,151
(38,544)
(35,044)
9,332
3,497
(16,504)
(3,675)
-
(242)
-
1,013
72,128
(7,002)
72,128
(6,231)
-
1,860
-
4,118
23,924
5,330
23,924
11,308
7,058
(31,198)
513
(6,029)
4,116
(13,328)
11,687
(50,555)
1,789
(23,281)
-
(9,478)
1,700
(30,558)
3,489
(63,317)
2,501
(844)
(2)
1,296
(2,416)
(2,537)
79
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,501
(844)
(2)
-
(737)
(545)
1,296
(2,416)
(2,537)
1,375
(91)
(1,045)
79
98
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(737)
(545)
1,375
(91)
(1,045)
98
-
(11)
(320)
(331)
-
1
(593)
(592)
(26,305)
(4,514)
55,594
24,775
(20,577)
(5,359)
(197)
(26,133)
(10,907)
200
14,103
3,396
2,935
(88)
(13,883)
(11,036)
30,249
366
(14,571)
16,044
27,314
454
(688)
27,080
$
19,342
566
(468)
19,440
30,249
366
(14,571)
16,044
Cash flows from operating activities:
Net cash provided (used)
by operating activities
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:
Proceeds from issuance
Cash dividends paid
Common stock warrants repurchased
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Excess tax benefits related to
stock option payments
Net change in noncontrolling interests:
Other
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
228
Condensed Consolidating Statement of Cash Flows
(in millions)
Year ended December 31,2009
Cash flows from operating activities:
Net cash provided by operating activities
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
Other
consolidating
subsidiaries/ Consolidated
Company
WFFI eliminations
Parent
$
7,356
1,655
19,602
28,613
1,184
-
(463)
925
290
(1,667)
50,929
38,521
(93,155)
53,038
38,811
(95,285)
-
(981)
53,221
52,240
-
-
-
-
11,369
(497)
12,979
(1,382)
-
22,513
-
-
11,119
(5,523)
(138)
(1,000)
-
-
-
355
6,162
(3,363)
3,309
(4,438)
(11,231)
1,497
(12,979)
1,382
(138)
(7,015)
6,162
(3,363)
14,428
(9,961)
-
-
-
-
(138)
15,853
Net cash provided by investing activities
45,703
3,380
22,702
71,785
Cash flows from financing activities:
Net change in:
Deposits
Short-term borrowings
Long-term debt:
Proceeds from issuance
Repayment
Preferred stock:
Redeemed
Cash dividends paid
Common stock:
Proceeds from issuance
Repurchased
Cash dividends paid
Excess tax benefits related to stock option payments
Net change in noncontrolling interests:
Purchase of Prudential's noncontrolling interest
Other
Other, net
Net cash 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
-
(19,100)
-
2,158
42,473
(52,166)
42,473
(69,108)
8,297
(22,931)
1,347
(8,508)
(1,248)
(34,821)
8,396
(66,260)
(25,000)
(2,178)
21,976
(220)
(2,125)
18
-
-
(140)
-
-
-
-
-
-
-
-
-
-
-
-
-
(4)
-
(4,500)
(549)
140
(25,000)
(2,178)
21,976
(220)
(2,125)
18
(4,500)
(553)
-
(41,403)
(5,007)
(50,671)
(97,081)
11,656
15,658
$
27,314
28
426
454
(8,367)
7,679
3,317
23,763
(688)
27,080
229
Note 26: 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.
We do not consolidate our wholly-owned trust (the Trust)
formed solely to issue trust preferred and preferred purchase
securities (the Securities). Securities issued by the Trust
includable in Tier 1 capital were $7.5 billion at
December 31, 2011. Since December 31, 2010, we have called
$9.2 billion of trust preferred securities, and also issued
$2.5 billion in Series I Preferred Stock, replacing certain
preferred purchase securities reflected in the amount of
Securities issued by the Trust includable in Tier 1 capital at
December 31, 2010. The Series I Preferred Stock was included in
preferred stock (Note 18), as a separate component of Tier 1
capital. The junior subordinated debentures held by the Trust
were included in the Company’s long-term debt.
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, 2011, 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, 2011, 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)
Regulatory capital:
Tier 1
Total
Assets:
Risk-weighted
Adjusted average (2)
Capital ratios:
Tier 1 capital
Total capital
Tier 1 leverage (2)
Wells Fargo & Company
Wells Fargo Bank, N.A.
Well-
Minimum
2011
2010
2011
2010
ratios (1)
ratios (1)
December 31, capitalized
capital
$
114.0
109.4
92.6
90.2
148.5
147.1
117.9
117.1
$
1,005.6
980.0
923.2
895.2
1,262.6
1,189.5
1,115.4
1,057.7
11.33 %
11.16
10.03
10.07
6.00
14.76
9.03
15.01
12.77
13.09
10.00
9.19
8.30
8.52
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.
230
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, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
In 2010, the Company adopted a new accounting standard related to its involvement with variable interest entities, and in 2009, the
Company changed its method of evaluating other than temporary impairment for debt securities.
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, 2011, 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 28, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
San Francisco, California
February 28, 2012
231
Quarterly Financial Data
Condensed Consolidated Statement of Income - Quarterly (Unaudited)
2011
Quarter ended
2010
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
$
12,378
12,178
12,384
12,472
12,969
13,130
13,472
13,225
1,486
1,636
1,706
1,821
1,906
2,032
2,023
2,078
10,892
2,040
10,542
1,811
10,678
1,838
10,651
2,210
11,063
2,989
11,098
3,445
11,449
3,989
11,147
5,330
8,852
8,731
8,840
8,441
8,074
7,653
7,460
5,817
Service charges on deposit accounts
1,091
1,103
1,074
1,012
Trust and investment fees
Card fees
Other fees
Mortgage banking
Insurance
Net gains (losses) from trading activities
Net gains (losses) on debt securities available for
sale
Net gains from equity investments
Operating leases
Other
2,658
680
1,096
2,364
466
430
48
61
60
759
2,786
1,013
1,085
1,833
423
(442)
300
344
284
357
2,944
1,003
1,023
2,916
957
989
1,619
2,016
568
414
503
612
1,035
2,958
941
1,063
2,757
564
532
1,132
2,564
935
1,004
2,499
397
470
(128)
(166)
(268)
(114)
724
103
364
353
77
409
317
79
453
131
222
536
1,417
1,332
2,743
911
2,669
865
982
941
2,011
2,470
544
109
30
288
329
581
621
537
28
43
185
610
Total noninterest income
9,713
9,086
9,708
9,678
10,431
9,776
9,945
10,301
Noninterest expense
Salaries
Commission and incentive compensation
Employee benefits
Equipment
Net occupancy
Core deposit and other intangibles
FDIC and other deposit assessments
Other
3,706
2,251
1,012
607
759
467
314
3,718
2,088
780
516
751
466
332
3,584
3,454
2,171
2,347
1,164
528
1,392
632
749
464
315
752
483
305
3,513
2,195
1,192
813
750
549
301
3,478
2,280
1,074
557
742
548
300
3,564
3,314
2,225
1,992
1,063
588
1,322
678
742
553
295
796
549
301
3,392
3,026
3,500
3,368
4,027
3,274
3,716
3,165
Total noninterest expense
12,508
11,677
12,475
12,733
13,340
12,253
12,746
12,117
Income before income tax expense
Income tax expense
6,057
1,874
6,140
1,998
6,073
2,001
5,386
1,572
5,165
1,672
5,176
1,751
4,659
1,514
4,001
1,401
Net income before
noncontrolling interests
Less: Net income from noncontrolling interests
4,183
76
4,142
87
4,072
124
3,814
55
3,493
79
3,425
86
3,145
83
2,600
53
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
$
4,107
4,055
3,948
3,759
3,414
3,339
3,062
2,547
219
216
220
189
182
189
184
175
$
3,888
3,839
3,728
3,570
3,232
3,150
2,878
2,372
$
0.74
0.73
0.73
0.72
0.70
0.70
0.68
0.67
0.62
0.61
0.60
0.60
0.55
0.55
0.46
0.45
0.12
5,271.9
0.12
5,275.5
0.12
5,286.5
0.12
5,278.8
0.05
5,256.2
0.05
5,240.1
0.05
5,219.7
0.05
5,190.4
Diluted average common shares outstanding
5,317.6
5,319.2
5,331.7
5,333.1
5,293.8
5,273.2
5,260.8
5,225.2
Market price per common share (1):
High
Low
Quarter-end
$
27.97
22.61
29.63
22.58
32.63
25.26
34.25
29.82
27.56
24.12
28.06
31.71
31.61
23.37
30.99
28.77
23.02
25.12
34.25
25.52
31.99
26.37
25.60
31.12
(1) Based on daily prices reported on the New York Stock Exchange Composite Transaction Reporting System.
232
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
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 and equity securities
Total securities available for sale
Mortgages held for sale (4)
Loans held for sale (4)
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 (4)
Other
Average
balance
Yields/
rates
67,968
45,521
0.52 % $
3.57
8,708
28,015
0.99
4.80
84,332
34,717
119,049
47,278
203,050
44,842
1,118
166,920
105,219
19,624
12,893
38,740
3.68
7.05
4.66
4.38
4.46
4.07
5.84
4.08
4.26
4.61
7.41
2.39
343,396
4.10
229,746
87,212
21,933
86,276
4.74
4.34
12.96
6.23
425,167
5.39
768,563
4,671
4.81
4.32
2011
Interest
income/
expense
89
407
22
336
776
612
1,388
518
2,264
456
16
1,713
1,130
228
239
233
3,543
2,727
953
711
1,356
5,747
9,290
50
Quarter ended December 31,
Average
balance
Yields/
rates
72,029
33,871
0.40 %
3.56
$
1,597
18,245
2.80
5.58
76,674
31,060
4.48
10.95
107,734
35,492
163,068
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
Total earning assets
$
1,135,733
4.41 % $
12,572
1,074,184
4.87 % $
13,135
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
$
35,285
485,127
64,868
12,868
67,213
665,361
48,742
129,445
12,166
855,714
280,019
0.06 % $
0.14
1.43
1.85
0.20
0.30
0.14
2.73
2.60
0.69
-
6
175
233
60
33
507
17
885
80
1,489
-
60,879
431,171
79,146
13,438
55,463
640,097
50,609
160,801
8,258
859,765
214,419
0.09 % $
0.25
1.43
2.00
0.21
0.41
0.24
2.86
3.13
0.89
-
Total funding sources
$
1,135,733
0.52
1,489
1,074,184
0.71
15
266
285
67
29
662
31
1,153
65
1,911
-
1,911
Net interest margin and net interest income on
a taxable-equivalent basis (5)
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
$
$
$
$
$
17,718
25,057
128,220
170,995
246,692
63,556
140,766
(280,019)
170,995
1,306,728
3.89 % $
11,083
4.16 % $
11,224
18,016
24,832
120,005
162,853
197,943
52,930
126,399
(214,419)
162,853
1,237,037
(1) Our average prime rate was 3.25% for the quarters ended December 31, 2011 and 2010. The average three-month London Interbank Offered Rate (LIBOR) was 0.48%
and 0.29% for the same quarters, respectively.
(2) Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.
(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
represent amortized cost and the previously reported average balance amounts for all periods prior to 2011 have been changed to amortized cost, the basis used to
determine yield for those periods.
(4) Nonaccrual loans and related income are included in their respective loan categories.
(5)
Includes taxable-equivalent adjustments of $191 million and $161 million for the quarters ended December 31, 2011 and 2010, respectively primarily related to tax-
exempt income on certain loans and securities. The federal statutory tax rate was 35% for the periods presented.
233
Glossary of Acronyms
ACL
Allowance for credit losses
MERS
Mortgage Electronic Registration Systems, Inc.
ALCO
Asset/Liability Management Committee
MHA
Making Home Affordable programs
ARS
ASU
ARM
AVM
Auction rate security
Accounting Standards Update
Adjustable-rate mortgage
Automated valuation model
BCBS
Basel Committee on Bank Supervision
Bank holding company
Certificate of deposit
Collateralized debt obligation
BHC
CD
CDO
CFPB
CLO
MHFS
Mortgages held for sale
MSR
MTN
NAV
NPA
OCC
OCI
OTC
Mortgage servicing right
Medium-term note
Net asset value
Nonperforming asset
Office of the Comptroller of the Currency
Other comprehensive income
Over-the-counter
Consumer Finance Protection Bureau
OTTI
Other-than-temporary impairment
Collateralized loan obligation
PCI Loans
Purchased credit-impaired loans
CLTV
Combined loan-to-value
PTPP
Pre-tax pre-provision profit
RBC
ROA
ROE
SEC
S&P
SPE
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
Securities and Exchange Commission
Standard & Poor’s
Special purpose entity
TARP
Troubled Asset Relief Program
TDR
Troubled debt restructuring
VA
VaR
VIE
Department of Veterans Affairs
Value-at-risk
Variable interest entity
WFCC
Wells Fargo Canada Corporation
WFFI
Wells Fargo Financial, Inc. and its wholly-owned
subsidiaries
CPP
CPR
CRE
DPD
Capital Purchase Program
Constant prepayment rate
Commercial real estate
Days past due
ESOP
Employee Stock Ownership Plan
FAS
Statement of Financial Accounting Standards
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFELP
Federal Family Education Loan Program
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
Board of Governors of the Federal Reserve System
GAAP
Generally accepted accounting principles
GNMA
Government National Mortgage Association
GSE
Government-sponsored entity
G-SIB
Globally systemic important bank
HAMP
Home Affordability Modification Program
HPI
HUD
Home Price Index
Department of Housing and Urban Development
LHFS
Loans held for sale
LIBOR
London Interbank Offered Rate
LOCOM
Lower of cost or market value
Loan-to-value
Mortgage-backed security
LTV
MBS
234
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, 2011, 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
235
Wells Fargo & Company
Common stock
Contacts
Wells Fargo & Company is listed and trades on the
New York Stock Exchange: WFC
5,262,611,636 common shares outstanding (12/31/11)
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 2011 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
Investor Relations
1−415−371−2921
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, April 24, 2012
Julia Morgan Ballroom
Merchants Exchange Building
465 California Street
San Francisco, California
Our reputation
CAREERS & the disABLED
Among Top 50 Employers
by Readers Choice
CIO
Among the Top 100 Companies for
Technology Innovations that Advance
Business Results
DiversityInc
Among Top 50 Companies for
Diversity, Top 10 Companies for
Asian Americans, Top 10 Companies
for Lesbian, Gay, Bisexual, and
Transgender Employees
Forbes
Top 20 Biggest Public Companies
in the World
Fortune
World’s 41st Most Admired Company,
23rd in Revenue Among All Companies
in All Industries
American Banker
Most Powerful Women in Banking;
One of America’s Top Banking Teams
Global Finance
Best Consumer and Corporate/
Institutional Internet Banks in the U.S.
Human Rights Campaign
Perfect Score on Corporate
Equality Index
LATINAStyle
12th Best Company for Latinas
The Chronicle of Philanthropy
America’s Third Most Generous
Cash Donor
American Customer Satisfaction
Index (ACSI)
America’s #1 Large Bank for
Customer Satisfaction
Bank Technology News(cid:3)/
American Banker
Top Innovator for Wells Fargo Mobile
and ATM Services
BLACK ENTERPRISE
One of the Top 40 Best Companies
for Diversity
Brand Finance
The Most Valuable Bank Brand
in the U.S. (2012)
Brand Z
Among the Top 20 Most Valuable
Brands in the World
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.
236
Today’s Wells Fargo is a coast-to-coast company with vast
reach. We touch people and businesses billions of times a year —
at least 5 billion times a year in the Community Bank alone.
But we never forget that financial services is a people business.
Working one on one with customers to help them with the
decisions they face every day is at the core of who we are.
First we listen to customers like Tony Williamson, who started
a Minnesota-based IT staffing business, Ajasa Technologies,
with his wife, Shelley, in 1995. Then we offer guidance and
solutions. Wells Fargo helped their business with credit to
manage cash flow. Now Ajasa Technologies has 400 employees
and is developing mobile applications for digital payments.
“You can’t do what you were doing a year ago,” said Williamson.
“You have to change, and Wells Fargo has helped us adapt.”
Multiply that times our more than 270,000 team members who
share the same spirit. New opportunities. Unchanging vision.
2 To our owners
10 70,000,000 opportunities
23 Board of Directors, Senior Leaders
25 Financial Review
112 Controls and Procedures
114 Financial Statements
231 Report of Independent Registered
Public Accounting Firm
235 Stock Performance
Wells Fargo & Company
(NYSE:WFC)
We’re a diversified financial services company
— community-based and relationship-oriented —
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 Phone Bank,SM and internet sites
are headquarters for satisfying all our customers’
financial needs and helping them succeed financially,
through banking, insurance, investments, mortgage,
and commercial and consumer finance.
Assets: $1.3 trillion, 4th among all U.S. banks
Market value of stock: $145 billion,
1st among all U.S. banks (12/31/11)
Customers: 70 million,
(one of every three U.S. households)
team members: More than 270,000
(full time and part time)
Stores: 9,112
Wells Fargo coast to coast
Washington
233
Oregon
172
Montana
57
Idaho
106
Wyoming
32
Nevada
148
Utah
154
Colorado
243
North Dakota
36
South Dakota
57
Nebraska
64
Kansas
43
Minnesota
244
Iowa
99
California
1,407
Alaska
59
Arizona
335
New Mexico
106
Oklahoma
23
Texas
853
Hawaii
4
Wisconsin
106
Michigan
78
Vt.
8
N.H.
19
New York
230
Illinois
143
Indiana
90
Ohio
98
Pennsylvania
419
Kentucky
24
Tennessee
57
W. Virginia
29
Virginia
384
North Carolina
455
South Carolina
180
Mississippi
27 Alabama
171
Georgia
368
New Jersey
393
Delaware
31
Maryland
136
D.C.
39
Florida
808
Missouri
62
Arkansas
30
Louisiana
24
Around the world
Argentina
Australia
Bangladesh
Brazil
Canada
Chile
China
Colombia
Dominican Republic
Ecuador
Egypt
England
France
Germany
India
Indonesia
Ireland
Italy
Japan
Jersey
Malaysia
Mexico
Philippines
Russia
Singapore
South Africa
South Korea
Spain
Taiwan
Thailand
Turkey
United Arab Emirates
Vietnam
Maine
6
Massachusetts
59
Rhode Island
6
Connecticut
99
Stores
9,112
worldwide
ATMs
12,211
wellsfargo.com
22.4 million
active online
customers
Mobile banking
7.3 million
active mobile
customers
Wells Fargo
Customer
Connection
500+ million
customer
contacts
#1 Retail banking deposits 1
#1 Total stores
#1 Retail mortgage lender
#1 Home loan originator to minority and low- to moderate-income
consumers & in low- to moderate-income neighborhoods
(2010 HMDA data)
#1 Used car lender (AutoCount 2011)
#1 Small business lender (U.S. in dollars per 2010 Community
Reinvestment Act government data)
#1 U.S. Small Business Administration’s (SBA) 2011 Large 7(a)
Lender of the Year
#1 REIT preferred stock (FY 2011, Bloomberg)
#1
#1
Internet Bank in the U.S. (2011 Global Finance Magazine)
In mobile banking for ease-of-use, privacy, security, quality, and
availability (Keynote Mobile Banking Scorecard 2011)
In the world for best social media strategy
(2011 Global Finance Magazine)
#1
#1 Mortgage servicer
#2 Debit card issuer
#2 Annuity distributor
#2 Real estate lead arranger of loan syndications
(FY 2011, Thomson Reuters)
1 Deposits up to $500 million in a single banking store, excludes non-retail stores and
credit unions. Source: SNL.
#2 REIT common stock (FY 2011, Dealogic)
#2 Arranger of asset-based loans (FY 2011, Thomson Reuters)
#2 Non-investment grade loan issuer by number of transactions
(FY 2010, Thomson Reuters)
#2 Underwriter of preferred stock (FY 2010, Bloomberg)
#2 Provider of private student loans
#2 Overall auto finance lender (AutoCount 2011)
#3 Branded bank ATM owner
#3 Full-service retail brokerage provider based on number of
Financial Advisors
#4 Loan syndication bookrunner (FY 2011, Thomson Reuters)
#4 High-grade corporate loan issuer (FY 2011, Thomson Reuters)
#4 Wealth management provider
#5 IRA provider (Cerulli Associates)
#5 Family wealth provider (Family Wealth Alliance)
#6 Institutional retirement plan recordkeeper
(PLANSPONSOR Magazine)
#7 Issuer of credit cards
#7 Merchant processor for credit and debit cards
#8 Senior manager of total municipal bond issues
(FY 2011, Thomson Reuters)
© 2012 Wells Fargo & Company. All rights reserved.
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Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94104
1-866-878-5865 wellsfargo.com
Our vision:
Satisfy all our customers’ financial needs and help them
succeed financially.
Nuestra vision:
Deseamos satisfacer todas las necesidades financieras
de nuestros clientes y ayudarlos a tener éxito en el
área financiera.
Notre vision:
Satisfaire tous les besoins financiers de nos clients
et les aider à atteindre le succès financier.
Wells Fargo & Company Annual Report 2011
W
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New opportunities. Unchanging vision.
“The reason we wake up in the morning is to help our
customers succeed financially and to satisfy all their
financial needs. The result is we make money because
of our focus on serving customers, not the other way
around. This time-tested vision will forever be what
matters to Wells Fargo. We’ll never put the stagecoach
ahead of the horses.”— John G. Stumpf, Chairman, President and Chief Executive Officer
Together we’ll go far
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